What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 303 added, 353 removed, 653 unchanged (50% 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 and six months ended June 30, 2020 and 2019.

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

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

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Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements.

The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.

The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,”

“plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.

The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances.

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• 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;

Department of Education (the "Department"), which current contracts accounted for 30 percent of the Company's revenue in 2019, risks that the reported non-binding notice of intent by the Department to extend the current servicing contracts from December 14, 2020 to approximately June 15, 2021, which notice does not commit the Department to extend the contracts, may not result in actual extensions of the contracts, 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 and ISS procurement processes (under which awards of new NextGen contracts have been made to other service providers), the possibility that awards or 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;

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• 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;

• risks and uncertainties related to the ability of ALLO Communications LLC ("ALLO") to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks;

• risks related to the ability to satisfy regulatory and other conditions and complete all of the various transactions contemplated by the reported recapitalization and additional funding for ALLO in the expected time frame or at all, and risks related to the expected benefits to the Company (including the estimated incremental net income contribution) and to ALLO from such transactions, including risks and uncertainties as to whether the Company and/or ALLO will be able to realize such expected benefits;

• risks and uncertainties of the expected benefits from Nelnet Bank obtaining an industrial bank charter, including the ability to successfully conduct 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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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,

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

2020 2019 2020 2019

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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 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;

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

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

• The recognition of negative provision for loan losses in the third quarter of 2020 on the Company's loan portfolio;

• The recognition of a $14.8 million ($11.2 million after tax) gain from the sale of consumer loans in the third quarter of 2020;

• The recognition of $14.0 million ($10.6 million after tax) of expenses during the third quarter of 2019 to extinguish notes payable in certain asset-backed securitizations prior to the notes' contractual maturities.

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;

• The recognition of an $11.8 million ($9.0 million after tax) non-cash loss in the third quarter of 2020 related to the Company's solar investments.

The accounting treatment for the majority of the Company's solar investments results in accelerated losses in the initial year of investment.

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

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

• 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 recognition of a $33.0 million ($25.1 million after tax) gain from the sale of consumer loans in 2020;

• The recognition of $15.8 million ($12.0 million after tax) of expenses during 2019 to extinguish notes payable in certain asset-backed securitizations prior to the notes' contractual maturities;

• 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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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;

These factors were partially offset by the following items:

• 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.

• The recognition of a $12.6 million ($9.6 million after-tax) non-cash loss in 2020 related to the Company's solar investments.

Operating Results

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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 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.

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

As of September 30, 2020, the Company had a $19.5 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years.

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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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 for the three and six months ended June 30, 2020 and 2019 (dollars in millions).

The information below provides the operating results for each reportable operating segment for the three and nine months ended September 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 during the six months ended June 30, 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 the impact from changes in fair values of derivatives.

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

For information regarding the exclusion of the impact from changes in fair values of derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.

Certain events and transactions from 2020, which have impacted, will impact, or could impact the operating results of the Company, are discussed below.

Recent Development - 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.

For additional information, see the discussion under the caption "Recapitalization and Additional Funding for ALLO Communications LLC ("ALLO")" in note 14 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Recent Development - Nelnet Bank

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.

For additional information, see the discussion under the caption "Nelnet Bank" in note 14 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Certain other events and transactions from 2020, which have impacted, will impact, or could impact the operating results of the Company, are discussed below.

Impacts of COVID-19 Pandemic

The rapid outbreak of the respiratory disease caused by a novel strain of coronavirus, coronavirus 2019 or COVID-19 (“COVID-19”), was declared a global pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President on March 13, 2020.

Beginning on March 15, 2020, many businesses and schools closed or reduced hours throughout the U.S.

to combat the spread of COVID-19, and states and local jurisdictions implemented various containment efforts, including lockdowns on non-essential business, stay-at-home orders, and shelter-in-place orders.

Beginning in March 2020, the coronavirus 2019 or COVID-19 (“COVID-19”) pandemic resulted in many businesses and schools closing or reducing hours throughout the U.S.

to combat the spread of COVID-19, and states and local jurisdictions implementing various containment efforts, including lockdowns on non-essential business and other business restrictions, stay-at-home orders, and shelter-in-place orders.

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

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

and world markets.

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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.

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 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.

On August 8, 2020, the President issued a memorandum extending the CARES Act federal student loan borrower relief provisions until December 31, 2020.

