What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 223 added, 289 removed, 937 unchanged (35% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Loans and accrued interest receivable (net of allowance for loan losses of $ 185,899 and

42 unchanged sentences

Total liabilities and equity $ 22,222,526 23,708,970

Supplemental information - assets and liabilities of consolidated education and other lending variable interest entities:

Supplemental information - assets and liabilities of consolidated education and other lending

variable interest entities:

Loans and accrued interest receivable $ 20,085,382 21,399,382

Restricted cash 501,080 639,847

Other assets 30 31

Bonds and notes payable ( 19,349,111 ) ( 20,742,798 )

5 unchanged sentences

(Dollars in thousands, except share data)

Three months ended Six months ended

June 30, June 30,

Three months ended Nine months ended

September 30, September 30,

2020 2019 2020 2019

6 unchanged sentences

Net interest income 81,322 66,457 203,030 185,098

Less provision for loan losses 2,999 9,000 79,297 16,000

Less (negative provision) provision for loan losses ( 5,821 ) 10,000 73,476 26,000

Net interest income after provision for loan losses 87,143 56,457 129,554 159,098

23 unchanged sentences

Net income 71,176 33,135 118,020 99,461

Net income attributable to noncontrolling interests

Net loss (income) attributable to noncontrolling interests

327 77 ( 568 ) ( 38 )

11 unchanged sentences

(Dollars in thousands)

Three months ended Six months ended

June 30, June 30,

Three months ended Nine months ended

September 30, September 30,

2020 2019 2020 2019

8 unchanged sentences

Comprehensive income 72,227 32,881 119,332 98,468

Comprehensive income attributable to noncontrolling interests ( 128 ) ( 59 ) ( 895 ) ( 115 )

Comprehensive loss (income) attributable to noncontrolling interests 327 77 ( 568 ) ( 38 )

Comprehensive income attributable to Nelnet, Inc.

6 unchanged sentences

Class A Class B

Balance as of March 31, 2019 — 28,628,528 11,459,641 $ — 286 115 636 2,321,407 3,552 4,298 2,330,294

Balance as of June 30, 2019 — 28,399,526 11,279,641 $ — 284 113 1,670 2,317,115 3,144 4,292 2,326,618

Issuance of noncontrolling interests — — — — — — — — — 4,165 4,165

Net income — — — — — — — 24,619 — 59 24,678

Net income (loss) — — — — — — — 33,212 — ( 77 ) 33,135

Other comprehensive loss — — — — — — — — ( 254 ) — ( 254 )

5 unchanged sentences

Repurchase of common stock — ( 3,365 ) — — — — ( 221 ) — — — ( 221 )

Conversion of common stock — 180,000 ( 180,000 ) — 2 ( 2 ) — — — — —

Balance as of September 30, 2019 — 28,411,506 11,279,641 $ — 284 113 3,678 2,343,185 2,890 4,515 2,354,665

Balance as of June 30, 2020 — 27,232,836 11,171,609 $ — 272 112 1,867 2,331,312 3,233 3,990 2,340,786

Balance as of March 31, 2020 — 28,582,032 11,271,609 $ — 286 113 9,140 2,310,282 859 5,120 2,325,800

Issuance of noncontrolling interests — — — — — — — — — 14 14

Net income — — — — — — — 86,482 — 128 86,610

Net income (loss) — — — — — — — 71,503 — ( 327 ) 71,176

Other comprehensive income — — — — — — — — 1,051 — 1,051

5 unchanged sentences

Repurchase of common stock — ( 93,380 ) — — — — ( 2,580 ) ( 2,038 ) — — ( 4,618 )

Conversion of common stock — 100,000 ( 100,000 ) — 1 ( 1 ) — — — — —

Acquisition of noncontrolling interest — — — — — — — ( 1,250 ) — ( 750 ) ( 2,000 )

Balance as of June 30, 2020 — 27,232,836 11,171,609 $ — 272 112 1,867 2,331,312 3,233 3,990 2,340,786

Balance as of September 30, 2020 — 27,163,588 11,171,609 $ — 272 112 1,704 2,393,113 4,284 3,346 2,402,831

See accompanying notes to consolidated financial statements.

16 unchanged sentences

Conversion of common stock — 180,000 ( 180,000 ) — 2 ( 2 ) — — — — —

Balance as of June 30, 2019 — 28,399,526 11,279,641 $ — 284 113 1,670 2,317,115 3,144 4,292 2,326,618

Balance as of September 30, 2019 — 28,411,506 11,279,641 $ — 284 113 3,678 2,343,185 2,890 4,515 2,354,665

Balance as of December 31, 2019 — 28,458,495 11,271,609 $ — 285 113 5,715 2,377,627 2,972 4,382 2,391,094

11 unchanged sentences

Acquisition of noncontrolling interest — — — — — — — ( 1,250 ) — ( 750 ) ( 2,000 )

Balance as of June 30, 2020 — 27,232,836 11,171,609 $ — 272 112 1,867 2,331,312 3,233 3,990 2,340,786

Balance as of September 30, 2020 — 27,163,588 11,171,609 $ — 272 112 1,704 2,393,113 4,284 3,346 2,402,831

See accompanying notes to consolidated financial statements.

2 unchanged sentences

(Dollars in thousands)

Six months ended

Nine months ended

September 30,

Net income attributable to Nelnet, Inc.

2 unchanged sentences

118,020 99,461

Adjustments to reconcile net income to net cash used in operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs

3 unchanged sentences

Derivative market value adjustments 21,072 73,265

Proceeds from termination of derivative instruments — 2,119

Payments from termination of derivative instruments, net — ( 13,940 )

Payments to clearinghouse - initial and variation margin, net ( 20,405 ) ( 59,967 )

1 unchanged sentence

Gain from investments, net ( 37,766 ) ( 4,891 )

(Gain) loss on repurchases and extinguishment of debt ( 403 ) 1,801

(Gain) loss on repurchases and extinguishment of debt, net ( 508 ) 15,679

Deferred income tax benefit ( 10,975 ) ( 9,592 )

1 unchanged sentence

Impairment expense 34,419 —

Increase in accrued interest receivable ( 123,276 ) ( 44,967 )

Increase in loan and investment accrued interest receivable ( 27,192 ) ( 57,864 )

Decrease (increase) in accounts receivable 45,475 ( 7,637 )

2 unchanged sentences

Decrease in accrued interest payable ( 17,673 ) ( 9,334 )

Decrease in other liabilities ( 26,817 ) ( 504 )

Increase in other liabilities 32,733 62,757

Decrease in the carrying amount of lease liability ( 8,484 ) ( 6,734 )

Decrease in due to customers ( 151,674 ) ( 60,369 )

Net cash used in operating activities ( 105,601 ) ( 17,835 )

Net cash provided by operating activities 173,035 142,918

Cash flows from investing activities:

22 unchanged sentences

Acquisition of noncontrolling interest ( 2,000 ) —

Issuance of noncontrolling interests — 4,138

Distribution to noncontrolling interests ( 660 ) ( 173 )

6 unchanged sentences

(Dollars in thousands)

Six months ended

Nine months ended

September 30,

Supplemental disclosures of cash flow information:

2 unchanged sentences

Cash disbursements made for operating leases $ 9,457 7,307

Noncash operating, investing, and financing activity:

Non-cash operating, investing, and financing activity:

ROU assets obtained in exchange for lease obligations $ 4,158 7,972

4 unchanged sentences

As of As of As of As of

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

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

Total cash and cash equivalents $ 96,316 133,906 160,979 121,347

9 unchanged sentences

The accompanying unaudited consolidated financial statements of Nelnet, Inc.

and subsidiaries (the “Company”) as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2019 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented.

and subsidiaries (the “Company”) as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2019 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented.

