What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 438 added, 336 removed, 568 unchanged (58% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three months ended March 31, 2020 and 2019.

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and six months ended June 30, 2020 and 2019.

All dollars are in thousands, except per share amounts, unless otherwise noted.)

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These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements.

These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2019 Annual Report, the "Risk Factors" section of this report, and elsewhere in this report, and include such risks and uncertainties as:

• risks and uncertainties related to the severity, magnitude, and duration of the COVID-19 pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, individual, or travel activities intended to slow the spread of the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets;

• the ability to successfully maintain and increase allocated volumes of student loans serviced under existing and any future servicing contracts with the U.S.

anticipated time frame or at all, risks that the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), and private education and consumer loans;

These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2019 Annual Report and subsequent reports filed by the Company with the SEC, including the "Risk Factors" section of this report, and elsewhere in this report, and include such risks and uncertainties as:

• risks and uncertainties related to the severity, magnitude, and duration of the COVID-19 pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities intended to slow the spread of the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets;

• risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and any future servicing contracts with the U.S.

Department of Education (the "Department"), which current contracts accounted for 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 pending and uncertain nature of the Department's NextGen procurement process (under which awards of new contracts have been made to other service providers) and the impact of the reported cancellation by the Department of the previous EPS component of NextGen, the uncertain timing and nature of the outcome of the Company's protests of the reported decision by the Department as to the Company's proposal for the BPO component of NextGen and a protest by another interested party regarding the BPO solicitation, the possibility that awards or other evaluations of proposals may be challenged by various interested parties and may not be finalized or implemented within the currently anticipated time frame or at all, risks that the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), and private education and consumer loans;

• loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans 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 terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as 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;

• 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;

• 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 changes 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 terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income 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;

• 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 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 that the conditions to the reported approval of federal deposit insurance and an industrial bank charter for Nelnet Bank may not be satisfied within a reasonable timeframe or at all, thus delaying or preventing Nelnet Bank from commencing operations, and the uncertain nature of the expected benefits from obtaining an industrial bank charter, including the ability to successfully launch banking operations and achieve expected market penetration;

operations, and the uncertain nature of the expected benefits from obtaining an industrial bank charter, including the ability to successfully launch banking operations and achieve expected market penetration;

• 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;

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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 (loss) income to net (loss) income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.

Three months ended March 31,

GAAP net (loss) income attributable to Nelnet, Inc.

A reconciliation of the Company's GAAP net income to net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

GAAP net income attributable to Nelnet, Inc.

$ 86,482 24,619 45,950 66,210

Realized and unrealized derivative market value adjustments

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(939) (8,894) (5,883) (16,232)

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

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

$ 89,454 52,785 64,580 117,613

Earnings per share:

GAAP net (loss) income attributable to Nelnet, Inc.

GAAP net income attributable to Nelnet, Inc.

$ 2.21 0.61 1.16 1.65

Realized and unrealized derivative market value adjustments

0.10 0.93 0.62 1.68

Tax effect (a)

(0.03) (0.22) (0.15) (0.41)

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

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

$ 2.28 1.32 1.63 2.92

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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 to a net loss for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to the following factors:

• The recognition of an incremental provision for loan losses totaling $63.0 million ($47.9 million after tax) related to the increase in expected defaults as a result of the COVID-19 pandemic;

• The recognition of $34.1 million ($25.9 million after-tax) of impairment charges related to the Company's beneficial interest in consumer loan securitizations and certain venture capital investments due to adverse economic conditions resulting from the COVID-19 pandemic;

GAAP net income increased for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to the following factors:

• The recognition of a $51.0 million ($38.8 million after tax) gain to adjust the carrying value of the Company's investment in Hudl to reflect Hudl's May 2020 equity raise transaction value;

• The increase in loan spread on the Company's loan portfolio and related derivative settlements;

• A decrease in net losses related to changes in the fair values of derivative instruments that do not qualify for hedge accounting.

These factors were partially offset by the following items:

• The decrease in the average balance of loans due to the amortization of the FFELP loan portfolio;

• The decrease in net income from the Company's Loan Servicing and Systems operating segment due to a decrease in revenue as a result of the COVID-19 pandemic and incurring additional costs to meet increased service and security standards under the Department servicing contracts.

GAAP net income decreased for the six months ended June 30, 2020 compared to the same period in 2019 primarily due to the following factors:

• The recognition of an incremental provision for loan losses totaling $63.0 million ($47.9 million after tax) in the first quarter of 2020 related to the increase in expected life of loan defaults as a result of the COVID-19 pandemic;

• The recognition of $34.1 million ($25.9 million after tax) of impairment charges in the first quarter of 2020 related to the Company's beneficial interest in consumer loan securitizations and certain venture capital investments due to adverse economic conditions resulting from the COVID-19 pandemic;

• 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;

• The decrease in net income from the Company's Loan Servicing and Systems operating segment due to incurring additional costs to meet increased service and security standards under the Department servicing contracts.

These factors were partially offset by the following items:

• The recognition of a $18.2 million ($13.8 million after tax) gain from the sale of consumer loans in 2020;

• The recognition of a $51.0 million ($38.8 million after tax) gain in the second quarter of 2020 to adjust the carrying value of the Company's investment in Hudl to reflect Hudl's May 2020 equity raise transaction value;

• The recognition of a $18.2 million ($13.8 million after tax) gain from the sale of consumer loans in the first quarter of 2020;

• A decrease in net losses related to changes in the fair values of derivative instruments that do not qualify for hedge accounting.

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This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes.

As of March 31, 2020, the Company had a $20.6 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years.

The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

As of June 30, 2020, the Company had a $19.8 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 10.8 years.

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.

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In addition, the Company earns fee-based revenue through the following reportable operating segments:

• Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Solutions ("NDS")

• 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 Solutions ("NBS")

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Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.

The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the three months ended March 31, 2020 and 2019 (dollars in millions).

The information below provides the operating results for each reportable operating segment for the three and six months ended June 30, 2020 and 2019 (dollars in millions).

See "Results of Operations" for each reportable operating segment under this Item 2 for additional detail.

(a) Revenue includes intersegment revenue.

(b) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of operations, excluding a COVID-19 related impairment expense in 2020 of $26.3 million and the impact from changes in fair values of derivatives.

(b) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of operations, excluding a COVID-19 related impairment expense during the six months ended June 30, 2020 of $26.3 million, and the impact from changes in fair values of derivatives.

Net income excludes changes in fair values of derivatives, net of tax.

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The COVID-19 pandemic has caused significant disruption to the U.S.

and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates and equity market valuations, and extreme volatility in the U.S.

and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates and equity market valuations, and extreme volatility in

and world markets.

As a result of the COVID-19 outbreak and federal, state, and local government responses to COVID-19, we have and may in the future experience various disruptions and impacts to our businesses and results of operations.

The following provides a summary of how COVID-19 has and may impact our business and operating results.

As a result of the COVID-19 outbreak and federal, state, and local government responses to COVID-19, the Company has experienced and may in the future experience various disruptions and impacts to the Company's businesses and results of operations.

The following provides a summary of how COVID-19 has impacted and may impact the Company's business and operating results.

The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state, and local guidelines, including those regarding social distancing.

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The Company has investments in real estate, early-stage and emerging growth companies (venture capital investments), and renewable energy (solar).

During March 2020, the Company identified several venture capital investments that were negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic and recognized an impairment charge on such investments of $7.8 million (pre-tax).

The Company identified several venture capital investments that were negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic and recognized impairment charges on such investments of $7.8 million (pre-tax) during the first quarter of 2020.

Loan Servicing and Systems

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law on March 27, 2020, among other things, provides broad relief for federal student loan borrowers.

Under the CARES Act, federal student loan

payments and interest accruals were suspended until September 30, 2020 for all borrowers that have loans owned by the Department.

The CARES Act, which was signed into law on March 27, 2020, among other things, provides broad relief for federal student loan borrowers.

Under the CARES Act, federal student loan payments and interest accruals were suspended until September 30, 2020 for all borrowers that have loans owned by the Department.

The Department instructed servicers to apply the benefits of the law retroactively to March 13, 2020, when the President declared a state of emergency related to COVID-19.

As a part of the payment suspension, student loan servicers are required to report suspended payments to credit bureaus as if the customer made their payment on-time, rather than a forbearance, which would negatively affect a customer's credit report.

Although the Company will receive less revenue per borrower through September 30, 2020 based on borrower status, the Company currently anticipates more borrowers being in a current status subsequent to September 30, 2020, at which time the Company's revenue per borrower will increase.

Currently, the Company anticipates no adverse impact to the total amount of revenue earned for the remainder of 2020 under the Department servicing contracts as a result of the CARES Act.

However, the revenue recognized in the second and third quarters is expected to be lower and revenue in the fourth quarter is expected to be higher, than in corresponding prior periods.

While federal student loan payments are suspended, the Company anticipates a decrease in operating expenses due to a significant reduction of borrower statement printing and postage costs.

The Company anticipates a decrease in FFELP, private education, and consumer loan servicing revenue in future periods that are impacted by the COVID-19 pandemic due to reduced or eliminated delinquency outreach to borrowers, holds on claim filings, and reduced or eliminated late fees processing.

Due to decreased servicing and transaction activity as a result of suspended payments under the CARES Act as discussed above, the Company has been able to transition associates to help government entities process unemployment claims and conduct certain health tracing support activities.

Currently, the Company anticipates no adverse impact to the total amount of revenue earned during 2020 under the Department servicing contracts as a result of the CARES Act.

However, servicing revenue was negatively impacted in the second quarter of 2020, is expected to be lower in the third quarter of 2020, and is currently expected to be higher in the fourth quarter of 2020, than in corresponding prior periods.

While federal student loan payments are suspended, the Company's operating expenses have been and will continue to be lower due to a significant reduction of borrower statement printing and postage costs.

In addition, during the second quarter of 2020, revenue from the Department for originating consolidation loans was adversely impacted as a result of borrowers receiving relief on their existing loans, thus not initiating a consolidation.

The Company currently anticipates this revenue will continue to be negatively impacted while student loan payments and interest accruals are suspended.

During the second quarter of 2020, FFELP, private education, and consumer loan servicing revenue was adversely impacted by the COVID-19 pandemic due to reduced or eliminated delinquency outreach to borrowers, holds on claim filings, and reduced or eliminated late fees processing.

In addition, origination fee revenue was negatively impacted as borrowers are less likely to refinance their loans when they are receiving certain relief measures from their current lender.

The Company anticipates this trend will continue in future periods that are impacted by the COVID-19 pandemic, with the magnitude based on the extent to which existing or additional borrower relief policies and activities are implemented or extended by servicing customers.

If the student loan borrower relief provisions of the CARES Act were potentially extended past September 30, 2020 and/or new legislative or regulatory student loan borrower relief measures similar to such provisions of the CARES Act were to become effective, the levels and timing of future servicing revenues could continue to be impacted in a similar manner through the extended period of time that such provisions or measures are in effect.

Due to decreased servicing and transaction activity as a result of suspended payments under the CARES Act as discussed above, the Company has been able to transition associates to help state agencies process unemployment claims and conduct certain health tracing support activities.