The Company received less servicing revenue per borrower from the Department based on the borrower forbearance status through September 30, 2020 than what was earned on such accounts prior to these provisions.

The Department further reduced the monthly rate paid to its servicers for those in a forbearance status for the period from October 1, 2020 through December 31, 2020 from $2.19 per borrower to $2.05 per borrower.

The Company currently anticipates revenue per borrower will return to pre-COVID-19 levels in the first quarter 2021.

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.

In addition, 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.

During the second and third quarters 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.

The Company currently 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 December 31, 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.

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

In addition, as a result of COVID-19, demand for certain of the Company's products and services has been negatively impacted.

The Company currently anticipates this trend will continue in future periods that are impacted by the COVID-19 pandemic.

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 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.

ALLO signed the FCC Keep Americans Connected Pledge and did not suspend customers for non-payment, charge late fees, or 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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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 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.

In addition, variable loan spread was compressed during the first and second quarters of 2020 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 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 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.

During the third quarter of 2020, as the Company's debt reset at lower interest rates, the Company's variable loan spread increased.

As a result of the decrease in interest rates in 2020, the Company has earned an increased amount of fixed rate floor income from 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.

This relief package excluded FFELP, private education, and consumer loans.

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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.

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.

As of September 30, 2020, federally insured and private education loans in forbearance were $1.9 billion (or 10.0% of the portfolio) and $5.4 million (or 2.0% of the portfolio), respectively.

The amount of federally insured and private education loans in forbearance hit their peak in May 2020 at $6.0 billion and $38.6 million, respectively.

The Company anticipates that loans in forbearance will continue to decline in the fourth quarter of 2020 and in 2021, 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.

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.

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.

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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 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.

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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

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.

additional information, see the discussion under the caption "Investment in Agile Sports Technologies, Inc.

(doing business as "Hudl")" in note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Department of Education Servicing Contracts and Procurements for New Contracts

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.

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

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, the Department issued solicitations for three NextGen components:

• NextGen Enhanced Processing Solution ("EPS")

• NextGen Business Process Operations ("BPO")

• NextGen Optimal Processing Solution ("OPS")

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

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.

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.

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.

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 currently provide for expiration on December 14, 2020, with 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 for a new framework for the servicing of all student loans owned by the Department.

For information regarding recent developments related to and the current status of these servicing contracts, and the Department's procurement processes for new servicing contracts, see note 12 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Adoption of New Accounting Standard for Credit Losses

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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 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 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.

• As of September 30, 2020, the Company had cash and cash equivalents of $96.3 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 $179.0 million as of September 30, 2020.

As of September 30, 2020, the Company has participated $108.7 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 June 30, 2020, the unsecured line of credit had $30.0 million outstanding and $425.0 million was available for future use.

As of September 30, 2020, the unsecured line of credit had no amount outstanding 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.

• 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 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.

As of September 30, 2020, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $2.26 billion, of which approximately $1.62 billion will be generated over the next approximate 5 years (through 2025).

• 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 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.

Year to date, through September 30, 2020, the Company has repurchased 1,591,314 shares of stock for $73.1 million ($45.96 per share).

As of September 30, 2020, 3.2 million shares remained authorized for repurchase under the Company's stock repurchase program.

• The Company paid a third 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 fourth quarter 2020 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.22 per share.

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

• Subsequent to September 30, 2020, ALLO received approximately $197.0 million of proceeds from an investment by SDC, a third party global digital infrastructure investor, and paid Nelnet, Inc.

$160.0 million to redeem certain preferred membership units of ALLO held by Nelnet, Inc.

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, including anticipated capital commitments to Nelnet Bank;

expansion of ALLO’s telecommunications network;

strategic acquisitions and investments;

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 and six months ended June 30, 2020 compared to the same periods in 2019 is provided below.

An analysis of the Company's operating results for the three and nine months ended September 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 Six months ended

June 30, June 30,

Three months ended Nine months ended

September 30, September 30,

2020 2019 2020 2019 Additional information

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Net interest income 81,322 66,457 203,030 185,098 See table below for additional analysis.

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.

Less (negative provision) provision for loan losses (5,821) 10,000 73,476 26,000 The Company's provision expense for the three months ended September 30, 2020 was impacted by the Company's estimate of certain 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.