The preparation of financial statements in conformity with U.S.

1 unchanged sentence

Actual results could differ from those estimates.

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020.

The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report").

55 unchanged sentences

Qualitative and quantitative adjustments to historical loss information are made separately on each of the Company’s federally insured, private education, and consumer loan portfolios.

Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all of the following for the Company’s federally insured loan portfolio:

loans in repayment versus those in nonpaying status;

Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider the following factors, as applicable, for each of the Company’s loan portfolios:

student loans in repayment versus those in nonpaying status;

delinquency status;

type of private education or consumer loan program;

trends in defaults in the portfolio based on Company and industry data;

past experience;

trends in student loan claims rejected for payment by guarantors;

trends in federally insured student loan claims rejected for payment by guarantors;

changes in federal student loan programs;

current economic conditions, including changes in unemployment rates;

current economic conditions, including changes in unemployment rates and gross domestic product growth;

and other relevant qualitative factors.

1 unchanged sentence

Student loans disbursed prior to October 1, 1993 are fully insured.

Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all of the following for the Company’s private education loans:

loans in repayment versus those in a nonpaying status;

delinquency status;

type of program;

trends in defaults in the portfolio based on Company and industry data;

past experience;

current economic conditions, including changes in unemployment rates and gross domestic product growth;

and other relevant qualitative factors.

The Company places private education loans on nonaccrual status when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days past due.

Collections, if any, are reflected as a recovery through the allowance for loan losses.

Qualitative and quantitative adjustments related to current conditions and a reasonable and supportable forecast period consider all of the following for the Company's consumer loans:

delinquency status;

type of program;

trends in defaults in the portfolio based on Company and industry data;

past experience;

current economic conditions;

and other relevant qualitative factors.

The Company places consumer loans on nonaccrual status when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days or 180 days past due, depending on type of loan program.

19 unchanged sentences

Loans and accrued interest receivable consisted of the following:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Federally insured student loans:

14 unchanged sentences

$ 20,076,542 21,402,868

On January 30, 2020, the Company sold $ 124.2 million (par value) of consumer loans to an unrelated third party who securitized such loans.

The Company recognized a $ 18.2 million (pre-tax) gain as part of this transaction.

As partial consideration received for the consumer loans sold, the Company received a 31.4 percent residual interest in the consumer loan securitization that is included in "investments" on the Company's consolidated balance sheet.

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 of June 30, 2020, these loans were classified as held for investment and are included in the table above.

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 those loans.

On January 30, 2020 and July 29, 2020, the Company sold $ 124.2 million (par value) and $ 60.8 million (par value), respectively, of consumer loans to an unrelated third party who securitized such loans.

The Company recognized a gain of $ 18.2 million (pre-tax) and $ 14.8 million (pre-tax), respectively, as part of these transactions.

As partial considerations received for the consumer loans sold, the Company received a 31.4 percent and 25.4 percent residual interest, respectively, in the consumer loan securitizations that are included in "investments" on the Company's consolidated balance sheet.

Activity in the Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio segment.

Balance at beginning of period Impact of ASC 326 adoption Provision for loan losses Charge-offs Recoveries Initial allowance on loans purchased with credit deterioration (a) Loan sale Balance at end of period

Three months ended June 30, 2020

Balance at beginning of period Impact of ASC 326 adoption Provision (negative provision) for loan losses Charge-offs Recoveries Initial allowance on loans purchased with credit deterioration (a) Loan sale Balance at end of period

Three months ended September 30, 2020

Federally insured loans $ 144,829 — ( 5,299 ) ( 2,487 ) — 2,900 — 139,943

2 unchanged sentences

$ 209,445 — ( 5,821 ) ( 5,215 ) 514 2,900 ( 15,924 ) 185,899

Three months ended June 30, 2019

Three months ended September 30, 2019

Federally insured loans $ 39,056 — 2,000 ( 3,380 ) — — — 37,676

2 unchanged sentences

$ 62,591 — 10,000 ( 6,598 ) 424 — — 66,417

Six months ended June 30, 2020

Nine months ended September 30, 2020

Federally insured loans $ 36,763 72,291 32,074 ( 14,885 ) — 13,700 — 139,943

2 unchanged sentences

$ 61,914 91,014 73,476 ( 26,138 ) 1,357 13,700 ( 29,424 ) 185,899

Six months ended June 30, 2019

Nine months ended September 30, 2019

Federally insured loans $ 42,310 — 6,000 ( 10,634 ) — — — 37,676

2 unchanged sentences

$ 60,388 — 26,000 ( 19,580 ) 1,109 — ( 1,500 ) 66,417

a) During the three and six months ended June 30, 2020, the Company acquired $ 292.7 million (par value) and $ 583.9 million (par value), respectively, of federally insured rehabilitation loans.

a) During the three and nine months ended September 30, 2020, the Company acquired $ 137.5 million (par value) and $ 721.4 million (par value), respectively, of federally insured rehabilitation loans.

These loans met the definition of PCD loans when they were purchased by the Company.

4 unchanged sentences

Apart from the impact of the adoption of ASC 326 effective January 1, 2020, the Company’s allowance for loan losses increased during the first quarter of 2020 primarily as a result of the COVID-19 pandemic and its effects on current and forecasted economic conditions.

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.

The Company's provision expense for the three months ended June 30, 2020 was impacted by the Company's estimate of certain improved economic conditions as of June 30, 2020 in comparison to 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.

The Company's provision expense for the three months ended September 30, 2020 was impacted by the Company's ongoing loan portfolio amortization;

management's estimate of certain continued improved economic conditions as of September 30, 2020 in comparison to what was used by the Company to determine the allowance for loan losses as of June 30, 2020;

and a decrease in the amount of loans in forbearance at September 30, 2020 as compared to June 30, 2020.

Loan Status and Delinquencies

3 unchanged sentences

The table below shows the Company’s loan status and delinquency amounts.

As of June 30, 2020 As of December 31, 2019 As of June 30, 2019

As of September 30, 2020 As of December 31, 2019 As of September 30, 2019

Federally insured loans:

48 unchanged sentences

The CARES Act, among other things, provides broad relief, effective March 13, 2020 through September 30, 2020, for borrowers that have student loans owned by the Department of Education (the "Department").

On August 8, 2020, the President directed the Secretary of the Department to continue to suspend loan payments, stop collections, and waive interest on student loans owned by the Department until December 31, 2020.

This relief package excluded Federal Family Education Loan Program ("FFELP" or "FFEL Program"), private education, and consumer loans.

2 unchanged sentences

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.

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.

However, the Company will continue to apply a natural disaster forbearance with an end date of December 31, 2020 to any federally insured and private education loan upon request.

In addition, for both federally insured and private education loans, effective March 13, 2020 through December 31, 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.

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 were suspended.

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

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

When providing relief for its borrowers, the Company follows the guidance under the CARES Act to determine if a modification is subject to troubled debt restructuring classification.