These contracts were awarded to the Company as a result of the Company's technology, security, compliance, and other capabilities needed to conduct such activities.

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If interest rates remain at current levels, the Company anticipates this segment will earn minimal interest income in future periods.

Another potential impact relates to school enrollments.

As a result of COVID-19, enrollments in higher education, beginning with the summer 2020 term, and for K-12 schools, beginning with the fall 2020 academic term, could be negatively impacted.

A decrease in enrollment at schools served by the Company would negatively impact schools' demand for certain of the Company's products and services, which would negatively impact the Company's revenue in future periods.

In addition, as a result of COVID-19, demand for certain of the Company's products and services during the second quarter of 2020 was negatively impacted.

Enrollment declines in higher education and K-12 schools, as a result of the COVID-19 pandemic, could continue to negatively impact schools' demand for the Company's products and services in future periods.

Communications

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Along with offering 60 days free for eligible customers, ALLO has partnered with school districts to provide more connectivity to students, often at discounted rates.

ALLO has signed the FCC Keep Americans Connected Pledge and will not suspend customers for non-payment, will not charge late fees, and will not apply suspension fees during the period March 15, 2020 to May 15, 2020, which may be extended.

ALLO signed the FCC Keep Americans Connected Pledge and did not suspend customers for non-payment, charge late fees, and apply suspension fees during the period from March 15, 2020 to June 30, 2020.

A prolonged economic downturn as a result of the COVID-19 pandemic could adversely impact customers’ ability to pay for ALLO services.

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AGM's results were adversely impacted during the first quarter of 2020 as a result of COVID-19 due to:

• A decrease in variable loan spread due to a widening of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans.

The significant widening during the first quarter of 2020 was the result of a significant decrease in interest rates during the quarter as a result of COVID-19.

• An incremental increase in the provision for loan losses of $63.0 million (pre-tax) resulting from an increase in expected life of loan defaults due to the COVID-19 pandemic.

• A $26.3 million (pre-tax) impairment charge recognized on the Company's beneficial interest in consumer loan securitizations.

The Company's estimate of future cash flows from the beneficial interest in consumer loan securitizations was lower than originally anticipated due to the expectation of increased consumer loan defaults within such securitizations due to the distressed economic conditions resulting from the COVID-19 pandemic.

In addition, during the first quarter of 2020, variable loan spread on the Company's federal student loan portfolio decreased due to a widening of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans.

The significant widening during the first quarter of 2020 was the result of a significant decrease in interest rates in March 2020 as a result of COVID-19.

In a declining interest rate environment, student loan spread is compressed, due to the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest resets on the Company's debt that occurs either monthly or quarterly.

As the Company's debt resets at lower interest rates during the second quarter of 2020, the Company expects variable loan spread will increase from current levels.

In addition, the Company anticipates receiving increased

levels of gross fixed rate floor income on its federal insured student loan portfolio in future periods as a result of the significant drop in interest rates in March 2020.

This increase will be partially offset by a decrease in net settlements received on derivatives used to hedge these loans.

• A $26.3 million (pre-tax) impairment charge recognized during the quarter on the Company's beneficial interest in consumer loan securitizations.

As of March 31, 2020, the Company's estimate of future cash flows from the beneficial interest in consumer loan securitizations was lower than previously anticipated due to the expectation of increased consumer loan defaults within such securitizations due to the distressed economic conditions resulting from the COVID-19 pandemic.

• An incremental increase in the provision for loan losses of $63.0 million (pre-tax) resulting from an increase in expected defaults due to the COVID-19 pandemic.

As the Company's debt reset at lower interest rates during the second quarter of 2020, the Company's variable loan spread increased.

During the first half of the second quarter of 2020, interest rates continued to decrease.

As the Company's debt continues to reset to these lower interest rates during the third quarter of 2020, the Company expects variable loan spread will continue to increase from current levels.

In addition, as a result of the decrease in interest rates in March 2020 and the first half of the second quarter of 2020, the Company has received and anticipates to continue to receive an increase in fixed rate floor income earned on its federally insured student loan portfolio.

The CARES Act, among other things, provides broad relief, effective March 13, 2020, for borrowers that have student loans owned by the Department of Education.

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Although the Company’s loans are excluded from the provisions of the CARES Act, the Company is providing relief for its borrowers.

For the Company’s federally insured loans, the Company is proactively applying a 90 day, non-capping natural disaster forbearance to any loan that is 31-269 days past due, and to any current loan upon request.

For the Company’s private education loans, the Company is proactively applying a 90 day non-capping natural disaster forbearance to any loan that is 80 days past due, and to any other loan upon request.

Federally insured loans in forbearance increased to $2.1 billion, or 10.6% of the portfolio at March 31, 2020, compared to $1.3 billion, or 6.6% of the portfolio, as of December 31, 2019.

Private education loans in forbearance increased to $11.4 million, or 4.2% of the portfolio, at March 31, 2020, compared to $3.1 million, or 1.3% of the portfolio, at December 31, 2019.

Federally insured and private education loans in forbearance continued to increase in April 2020 to $5.2 billion, or 26.1% of the portfolio, and $35.7 million, or 13.3% of the portfolio, as of April 30, 2020, respectively.

The Company anticipates that loans in forbearance will continue to increase, but at a much slower rate than in March and April 2020.

The Company currently expects this trend to reverse in June and July 2020, absent any intervening policy change, when borrowers are currently scheduled to exit forbearance.

For the Company's federally insured and private education loans, effective March 13, 2020 through June 30, 2020, the Company proactively applied a 90 day natural disaster forbearance to any loan that was 31-269 days past due (for federally insured loans) and 80 days past due (for private education loans), and to any current loan upon request.

Beginning July 1, 2020, the Company discontinued proactively applying 90 day natural disaster forbearances on past due loans.

However, the Company will continue to apply a natural disaster forbearance with an end date of September 30, 2020, to any federally insured and private education loan upon request.

Federally insured loans in forbearance increased to $5.4 billion, or 27.7% of the portfolio, at June 30, 2020, compared to $1.3 billion, or 6.6% of the portfolio, as of December 31, 2019.

Private education loans in forbearance increased to $21.9 million, or 7.5% of the portfolio, at June 30, 2020, compared to $3.1 million, or 1.3% of the portfolio, at December 31, 2019.

Federally insured and private education loans in forbearance declined in June 2020 from May peaks of $6.0 billion and $38.6 million, respectively.

The Company anticipates that loans in forbearance will continue to decline in the third and fourth quarters of 2020, absent any intervening policy change, when borrowers are currently scheduled to exit forbearance.

Despite the COVID-19 pandemic, most borrowers continue to make payments according to their payment plans.

For private education loans, the Company is delaying final demand letters and default activity, while replacing collection calls with borrower outreach on relief options.

For both federally insured and private education loans, all borrower late fees are being waived and borrower payments made after March 13, 2020 are refunded upon a borrower’s request.

All borrower relief activity was implemented in late March and April 2020, using an effective date of March 13, 2020.

The borrower relief activity will continue until July 1, 2020, at which time the Company will review whether such policies should continue.

No negative borrower reporting will be sent to credit bureaus during this time.

For the majority of the Company’s consumer loans, borrowers are generally being offered, upon request, a two-month deferral of payments, with an option of additional deferrals if the COVID-19 crisis continues.

In addition, all fees (non-sufficient funds, late charges, check fees) and credit bureau reporting are currently suspended.

In addition, for private education loans, effective March 13, 2020 through September 30, 2020, the Company is delaying final demand letters and default activity, while replacing collection calls with borrower outreach on relief options.

For both federally insured and private education loans, effective March 13, 2020 through September 30, 2020, borrower late fees are being waived and borrower payments made after March 13, 2020 are refunded upon a borrower's request.

For the majority of the Company's consumer loans, borrowers are generally being offered, upon request and/or documented evidence of financial distress, a two-month deferral of payments, with an option of additional deferrals if the COVID-19 pandemic continues.

In addition, effective March 13, 2020 through September 30, 2020, the majority of fees (non-sufficient funds, late charges, check fees) and credit bureau reporting are currently suspended.

The specific relief terms on the Company's consumer loan portfolio vary depending on the loan program and servicer of such loans.

The Company is not contractually committed to acquire private education or consumer loans, so the Company has been and will continue to be selective as to which, if any, loans it purchases during the current period of economic uncertainty.

The Company will continue to review whether additional and/or extended borrower relief policies and activities are needed.

The Company is not contractually committed to acquire FFELP, private education, or consumer loans, so the Company has been and will continue to be selective as to which, if any, loans it purchases during the current period of economic uncertainty.

As a result of the economic uncertainty, the Company has identified certain opportunities to deploy capital.

In March and April 2020, the Company purchased residual interest in certain FFELP securitizations for $3.1 million and $24.0 million, respectively.

The Company currently believes its cash and anticipated cash generated from operations will be sufficient to fund its operating expenses and business activities for the foreseeable future.

In March and April 2020, the Company purchased residual interests in certain FFELP securitizations for $33.5 million.

In addition, the Company has purchased $89.3 million of investments in student loan asset-backed securities during the six months ended June 30, 2020 (net of proceeds from sales of such securities).

A majority of the student loan asset-backed securities purchases were funded via a participation agreement with Union Bank (a related party).

The Company currently believes its cash and anticipated cash generated from operations on an annual basis will be sufficient to fund its operating expenses and business activities for the foreseeable future.

In addition, the Company does not currently believe the COVID-19 pandemic will have any impact regarding compliance with covenants on any of the Company's debt facilities, including its unsecured line of credit.

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Other Risks and Uncertainties

The COVID-19 crisis is unprecedented and continues to evolve.

The extent to which COVID-19 may impact our businesses depends on future developments, which are highly uncertain, subject to various risks, and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, stay-at-home or other similar orders and social distancing in the United States and other countries, business and/or school closures and disruptions,

and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

The COVID-19 pandemic is unprecedented and continues to evolve.

The extent to which COVID-19 may impact the Company's businesses depends on future developments, which are highly uncertain, subject to various risks, and cannot be predicted with confidence, such as the ultimate spread, severity, and duration of the pandemic, travel restrictions, stay-at-home or other similar orders and social distancing in the United States and other countries, business and/or school closures and disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

For additional information on the risks and uncertainties regarding the impacts of COVID-19, see Part II, Item 1A.

"Risk Factors - The COVID-19 pandemic has adversely impacted our results of operations, and could continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows" in this report.

Adoption of New Accounting Standard for Credit Losses

On January 1, 2020, the Company adopted ASU No.

2016-13 , Financial Instruments – Credit Losses (“ASC 326”), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for financial assets measured at amortized cost at the time the financial asset is originated or acquired.

The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

The new guidance primarily impacted the allowance for loan losses related to the Company’s loan portfolio.

Upon adoption, the Company recorded an increase to the allowance for loan losses of $91.0 million, which included a reclassification of the non-accretable discount balance and premiums related to loans purchased with evidence of credit deterioration, and decreased retained earnings, net of tax, by $18.9 million.

Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 (recognizing estimated credit losses expected to occur over the asset's remaining life) while prior period amounts continue to be reported in accordance with previously applicable GAAP (recognizing estimated credit losses using an incurred loss model);

therefore, the comparative information for 2019 is not comparable to the information presented for 2020.

Investment in Agile Sports Technologies, Inc.

(doing business as "Hudl")

On May 20, 2020, the Company made an additional equity investment of approximately $26.0 million in Hudl, as one of the participants in an equity raise completed by Hudl.

Prior to the additional 2020 investment, the Company had direct and indirect equity ownership interests in Hudl of less than 20%, which did not materially change as a result of this transaction.

The Company accounts for its investment in Hudl using the measurement alternative method, which requires it to adjust its carrying value of the investment for changes resulting from observable market transactions.

As a result of Hudl’s equity raise, the Company recognized a $51.0 million (pre-tax) gain during the three months ended June 30, 2020 to adjust its carrying value to reflect the May 20, 2020 transaction value.

This gain is included in "other income" on the consolidated statements of income.

Department of Education NextGen Procurement

Nelnet Servicing, LLC ("Nelnet Servicing"), a subsidiary of the Company, earns loan servicing revenue from a servicing contract with the Department of Education (the "Department").

Revenue earned by Nelnet Servicing related to this contract was $38.7 million and $39.6 million for the three months ended March 31, 2020 and 2019, respectively.

Nelnet Servicing, LLC ("Nelnet Servicing"), a subsidiary of the Company, earns loan servicing revenue from a servicing contract with the Department.

Revenue earned by Nelnet Servicing related to this contract was $37.4 million and $40.5 million for the three months ended June 30, 2020 and 2019, and $76.0 million and $80.1 million for the six months ended June 30, 2020 and 2019, respectively.

In addition, Great Lakes Educational Loan Services, Inc.

("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 $46.4 million and $47.1 million for the three months ended March 31, 2020 and 2019, respectively.

Revenue earned by Great Lakes related to this contract was $45.2 million and $46.0 million for the three months ended June 30, 2020 and 2019, and $91.7 million and $93.1 million for the six months ended June 30, 2020 and 2019, respectively.

Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019.

Nelnet Servicing and Great Lakes each received extensions from the Department on their contracts through December 14, 2020.

On November 26, 2019, Nelnet Servicing and Great Lakes each received extensions from the Department on their contracts through December 14, 2020.

The most current contract extensions also provide the potential for two additional six-month extensions at the Department's discretion through December 14, 2021.

The Department 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:

On January 15, 2019, the Department issued solicitations for three NextGen components:

• NextGen Enhanced Processing Solution ("EPS")

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On January 10, 2020, the Department released an amendment to the BPO solicitation component and the Company responded on January 30, 2020.

EPS is the transitional technology system and certain processing functions the Department planned to use under NextGen to service the Department's student loan customers for a period of time before eventually moving to OPS in the future.

The EPS solicitation component was for a transitional technology system and certain processing functions the Department planned to use under NextGen to service the Department's student loan customers for a period of time before eventually moving to OPS in the future.

However, on April 3, 2020, the Department cancelled the OPS solicitation component.

BPO is the back office and call center operational functions for servicing the Department's student loan customers.

On March 30, 2020, the Company received a letter from the Department notifying the Company that the Company's proposal in response to the EPS component has been determined to be outside of the competitive range and will receive no further consideration for an award.

The BPO solicitation component is for the back office and call center operational functions for servicing the Department's student loan customers.

On March 30, 2020, the Company received a letter from the Department notifying the Company that the Company's proposal in response to the EPS component had been determined to be outside of the competitive range and would receive no further consideration for an award.

On April 13, 2020, the Company filed a protest with the Government Accountability Office ("GAO") challenging the Department's decision to cancel the OPS solicitation component without amending the EPS solicitation component.

In addition, on April 27, 2020, the Company filed a supplemental protest challenging on a number of bases the Department's competitive range exclusion of the Company's proposal from the EPS solicitation component and

requesting that the GAO restore the Company's ability to participate in the EPS solicitation.

The Department has not yet awarded a contract for the EPS component.

Under applicable law, as of the date of the Company's initial protest filing, the Department is subject to a stay from awarding a contract until all protests are resolved.

The Company cannot predict the timing or nature of the outcome of its protests.

The Department has not yet made an award on the BPO component and the Company cannot predict the timing, nature, or outcome of the BPO solicitation.

If the Department's NextGen EPS decision stands, Nelnet Servicing and Great Lakes will eventually be required to migrate their portfolios onto another provider's system after an award is made, and the Company would ultimately need to restructure the Company's loan servicing segment for long-term success.

If the Company is awarded a BPO contract for operational services, it would partially mitigate the impact of not being awarded the EPS component.

On April 27, 2020, the Company filed a supplemental protest challenging a number of bases for the Department's competitive range exclusion of the Company's proposal from the EPS solicitation component.

On July 10, 2020, the Department cancelled the solicitation for the EPS component.

In its cancellation description, the Department indicated that it continues to be committed to the goals and vision of NextGen, and that it will be introducing a new solicitation to continue the NextGen strategy in the future.

Based on the Department's cancellation of the EPS procurement, on July 14, 2020, the GAO dismissed the Company's protests as moot.

The Company fully intends to compete for the servicing system solution as the Department proceeds with their NextGen strategy.

On June 18, 2020, the Company received a letter from the Department notifying the Company that the Company's proposal in response to the BPO solicitation component was determined to be ineligible for award, claiming the Company's response did not meet certain requirements related to small business participation.

The Company immediately requested a debriefing regarding the Department's basis for this decision.

Prior to providing the Company a debriefing, on June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO solicitation.

On July 13, 2020, the Company filed a protest with the GAO challenging on a number of bases the Department's determination that the Company's BPO response did not meet small business participation requirements.

In addition, on July 20, 2020, the Company filed a supplemental protest challenging the Department's decision to proceed with awards of contracts for the BPO component, when it cancelled the EPS component and a new EPS solicitation is expected to be released.

On July 24, 2020, the Department provided the Company a debriefing regarding the Department's June 18, 2020 decision to eliminate the Company from the BPO competition.

On July 28, 2020, the Company filed a second supplemental protest challenging the Department's BPO decision.

Under applicable law, contract awards to other parties for the BPO component are subject to a stay of performance until the protests are resolved.

A decision by the GAO is due on or before October 22, 2020.

The Company cannot predict the outcome of the current protests regarding the BPO component, or the timing, nature, or ultimate outcome of the Department's NextGen contract procurement process.

Adoption of New Accounting Standard for Credit Losses

On January 1, 2020, the Company adopted ASU No.

The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

The new guidance primarily impacted the allowance for loan losses related to the Company’s loan portfolio.

therefore, the comparative information for 2019 is not comparable to the information presented for 2020.

On March 18, 2020, the Company announced that it received notification of approval from the Federal Deposit Insurance Corporation (“FDIC”) Board of Directors for federal deposit insurance and the Utah Department of Financial Institutions (“UDFI”) in connection with the establishment of Nelnet Bank as a Utah-chartered industrial bank.

Nelnet Bank would operate as an internet bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City.

The approval from the FDIC and UDFI is subject to a number of conditions, including a Capital Adequacy and Liquidity Management Agreement and a Parent Company Agreement with the FDIC and compliance with the terms of the orders from the FDIC and UDFI, respectively.

Nelnet Bank will have to meet a readiness review by the FDIC and UDFI before commencing operations.

Nelnet Bank is also awaiting approval of its Community Reinvestment Act Plan.

A timeline has not been established for these next steps in the process.

Nelnet Bank would operate as an internet bank franchise focused on the private education loan marketplace, with a home office in Draper, Utah.

The approval from the FDIC and UDFI is subject to a number of conditions, including compliance with the terms of the orders from the FDIC and UDFI.

In addition, Nelnet Bank will have to meet a readiness review by the FDIC and UDFI before commencing operations.

Although a formal timeline has not been established for these items, the Company currently believes Nelnet Bank could be approved and operational by the fourth quarter of 2020.

On June 26, 2020, Nelnet Bank, Nelnet, Inc.

(the parent), and Michael S.

Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank.

As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc.

is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent;

(ii) provide and maintain a revolving line of credit for the benefit of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.;

(iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations;

and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.

During the three and six months ended June 30, 2020, the Company incurred incremental direct costs associated with Nelnet Bank of $1.3 million and $2.5 million, respectively.

Nelnet Bank will be funded with an initial capital commitment of $100.0 million from the Company.

Nelnet Bank will operate as a separate subsidiary of the Company, and the industrial bank charter will allow the Company to maintain its other diversified business offerings.

• As of March 31, 2020, the Company had cash and cash equivalents of $204.8 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 $57.1 million as of March 31, 2020.

• As of June 30, 2020, the Company had cash and cash equivalents of $67.5 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 $142.2 million as of June 30, 2020.

As of June 30, 2020, the Company has participated $86.7 million of these securities, and such participation is reflected as debt on the Company's consolidated balance sheet.

• The Company has a $455.0 million unsecured line of credit with a maturity date of December 16, 2024.

As of March 31, 2020, the unsecured line of credit had $100.0 million outstanding and $355.0 million was available for future use.

As of June 30, 2020, the unsecured line of credit had $30.0 million outstanding and $425.0 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 March 31, 2020, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $2.27 billion, of which approximately $1.57 billion will be generated over the next six years.

• During the first three months of 2020, the Company completed three FFELP asset-backed securitizations totaling $1.1 billion.

• As of March 31, 2020, the Company had $767.5 million, $114.5 million, and $132.9 million of capacity under its FFELP, private education, and consumer loan warehouse facilities, respectively, to purchase additional loans.

As of June 30, 2020, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $2.28 billion, of which approximately $1.51 billion will be generated over the next 5 1/2 years (through 2025).

• During the first six months of 2020, the Company completed three FFELP asset-backed securitizations totaling $1.1 billion.

• As of June 30, 2020, the Company had $348.9 million, $92.6 million, and $126.4 million of capacity under its FFELP, private education, and consumer loan warehouse facilities, respectively, to purchase additional loans.

Subsequent to June 30, 2020, the Company made the decision to sell an additional $60.8 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 25.4 percent residual interest in the consumer loan securitization.

The Company currently anticipates recognizing a gain in the third quarter of 2020 of $14.8 million (pre-tax) from the sale

of these loans.

After the completion of this loan sale, $46.8 million was outstanding under the Company's consumer loan warehouse facility and $153.2 million was available for future funding.

• The Company has a stock repurchase program to purchase up to a total of five million shares of the Company’s Class A common stock during the three-year period ending May 7, 2022.

Year to date, through May 7, 2020, the Company has repurchased 791,104 shares of stock for $35.4 million ($44.73 per share).

As of May 7, 2020, 4.0 million shares remained authorized for repurchase under the Company's stock repurchase program.

• The Company paid a first quarter 2020 cash dividend on the Company's Class A and Class B common stock of $0.20 per share.

In addition, the Company's Board of Directors has declared a second quarter 2020 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.20 per share.