The increase during the nine months ended September 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

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Communications revenue 20,211 16,470 57,390 46,770 See Communications operating segment - results of operations.

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.

Gain on sale of loans 14,817 — 33,023 1,712 Gain on sale of loans represents portfolios of consumer loans sold in the first and third quarters of 2020 and the second quarter of 2019.

Other income 1,502 13,439 69,910 36,946 See table below for the components of "other income."

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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 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.

Total other income/expense 225,494 219,114 667,169 607,391

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(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 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.

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

Depreciation and amortization 30,308 27,701 87,349 76,398 Increases were primarily due to additional depreciation expense at ALLO.

Other expenses 34,744 58,329 115,184 147,562 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.

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 are suspended as a result of COVID-19 borrower relief efforts;

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

and (iii) a decrease in servicing fees paid by the AGM segment to third parties.

In addition, the AGM segment recognized $14.0 million and $15.8 million of expenses during the three and nine months ended September 30, 2019, respectively, to extinguish asset-backed notes from certain securitizations prior to their contractual maturity.

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

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Income before income taxes 90,332 41,964 148,306 125,890

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.

Income tax expense 19,156 8,829 30,286 26,429 The effective tax rate was 21.1% and 21.0% for the three months ended September 30, 2020 and 2019, respectively, and 20.5% and 21.0% for the nine months ended September 30, 2020 and 2019, respectively.

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

Net income attributable to noncontrolling interests

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

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

Net income attributable to

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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 Income" in note 4 and in the table below.

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

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

2020 2019 2020 2019 Additional information

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Settlements on associated derivatives

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

(3,588) 7,064 (2,772) 35,931 Represents the net settlements (paid) received related to the Company’s floor income interest rate swaps.

Fixed rate floor income, net of settlements on derivatives

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Corporate debt interest expense

(1,107) (3,891) (2,557) (7,703) Includes interest expense on the Junior Subordinated Hybrid Securities and unsecured line of credit.

Decrease due to a decrease in interest rates and in the average balance outstanding on the Company's unsecured line of credit.

(913) (2,161) (3,470) (9,865) Includes interest expense on the Junior Subordinated Hybrid Securities, unsecured line of credit, and the asset-backed securities participation agreement.

Decrease was due to a decrease in interest rates and in the average balance outstanding on the Company's unsecured line of credit, partially offset by interest expense incurred on the asset-backed securities participation agreement that was executed in the second quarter of 2020.

Net interest income (net of settlements on derivatives)

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The following table summarizes the components of "other 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 (a) $ 53,151 4,258 49,286 3,831

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

Management fee revenue (b) 2,353 2,291 6,897 6,642

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

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

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

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

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

Other income $ 1,502 13,439 69,910 36,946

(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.

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

As of September 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.

(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.

The decrease in borrower late fees for the three and nine months ended September 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.

(d) 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.

Amounts also include the Company's share of income or loss from solar investments accounted for using the Hypothetical Liquidation at Book Value ("HLBV") method of accounting.

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.

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

Based on current solar investments made to date, the Company currently anticipates it will recognize a pre-tax loss related to its solar investments of approximately $24.0 million in the fourth quarter of 2020.

The amount of the loss the Company ultimately recognizes will be impacted by the amount of income/loss ultimately allocated to the Company using the HLBV method of accounting on its solar investments and the amount of additional solar investments made by the Company for the remainder of 2020.

LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS

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2020 June 30,

Servicing volume (dollars in millions):

2020 September 30,

Servicing volume

(dollars in millions):

Government $ 179,507 183,093 181,682 184,399 183,790 185,477 185,315 189,932

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6,393,151 6,332,261 6,211,132 6,457,296 6,433,324 6,354,158 6,264,559 6,251,598

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

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.

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 for a new framework for the servicing of all student loans owned by the Department.

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

See note 12 of the notes to consolidated financial statements included under Part I, Item 1 of this report 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.

Under the most recently publicly announced performance metric measurements used by the Department for the quarterly periods January 1, 2020 through June 30, 2020, Great Lakes’ and Nelnet Servicing’s overall rankings among the nine current servicers for the Department were first and tied for fifth, respectively.

Based on these results, Great Lakes’ and Nelnet Servicing’s allocation of new student loan servicing volumes for the period September 1, 2020 through February 28, 2021 are 20 percent and 10 percent, respectively.