All relief provided to borrowers by the Company through September 30, 2020 have met the criteria under the CARES Act and the modifications have not been accounted for as troubled debt restructuring.

Nonaccrual Status

The Company does not place federally insured loans on nonaccrual status due to the government guaranty.

The amortized cost of private and consumer loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of December 31, 2019 and June 30, 2020, was not material.

The amortized cost of private and consumer loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of December 31, 2019 and September 30, 2020, was not material.

Amortized Cost Basis by Origination Year

The following table presents the amortized cost of the Company's private education and consumer loans by loan status and delinquency amount as of June 30, 2020 based on year of origination.

The following table presents the amortized cost of the Company's private education and consumer loans by loan status and delinquency amount as of September 30, 2020 based on year of origination.

Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made under the Federal Direct Loan Program.

As such, all the Company’s federally insured loans were originated prior to July 1, 2010.

Six months ended June 30, 2020 2019 2018 2017 2016 Prior Years Total

Nine months ended September 30, 2020 2019 2018 2017 2016 Prior Years Total

Private education loans:

27 unchanged sentences

The following tables summarize the Company’s outstanding debt obligations by type of instrument:

As of June 30, 2020

As of September 30, 2020

Interest rate

54 unchanged sentences

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

As of June 30, 2020, the Company had two FFELP warehouse facilities as summarized below.

As of September 30, 2020, the Company had two FFELP warehouse facilities as summarized below.

NFSLW-I (a) NHELP-II (b) Total

9 unchanged sentences

(b) On May 29, 2020, the Company decreased the maximum financing amount for this warehouse facility to $ 250 million, extended the expiration of liquidity provisions to February 26, 2021, and extended the maturity date to February 26, 2023.

On November 2, 2020, the Company decreased the maximum financing amount for each of its FFELP warehouse facilities to $ 50.0 million.

Asset-Backed Securitizations

The following table summarizes the asset-backed securitization transactions completed during the first six months of 2020.

2020-1 2020-2 2020-3 Total

The following table summarizes the asset-backed securitization transactions completed during the first nine months of 2020.

2020-1 2020-2 2020-3 2020-4 (a) Total

Date securities issued 2/20/20 3/11/20 3/19/20 8/27/20

14 unchanged sentences

Final maturity date 3/26/68 4/25/68 3/26/68

(a) Total original principal amount excludes the Class B subordinated tranche for the 2020-4 transaction totaling $ 5.0 million that was retained by the Company at issuance.

As of September 30, 2020, the Company had a total of $ 20.8 million (par value) of its own asset-backed securities that were retained upon initial issuance or repurchased in the secondary market.

For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements.

However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated in the trust estate.

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

Upon sale, these notes would be

shown as "bonds and notes payable" in the Company's consolidated balance sheet.

The Company believes the market value of such notes is currently less than par value.

Any excess of the par value over the market value on the date of sale would be recognized by the Company as interest expense over the life of the bonds.

Private Education Loan Warehouse Facility

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 February 13, 2020, the Company obtained 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 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 September 30, 2020, $ 102.6 million was outstanding under this warehouse facility and $ 97.4 million was available for future funding.

Additionally, as of September 30, 2020, the Company had $ 11.1 million advanced as equity support under this facility.

Consumer Loan Warehouse Facility

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 June 30, 2020, $ 73.6 million was outstanding under this warehouse 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.

The Company has a consumer loan warehouse facility that as of September 30, 2020 had an aggregate maximum financing amount available of $ 200.0 million.

The facility has 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 September 30, 2020, $ 30.3 million was outstanding under this warehouse facility and $ 169.7 million was available for future funding.

Additionally, as of September 30, 2020, the Company had $ 13.8 million advanced as equity support under this facility.

On November 3, 2020, the Company decreased the maximum financing amount on this facility to $ 100.0 million.

Unsecured Line of Credit

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

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

As of September 30, 2020, no amount was outstanding on the line of credit and $ 455.0 million was available for future use.

The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of $ 550.0 million, subject to certain conditions.

Junior Subordinated Hybrid Securities ("Hybrid Securities")

Subsequent to September 30, 2020, the Company redeemed all the outstanding $ 20.4 million of Hybrid Securities at par.

Other Borrowings

During the second quarter of 2020, the Company entered into an agreement with Union Bank and Trust Company ("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 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.

As of September 30, 2020, $ 108.7 million of student loan asset-backed securities 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.

4 unchanged sentences

Derivative instruments used as part of the Company's risk management strategy are further described in note 5 of the notes to consolidated financial statements included in the 2019 Annual Report.

A tabular presentation of such derivatives outstanding as of June 30, 2020 and December 31, 2019 is presented below.

The following table summarizes the Company’s outstanding basis swaps as of December 31, 2019 and June 30, 2020, in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

A tabular presentation of such derivatives outstanding as of September 30, 2020 and December 31, 2019 is presented below.

The following table summarizes the Company’s outstanding basis swaps as of December 31, 2019 and September 30, 2020, in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

Maturity Notional amount

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

2020 $ — 1,000,000

7 unchanged sentences

(a) $ 750 million of the notional amount of these derivatives had forward effective start dates in May 2020.

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2020 and December 31, 2019 was one-month LIBOR plus 9.1 basis points and 9.7 basis points, respectively.

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 2020 and December 31, 2019 was one-month LIBOR plus 9.1 basis points and 9.7 basis points, respectively.

Interest Rate Swaps – Floor Income Hedges

The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income.

As of June 30, 2020 As of December 31, 2019

Maturity Notional amount Weighted average fixed rate paid by the Company (a)(d) Notional amount Weighted average fixed rate paid by the Company (a)

As of September 30, 2020 As of December 31, 2019

Maturity Notional amount Weighted average fixed rate paid by the Company (a)(c) Notional amount Weighted average fixed rate paid by the Company (a)

2020 $ — — % $ 1,500,000 1.01 %

1 unchanged sentence

2022 (b) 500,000 0.94 250,000 1.65

2023 (c) 400,000 1.00 150,000 2.25

2023 400,000 1.00 150,000 2.25

2024 250,000 0.28 — —

$ 1,750,000 1.28 % $ 2,500,000 1.42 %

(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.

(b) $ 250.0 million of the derivatives outstanding at December 31, 2019 and June 30, 2020 have forward effective start dates in June 2021 and $ 250.0 million of derivatives entered into in May 2020 have forward effective start dates in August 2020.

(d) Excluding the derivatives with forward effective start dates, the weighted average fixed rate paid by the Company as of June 30, 2020, on its $ 750.0 million floor income derivative portfolio was 2.17 %.

Interest Rate Caps

In June 2015 and June 2019, the Company paid $ 2.9 million and $ 0.3 million, respectively, for interest rate cap contracts to mitigate a rise in interest rates and its impact on earnings related to its student loan portfolio earning a fixed rate.

In the event that the one-month LIBOR or three-month LIBOR rate rises above the applicable strike rate, the Company will receive monthly payments related to the spread difference.

The following table summarizes these derivative instruments as of June 30, 2020.

Notional Amount Strike rate Maturity date

$ 125,000 2.50 % (1-month LIBOR)

July 15, 2020

150,000 4.99 % (1-month LIBOR)

July 15, 2020

500,000 2.25 % (3-month LIBOR)

September 25, 2020

(b) $ 250.0 million of the derivatives outstanding at December 31, 2019 and September 30, 2020 have forward effective start dates in June 2021.