The second quarter cash dividend will be paid on June 15, 2020 to shareholders of record at the close of business on June 1, 2020.

Year to date, through June 30, 2020, the Company has repurchased 1,497,934 shares of stock for $68.5 million ($45.75 per share), of which the vast majority was purchased during the second quarter of 2020.

As of June 30, 2020, 3.3 million shares remained authorized for repurchase under the Company's stock repurchase program.

• The Company paid a second quarter 2020 cash dividend on the Company's Class A and Class B common stock of $0.20 per share.

In addition, the Company's Board of Directors has declared a third quarter 2020 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.20 per share.

The third quarter cash dividend will be paid on September 15, 2020 to shareholders of record at the close of business on September 1, 2020.

The Company intends to use its strong liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions;

strategic acquisitions and investments;

expansion of ALLO’s telecommunications

strategic acquisitions and investments, including anticipated capital commitments to Nelnet Bank;

expansion of ALLO’s telecommunications network;

and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions.

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CONSOLIDATED RESULTS OF OPERATIONS

An analysis of the Company's operating results for the three months ended March 31, 2020 compared to the same period in 2019 is provided below.

An analysis of the Company's operating results for the three and six months ended June 30, 2020 compared to the same periods in 2019 is provided below.

The Company’s operating results are primarily driven by the performance of its existing loan portfolio and the revenues generated by its fee-based businesses and the costs to provide such services.

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Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis.

Three months ended

Three months ended Six months ended

June 30, June 30,

2020 2019 2020 2019 Additional information

Loan interest $ 181,793 242,333 Decrease was due primarily to decreases in the gross yield earned on loans and the average balance of loans, partially offset by an increase in fixed rate floor income due to lower interest rates in 2020 as compared to 2019.

Loan interest $ 146,140 238,222 327,933 480,555 Decrease was due primarily to decreases in the gross yield earned on loans and the average balance of loans, partially offset by an increase in gross fixed rate floor income due to lower interest rates in 2020 as compared to 2019.

Investment interest 5,743 8,566 13,141 16,819 Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations.

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Net interest income 66,635 59,825 121,708 118,641 See table below for additional analysis.

Less provision for loan losses 76,299 7,000 Increase was due to the increase in expected defaults as a result of the COVID-19 pandemic and an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired during the first quarter of 2019 for which the provision for loan losses was recognized based upon an incurred loss methodology.

Net interest income after provision for loan losses

(21,226) 51,816

Less provision for loan losses 2,999 9,000 79,297 16,000 The increase during the six months ended June 30, 2020 compared to the same period in 2019 was due to provision expense recognized in the first quarter of 2020 as a result of an increase in expected defaults as a result of the COVID-19 pandemic and an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired in 2019 for which the provision for loan losses was recognized based upon an incurred loss methodology.

Net interest income after provision for

loan losses 63,636 50,825 42,411 102,641

Other income/expense:

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Communications revenue 18,998 15,758 37,179 30,300 See Communications operating segment - results of operations.

Gain on sale of loans 18,206 — The Company sold a portfolio of consumer loans in 2020 and recognized a gain of $18.2 million.

Gain on sale of loans — 1,712 18,206 1,712 The Company sold a portfolio of consumer loans in the first quarter of 2020 and the second quarter of 2019 and recognized gains of $18.2 million and $1.7 million, respectively.

Other income 60,127 14,440 68,408 23,507 See table below for the components of "other income."

Impairment expense

(34,087) — 2020 amount represents COVID-19 related impairments of $26.3 million and $7.8 million to the beneficial interest in consumer loan securitization investments and several venture capital investments, respectively.

(332) — (34,419) — During the first quarter of 2020, the Company recognized impairments of $26.3 million and $7.8 million related to beneficial interest in consumer loan securitization investments and several venture capital investments, respectively.

Such impairments were the result of impacts from the COVID-19 pandemic.

Derivative settlements, net

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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 the first quarter of 2020 and 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 loss in both periods.

During the first quarter of 2020 and first and second quarters of 2019, there were significant decreases in the forward yield curve resulting in decreases in the fair value of the Company's floor income interest rate swaps that resulted in a loss during these periods.

Although the decrease in the forward yield curve was more substantial in 2020 as compared to 2019, the notional amount of derivatives outstanding during 2020 was much lower than compared to 2019.

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Operating expenses:

Salaries and benefits 119,878 111,059 Increase was due to (i) increases in personnel in the LSS and corporate operating segments to meet increased service and security standards under the Department servicing contracts;

Salaries and benefits 119,247 111,214 239,125 222,272 Increases were due to (i) increases in personnel in the LSS and corporate operating segments to meet increased service and security standards under the Department servicing contracts;

(ii) increases in personnel in the LSS operating segment to develop a new private education and consumer loan servicing system;

(iii) increases in personnel to support the growth in revenue and the development of new technologies in the ETS&PP operating segment;

and (iv) increases in personnel at ALLO to support customer and network expansion.

(iii) increases in personnel to support the growth in the customer base and the development of new technologies in the ETS&PP operating segment;

and (iv) a decrease in the amount of salary and benefit costs capitalized in 2020 as compared to 2019 at ALLO.

See each individual operating segment results of operations discussion for additional information.

Depreciation and amortization 27,648 24,213 Increase was primarily due to additional depreciation expense at ALLO.

Depreciation and amortization 29,393 24,484 57,041 48,697 Increases were primarily due to additional depreciation expense at ALLO.

Other expenses 37,052 45,417 80,439 89,233 Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs.

Decreases were due to (i) cost savings in the LSS segment from an increase in the adoption of electronic borrower statements and correspondence and a decrease in printing and postage while loan payments were suspended as a result of COVID-19 borrower relief efforts;

and (ii) reduction of travel expenses and the cancellation of on-site conferences in the ETS&PP segment.

See each individual operating segment results of operations discussion for additional information.

Total operating expenses 185,692 181,115 376,605 360,202

(Loss) income before income taxes (49,898) 53,038

Income tax benefit (expense) 10,133 (11,391) The effective tax rate was 20.0% and 21.5% for the three months ended March 31, 2020 and 2019, respectively.

Income before income taxes 107,874 30,887 57,976 83,925

Income tax expense 21,264 6,209 11,131 17,600 The effective tax rate was 19.7% and 20.1% for the three months ended June 30, 2020 and 2019, respectively, and 19.5% and 21.0% for the six months ended June 30, 2020 and 2019, respectively.

The Company currently expects its effective tax rate for 2020 will range between 19 and 21 percent.

Net (loss) income (39,765) 41,647

Net income 86,610 24,678 46,845 66,325

Net income attributable to noncontrolling interests

Net (loss) income attributable to Nelnet, Inc.

(128) (59) (895) (115)

Net income attributable to

$ 86,482 24,619 45,950 66,210

The following table summarizes the components of “net interest income” and “derivative settlements, net.”

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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.

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.

See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in the table below.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

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Settlements on associated derivatives

2,125 16,701 Represents the net settlements received related to the Company’s floor income interest rate swaps.

(1,308) 12,165 816 28,867 Represents the net settlements received (paid) related to the Company’s floor income interest rate swaps.

Fixed rate floor income, net of settlements on derivatives

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Investment interest

5,743 8,566 13,141 16,819

Corporate debt interest expense

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

Three months ended March 31,

Borrower late fee income (a) $ 3,188 3,512

Investment advisory services (b) 2,802 711

Management fee revenue (c) 2,243 1,872

Gain (loss) on investments, net (3,864) (427)

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Gain on investments, net of losses (a) $ 53,151 4,258 49,286 3,831

Management fee revenue (b) 1,914 2,277 4,544 4,350

Investment advisory services (c) 922 731 3,724 1,441

Borrower late fee income (d) 319 3,161 3,506 6,674

Other 3,821 4,013 7,348 7,211

Other income $ 60,127 14,440 68,408 23,507

(a) Represents borrower late fees earned by the AGM operating segment.

The Company anticipates borrower late fees will decrease in future periods impacted by the COVID-19 pandemic as a result of borrower relief initiatives.

(b) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary, under various arrangements.

(a) During the second quarter of 2020, the Company recognized a $51.0 million (pre-tax) gain to adjust the carrying value of its investment in Hudl to reflect Hudl's May 2020 equity raise transaction value.

(b) 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 January 2021.

Decrease for the three months ended June 30, 2020 as compared to the same period in 2019 was due to a reduction in administrative support for Great Lakes’ former parent company.

Increase for the six months ended June 30, 2020 as compared to the same period in 2019 was due to an increase in marketing and administrative support provided to other clients primarily in the first quarter of 2020.

(c) 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 March 31, 2020, the outstanding balance of asset-backed securities under management subject to these arrangements was $1.1 billion.

As of June 30, 2020, the outstanding balance of asset-backed securities under management subject to these arrangements was $1.3 billion.

In addition, WRCM earns annual management fees of five basis points for certain other investments under management.

The increase in advisory fees in 2020 as compared to 2019 was the result of an increase in performance fees earned.

(c) 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 January 2021.

The amount also includes revenue earned from marketing services provided to other customers, which increased for the three months ended March 31, 2020 as compared to the same period in 2019.

(d) Represents borrower late fees earned by the AGM operating segment.

The decrease in borrower late fees for the three and six months ended June 30, 2020 as compared to the same periods in 2019 was due to the Company suspending borrower late fees effective March 13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic.

LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS

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2019 March 31,

2020 June 30,

Servicing volume (dollars in millions):

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Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019.

Nelnet Servicing and Great Lakes each received extensions from the Department on their contracts through December 14, 2020.

On November 26, 2019, Nelnet Servicing and Great Lakes each received extensions from the Department on their contracts through December 14, 2020.

The most current contract extensions also provide the potential for two additional six-month extensions at the Department's discretion through December 14, 2021.

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See "Overview - Department of Education NextGen Procurement" above for additional information.

The Department currently allocates new loan volume among its servicers based on certain performance metrics that measure the satisfaction among separate customer groups, including borrowers and Department personnel who work with the servicers, and that measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid default.

Under the most recently publicly announced performance metric measurements used by the Department for the quarterly periods July 1, 2019 through December 31, 2019, Great Lakes’ and Nelnet Servicing’s overall rankings among the nine current servicers for the Department were tied for first and tied for third, respectively.

Based on these results, Great Lakes’ and Nelnet Servicing’s allocation of new student loan servicing volumes for the period March 1, 2020 through August 31, 2020 are 19 percent and 10 percent, respectively.

Summary and Comparison of Operating Results

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

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8,537 11,598 19,591 23,815 Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM operating segment.

Decrease was due to the expected amortization of AGM's FFELP portfolio.

Decrease was due to the impact of borrower relief policies implemented by AGM in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio.

FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off.

Other income 1,914 2,277 4,544 4,350 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 January 2021.

Increase was due to an increase in marketing services provided to other customers.

Decrease for the three months ended June 30, 2020 as compared to the same period in 2019 was due to a reduction in administrative support for Great Lakes’ former parent company.

Total other income 121,493 127,860 247,913 257,048

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Depreciation and amortization

Other expenses 17,489 18,928 Decrease was due to cost-savings as a result of an increase in electronic borrower statements and correspondence and a decrease in the provision for servicing losses.