On October 26, 2020, the Department communicated to its servicers that a not-for-profit servicer requested to end its contract with the Department.

Effective October 23, 2020, the percent of allocated new student loan servicing volume that previously was awarded to this servicer will be split among the remaining servicers, resulting in Great Lakes' allocation to increase by two percent and each remaining servicer to obtain an additional one percent allocation.

Summary and Comparison of Operating Results

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

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

2020 2019 2020 2019 Additional information

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Other income 2,353 2,291 6,897 6,642 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 nine months ended September 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.

Total other income 124,434 127,188 372,346 384,237

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Depreciation and amortization

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.

9,951 8,565 27,941 26,236 Increase was due to capital expenditures to support the recent extension of the government servicing contracts.

Other expenses 12,407 16,686 43,277 52,732 Decrease for the three and nine months ended September 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.

Decrease for the nine months ended September 30, 2020 as compared to the same period in 2019 was also due to a decrease in expenses related to travel and the provision for servicing losses.

Intersegment expenses 15,834 12,955 48,069 40,317 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.

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Net income $ 10,139 15,393 31,585 49,048 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.

In addition, servicing 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.

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Loan servicing and systems revenue

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

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

2020 2019 2020 2019 Additional information

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

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

Software services 10,426 10,493 32,395 30,255 Increase for the nine months ended September 30, 2020 as compared to the same period in 2019 was due to increased contract programming revenue for services provided during the first six months of 2020 related to hosted FFELP guarantee activities.

Software services revenue has been negatively impacted in 2020 as a result of COVID-19 forbearances on loans serviced by the Company's Direct Servicing hosted clients, offset by an increase in remote hosted borrowers.

Outsourced services and other 8,883 2,264 15,685 6,651 The majority of this revenue relates to providing contact center and back office operational outsourcing activities.

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

5 unchanged sentences

Summary and Comparison of Operating Results

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

Three months ended September 30, Nine months ended September 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.

Net interest income $ 351 3,487 2,723 7,143 Represents interest income on tuition funds held in custody for schools.

Decrease was due to a decrease in interest rates in 2020 as compared with 2019.

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

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Intersegment revenue 3 — 17 —

Other income 373 — 373 —

Total other income

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25,243 25,671 63,424 62,601 See table below for additional information.

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.

Salaries and benefits 25,460 23,826 73,678 69,656 Increase was due to an increase in headcount to support the growth of the customer base and investment in the development of new technologies.

Depreciation and amortization

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.

2,366 2,997 7,115 9,832 Amortization of intangible assets related to business acquisitions was $2.4 million and $2.8 million for the three months ended September 30, 2020 and 2019, respectively, and $7.1 million and $9.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Other expenses 3,126 5,325 11,544 16,440 Decrease was due to a reduction of travel expenses and the cancellation of on-site conferences as a result of the COVID-19 pandemic.

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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 June 30, Six months ended June 30,

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

2020 2019 2020 2019 Additional information

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.

Tuition payment plan services $ 22,477 25,760 77,011 80,589 Tuition payment plan services revenue for the three months ended September 30, 2020 decreased as compared to the same period in 2019 as a result of the COVID-19 pandemic.

Revenue recognized during the first six months of 2020 was 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 for these periods were received and were based on school enrollments prior to the conditions arising from the COVID-19 pandemic.

Payment processing

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.

35,420 35,138 88,329 85,428 Increase in revenue was due to an increase in payments volume from new school customers, partially offset by the decline in payment volume for certain of the Company’s existing customers as a result of the COVID-19 pandemic.

Education technology and services

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.

15,840 13,067 50,820 46,872 Increase was due to an increase from FACTS Student Information System (“SIS”) software subscriptions, online application and enrollment services, and financial needs assessment services as a result of an increase in the number of students and schools using these products.

384 286 940 864

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Summary and Comparison of Operating Results

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

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

2020 2019 2020 2019 Additional information

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

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.

Salaries and benefits 5,485 5,763 16,471 15,692 Gross salaries and benefits paid in 2020 as compared to 2019 decreased due to a decrease in headcount.

However, certain salary and benefit costs qualify for capitalization as ALLO develops its network.

The total amount of costs capitalized during the nine months ended September 30, 2020 was lower than the same period in 2019, which resulted in an increase in expense for the current year to date period.

Depreciation and amortization 11,152 10,926 32,482 26,025 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 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.