(c) Excluding the derivatives with forward effective start dates, the weighted average fixed rate paid by the Company as of September 30, 2020, on its $ 1.5 billion floor income derivative portfolio was 1.21 %.

Consolidated Financial Statement Impact Related to Derivatives - Statements of Income

The following table summarizes the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income.

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

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

1 unchanged sentence

Interest rate swaps - floor income hedges ( 3,588 ) 7,064 ( 2,772 ) 35,931

Total settlements - income (expense) 5,821 12,972 10,058 32,007

Total settlements - (expense) income ( 2,391 ) 7,298 7,666 39,306

Change in fair value:

7 unchanged sentences

A summary of the Company's investments follows:

As of June 30, 2020 As of December 31, 2019

As of September 30, 2020 As of December 31, 2019

Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized cost Gross unrealized gains Gross unrealized losses Fair value

1 unchanged sentence

Student loan asset-backed and other debt securities - available-for-sale (a) $ 173,327 6,049 ( 414 ) 178,962 48,790 3,911 — 52,701

$ 137,970 4,571 ( 316 ) 142,225 48,790 3,911 — 52,701

Equity securities 26,793 6,465 ( 2,792 ) 30,466 9,622 4,561 ( 1,283 ) 12,900

3 unchanged sentences

Measurement alternative 143,221 72,760

143,224 72,760

Equity method 14,104 15,379

14,906 15,379

Other 938 1,301

Total venture capital and funds 158,263 89,440

Real estate and solar:

Equity method

55,611 51,721

Equity and HLBV method (b) 44,634 51,721

Other 852 867

Total real estate and solar 45,486 52,588

56,467 52,588

Beneficial interest in federally insured loan securitizations (b) 32,396 —

Beneficial interest in consumer loan securitizations, net of allowance for credit losses of $ 24,837 as of June 30, 2020 (b)

Beneficial interest in federally insured loan securitizations (c) 30,726 —

Beneficial interest in consumer loan securitizations, net of allowance for credit losses of $ 20,947 as of September 30, 2020 (c)

27,751 33,187

2 unchanged sentences

Total investments $ 476,827 $ 247,099

(a) As of June 30, 2020, $ 86.7 million (par value) of student loan asset-backed securities were subject to participation interests held by Union Bank, as discussed in note 3 under "Other Borrowings."

(b) During 2020, the Company has purchased partial ownership in certain federally insured and consumer loan securitizations.

As of the latest remittance reports filed by the various trusts prior to June 30, 2020, the Company's ownership correlates to approximately $ 545 million and $ 270 million of federally insured and consumer loans, respectively, included in these securitizations.

(a) As of September 30, 2020, $ 108.7 million (par value) of student loan asset-backed securities were subject to participation interests held by Union Bank, as discussed in note 3 under "Other Borrowings."

As of September 30, 2020, the stated maturities of a majority of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years;

however, such securities with a fair value of $ 30.9 million as of September 30, 2020 are scheduled to mature within the next 10 years, including $ 2.0 million, $ 24.4 million, and $ 4.5 million scheduled to mature within the next one year, 1-5 years, and 6-10 years, respectively.

(b) The Company makes investments in entities that promote renewable energy sources (solar).

The Company’s investments in these entities generate a return primarily through the realization of federal income tax credits, operating cash flows, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods which range from 5 to 6 years.

As of September 30, 2020, the Company has funded or is committed to fund $ 153.6 million in solar investments.

The carrying value of the Company’s solar investments are reduced by tax credits earned when the solar project is placed in service.

The Company accounts for its solar investments using the Hypothetical Liquidation at Book Value (“HLBV”) method of accounting.

HLBV is a balance sheet-oriented method of accounting that provides an approach for allocating pre-tax net income or loss to an investor.

HLBV allocates pre-tax net income or loss to the partners (investors) and calculates at the end of each balance sheet date the amount each partner would receive in the event the partnership were liquidated at book value.

The amount allocated to each partner requires an analysis of each partners’ capital account as adjusted according to the liquidation provisions of the partnership agreement.

For the majority of the Company’s solar investments, the HLBV

method of accounting results in accelerated losses in the initial year of investment.

During the three and nine months ended September 30, 2020, the Company recognized pre-tax losses of $ 11.8 million and $ 12.6 million, respectively, on its solar investments.

These losses are included in "other income" in the consolidated statements of income.

The losses recognized for the same periods in 2019 were not significant.

As of the latest remittance reports filed by the various trusts prior to September 30, 2020, the Company's ownership correlates to approximately $ 530 million and $ 350 million of federally insured and consumer loans, respectively, included in these securitizations.

Investment in Agile Sports Technologies, Inc.

3 unchanged sentences

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.

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

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

1 unchanged sentence

Impairment Expense

During the three months ended March 31, 2020, the Company recorded a total of $ 34.1 million (pre-tax) in impairment charges related to its investments, which included $ 26.3 million and $ 7.8 million in impairments related to the Company's beneficial interest in consumer loan securitizations and several of its venture capital investments, respectively.

During the first quarter of 2020, the Company recorded a total of $ 34.1 million (pre-tax) in impairment charges related to its investments, which included $ 26.3 million and $ 7.8 million in impairments related to the Company's beneficial interest in consumer loan securitizations and several of its venture capital investments, respectively.

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.

1 unchanged sentence

Additionally, as of March 31, 2020, the Company identified several venture capital investments, a majority of which were accounted for under the measurement alternative, that were also negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic during the first quarter of 2020, and estimated that the fair value of such investments was significantly reduced from their previous carrying value.

During the three months ended June 30, 2020, the Company recorded a $ 0.3 million (pre-tax) impairment charge related to a real estate investment.

No additional impairment charges were considered necessary by the Company as of June 30, 2020.

Intangible Assets

A summary of the Company's intangible assets follows:

Weighted average remaining useful life as of June 30, 2020 (months)

June 30, 2020 December 31, 2019

Weighted average remaining useful life as of

September 30, 2020 (months)

September 30, 2020 December 31, 2019

Amortizable intangible assets, net:

4 unchanged sentences

Computer software (net of accumulated amortization of $ 4,708 and $ 3,233 , respectively)

8 1,171 2,154

Total - amortizable intangible assets, net 81 $ 58,701 81,532

The Company recorded amortization expense on its intangible assets of $ 7.4 million and $ 8.3 million during the three months ended June 30, 2020 and 2019, respectively, and $ 14.8 million and $ 16.8 million during the six months ended June 30, 2020 and 2019, respectively.

The Company recorded amortization expense on its intangible assets of $ 8.0 million during each of the three months ended September 30, 2020 and 2019, and $ 22.8 million and $ 24.8 million during the nine months ended September 30, 2020 and 2019, respectively.

The Company will continue to amortize intangible assets over their remaining useful lives.