9,142 8,799 17,990 17,671

Other expenses 13,380 17,118 30,870 36,047 Decrease for the three and six months ended June 30, 2020 as compared to the same periods in 2019 was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act, primarily associated with the fact that while student loan payments are suspended there is a significant reduction of borrower statement printing and postage costs.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence.

Decrease for the six months ended June 30, 2020 as compared to the same period in 2019 was also due to a decrease in the provision for servicing losses.

Intersegment expenses 15,996 13,604 32,235 27,362 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.

2 unchanged sentences

Income before income taxes 14,598 22,374 28,220 44,281

13,623 21,909

Income tax expense (3,504) (5,370) (6,773) (10,628) Represents income tax expense at an effective tax rate of 24%.

Net income $ 10,354 16,651 The LSS segment incurred additional costs during the period ended March 31, 2020 to meet increased service and security standards under the Department servicing contracts.

As a result, the segment's net income and operating margin decreased compared to the same period in 2019.

Net income $ 11,094 17,004 21,447 33,653 The LSS segment incurred additional costs during 2020 to meet increased service and security standards under the Department servicing contracts.

In addition, revenue in 2020 has been negatively impacted as a result of the COVID-19 pandemic.

As a result, the segment's net income and operating margin decreased in 2020 as compared to the same periods in 2019.

Before tax operating margin 12.0 % 17.5 % 11.4 % 17.2 %

10.8 % 17.0 %

Loan servicing and systems revenue

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

Government servicing - Nelnet $ 37,360 40,459 76,010 80,099 Represents revenue from Nelnet Servicing's Department servicing contract.

Decrease was due to a decrease in the borrowers serviced and a decrease in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program and fees earned from the Department for originating consolidation loans.

Decrease was due to a decrease in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program, decrease in fees earned from the Department for originating consolidation loans, and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Government servicing - Great Lakes 45,213 45,973 91,660 93,050 Represents revenue from the Great Lakes' Department servicing contract.

Decrease was due to a decrease in the number of borrowers serviced.

Private education and consumer loan servicing

8,609 9,480 Decrease was due to the change in portfolio mix of private education and consumer loans, partially offset by an increase in loan servicing volume from existing and new clients.

FFELP servicing

5,614 6,695 Decrease was due to portfolio amortization.

Decrease was due to a decrease in fees earned from the Department for originating consolidation loans and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Private education and consumer loan servicing 8,196 8,985 16,805 18,465 Decrease was due to a decrease in the number of borrowers serviced, a decrease in origination fees, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

FFELP servicing 4,917 6,424 10,531 13,119 Decrease was due to a decrease in the number of borrowers serviced and the impact of borrower relief policies implemented by lenders in response to the COVID-19 pandemic.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off.

Revenue earned by the LSS operating segment for servicing loans for the AGM operating segment is included in "intersegment servicing revenue."

Software services 10,651 10,021 21,969 19,762 Increase was due to an increase in borrowers and services in which the Company provides hosted FFELP guarantee activities.

Outsourced services and other

2,098 2,265 The majority of this revenue relates to providing contact center outsourcing activities.

Outsourced services and other 4,705 2,123 6,803 4,388 The majority of this revenue relates to providing contact center outsourcing activities.

Increase was due to providing temporary outsourcing services to state agencies to process unemployment claims and conduct certain health tracing support activities.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Loan servicing and systems revenue $ 111,042 113,985 223,778 228,883

$ 112,735 114,898

EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS

2 unchanged sentences

Summary and Comparison of Operating Results

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

Net interest income $ 399 1,648 2,373 3,657 Decrease was due to a decrease in interest rates in 2020 as compared with 2019, including the significant drop in interest rates in March 2020 as a result of the COVID-19 pandemic.

The decrease in interest income was partially offset by an increase in average cash balances.

If interest rates remain at current levels, the Company anticipates this segment will earn minimal interest income in future periods.

6 unchanged sentences

15,376 15,871 38,181 36,930 See table below for additional information.

Salaries and benefits 23,696 23,008 Increase was due to an increase in the average salaries and benefits cost per associate.

In addition, the operating segment had an increase in headcount to support the growth of its customer base and investment in the development of new technologies.

Salaries and benefits 24,522 22,823 48,218 45,830 Increase was due to an increase in headcount to support the growth of its customer base and investment in the development of new technologies.

These increases were partially offset by a decrease in headcount due to operating efficiencies gained related to the acquisition of TMS in November 2018.

Depreciation and amortization

2,387 3,510 Amortization of intangible assets related to business acquisitions was $2.2 million and $3.3 million for the three months ended March 31, 2020 and 2019, respectively.

Other expenses 6,092 5,311 Increase was due to an additional expense to increase allowance for doubtful accounts for the increased risk of uncollectible balances due to distressed economic conditions resulting from the COVID-19 pandemic.

Increase was partially offset by a decrease in travel expenses in 2020 compared to 2019, due to COVID-19.

Intersegment expenses, net

3,327 3,299 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.

2,362 3,324 4,749 6,835 Amortization of intangible assets related to business acquisitions was $2.2 million and $3.2 million for the three months ended June 30, 2020 and 2019, respectively, and $4.4 million and $6.5 million for the six months ended June 30, 2020 and 2019, respectively.

Other expenses 2,326 5,805 8,418 11,116 Decrease was due to a reduction of travel expenses and the cancellation of on-site conferences as a result of the COVID-19 pandemic.

Intersegment expenses, net 3,429 3,148 6,756 6,447 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

Total operating expenses 32,639 35,100 68,141 70,228

35,502 35,128

Income before income taxes 11,691 11,019 39,044 36,001

27,352 24,981

Income tax expense (2,806) (2,645) (9,371) (8,640) Represents income tax expense at an effective tax rate of 24%.

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The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

Tuition payment plan services $ 31,587 30,173 Increase was due to an increase in the number of managed tuition payment plans.

Revenue recognized during the first quarter of 2020 is primarily related to payment plans for the 2019-2020 academic year for K-12 schools and the spring 2020 semester for institutions of higher education.

Fees for these payment plans were received and are based on school enrollments prior to the conditions arising from the COVID-19 pandemic.

As a result of COVID-19, enrollments in higher education, beginning with the summer 2020 term, and for K-12 schools, beginning with the fall 2020 academic term, could be negatively impacted.

A decrease in enrollment at schools in which the Company serves would negatively impact tuition payment plan revenue in future periods.

Tuition payment plan services $ 22,947 24,655 54,534 54,829 Revenue recognized during the first six months of 2020 is primarily related to payment plans for the 2019-2020 academic year for K-12 schools and the spring and summer 2020 semester for institutions of higher education.

As a result, fees for the majority of payment plans were received and are based on school enrollments prior to the conditions arising from the COVID-19 pandemic.

As a result of the COVID-19 pandemic, tuition payment plan services revenue for the three months ended June 30, 2020 decreased as compared to the same period in 2019.

Enrollment declines in higher education and K-12 schools as a result of the COVID-19 pandemic could negatively impact tuition payment plan revenue in future periods.

Payment processing

31,742 28,979 Increase was the result of higher payment volumes processed by payment technologies from new and existing school and non-education customers.

Growth in revenues from payment processing could be impacted in future periods as a result of the COVID-19 pandemic.

A decline in enrollment in institutions served may result in a corresponding decline in the volume of payments processed.

21,168 21,311 52,910 50,290 Decrease in revenue for the three months ended June 30, 2020 as compared to the same period in 2019 was due to a decrease in the volume of payments processed as a result of the COVID-19 pandemic.

Enrollment declines in higher education and K-12 schools as a result of the COVID-19 pandemic beginning with the fall 2020 academic term could result in a corresponding decline in the volume of payments processed, which would negatively impact payment processing revenue in future periods.

Education technology and services

20,054 19,709 Increase was due to an increase from FACTS Student Information System (“SIS”) software subscriptions.

Growth in FACTS SIS revenues were partially offset by growth rate declines in financial needs assessment and online enrollment and application revenues experienced in March 2020 which coincided with the closures of K-12 schools due to the COVID-19 pandemic.

14,927 14,096 34,980 33,805 Increase was due to an increase from FACTS Student Information System (“SIS”) software subscriptions and an increase in volume for the Nelnet Campus Commerce refunds service.

The growth rate in the Company’s financial needs assessment service was flat compared to 2019 , resulting in an overall growth rate that was lower than historical periods.

The COVID-19 pandemic could negatively impact enrollments and schools’ demand for certain of the Company’s products and services, which would negatively impact the Company’s revenue in future periods.

262 280 555 578

Education technology, services, and payment processing revenue

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Cost to provide education technology, services, and payment processing services

22,806 21,059 Costs primarily relate to payment processing revenue.

Increase was due to an increase in payments volume from new and existing school and non-education customers.

15,376 15,871 38,181 36,930 Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment revenue.

$ 43,928 44,471 104,798 102,572

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Summary and Comparison of Operating Results

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

Net interest income (expense) $ — 2

Net interest income $ — 1 — 3

Communications revenue

6 unchanged sentences

Other costs include connectivity, franchise, and other regulatory costs directly related to providing internet and voice services.

Salaries and benefits 5,416 4,737 Increase was due to additional residential households and businesses served.

Salaries and benefits 5,570 5,192 10,986 9,929 Certain salary and benefit costs qualify for capitalization as ALLO develops its network.

Overall, there was a decrease in gross salaries and benefits paid in 2020 as compared to 2019 due to a decrease in headcount.

However, the amount of costs capitalized in 2020 was lower than 2019, resulting in an overall increase in salaries and benefits, net of capitalized costs.

Depreciation and amortization 10,824 7,737 21,330 15,099 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 March 31, 2020, December 31, 2019, March 31, 2019, and December 31, 2018 were $322.5 million, $315.3 million, $285.8 million and $273.9 million, respectively.

The gross property and equipment balances related to this segment as of June 30, 2020, December 31, 2019, June 30, 2019, and December 31, 2018 were $332.6 million, $315.3 million, $298.2 million and $273.9 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 3,774 3,865 7,463 7,342 Other expenses includes selling, general, and administrative expenses necessary for operations, such as advertising, occupancy, professional services, construction materials, and personal property taxes.

Increase was due to an increase in the number of households and businesses served in 2020 as compared to 2019.

Decrease for the three months ended June 30, 2020 as compared to the same period in 2019 was due to a reduction in travel expenses related to the COVID-19 pandemic.

Intersegment expenses

1 unchanged sentence

Total operating expenses 20,704 17,510 40,939 33,750

20,236 16,240

Loss before income taxes (7,057) (6,490) (14,340) (12,820)

2 unchanged sentences

Additional information:

$ (5,536) (4,810)

Net interest (income) expense

Net loss $ (5,363) (4,932) (10,898) (9,743)

Net interest income — (1) — (3)

Income tax benefit (1,694) (1,558) (3,442) (3,077)

(1,748) (1,519)

Depreciation and amortization 10,824 7,737 21,330 15,099

Earnings before interest, income taxes, depreciation, and amortization (EBITDA)

Earnings before interest, income

taxes, depreciation, and

amortization (EBITDA)

$ 3,767 1,246 6,990 2,276 For additional information regarding this non-GAAP measure, see the table below.