The gross property and equipment balances related to this segment as of September 30, 2020, December 31, 2019, September 30, 2019, and December 31, 2018 were $346.6 million, $315.3 million, $308.1 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 2,219 3,842 9,681 11,184 Other expenses includes selling, general, and administrative expenses necessary for operations, such as advertising, occupancy, professional services, construction materials, and personal property taxes.

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.

Decrease was due to a reduction in construction related costs and travel expenses as a result of the COVID-19 pandemic.

Intersegment expenses

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

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

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

2020 2019 2020 2019

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Capital expenditures 14,250 10,187 31,490 37,185

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

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

Residential customer information:

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Households served/passed 38.6 % 36.6 % 34.6 % 33.9 % 32.9 % 32.2 % 31.7 % 30.5 %

Total households in current markets and new markets announced (c) 171,121 171,121 160,884 159,974 159,974 152,840 152,840

Total households in current markets (c) 171,121 171,121 171,121 160,884 159,974 159,974 152,840 152,840

(a) Earnings before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications.

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

Recapitalization and Additional Funding for ALLO

On October 1, 2020, Nelnet, Inc.

and ALLO entered into various agreements with SDC, a third party global digital infrastructure investor, in connection with a recapitalization and additional funding for ALLO.

Upon regulatory approval of various aspects of the transactions, Nelnet Inc.'s voting ownership interest in ALLO will drop to 45 percent, and ALLO will be deconsolidated from the Company's consolidated financial statements.

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

See note 14 of the notes to consolidated financial statements included under Part 1, Item 1 of this report for additional information.

ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS

Loan Portfolio

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.

As of September 30, 2020, the Company had a $19.5 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years.

For a summary of the Company’s loan portfolio as of September 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 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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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 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.

The Company's total allowance for loan losses of $185.9 million at September 30, 2020 represents reserves equal to 0.7% of the Company's federally insured loans (or 28.5% of the risk sharing component of the loans that is not covered by the federal guaranty), 7.3% of the Company's private education loans, and 25.9% of the Company's consumer loans.

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

Loan Spread Analysis

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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,

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

2020 2019 2020 2019

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Fixed rate floor income, net of settlements on derivatives 0.66 0.36 0.56 0.43

Core loan spread (d) 1.35 % 1.21 % 1.19 % 1.25 %

Core loan spread 1.46 % 1.17 % 1.28 % 1.23 %

Average balance of loans $ 19,866,040 21,600,850 20,300,617 21,917,298

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derivative settlements follows.

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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(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.

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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 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).

Variable loan spread was compressed during the first and second quarters of 2020 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, the Company expects variable loan spread to increase from current levels.

During the third quarter of 2020, as the Company's debt reset at lower interest rates, the Company's variable loan spread increased.

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

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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Fixed rate floor income contribution to spread, net 0.66 % 0.36 % 0.56 % 0.43 %

(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 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.

(a) Derivative settlements consist of net settlements (paid) received related to the Company's derivatives used to hedge student loans earning fixed rate floor income.

The increase in gross fixed rate floor income for the three and nine months ended September 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.

The decrease in net derivative settlements (paid) 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.

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 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.

As of September 30, 2020, the interest earned on a principal amount of $17.8 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 $17.3 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR.

In addition, the majority of the Company’s derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR.

There is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021, and any market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company’s LIBOR-indexed derivative instruments.

A market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company’s LIBOR-indexed derivative instruments.

See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2019 Annual Report.

Summary and Comparison of Operating Results

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

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

2020 2019 2020 2019 Additional information

Net interest income after provision for loan losses $ 86,025 51,740 125,500 153,069 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.

Gain on sale of loans 14,817 — 33,023 1,712 The Company sold portfolios of consumer loans in the first and third quarters of 2020, and second quarter of 2019, and recognized gains of $18.2 million, $14.8 million, and $1.7 million, respectively.

Other income 1,004 3,384 4,951 10,084 Represents primarily borrower late fees.

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

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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 16,870 5,052 (1,735) (22,163)

Salaries and benefits 438 394 1,301 1,153

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.

Other expenses 3,672 19,054 12,253 29,098 The Company recognized $14.0 million and $15.8 million of expenses during the three and nine months ended September 30, 2019, respectively, to extinguish asset-backed notes from certain securitizations prior to their contractual maturity.