As of June 30, 2020, the Company estimates it will record amortization expense as follows:

2020 (July 1 - December 31) $ 16,011

As of September 30, 2020, the Company estimates it will record amortization expense as follows:

2020 (October 1 - December 31) $ 7,979

2025 and thereafter 12,649

The carrying amount of goodwill as of December 31, 2019 and June 30, 2020 by reportable operating segment was as follows:

The carrying amount of goodwill as of December 31, 2019 and September 30, 2020 by reportable operating segment was as follows:

Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management Corporate and Other Activities Total

2 unchanged sentences

A summary of the Company's property and equipment follows:

Useful life June 30, 2020 December 31, 2019

Useful life September 30, 2020 December 31, 2019

Non-communications:

28 unchanged sentences

Total property and equipment, net $ 360,490 348,259

The Company recorded depreciation expense on its property and equipment of $ 22.0 million and $ 16.2 million during the three months ended June 30, 2020 and 2019, respectively, and $ 42.3 million and $ 31.9 million during the six months ended June 30, 2020 and 2019, respectively.

The Company recorded depreciation expense on its property and equipment of $ 22.3 million and $ 19.7 million during the three months ended September 30, 2020 and 2019, respectively, and $ 64.6 million and $ 51.6 million during the nine months ended September 30, 2020 and 2019, respectively.

Earnings per Common Share

2 unchanged sentences

Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock.

Three months ended June 30,

Three months ended September 30,

Common shareholders Unvested restricted stock shareholders Total Common shareholders Unvested restricted stock shareholders Total

2 unchanged sentences

Weighted-average common shares outstanding - basic and diluted 37,988,584 549,892 38,538,476 39,356,311 520,818 39,877,129

38,641,794 561,610 39,203,404 39,518,652 531,413 40,050,065

Earnings per share - basic and diluted $ 1.86 1.86 1.86 0.83 0.83 0.83

$ 2.21 2.21 2.21 0.61 0.61 0.61

Six months ended June 30,

Nine months ended September 30,

Common shareholders Unvested restricted stock shareholders Total Common shareholders Unvested restricted stock shareholders Total

2 unchanged sentences

Weighted-average common shares outstanding - basic and diluted 38,676,092 553,840 39,229,932 39,574,868 523,478 40,098,346

39,023,624 555,835 39,579,459 39,685,958 524,829 40,210,787

Earnings per share - basic and diluted $ 2.99 2.99 2.99 2.48 2.48 2.48

$ 1.16 1.16 1.16 1.65 1.65 1.65

Segment Reporting

1 unchanged sentence

The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.

Three months ended June 30, 2020

Three months ended September 30, 2020

Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset

2 unchanged sentences

Total interest income $ 34 367 — 137,959 1,646 ( 261 ) 139,745

$ 52 420 — 150,583 1,196 ( 368 ) 151,883

Interest expense 24 16 — 57,755 888 ( 261 ) 58,423

28 21 — 84,489 1,078 ( 368 ) 85,248

Net interest income (expense) 10 351 — 80,204 758 — 81,322

24 399 — 66,094 118 — 66,635

Less provision for loan losses

— — — 2,999 — — 2,999

Less (negative provision) provision for loan losses — — — ( 5,821 ) — — ( 5,821 )

Net interest income after provision for loan losses 10 351 — 86,025 758 — 87,143

24 399 — 63,095 118 — 63,636

Other income/expense:

Loan servicing and systems revenue 113,794 — — — — — 113,794

111,042 — — — — — 111,042

Intersegment revenue 8,287 3 — — — ( 8,290 ) —

8,537 3 — — — ( 8,540 ) —

Education technology, services, and payment processing revenue — 74,121 — — — — 74,121

— 59,304 — — — — 59,304

Communications revenue — — 20,211 — — — 20,211

— — 18,998 — — — 18,998

Gain on sale of loans — — — 14,817 — — 14,817

1,914 — 392 732 57,089 — 60,127

Other income 2,353 373 511 1,004 ( 2,737 ) — 1,502

Impairment expense — — — — — — —

Derivative settlements, net — — — ( 2,391 ) — — ( 2,391 )

— — — 5,821 — — 5,821

Derivative market value adjustments, net — — — 3,440 — — 3,440

— — — ( 3,911 ) — — ( 3,911 )

Total other income/expense 124,434 74,497 20,722 16,870 ( 2,737 ) ( 8,290 ) 225,494

121,493 59,307 19,390 2,642 56,757 ( 8,540 ) 251,049

Cost of services:

Cost to provide education technology, services, and payment processing services — 25,243 — — — — 25,243

— 15,376 — — — — 15,376

Cost to provide communications services — — 5,914 — — — 5,914

— — 5,743 — — — 5,743

Total cost of services — 25,243 5,914 — — — 31,157

— 15,376 5,743 — — — 21,119

Operating expenses:

Salaries and benefits 72,912 25,460 5,485 438 21,801 — 126,096

68,401 24,522 5,570 421 20,334 — 119,247

Depreciation and amortization 9,951 2,366 11,152 — 6,839 — 30,308

9,142 2,362 10,824 — 7,065 — 29,393

Other expenses 12,407 3,126 2,219 3,672 13,320 — 34,744

13,380 2,326 3,774 4,863 12,710 — 37,052

Intersegment expenses, net 15,834 3,610 491 8,868 ( 20,513 ) ( 8,290 ) —

15,996 3,429 536 9,055 ( 20,476 ) ( 8,540 ) —

Total operating expenses 111,104 34,562 19,347 12,978 21,447 ( 8,290 ) 191,148

106,919 32,639 20,704 14,339 19,633 ( 8,540 ) 185,692

Income (loss) before income taxes 13,340 15,043 ( 4,539 ) 89,917 ( 23,426 ) — 90,332

14,598 11,691 ( 7,057 ) 51,398 37,242 — 107,874

Income tax (expense) benefit ( 3,201 ) ( 3,610 ) 1,089 ( 21,580 ) 8,146 — ( 19,156 )

( 3,504 ) ( 2,806 ) 1,694 ( 12,336 ) ( 4,312 ) — ( 21,264 )

Net income (loss) 10,139 11,433 ( 3,450 ) 68,337 ( 15,280 ) — 71,176

11,094 8,885 ( 5,363 ) 39,062 32,930 — 86,610

Net income attributable to noncontrolling interests

— — — — ( 128 ) — ( 128 )

Net loss (income) attributable to noncontrolling interests — — — — 327 — 327

Net income (loss) attributable to Nelnet, Inc.

$ 10,139 11,433 ( 3,450 ) 68,337 ( 14,953 ) — 71,503

Total assets as of June 30, 2020 $ 221,313 351,392 301,741 21,136,268 732,994 ( 132,500 ) 22,611,208

Three months ended June 30, 2019

Total assets as of September 30, 2020 $ 211,726 382,608 305,276 20,686,478 770,621 ( 134,183 ) 22,222,526

Three months ended September 30, 2019

Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset

3 unchanged sentences

Total interest income $ 532 3,499 — 233,225 2,859 ( 1,171 ) 238,945

$ 550 1,659 1 243,295 2,258 ( 974 ) 246,788

Interest expense 51 12 — 171,485 2,110 ( 1,171 ) 172,488

19 11 — 184,035 3,872 ( 974 ) 186,963

Net interest income (expense) 481 3,487 — 61,740 749 — 66,457

531 1,648 1 59,260 ( 1,614 ) — 59,825

Less provision for loan losses

— — — 9,000 — — 9,000

Less (negative provision) provision for loan losses — — — 10,000 — — 10,000

Net interest income after provision for loan losses 481 3,487 — 51,740 749 — 56,457

531 1,648 1 50,260 ( 1,614 ) — 50,825

Other income/expense:

Loan servicing and systems revenue 113,286 — — — — — 113,286

113,985 — — — — — 113,985

Intersegment revenue 11,611 — — — — ( 11,611 ) —

11,598 — — — — ( 11,598 ) —

Education technology, services, and payment processing revenue — 74,251 — — — — 74,251

— 60,342 — — — — 60,342

Communications revenue — — 16,470 — — — 16,470

— — 15,758 — — — 15,758

Gain on sale of loans — — — — — — —

2,277 — 362 3,176 8,624 — 14,440

Other income 2,291 — 532 3,384 7,231 — 13,439

Impairment expense — — — — — — —

Derivative settlements, net — — — 7,298 — — 7,298

— — — 12,972 — — 12,972

Derivative market value adjustments, net — — — ( 5,630 ) — — ( 5,630 )

— — — ( 37,060 ) — — ( 37,060 )

Total other income/expense 127,188 74,251 17,002 5,052 7,231 ( 11,611 ) 219,114

127,860 60,342 16,120 ( 19,200 ) 8,624 ( 11,598 ) 182,149

Cost of services:

Cost to provide education technology, services, and payment processing services — 25,671 — — — — 25,671

— 15,871 — — — — 15,871

Cost to provide communications services — — 5,236 — — — 5,236

— — 5,101 — — — 5,101

Total cost of services — 25,671 5,236 — — — 30,907

— 15,871 5,101 — — — 20,972

Operating expenses:

Salaries and benefits 69,209 23,826 5,763 394 17,479 — 116,670

66,496 22,823 5,192 382 16,321 — 111,214

Depreciation and amortization 8,565 2,997 10,926 — 5,212 — 27,701

8,799 3,324 7,737 — 4,623 — 24,484

Other expenses 16,686 5,325 3,842 19,054 13,422 — 58,329

17,118 5,805 3,865 6,207 12,423 — 45,417

Intersegment expenses, net 12,955 3,194 701 11,678 ( 16,917 ) ( 11,611 ) —

13,604 3,148 716 11,665 ( 17,535 ) ( 11,598 ) —

Total operating expenses 107,415 35,342 21,232 31,126 19,196 ( 11,611 ) 202,700

106,017 35,100 17,510 18,254 15,832 ( 11,598 ) 181,115

Income (loss) before income taxes 20,254 16,725 ( 9,466 ) 25,666 ( 11,216 ) — 41,964

22,374 11,019 ( 6,490 ) 12,806 ( 8,822 ) — 30,887

Income tax (expense) benefit ( 4,861 ) ( 4,014 ) 2,272 ( 6,160 ) 3,935 — ( 8,829 )

( 5,370 ) ( 2,645 ) 1,558 ( 3,074 ) 3,321 — ( 6,209 )

Net income (loss) 15,393 12,711 ( 7,194 ) 19,506 ( 7,281 ) — 33,135

17,004 8,374 ( 4,932 ) 9,732 ( 5,501 ) — 24,678

Net income attributable to noncontrolling interests

— — — — ( 59 ) — ( 59 )

Net loss (income) attributable to noncontrolling interests — — — — 77 — 77

Net income (loss) attributable to Nelnet, Inc.

$ 15,393 12,711 ( 7,194 ) 19,506 ( 7,204 ) — 33,212

Total assets as of June 30, 2019 $ 267,611 336,896 302,873 22,907,234 595,623 ( 190,437 ) 24,219,800

Six months ended June 30, 2020

Total assets as of September 30, 2019 $ 222,606 413,076 306,743 22,520,688 685,998 ( 212,392 ) 23,936,719

Nine months ended September 30, 2020

Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset

2 unchanged sentences

Total interest income $ 403 2,777 — 474,468 4,397 ( 1,228 ) 480,818

$ 369 2,411 — 336,509 2,751 ( 967 ) 341,074

Interest expense 97 54 — 275,492 3,373 ( 1,228 ) 277,788

73 38 — 217,737 2,485 ( 967 ) 219,366

Net interest income (expense) 306 2,723 — 198,976 1,024 — 203,030

296 2,373 — 118,772 266 — 121,708

Less provision for loan losses

— — — 79,297 — — 79,297

Less (negative provision) provision for loan losses — — — 73,476 — — 73,476

Net interest income after provision for loan losses 306 2,723 — 125,500 1,024 — 129,554

296 2,373 — 39,475 266 — 42,411

Other income/expense:

Loan servicing and systems revenue 337,571 — — — — — 337,571

223,778 — — — — — 223,778

Intersegment revenue 27,878 17 — — — ( 27,895 ) —

19,591 14 — — — ( 19,605 ) —

Education technology, services, and payment processing revenue — 217,100 — — — — 217,100

— 142,979 — — — — 142,979

Communications revenue — — 57,390 — — — 57,390

— — 37,179 — — — 37,179

Gain on sale of loans — — — 33,023 — — 33,023

4,544 — 745 3,947 59,172 — 68,408

Other income 6,897 373 1,256 4,951 56,435 — 69,910

Impairment expense — — — ( 26,303 ) ( 8,116 ) — ( 34,419 )

Derivative settlements, net — — — 7,666 — — 7,666

— — — 10,058 — — 10,058

Derivative market value adjustments, net — — — ( 21,072 ) — — ( 21,072 )

— — — ( 24,513 ) — — ( 24,513 )

Total other income/expense 372,346 217,490 58,646 ( 1,735 ) 48,319 ( 27,895 ) 667,169

247,913 142,993 37,924 ( 18,605 ) 51,056 ( 19,605 ) 441,676

Cost of services:

Cost to provide education technology, services, and payment processing services — 63,424 — — — — 63,424

— 38,181 — — — — 38,181

Cost to provide communications services — — 17,240 — — — 17,240

— — 11,325 — — — 11,325

Total cost of services — 63,424 17,240 — — — 80,664

— 38,181 11,325 — — — 49,506

Operating expenses:

Salaries and benefits 211,806 73,678 16,471 1,301 61,964 — 365,220

138,894 48,218 10,986 863 40,163 — 239,125

Depreciation and amortization 27,941 7,115 32,482 — 19,811 — 87,349

17,990 4,749 21,330 — 12,972 — 57,041

Other expenses 43,277 11,544 9,681 12,253 38,428 — 115,184

30,870 8,418 7,463 8,581 25,108 — 80,439

Intersegment expenses, net 48,069 10,366 1,650 29,839 ( 62,030 ) ( 27,895 ) —

32,235 6,756 1,160 20,971 ( 41,517 ) ( 19,605 ) —

Total operating expenses 331,093 102,703 60,284 43,393 58,173 ( 27,895 ) 567,753

219,989 68,141 40,939 30,415 36,726 ( 19,605 ) 376,605

Income (loss) before income taxes 41,559 54,086 ( 18,878 ) 80,372 ( 8,830 ) — 148,306

28,220 39,044 ( 14,340 ) ( 9,545 ) 14,596 — 57,976

Income tax (expense) benefit ( 9,974 ) ( 12,981 ) 4,531 ( 19,289 ) 7,426 — ( 30,286 )

( 6,773 ) ( 9,371 ) 3,442 2,291 ( 720 ) — ( 11,131 )

Net income (loss) 31,585 41,105 ( 14,347 ) 61,083 ( 1,404 ) — 118,020

21,447 29,673 ( 10,898 ) ( 7,254 ) 13,876 — 46,845

Net income attributable to noncontrolling interests

— — — — ( 895 ) — ( 895 )

Net loss (income) attributable to noncontrolling interests — — — — ( 568 ) — ( 568 )

Net income (loss) attributable to Nelnet, Inc.