Certain financial and operating data for ALLO is summarized in the tables below.

Three months ended March 31,

Three months ended June 30, Six months ended June 30, 2020

2020 2019 2020 2019

Residential revenue $ 14,209 74.8 % $ 11,890 75.5 % $ 27,766 74.6 % $ 22,955 75.7 %

10 unchanged sentences

Capital expenditures 10,077 15,040 17,240 26,998

September 30,

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018

Residential customer information:

12 unchanged sentences

(b) Represents the number of single residence homes, apartments, and condominiums that ALLO already serves and those in which ALLO has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected.

(c) 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.

During the first quarter of 2020, ALLO announced plans to expand its network to make services available in Norfolk, Nebraska.

(c) During the first quarter of 2020, ALLO announced plans to expand its network to make services available in Norfolk, Nebraska.

ALLO is now in twelve communities, including ten in Nebraska and two in Colorado.

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Loan Portfolio

As of March 31, 2020, the Company had a $20.6 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years.

For a summary of the Company’s loan portfolio as of March 31, 2020 and December 31, 2019, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

As of June 30, 2020, the Company had a $19.8 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 10.8 years.

For a summary of the Company’s loan portfolio as of June 30, 2020 and December 31, 2019, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Loan Activity

The following table sets forth the activity of loans:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Beginning balance $ 20,605,065 22,082,643 20,798,719 22,520,498

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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.

For a summary of the activity in the allowance for loan losses for the three months ended March 31, 2020 and 2019, and a summary of the Company's loan status and delinquency amounts as of March 31, 2020, December 31, 2019, and March 31, 2019, see note 2 of the notes to consolidated financial statements included under Part 1, Item 1 of this report.

Provision for loan losses was $76.3 million and $7.0 million for the three months ended March 31, 2020 and 2019, respectively.

The increase in the provision for loan losses in 2020 as compared to 2019 was due to an incremental provision in 2020 of $63.0 million for the increase in expected defaults as a result of the COVID-19 pandemic and an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired during the first quarter of 2019 in which the provision for loan losses was recognized based upon an incurred loss methodology.

The Company's total allowance for loan losses of $208.9 million at March 31, 2020 represents reserves equal to 0.7% of the Company's federally insured loans (or 29.1% of the risk sharing component of the loans that is not covered by the federal guaranty), 8.4% of the Company's private education loans, and 26.8% of the Company's consumer loans.

For a summary of the activity in the allowance for loan losses for the three and six months ended June 30, 2020 and 2019, and a summary of the Company's loan status and delinquency amounts as of June 30, 2020, December 31, 2019, and June 30, 2019, see note 2 of the notes to consolidated financial statements included under Part 1, Item 1 of this report.

Provision for loan losses was $3.0 million and $9.0 million for the three months ended June 30, 2020 and 2019, respectively, and $79.3 million and $16.0 million for the six months ended June 30, 2020 and 2019, respectively.

The increase in the provision for loan losses for the six months ended June 30, 2020 as compared to the same period in 2019 was due to an incremental provision recorded in the first quarter of 2020 of $63.0 million for the increase in expected defaults as a result of the COVID-19 pandemic and an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired during 2019 in which the provision for loan losses was recognized based upon an incurred loss methodology.

The Company's provision expense for the three months ended June 30, 2020 was also impacted by the Company's estimate of certain improved economic conditions as of June 30, 2020 than what was used by the Company to determine the allowance for loan losses as of March 31, 2020.

These improved economic conditions were partially offset by the Company extending its reversion period (to the Company's actual long-term historical loss experience) as of June 30, 2020, as the Company currently believes the economy will take longer to recover from the COVID-19 pandemic than what was originally estimated as of March 31, 2020.

The Company's total allowance for loan losses of $209.4 million at June 30, 2020 represents reserves equal to 0.7% of the Company's federally insured loans (or 29.1% of the risk sharing component of the loans that is not covered by the federal guaranty), 8.7% of the Company's private education loans, and 26.2% of the Company's consumer loans.

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 loans or debt outstanding.

Three months ended March 31,

The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding.

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Variable loan yield, gross 3.09 % 5.00 % 3.55 % 5.02 %

1 unchanged sentence

Discount accretion, net of premium and deferred origination costs amortization

0.02 0.02 0.02 0.02

Variable loan yield, net 2.27 4.18 2.74 4.20

3 unchanged sentences

Fixed rate floor income, gross

0.63 0.20 0.49 0.19

Fixed rate floor income - derivative settlements (a) (c)

(0.02) 0.23 0.01 0.27

Fixed rate floor income, net of settlements on derivatives 0.61 0.43 0.50 0.46

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A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without

derivative settlements follows.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Core loan spread 1.35 % 1.21 % 1.19 % 1.25 %

3 unchanged sentences

(b) Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps.

(c) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps.

(d) Core loan spread, excluding consumer loans, would have been 0.97% and 1.22% for the three months ended March, 31, 2020

and 2019, respectively.

(c) Derivative settlements consist of net settlements (paid) received related to the Company’s floor income interest rate swaps.

(d) Core loan spread, excluding consumer loans, would have been 1.24% and 1.16% for the three months ended June 30, 2020

and 2019, respectively, and 1.10% and 1.17% for the six months ended June 30, 2020 and 2019, respectively.

A trend analysis of the Company's core and variable loan spreads is summarized below.

4 unchanged sentences

See Item 3, “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 decreased during the three months ended March 31, 2020 as compared to the same period in 2019 due to a widening of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

The significant widening during the first quarter of 2020 was the result of a significant decrease in interest rates during March 2020.

Variable loan spread decreased during the three and six months ended June 30, 2020 as compared to the same periods in 2019 due to a widening of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

The significant widening during the first and second quarters of 2020 was the result of the significant decrease in interest rates during March 2020 and the first half of the second quarter of 2020.

As the Company's debt resets at lower interest rates during the second quarter of 2020, the Company expects variable loan spread to increase from current levels.

As the Company's debt resets at lower interest rates, the Company expects variable loan spread to increase from current levels.

1 unchanged sentence

A summary of fixed rate floor income and its contribution to core loan spread follows:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Fixed rate floor income, gross $ 31,866 10,840 50,625 21,265

3 unchanged sentences

(a) Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.

The increase in gross fixed rate floor income for the three months ended March 31, 2020 compared to the same period in 2019 was due to lower interest rates in 2020 as compared to 2019.

The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge loans earning fixed rate floor income.

The decrease in derivative settlements from the floor income interest rate swaps in 2020 as compared to 2019 was due to a decrease in the notional amount of derivatives outstanding and a decrease in interest rates.

The Company anticipates receiving increased levels of gross fixed rate floor income in future periods as a result of the significant drop in interest rates in March 2020.

This increase will be partially offset by a decrease in net settlements received on derivatives used to hedge these loans.

The increase in gross fixed rate floor income for the three and six months ended June 30, 2020 compared to the same periods in 2019 was due to lower interest rates in 2020 as compared to 2019.

The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge a portion of loans earning fixed rate floor income.

The decrease in net derivative settlements received from the floor income interest rate swaps in 2020 as compared to 2019 was due to a decrease in the notional amount of derivatives outstanding and a decrease in interest rates.

The Company anticipates receiving increased levels of gross fixed rate floor income in future periods as a result of the significant drop in interest rates in the first and second quarters of 2020.

This increase will be partially offset by an increase in net settlements paid on derivatives used to hedge these loans.

See Item 3, “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.

Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate

As of March 31, 2020, the interest earned on a principal amount of $18.8 billion in the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $18.5 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR.

As of June 30, 2020, the interest earned on a principal amount of $18.0 billion in the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $17.8 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.

2 unchanged sentences

Summary and Comparison of Operating Results

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

Net interest income after provision for loan losses

$ (23,622) 51,068 See table below for additional analysis.

Gain on sale of loans 18,206 — The Company sold a portfolio of consumer loans in 2020 and recognized a gain of $18.2 million.

Net interest income after provision for loan losses $ 63,095 50,260 39,475 101,328 See table below for additional analysis.

Gain on sale of loans — 1,712 18,206 1,712 The Company sold a portfolio of consumer loans in the first quarter of 2020 and second quarter of 2019 and recognized a gain of $18.2 million and $1.7 million, respectively.

Other income 732 3,176 3,947 6,701 Represents primarily borrower late fees.

The Company anticipates borrower late fees will decrease in future periods impacted by the COVID-19 pandemic as a result of borrower relief initiatives.

Impairment expense (26,303) — The 2020 amount represents impairment of the Company's beneficial interest in consumer loan securitization investments.

See "Overview - Impacts of COVID-19 Pandemic - Asset Generation and Management" above for additional information.

Impairment expense — — (26,303) — In March 2020, the Company recognized an impairment of its beneficial interest in consumer loan securitization investments as a result of the expected impacts of the COVID-19 pandemic.

See note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Derivative settlements, net

4,237 19,035 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, net 5,821 12,972 10,058 32,007 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below.

Derivative market value adjustments, net

(20,602) (30,574) 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.

Derivative market value adjustments, net (3,911) (37,060) (24,513) (67,635) 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.

Although the decrease in the forward yield curve was more substantial in 2020 as compared to 2019, the notional amount of derivatives outstanding during 2020 was much lower than compared to 2019.

Although the decreases in the forward yield curve were more substantial in 2020 as compared to 2019, the notional amount of derivatives outstanding during 2020 was much lower than compared to 2019.

Total other income/expense 2,642 (19,200) (18,605) (27,215)

1 unchanged sentence

Other expenses 4,863 6,207 8,581 10,044 The primary component of other expenses is servicing fees paid to third parties.

During the second quarter of 2019, the Company recognized $1.8 million of expenses to extinguish asset-backed notes from certain securitizations prior to their contractual maturity.

Excluding these costs, other expenses increased during the three and six months ended June 30, 2020 as compared to the same periods in 2019 due to an increase in third party servicing costs in connection with the Company's consumer loan portfolio.

Intersegment expenses 9,055 11,665 20,971 23,952 Amounts include fees paid to the LSS operating segment for the servicing of the Company’s loan portfolio.

These amounts exceed the actual cost of servicing the loans.

The decrease in servicing fees for the three and six months ended June 30, 2020 as compared to the same periods in 2019 was due to the expected amortization of the Company's FFELP portfolio and a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic.

Intersegment expenses also include costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

Total operating expenses 16,076 16,502 Total operating expenses, excluding the 2020 impairment of the Company's beneficial interest in consumer loan securitizations, were 31 basis points and 30 basis points of the average balance of loans for the three months ended March 31, 2020 and 2019, respectively.

(Loss) income before income taxes

(60,945) 26,552

Income tax benefit (expense) 14,627 (6,372) Represents income tax benefit (expense) at an effective tax rate of 24%.