Excluding these costs, other expenses were $5.1 million and $13.3 million for the three and nine months ended September 30, 2019, respectively.

Other than the debt extinguishment costs, the primary component of other expenses is servicing fees paid to third parties.

The decrease in servicing fees in 2020 as compared to 2019 was due to a decrease in the Company's loan portfolio.

Intersegment expenses 8,868 11,678 29,839 35,630 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.

The decrease in servicing fees for the three and nine months ended September 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 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

Total operating expenses 12,978 31,126 43,393 65,881 Total operating expenses, excluding the $14.0 million and $15.8 million of expenses recognized in the three and nine months ended September 30, 2019, respectively, related to the extinguishment of debt prior to their contractual maturity (as described above), were 26 basis points and 32 basis points of the average balance of loans for the three months ended September 30, 2020 and 2019, respectively, and 29 basis points and 30 basis points for the nine months ended September 30, 2020 and 2019, respectively.

Income before income taxes 89,917 25,666 80,372 65,025

Income tax expense (21,580) (6,160) (19,289) (15,606) Represents income tax expense at an effective tax rate of 24%.

Net income $ 68,337 19,506 61,083 49,419

Additional information:

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.

Net income $ 68,337 19,506 61,083 49,419 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 September 30, 2020 as compared to the same period in 2019 was due to (i) an increase in core loan spread;

(ii) recognizing a gain from the sale of a consumer loan portfolio in 2020;

(iii) a decrease in provision for loan losses;

and (iv) recognizing an expense for the early extinguishment of debt in 2019.

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;

The decrease in net income for the nine months ended September 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 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 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.

and (iv) a decrease in borrower late fees.

These items were partially offset by (i) an increase in core loan spread;

(ii) recognizing gains from the sale of consumer loan portfolios in 2020;

and (iii) recognizing expenses for the early extinguishment of debt in 2019.

Derivative market value adjustments, net (3,440) 5,630 21,072 73,265

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

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

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

2020 2019 2020 2019 Additional information

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Fixed rate floor income, gross 36,633 12,685 87,258 33,950 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.

Derivative settlements, net (a) (3,588) 7,064 (2,772) 35,931 Derivative settlements include the settlements (paid) received related to the Company's floor income interest rate swaps.

Decrease in net settlements (paid) received 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

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Investment interest 3,452 4,162 12,029 13,770 Decrease was due to lower interest rates in 2020 as compared to 2019.

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

Intercompany interest (245) (1,158) (1,174) (2,963) Decrease was due to lower interest rates in 2020 as compared to 2019.

Negative provision (provision) for

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loans 5,299 (2,000) (32,074) (6,000) 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) —

Negative provision (provision) for

loan losses - private education

loans 5,650 — (6,471) —

Provision for loan losses -

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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.

settlements on derivatives) (a) $ 83,634 59,038 133,166 192,375 Net interest income after provision for loan losses (net of settlements on derivatives) increased for the three months ended September 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 nine months ended September 30, 2020 would have been $196.2 million.

The increase in net interest income after provision for loan losses (net of settlements on derivatives), excluding this provision, for the nine months ended September 30, 2020 as compared to the same period in 2019 was due to an increase in core loan spread, partially offset by a decrease in the average balance of loans and an increase in the consumer loan provision for loan losses in 2019 due to significant acquisitions of consumer loans in 2019.

(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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As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations.

Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and capital needs to expand ALLO's communications network in the Company's Communications operating segment.

Sources of Liquidity

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.

As of September 30, 2020, the Company had cash and cash equivalents of $96.3 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 $179.0 million as of September 30, 2020.

As of September 30, 2020, the Company had participated $108.7 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 June 30, 2020, there was $30.0 million outstanding on the unsecured line of credit and $425.0 million was available for future use.

As of September 30, 2020, there was no amount outstanding on the unsecured line of credit and $455.0 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 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.

As of September 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 retained certain of its own asset-backed securities upon their initial issuance or repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market.

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

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

As of September 30, 2020, the Company holds $20.8 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, including anticipated capital commitments to Nelnet Bank;

expansion of ALLO's telecommunications network;

strategic acquisitions and investments;

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

The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances.

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 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.

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 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:

Recent Events

Recapitalization and Additional Funding for ALLO

On October 1, 2020, Nelnet, Inc.

and ALLO entered into various agreements with SDC, a third party global digital infrastructure investor, 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).