$ 31,585 41,105 ( 14,347 ) 61,083 ( 1,972 ) — 117,452

Total assets as of June 30, 2020 $ 221,313 351,392 301,741 21,136,268 732,994 ( 132,500 ) 22,611,208

Six months ended June 30, 2019

Total assets as of September 30, 2020 $ 211,726 382,608 305,276 20,686,478 770,621 ( 134,183 ) 22,222,526

Nine months ended September 30, 2019

Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset

2 unchanged sentences

Total interest income $ 1,579 7,175 3 723,388 7,170 ( 2,995 ) 736,319

$ 1,047 3,676 3 490,162 4,310 ( 1,824 ) 497,374

Interest expense 70 32 — 544,319 9,796 ( 2,995 ) 551,221

19 19 — 372,834 7,685 ( 1,824 ) 378,733

Net interest income (expense) 1,509 7,143 3 179,069 ( 2,626 ) — 185,098

1,028 3,657 3 117,328 ( 3,375 ) — 118,641

Less provision for loan losses

— — — 16,000 — — 16,000

Less (negative provision) provision for loan losses — — — 26,000 — — 26,000

Net interest income after provision for loan losses 1,509 7,143 3 153,069 ( 2,626 ) — 159,098

1,028 3,657 3 101,328 ( 3,375 ) — 102,641

Other income/expense:

Loan servicing and systems revenue 342,169 — — — — — 342,169

228,883 — — — — — 228,883

Intersegment revenue 35,426 — — — — ( 35,426 ) —

23,815 — — — — ( 23,815 ) —

Education technology, services, and payment processing revenue — 213,753 — — — — 213,753

— 139,502 — — — — 139,502

Communications revenue — — 46,770 — — — 46,770

— — 30,300 — — — 30,300

Gain on sale of loans — — — 1,712 — — 1,712

4,350 — 487 6,701 11,969 — 23,507

Other income 6,642 — 1,019 10,084 19,200 — 36,946

Impairment expense — — — — — — —

Derivative settlements, net — — — 39,306 — — 39,306

— — — 32,007 — — 32,007

Derivative market value adjustments, net — — — ( 73,265 ) — — ( 73,265 )

— — — ( 67,635 ) — — ( 67,635 )

Total other income/expense 384,237 213,753 47,789 ( 22,163 ) 19,200 ( 35,426 ) 607,391

257,048 139,502 30,787 ( 27,215 ) 11,969 ( 23,815 ) 388,276

Cost of services:

Cost to provide education technology, services, and payment processing services — 62,601 — — — — 62,601

— 36,930 — — — — 36,930

Cost to provide communications services — — 15,096 — — — 15,096

— — 9,860 — — — 9,860

Total cost of services — 62,601 15,096 — — — 77,697

— 36,930 9,860 — — — 46,790

Operating expenses:

Salaries and benefits 201,924 69,656 15,692 1,153 50,517 — 338,942

132,715 45,830 9,929 760 33,038 — 222,272

Depreciation and amortization 26,236 9,832 26,025 — 14,305 — 76,398

17,671 6,835 15,099 — 9,093 — 48,697

Other expenses 52,732 16,440 11,184 29,098 38,107 — 147,562

36,047 11,116 7,342 10,044 24,685 — 89,233

Intersegment expenses, net 40,317 9,642 2,081 35,630 ( 52,244 ) ( 35,426 ) —

27,362 6,447 1,380 23,952 ( 35,326 ) ( 23,815 ) —

Total operating expenses 321,209 105,570 54,982 65,881 50,685 ( 35,426 ) 562,902

213,795 70,228 33,750 34,756 31,490 ( 23,815 ) 360,202

Income (loss) before income taxes 64,537 52,725 ( 22,286 ) 65,025 ( 34,111 ) — 125,890

44,281 36,001 ( 12,820 ) 39,357 ( 22,896 ) — 83,925

Income tax (expense) benefit ( 15,489 ) ( 12,654 ) 5,349 ( 15,606 ) 11,971 — ( 26,429 )

( 10,628 ) ( 8,640 ) 3,077 ( 9,446 ) 8,037 — ( 17,600 )

Net income (loss) 49,048 40,071 ( 16,937 ) 49,419 ( 22,140 ) — 99,461

33,653 27,361 ( 9,743 ) 29,911 ( 14,859 ) — 66,325

Net income attributable to noncontrolling interests

— — — — ( 115 ) — ( 115 )

Net loss (income) attributable to noncontrolling interests — — — — ( 38 ) — ( 38 )

Net income (loss) attributable to Nelnet, Inc.

$ 49,048 40,071 ( 16,937 ) 49,419 ( 22,178 ) — 99,423

Total assets as of June 30, 2019 $ 267,611 336,896 302,873 22,907,234 595,623 ( 190,437 ) 24,219,800

Total assets as of September 30, 2019 $ 222,606 413,076 306,743 22,520,688 685,998 ( 212,392 ) 23,936,719

Disaggregated Revenue and Deferred Revenue

1 unchanged sentence

Loan Servicing and Systems

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

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

7 unchanged sentences

Education Technology, Services, and Payment Processing

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

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

8 unchanged sentences

Communications

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

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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The following table provides the components of "other income" on the consolidated statements of income:

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

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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

Management fee revenue 1,914 2,277 4,544 4,350

Investment advisory services $ 4,463 753 8,187 2,194

Management fee revenue 2,353 2,291 6,897 6,642

Borrower late fee income 871 3,196 4,377 9,870

Gain (loss) on investments, net ( 10,152 ) 1,948 39,134 5,779

Other 3,967 5,251 11,315 12,461

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Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Corporate and Other Activities Total

Three months ended June 30, 2020

Three months ended September 30, 2020

Balance, beginning of period $ 2,115 19,924 3,728 1,676 27,443

2 unchanged sentences

Balance, end of period $ 1,510 41,905 3,920 1,727 49,062

Three months ended June 30, 2019

Three months ended September 30, 2019

Balance, beginning of period $ 3,315 21,489 3,080 1,611 29,495

2 unchanged sentences

Balance, end of period $ 3,047 42,421 3,224 1,714 50,406

Six months ended June 30, 2020

Nine months ended September 30, 2020

Balance, beginning of period $ 2,712 32,074 3,232 1,628 39,646

2 unchanged sentences

Balance, end of period $ 1,510 41,905 3,920 1,727 49,062

Six months ended June 30, 2019

Nine months ended September 30, 2019

Balance, beginning of period $ 4,413 30,556 2,551 1,602 39,122

4 unchanged sentences

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.

Revenue earned by Nelnet Servicing related to this contract was $ 36.3 million and $ 38.6 million for the three months ended September 30, 2020 and 2019, and $ 112.3 million and $ 118.7 million for the nine months ended September 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 $ 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.

Revenue earned by Great Lakes related to this contract was $ 45.4 million and $ 46.2 million for the three months ended September 30, 2020 and 2019, and $ 137.0 million and $ 139.3 million for the nine months ended September 30, 2020 and 2019, respectively.

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

1 unchanged sentence

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

On October 13, 2020, Nelnet Servicing and Great Lakes received correspondence from the Department indicating the Department's intent to exercise the first additional six-month extension of the current servicing contracts, from December 14, 2020 to approximately June 15, 2021.

The correspondence served only as a non-binding notice of intent that does not commit the Department to extend the contracts, and any formal extension of the contracts will occur only upon a unilateral modification by the Department to the contracts.

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.

3 unchanged sentences

• NextGen Optimal Processing Solution ("OPS")

On April 1, 2019 and October 4, 2019, the Company responded to the EPS solicitation component.

On January 16, 2020, the Department released an amendment to the EPS solicitation component and the Company responded on February 3, 2020.

In addition, on August 1, 2019, the Company responded to the BPO solicitation component.

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

On April 1, 2019, October 4, 2019, and February 3, 2020, the Company responded to the EPS solicitation component.

In addition, on August 1, 2019 and January 30, 2020, the Company responded to the BPO solicitation component.

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.

2 unchanged sentences

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.

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 April 13, 2020 and April 27, 2020, the Company filed protests with the Government Accountability Office ("GAO") challenging the Department's decision to cancel the OPS solicitation component without amending the EPS solicitation component and 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.

On June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO solicitation.

On July 13, 2020, July 20, 2020 and July 28, 2020, the Company filed protests with the GAO challenging the Department's determination that the Company's BPO response did not meet small business participation requirements and 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 October 19, 2020, the GAO denied the Company's protests concerning the BPO solicitation component.

In the Department's description of its July 10, 2020 cancellation of the EPS solicitation component, the Department indicated that it continues to be committed to the goals and vision of NextGen, and that it would be introducing a new solicitation to continue the NextGen strategy in the future.

On October 28, 2020, the Department issued a new federal loan servicing solicitation for an Interim Servicing Solution ("ISS").

Responses for the ISS solicitation are due December 9, 2020.

ISS is a follow-on to the existing Title IV Additional Servicing and Not-for-Profit Servicing contracts, which would award a full system and servicing solution to two providers.

The Department anticipates awarding a five-year contract followed by five, one-year optional ordering periods.

Under ISS, the selected providers will provide the technology platform to host the Department's student loan portfolio;

customer service (including contact centers) and back-office processing;

digital engagement layer including borrower-facing website and mobile-applications;

intake, imaging, and fulfillment;

and portfolio-level operations.

As the companies awarded BPO contracts are onboarded, contact center and back-office operations will shift from the ISS contract to the BPO providers.

The Company fully intends to respond to the ISS solicitation.

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis.

As of June 30, 2020 As of December 31, 2019

As of September 30, 2020 As of December 31, 2019

Level 1 Level 2 Total Level 1 Level 2 Total

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The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets:

As of June 30, 2020

As of September 30, 2020

Fair value Carrying value Level 1 Level 2 Level 3

26 unchanged sentences

The methodologies for estimating the fair value of financial assets and liabilities are described in note 21 of the notes to consolidated financial statements included in the 2019 Annual Report.

Subsequent Events

Recapitalization and Additional Funding for ALLO Communications LLC ("ALLO")

On October 1, 2020, Nelnet, Inc.

entered into various agreements with SDC ALLO Holdings, LLC (“SDC”), a third party global digital infrastructure investor, and ALLO, the Company's communication's subsidiary, for various transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO.

The agreements provide for a series of initial interrelated transactions (the “Initial Transactions”) whereby (i) on October 15, 2020, ALLO issued non-voting preferred membership units of ALLO to SDC for an aggregate purchase price payment of approximately $ 197.0 million from SDC to ALLO, and ALLO redeemed certain non-voting preferred membership units of ALLO held by Nelnet, Inc.

in exchange for an aggregate redemption price payment to Nelnet, Inc.

of $ 160.0 million;

(ii) ALLO will use its reasonable best efforts to incur and undertake private debt financing from one or more unrelated third-party lender(s) in the aggregate approximate amount of $ 100.0 million;

and (iii) subject to ALLO obtaining such debt financing, ALLO will redeem certain additional preferred return membership units of ALLO held by Nelnet, Inc.

in exchange for an aggregate redemption price payment to Nelnet, Inc.

of approximately $ 100.0 million (subject to the amount of gross proceeds actually received in the debt financing).

Upon the receipt of required regulatory approvals from the Federal Communications Commission and other applicable regulatory authorities, the non-voting preferred membership units of ALLO held by SDC will automatically convert into voting membership units of ALLO.

As a result of such conversion, SDC, Nelnet, Inc., and members of ALLO's management will own approximately 48 percent, 45 percent and 7 percent, respectively, of the outstanding voting membership interests of ALLO and Nelnet, Inc.

will deconsolidate ALLO from the Company’s consolidated financial statements.

It is currently anticipated that such regulatory conditions will be satisfied by December 31, 2020.

Upon deconsolidation of ALLO by Nelnet, Inc., the Company will initially record its 45 percent voting membership interests in ALLO at fair value, and thereafter account for such investment under the equity method of accounting.

In addition, upon deconsolidation of ALLO, the Company will initially record its remaining non-voting preferred membership units in ALLO at fair value, and account for such investment as a separate equity investment.

The agreements also provide for secondary transactions (the “Secondary Transactions”) subsequent to the completion of the Initial Transactions, whereby (i) Nelnet, Inc., SDC, and ALLO will use commercially reasonable efforts (which expressly excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause ALLO to redeem, on or before the three and one-half year anniversary (subject to adjustment) of the completion of ALLO’s redemptions from Nelnet, Inc.

in the Initial Transactions, the remaining preferred membership units of ALLO held by Nelnet, Inc.

in exchange for an aggregate redemption price payment to Nelnet, Inc.

of approximately $ 126 million, plus the amount of accrued and unpaid preferred return on such units and the amount of any contributions or other amounts funded by Nelnet, Inc.

to ALLO subsequent to ALLO’s redemptions from Nelnet, Inc.

in the Initial Transactions;

and (ii) Nelnet, Inc.

will have a contingent payment obligation to pay SDC a contingent payment amount of $ 25 million to $ 35 million in the event Nelnet, Inc.

disposes of other voting membership units of ALLO that it holds and realizes from such disposition certain targeted return levels relative to the implied value of its investment in such units upon SDC's initial investment in ALLO on October 15, 2020.

The Company currently estimates the above transactions will result in the Company recognizing incremental net income before tax of approximately $ 230 million, which reflects the Company recognizing a gain as a result of the deconsolidation of ALLO and recording its voting and non-voting membership interests in ALLO at fair value, net of compensation expense for the modification of certain equity awards previously granted to members of ALLO's management and an expense to record the Company's contingent payment obligation to SDC at fair value.

The amount of incremental net income the Company ultimately recognizes as a result of these transactions will be impacted by the timing of when, or if, regulatory approval is obtained.

On November 2, 2020, the Company obtained final approval from the Federal Deposit Insurance Corporation ("FDIC") for federal deposit insurance and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations.

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

Nelnet Bank was funded by the Company with an initial capital contribution of $ 100 million, consisting of $ 55.9 million of cash and $ 44.1 million of student loan asset-backed securities.

In addition, the Company made a pledged deposit of $ 40.0 million with Nelnet Bank, as required under an agreement with the FDIC.

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

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 1. Financial Statements