Net (loss) income $ (46,318) 20,180

Total operating expenses 14,339 18,254 30,415 34,756 Total operating expenses, excluding the $1.8 million of expenses recognized in the second quarter of 2019 related to the extinguishment of debt prior to their contractual maturity (as described above), were 28 basis points and 30 basis points of the average balance of loans for the three months ended June 30, 2020 and 2019, respectively, and 30 basis points for both the six months ended June 30, 2020 and 2019.

Income (loss) before income taxes 51,398 12,806 (9,545) 39,357

Income tax (expense) benefit (12,336) (3,074) 2,291 (9,446) Represents income tax (expense) benefit at an effective tax rate of 24%.

Net income (loss) $ 39,062 9,732 (7,254) 29,911

Additional information:

Net (loss) income $ (46,318) 20,180

Derivative market value adjustments, net

20,602 30,574 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 to a net loss for the three months ended March 31, 2020 as compared to the same period in 2019 was due to (i) the impairment of the Company's beneficial interest in consumer loan securitizations recognized in 2020;

Net income (loss) $ 39,062 9,732 (7,254) 29,911 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 increase in net income for the three months ended June 30, 2020 as compared to the same period in 2019 was due to (i) an increase in core loan spread;

(ii) a decrease in operating expenses;

and (iii) a decrease in provision for loan losses.

These items were partially offset by (i) a decrease in the average balance of loans in 2020 as compared to 2019 and (ii) a decrease in borrower late fees.

The decrease in net income for the six months ended June 30, 2020 as compared to the same period in 2019 was due to (i) the impairment of the Company's beneficial interest in consumer loan securitizations recognized in 2020;

(ii) the decrease in core loan spread and the average balance of loans in 2020 as compared to 2019;

(iii) an incremental provision for loan losses in 2020 of $63.0 million (pre-tax) related to the increase in expected defaults as a result of the COVID-19 pandemic;

and (iv) an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired during the first quarter of 2019 for which the provision for loan losses was recognized based upon an incurred loss methodology.

and (iv) an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired during 2019 for which the provision for loan losses was recognized based upon an incurred loss methodology.

These items were partially offset by a $18.2 million (pre-tax) gain in 2020 from the sale of consumer loans.

Derivative market value adjustments, net 3,911 37,060 24,513 67,635

Tax effect (939) (8,894) (5,883) (16,232)

Net (loss) income, excluding derivative market value adjustments

$ (30,660) 43,416

Net interest income, net of settlements on derivatives

Net income, excluding derivative market value adjustments $ 42,034 37,898 11,376 81,314

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

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

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019 Additional information

Variable interest income, gross

$ 205,512 277,024 Decrease was due to a decrease in the gross yield earned on loans and a decrease in the average balance of loans.

Variable interest income, gross $ 155,646 271,983 361,156 549,006 Decrease was due to a decrease in the gross yield earned on loans and a decrease in the average balance of loans.

Consolidation rebate fees (42,387) (45,647) (85,524) (92,138) Decrease was due to a decrease in the average consolidation loan balance.

Discount accretion, net of premium and deferred origination costs amortization

660 1,375 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years.

Discount accretion, net of

premium and deferred

origination costs amortization 1,015 1,046 1,675 2,421 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years.

Variable interest income, net 114,274 227,382 277,307 459,289

Interest on bonds and notes payable

(132,668) (187,957) Decrease was due to a decrease in cost of funds and a decrease in the average balance of debt outstanding.

Interest on bonds and notes

payable (84,141) (183,072) (216,808) (371,029) Decrease was due to a decrease in cost of funds and a decrease in the average balance of debt outstanding.

Derivative settlements, net (a) 7,129 807 9,242 3,140 Derivative settlements include the net settlements received related to the Company’s 1:3 basis swaps.

Variable loan interest margin, net of settlements on derivatives (a)

32,479 46,285

Fixed rate floor income, gross

18,758 10,425 Fixed rate floor income increased due to lower interest rates in 2020 as compared to 2019.

Derivative settlements, net (a)

2,125 16,701 Derivative settlements include the settlements received related to the Company's floor income interest rate swaps.

Variable loan interest margin,

net of settlements on

derivatives (a) 37,262 45,117 69,741 91,400

Fixed rate floor income, gross 31,866 10,840 50,625 21,265 Fixed rate floor income increased due to lower interest rates in 2020 as compared to 2019.

Derivative settlements, net (a) (1,308) 12,165 816 28,867 Derivative settlements include the settlements received (paid) related to the Company's floor income interest rate swaps.

Decrease in settlements was due to a decrease in the notional amount of derivatives outstanding and lower interest rates in 2020 as compared to 2019.

Fixed rate floor income, net of settlements on derivatives

20,883 27,126

Fixed rate floor income, net of

settlements on derivatives 30,558 23,005 51,441 50,132

Core loan interest income (a) 67,820 68,122 121,182 141,532

53,362 73,411

Investment interest 4,443 5,073 8,577 9,608 Decrease was due to lower interest rates in 2020 as compared to 2019.

Intercompany interest (348) (963) (929) (1,805)

Provision for loan losses - federally insured loans

(39,323) (2,000) See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations."

Provision for loan losses - private education loans

Provision for loan losses - consumer loans

(27,176) (5,000)

Net interest income after provision for loan losses (net of settlements on derivatives) (a)

$ (19,385) 70,103 Excluding the incremental provision for loan losses in 2020 of $63.0 million related to the increase in expected defaults as a result of the COVID-19 pandemic, net interest income after provision for loan losses (net of settlements on derivatives) for the three months ended March 31, 2020 would have been $43.6 million.

This decrease was due to a decrease in core loan spread and the average balance of loans in 2020 as compared to 2019.

Negative provision (provision) for

loan losses - federally insured

loans 1,950 (2,000) (37,373) (4,000) See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations."

Provision for loan losses -

private education loans (2,322) — (12,121) —

Provision for loan losses -

consumer loans (2,627) (7,000) (29,803) (12,000)

Net interest income after provision

for loan losses (net of

settlements on derivatives) (a) $ 68,916 63,232 49,533 133,335 Net interest income after provision for loan losses (net of settlements on derivatives) increased for the three months ended June 30, 2020 as compared to the same period in 2019 due to an increase in core loan spread and a decrease in provision for loan losses, partially offset by a decrease in the average balance of loans.

Excluding the incremental provision for loan losses recognized in the first quarter of 2020 of $63.0 million related to the increase in expected defaults as a result of the COVID-19 pandemic, net interest income after provision for loan losses (net of settlements on derivatives) for the six months ended June 30, 2020 would have been $112.5 million.

The decrease in net interest income after provision for loan losses (net of settlements on derivatives), excluding this provision, for the six months ended June 30, 2020 as compared to the same period in 2019 was due to a decrease in core loan spread and the average balance of loans.

(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms.

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See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in this table.

See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table.

LIQUIDITY AND CAPITAL RESOURCES

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Sources of Liquidity

As of March 31, 2020, the Company had cash and cash equivalents of $204.8 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 $57.1 million as of March 31, 2020.

As of June 30, 2020, the Company had cash and cash equivalents of $67.5 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 $142.2 million as of June 30, 2020.

As of June 30, 2020, the Company has participated $86.7 million of these securities, and such participation is reflected as debt on the Company's consolidated balance sheet.

The Company also has a $455.0 million unsecured line of credit that matures on December 16, 2024.

As of March 31, 2020, there was $100.0 million outstanding on the unsecured line of credit and $355.0 million was available for future use.

As of June 30, 2020, there was $30.0 million outstanding on the unsecured line of credit and $425.0 million was available for future use.

In addition, the Company has a $22.0 million secured line of credit agreement that matures on May 30, 2022.

As of March 31, 2020, the secured line of credit had $5.0 million outstanding and $17.0 million was available for future use.

As of June 30, 2020, the secured line of credit had $5.0 million outstanding and $17.0 million was 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.

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Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale.

As of March 31, 2020, the Company holds $15.0 million (par value) of its own asset-backed securities.

As of June 30, 2020, the Company holds $14.6 million (par value) of its own asset-backed securities.

The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions;

strategic acquisitions and investments;

strategic acquisitions and investments, including anticipated capital commitments to Nelnet Bank;

expansion of ALLO's telecommunications network;

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On a calendar year annual basis, the Company has historically generated positive cash flow from operations.

However, during the six months ended June 30, 2020, the Company used $105.6 million in operating activities, compared to using $17.8 million for the same period in 2019.

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 Company’s consolidated balance sheet.

These accounts fluctuate with the fall and spring school terms based on the timing of when the Company collects tuition payments from customers and remits such payments to schools, resulting in these balances being significantly lower as of March 31 as compared to the balances as of December 31.

The “due to customers” liability account decreased $217.9 million and $153.2 million for the three months ended March 31, 2020 and 2019, respectively.

These accounts fluctuate with the fall and spring school terms based on the timing of when the Company collects tuition payments from customers and remits such payments to schools, resulting in these balances being significantly lower as of June 30 as compared to the balances as of December 31.

The “due to customers” liability account decreased $169.2 million and $90.7 million for the six months ended June 30, 2020 and 2019, respectively.

These decreases negatively impacted cash used in operating activities in the Company’s consolidated statements of cash flows for these periods.

During the three months ended March 31, 2020, the Company used $144.5 million in operating activities, compared to using $139.7 million for the same period in 2019.

Excluding the impact of the decrease in the "due to customers" liability account, the Company generated $73.4 million from operating activities for the three months ended March 31, 2020, compared to generating $13.5 million from operating activities for the same period in 2019.

The increase in such cash flows from operating activities was due to:

• Adjustments to net income (loss) for the impact of the non-cash provision for loan losses and impairment charges;

• The impact of changes to accounts receivable and other assets during the three months ended March 31, 2020 as compared to the same period in 2019.

These factors were partially offset by:

• The decrease in net income to a net loss;

Excluding the impact of the decrease in the "due to customers" liability account, the Company generated $63.6 million from operating activities for the six months ended June 30, 2020, compared to generating $72.9 million from operating activities for the same period in 2019.

The decrease in such cash flows from operating activities was due to:

• The decrease in net income;

• The adjustments to net income for derivative market value adjustments;

• Adjustments to net income (loss) for the impact of the gain from sale of loans and deferred taxes;

• The impact of changes to other liabilities during the three months ended March 31, 2020 as compared to the same period in 2019.

• Adjustments to net income for the impact of the gains from sale of loans and investments;

• The impact of changes to accrued interest receivable and other liabilities during the six months ended June 30, 2020 as compared to the same period in 2019.

These factors were partially offset by:

• Adjustments to net income for the impact of the non-cash provision for loan losses and impairment charges;

• A decrease in net payments to the Company's clearinghouse for margin payments on derivatives;

• The impact of changes to accounts receivable and other assets during the six months ended June 30, 2020 as compared to the same period in 2019.

The primary items included in the statement of cash flows for investing activities are the purchase and repayment of loans.

The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable used to fund loans.

Cash provided by investing activities and used in financing activities for the three months ended March 31, 2020 was $105.7 million and $83.5 million, respectively.

Cash provided by investing activities and used in financing activities for the three months ended March 31, 2019 was $386.3 million and $387.4 million, respectively.