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.

On November 2, 2020, the Company obtained final approval from the FDIC for federal deposit insurance and for a bank charter from the UDFI in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations.

Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 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 discussed below.

Prior to FDIC approval, Nelnet Bank, Nelnet, Inc.

(the parent), and Michael S.

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

(ii) provide and maintain an irrevocable asset liquidity takeout commitment 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 nine months ended September 30, 2020, the Company generated $173.0 million in operating activities, compared to $142.9 million for the same period in 2019.

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

• The increase in net income;

• 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 impact of changes to accrued interest receivable, accounts receivable, and other assets during the nine months ended September 30, 2020 as compared to the same period in 2019.

These factors were partially offset by:

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

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

• The impact of changes to other liabilities and the due to customers liability account during the nine months ended September 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 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.

Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2020 was $953.6 million and $1.4 billion, respectively.

Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2019 was $1.2 billion and $1.4 billion, 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 June 30, 2020

As of September 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 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.

As of September 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 $2.26 billion as detailed below.

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

As of September 30, 2020, the Company had $19.1 billion of loans included in asset-backed securitizations, which represented 97.8 percent of its total loan portfolio.

The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities as of September 30, 2020, private education and consumer loans funded with operating cash, and loans acquired subsequent to September 30, 2020.

Asset-backed Securitization Cash Flow Forecast

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(dollars in millions)

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.

The forecasted future undiscounted cash flows of approximately $2.26 billion include approximately $1.13 billion (as of September 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 $1.13 billion, or approximately $0.86 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's September 30, 2020 balance of consolidated shareholders' equity.

Two of the Company’s asset-backed securitizations as of September 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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The Company’s cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices.

If the forecast is computed assuming

a spread of 24 basis points between three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $25 million to $45 million.

If the forecast is computed assuming a spread of 24 basis points between three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $25 million to $50 million.

As the percentage of the Company's outstanding debt financed by three-month LIBOR declines, the Company's basis risk will be reduced.

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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 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.

As of September 30, 2020, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $550.0 million, of which $145.1 million was outstanding and $404.9 million was available for additional funding.

On November 2, 2020, the Company decreased the maximum financing amount for these FFELP warehouse facilities to $100.0 million (each facility having a $50.0 million maximum financing amount).

One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (November 20, 2020).

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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 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.

As of September 30, 2020, the Company had $11.2 million advanced as equity support on these facilities.

For further discussion of the Company's FFELP warehouse facilities outstanding at September 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 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.

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 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.

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.

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 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.

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 June 30, 2020, $925.3 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

As of September 30, 2020, $903.0 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 six months of 2020, the Company completed three FFELP asset-backed securitizations totaling $1.1 billion (par value).

During the first nine months of 2020, the Company completed four FFELP asset-backed securitizations totaling $1.3 billion (par value).

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

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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.

Depending on 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.

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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 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.

Based on the derivative portfolio outstanding as of September 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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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 portfolio.

Liquidity Impact Related to the Communications Operating Segment

ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado.

ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest.

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

As of September 30, 2020, the unsecured line of credit had no amount outstanding and $455.0 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 June 30, 2020, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use.

As of September 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.

Upon the maturity date of these facilities, there can be no assurance that the Company will be able to maintain these lines of credit, increase the amount outstanding under the lines, or find alternative funding if necessary.

The Company has issued Junior Subordinated Hybrid Securities (the "Hybrid Securities") that have a final maturity of September 15, 2061.

The Hybrid Securities are unsecured obligations of the Company.

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

As of September 30, 2020, the Company had $20.4 million of unsecured Junior Subordinated Hybrid Securities (the "Hybrid Securities") that were outstanding.

On October 5, 2020, the Company redeemed in full all the outstanding Hybrid Securities at par.

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.

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.

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

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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.

As of September 30, 2020, 3,246,732 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 and June 30, 2020 are shown below.

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

For additional information on stock repurchases during the third 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 June 30, 2020 1,473,049 67,274 45.67

Quarter ended September 30, 2020 93,380 4,618 49.45

Total 1,591,314 $ 73,145 45.96

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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.

On September 15, 2020, the Company paid a third 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 fourth quarter 2020 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.22 per share.

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

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

In addition, the payment of dividends is subject to the terms of the Company’s outstanding Hybrid Securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock.

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