Cash provided by investing activities and used in financing activities for the six months ended June 30, 2020 was $717.3 million and $913.0 million, respectively.

Cash provided by investing activities and used in financing activities for the six months ended June 30, 2019 was $855.5 million and $976.0 million, respectively.

Investing and financing activities are further addressed in the discussion that follows.

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The following table shows the Company's debt obligations outstanding that are secured by loan assets and related collateral.

As of March 31, 2020

As of June 30, 2020

Carrying amount

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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 March 31, 2020, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $2.27 billion as detailed below.

The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of March 31, 2020.

As of March 31, 2020, the Company had $20.0 billion of loans included in asset-backed securitizations, which represented 97.3 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 March 31, 2020, private education and consumer loans funded with operating cash, and loans acquired subsequent to March 31, 2020.

As of June 30, 2020, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $2.28 billion as detailed below.

The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of June 30, 2020.

As of June 30, 2020, the Company had $19.3 billion of loans included in asset-backed securitizations, which represented 97.3 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 June 30, 2020, private education and consumer loans funded with operating cash, and loans acquired subsequent to June 30, 2020.

Asset-backed Securitization Cash Flow Forecast

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(dollars in millions)

The forecasted future undiscounted cash flows of approximately $2.27 billion include approximately $1.06 billion (as of March 31, 2020) of overcollateralization included in the asset-backed securitizations.

These excess net asset positions are included in the consolidated balance sheets and included in the balances of "loans and accrued interest receivable" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $1.21 billion, or approximately $0.92 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's March 31, 2020 balance of consolidated shareholders' equity.

Two of the Company’s asset-backed securitizations as of March 31, 2020 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.

The forecasted future undiscounted cash flows of approximately $2.28 billion include approximately $1.14 billion (as of June 30, 2020) of overcollateralization included in the asset-backed securitizations.

These excess net asset positions are included in the consolidated balance sheets and included in the balances of "loans and accrued interest receivable" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $1.14 billion, or approximately $0.87 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's June 30, 2020 balance of consolidated shareholders' equity.

Two of the Company’s asset-backed securitizations as of June 30, 2020 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, the remaining unencumbered student loans (and other remaining assets, 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.

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Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.

As of March 31, 2020, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $1.1 billion, of which $0.3 billion was outstanding and $0.8 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).

As of June 30, 2020, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $550.0 million, of which $201.1 million was outstanding and $348.9 million was available for additional funding.

One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (November 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 loans would then be funded at this new advance rate until the final maturity date of the facility (November 22, 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 March 31, 2020, the Company had $18.5 million advanced as equity support on these facilities.

For further discussion of the Company's FFELP warehouse facilities outstanding at March 31, 2020, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

The Company has 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 March 31, 2020, $67.1 million was outstanding under this facility and $132.9 million was available for future funding.

Additionally, as of March 31, 2020, the Company had $29.1 million advanced as equity support under this facility.

As of June 30, 2020, the Company had $16.0 million advanced as equity support on these facilities.

For further discussion of the Company's FFELP warehouse facilities outstanding at June 30, 2020, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

On February 13, 2020, the Company closed on a private education loan warehouse facility with an aggregate maximum financing amount available of $100.0 million.

On March 20, 2020, the facility was amended to increase the maximum financing amount to $200.0 million.

The facility has an advance rate of 90 percent, liquidity provisions through February 13, 2021, and a final maturity date of February 13, 2022.

As of March 31, 2020, $85.5 million was outstanding under this warehouse facility and $114.5 million was available for future funding.

Additionally, as of March 31, 2020, the Company had $9.2 million advanced as equity support under this facility.

The facility has an advance rate of 80 to 90 percent, liquidity provisions through February 13, 2021, and a final maturity date of February 13, 2022.

As of June 30, 2020, $107.4 million was outstanding under this warehouse facility and $92.6 million was available for future funding.

Additionally, as of June 30, 2020, the Company had $12.4 million advanced as equity support under this facility.

As of June 30, 2020, $73.6 million was outstanding under this facility and $126.4 million was available for future funding.

Additionally, as of June 30, 2020, the Company had $24.7 million advanced as equity support under this facility.

Subsequent to June 30, 2020, the Company made the decision to sell an additional $60.8 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 25.4 percent residual interest in the consumer loan securitization.

The Company currently anticipates recognizing a gain in the third quarter of 2020 of $14.8 million (pre-tax) from the sale of these loans.

After the completion of this loan sale, $46.8 million was outstanding under the Company's consumer loan warehouse facility and $153.2 million was available for future funding.

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.

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The Company maintains an agreement with Union Bank, a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans.

As of March 31, 2020, $466.4 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

As of June 30, 2020, $925.3 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.

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Asset-backed Securities Transactions

During the first three months of 2020, the Company completed three FFELP asset-backed securitizations totaling $1.1 billion (par value).

During the first six months of 2020, the Company completed three FFELP asset-backed securitizations totaling $1.1 billion (par value).

The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities.

See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of 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.

The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations.

Fitch Ratings, Standard & Poor's, and Moody's Investors Service have recently downgraded and placed numerous tranches of FFELP securitizations by various issuers, including certain tranches of prior FFELP securitizations issued by subsidiaries of the Company, on review for potential downgrade due to principal payments and prepayments on the underlying student loans coming in slower than initial expectations, and the resulting risk that certain principal maturities on those FFELP securitizations may not be met by the final maturity dates, which could result in an event of default under the underlying securitization agreements.

The decrease in principal payments and prepayments is due to significant increases in forbearances resulting from a contraction in economic activity and an increase in unemployment due to the COVID-19 pandemic.

Such rating actions have caused the spreads on FFELP securitizations in general to widen and have reduced the liquidity in the secondary market for FFELP securitizations.

The ultimate impact of these developments on the Company’s current and future securitizations is uncertain.

Depending on future rating agency actions and market conditions, the Company currently anticipates continuing to access the asset-backed securitization market.

Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations.

Liquidity Impact Related to Hedging Activities

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By using derivative instruments, the Company is exposed to market risk which could impact its liquidity.

Based on the derivative portfolio outstanding as of March 31, 2020, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties and/or make variation margin payments to its third-party clearinghouse.

Based on the derivative portfolio outstanding as of June 30, 2020, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to 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 the Company's derivatives, or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to deposit additional collateral with its derivative instrument counterparties and/or make variation margin payments to its third-party clearinghouse.

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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.

For the three months ended March 31, 2020, ALLO's capital expenditures were $7.2 million.

The Company currently anticipates total ALLO network capital expenditures for the remainder of 2020 (April 1, 2020 - December 31, 2020) will be approximately $30 million.

For the six months ended June 30, 2020, ALLO's capital expenditures were $17.2 million.

The Company currently anticipates total ALLO network capital expenditures for the remainder of 2020 (July 1, 2020 - December 31, 2020) will be approximately $20 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.

Liquidity Impact Related to Nelnet Bank

On March 18, 2020, the Company announced that it received notification of approval from the FDIC Board of Directors for federal deposit insurance and the UDFI in connection with the establishment of Nelnet Bank as a Utah-chartered industrial bank.

Nelnet Bank would operate as an internet bank franchise focused on the private education loan marketplace, with a home office in Draper, Utah.

The approval from the FDIC and UDFI is subject to a number of conditions, including compliance with the terms of the orders from the FDIC and UDFI.

In addition, Nelnet Bank will have to meet a readiness review by the FDIC and UDFI before commencing operations.

Although a formal timeline has not been established for these items, the Company currently believes Nelnet Bank could be approved and operational by the fourth quarter of 2020.

On June 26, 2020, Nelnet Bank, Nelnet, Inc.

(the parent), and Michael S.

As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc.

(iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations;

and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.

Nelnet Bank will be funded with an initial capital commitment of $100.0 million from the Company.

Nelnet Bank will operate as a separate subsidiary of the Company, and the industrial bank charter will allow the Company to maintain its other diversified business offerings.

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 March 31, 2020, the unsecured line of credit had $100.0 million outstanding and $355.0 million was available for future use.

As of June 30, 2020, the unsecured line of credit had $30.0 million outstanding and $425.0 million was available for future use.

The Company also has a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022.

As of March 31, 2020, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use.

As of June 30, 2020, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use.

The line of credit is secured by several Company-owned properties.

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The Hybrid Securities are unsecured obligations of the Company.

As of March 31, 2020, the Company had $20.4 million of Hybrid Securities that remain outstanding.

As of June 30, 2020, the Company had $20.4 million of Hybrid Securities that remain outstanding.

During the second quarter of 2020, the Company entered into an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loan asset-backed securities.

As of June 30, 2020, $86.7 million of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

This participation agreement has been accounted for by the Company as a secured borrowing.

Upon termination or expiration of this agreement, the Company would expect to use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.

For further discussion of these debt facilities described above, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

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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 June 30, 2020, 3,335,819 shares remained authorized for repurchase under the Company's stock repurchase program.

Shares may be repurchased from time to time depending on various factors, including share prices and other potential uses of liquidity.

Shares repurchased by the Company during the three months ended March 31, 2020 are shown below.

Such shares were repurchased from employees to satisfy tax withholding obligations upon the vesting of restricted stock, and not as part of the stock repurchase program.

Shares repurchased by the Company during the three months ended March 31, 2020 and June 30, 2020 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.

For additional information on stock repurchases during the second quarter of 2020, see "Stock Repurchases" under Part II, Item 2 of this report.

Total shares repurchased Purchase price

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Quarter ended March 31, 2020 24,885 $ 1,253 50.36

Subsequent to March 31, 2020, through May 7, 2020, the Company has repurchased 791,104 shares of the Company's Class A common stock for $35.4 million ($44.73 per share).

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.

As of May 7, 2020, 4,012,773 shares remain authorized for purchase under the Company's repurchase program.

On March 13, 2020, the Company paid a first quarter 2020 cash dividend on the Company's Class A and Class B common stock of $0.20 per share.

In addition, the Company's Board of Directors has declared a second quarter 2020 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.20 per share.

The second quarter cash dividend will be paid on June 15, 2020 to shareholders of record at the close of business on June 1, 2020.

Quarter ended June 30, 2020 1,473,049 67,274 45.67

Total 1,497,934 $ 68,527 45.75

Included in the shares repurchased during the quarter ended June 30, 2020 in the table above are a total of 100,000 shares of Class A common stock the Company purchased on May 27, 2020 from Shelby J.

Butterfield, a significant shareholder of the Company.

The shares were purchased at a discount to the closing market price of the Company's Class A common stock as of May 27, 2020, and the transaction was separately approved by the Company's Board of Directors.

Immediately prior to the Company's repurchase of such shares from Ms.

Butterfield, the repurchased shares were shares of the Company's Class B common stock that Ms.

Butterfield converted to shares of Class A common stock.

On June 15, 2020, the Company paid a second quarter 2020 cash dividend on the Company's Class A and Class B common stock of $0.20 per share.

In addition, the Company's Board of Directors has declared a third quarter 2020 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.20 per share.

The third quarter cash dividend will be paid on September 15, 2020 to shareholders of record at the close of business on September 1, 2020.

The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis