NELNET INC 10-Q

ITEM 1. FINANCIAL STATEMENTS NELNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) (unaudited) As of As of September 30, 2020 December 31, 2019 Assets: Loans and accrued interest receivable (net of allowance for loan losses of $ 185,899 and $ 61,914 , respectively) $ 20,076,542 21,402,868 Cash and cash equivalents: Cash and cash equivalents - not held at a related party 31,998 13,922 Cash and cash equivalents - held at a related party 64,318 119,984 Total cash and cash equivalents 96,316 133,906 Investments 476,827 247,099 Restricted cash 519,143 650,939 Restricted cash - due to customers 286,082 437,756 Accounts receivable (net of allowance for doubtful accounts of $ 3,731 and $ 4,455 , respectively) 69,916 115,391 Goodwill 156,912 156,912 Intangible assets, net 58,701 81,532 Property and equipment, net 360,490 348,259 Other assets 121,597 134,308 Total assets $ 22,222,526 23,708,970 Liabilities: Bonds and notes payable $ 19,215,053 20,529,054 Accrued interest payable 29,612 47,285 Other liabilities 288,948 303,781 Due to customers 286,082 437,756 Total liabilities 19,819,695 21,317,876 Commitments and contingencies Equity: Nelnet, Inc. shareholders' equity: Preferred stock, $ 0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding — — Common stock: Class A, $ 0.01 par value. Authorized 600,000,000 shares; issued and outstanding 27,163,588 shares and 28,458,495 shares, respectively 272 285 Class B, convertible, $ 0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,171,609 shares and 11,271,609 shares, respectively 112 113 Additional paid-in capital 1,704 5,715 Retained earnings 2,393,113 2,377,627 Accumulated other comprehensive earnings 4,284 2,972 Total Nelnet, Inc. shareholders' equity 2,399,485 2,386,712 Noncontrolling interests 3,346 4,382 Total equity 2,402,831 2,391,094 Total liabilities and equity $ 22,222,526 23,708,970 Supplemental information - assets and liabilities of consolidated education and other lending variable interest entities: Loans and accrued interest receivable $ 20,085,382 21,399,382 Restricted cash 501,080 639,847 Bonds and notes payable ( 19,349,111 ) ( 20,742,798 ) Accrued interest payable and other liabilities ( 88,911 ) ( 162,494 ) Net assets of consolidated education and other lending variable interest entities $ 1,148,440 1,133,937 See accompanying notes to consolidated financial statements. 2 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (unaudited) Three months ended Nine months ended September 30, September 30, 2020 2019 2020 2019 Interest income: Loan interest $ 134,507 229,063 462,439 709,618 Investment interest 5,238 9,882 18,379 26,701 Total interest income 139,745 238,945 480,818 736,319 Interest expense: Interest on bonds and notes payable 58,423 172,488 277,788 551,221 Net interest income 81,322 66,457 203,030 185,098 Less (negative provision) provision for loan losses ( 5,821 ) 10,000 73,476 26,000 Net interest income after provision for loan losses 87,143 56,457 129,554 159,098 Other income/expense: Loan servicing and systems revenue 113,794 113,286 337,571 342,169 Education technology, services, and payment processing revenue 74,121 74,251 217,100 213,753 Communications revenue 20,211 16,470 57,390 46,770 Gain on sale of loans 14,817 — 33,023 1,712 Other income 1,502 13,439 69,910 36,946 Impairment expense — — ( 34,419 ) — Derivative market value adjustments and derivative settlements, net 1,049 1,668 ( 13,406 ) ( 33,959 ) Total other income/expense 225,494 219,114 667,169 607,391 Cost of services: Cost to provide education technology, services, and payment processing services 25,243 25,671 63,424 62,601 Cost to provide communications services 5,914 5,236 17,240 15,096 Total cost of services 31,157 30,907 80,664 77,697 Operating expenses: Salaries and benefits 126,096 116,670 365,220 338,942 Depreciation and amortization 30,308 27,701 87,349 76,398 Other expenses 34,744 58,329 115,184 147,562 Total operating expenses 191,148 202,700 567,753 562,902 Income before income taxes 90,332 41,964 148,306 125,890 Income tax expense 19,156 8,829 30,286 26,429 Net income 71,176 33,135 118,020 99,461 Net loss (income) attributable to noncontrolling interests 327 77 ( 568 ) ( 38 ) Net income attributable to Nelnet, Inc. $ 71,503 33,212 117,452 99,423 Earnings per common share: Net income attributable to Nelnet, Inc. shareholders - basic and diluted $ 1.86 0.83 2.99 2.48 Weighted average common shares outstanding - basic and diluted 38,538,476 39,877,129 39,229,932 40,098,346 See accompanying notes to consolidated financial statements. 3 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (unaudited) Three months ended Nine months ended September 30, September 30, 2020 2019 2020 2019 Net income $ 71,176 33,135 118,020 99,461 Other comprehensive income (loss): Available-for-sale securities: Unrealized holding gains (losses) arising during period, net 1,893 ( 334 ) 2,114 ( 1,306 ) Reclassification adjustment for (gains) losses recognized in net income, net ( 513 ) — ( 390 ) — Income tax effect ( 329 ) 80 ( 412 ) 313 Total other comprehensive income (loss) 1,051 ( 254 ) 1,312 ( 993 ) Comprehensive income 72,227 32,881 119,332 98,468 Comprehensive loss (income) attributable to noncontrolling interests 327 77 ( 568 ) ( 38 ) Comprehensive income attributable to Nelnet, Inc. $ 72,554 32,958 118,764 98,430 See accompanying notes to consolidated financial statements. 4 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) (unaudited) Nelnet, Inc. Shareholders Preferred stock shares Common stock shares Preferred stock Class A common stock Class B common stock Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) earnings Noncontrolling interests Total equity Class A Class B Balance as of June 30, 2019 — 28,399,526 11,279,641 $ — 284 113 1,670 2,317,115 3,144 4,292 2,326,618 Issuance of noncontrolling interests — — — — — — — — — 4,165 4,165 Net income (loss) — — — — — — — 33,212 — ( 77 ) 33,135 Other comprehensive loss — — — — — — — — ( 254 ) — ( 254 ) Distribution to noncontrolling interests — — — — — — — — — ( 3,865 ) ( 3,865 ) Cash dividends on Class A and Class B common stock - $ 0.18 per share — — — — — — — ( 7,142 ) — — ( 7,142 ) Issuance of common stock, net of forfeitures — 15,345 — — — — 524 — — — 524 Compensation expense for stock based awards — — — — — — 1,705 — — — 1,705 Repurchase of common stock — ( 3,365 ) — — — — ( 221 ) — — — ( 221 ) Balance as of September 30, 2019 — 28,411,506 11,279,641 $ — 284 113 3,678 2,343,185 2,890 4,515 2,354,665 Balance as of June 30, 2020 — 27,232,836 11,171,609 $ — 272 112 1,867 2,331,312 3,233 3,990 2,340,786 Issuance of noncontrolling interests — — — — — — — — — 14 14 Net income (loss) — — — — — — — 71,503 — ( 327 ) 71,176 Other comprehensive income — — — — — — — — 1,051 — 1,051 Distribution to noncontrolling interests — — — — — — — — — ( 331 ) ( 331 ) Cash dividends on Class A and Class B common stock - $ 0.20 per share — — — — — — — ( 7,664 ) — — ( 7,664 ) Issuance of common stock, net of forfeitures — 24,132 — — — — 553 — — — 553 Compensation expense for stock based awards — — — — — — 1,864 — — — 1,864 Repurchase of common stock — ( 93,380 ) — — — — ( 2,580 ) ( 2,038 ) — — ( 4,618 ) Balance as of September 30, 2020 — 27,163,588 11,171,609 $ — 272 112 1,704 2,393,113 4,284 3,346 2,402,831 See accompanying notes to consolidated financial statements. 5 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) (unaudited) Nelnet, Inc. Shareholders Preferred stock shares Common stock shares Preferred stock Class A common stock Class B common stock Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) earnings Noncontrolling interests Total equity Class A Class B Balance as of December 31, 2018 — 28,798,464 11,459,641 $ — 288 115 622 2,299,556 3,883 10,315 2,314,779 Issuance of noncontrolling interests — — — — — — — — — 4,217 4,217 Net income — — — — — — — 99,423 — 38 99,461 Other comprehensive loss — — — — — — — — ( 993 ) — ( 993 ) Distribution to noncontrolling interests — — — — — — — — — ( 3,978 ) ( 3,978 ) Cash dividends on Class A and Class B common stock - $ 0.54 per share — — — — — — — ( 21,546 ) — — ( 21,546 ) Issuance of common stock, net of forfeitures — 156,874 — — 1 — 4,400 — — — 4,401 Compensation expense for stock based awards — — — — — — 4,663 — — — 4,663 Repurchase of common stock — ( 723,832 ) — — ( 7 ) — ( 6,007 ) ( 34,248 ) — — ( 40,262 ) Impact of adoption of new accounting standard — — — — — — — — — ( 6,077 ) ( 6,077 ) Conversion of common stock — 180,000 ( 180,000 ) — 2 ( 2 ) — — — — — Balance as of September 30, 2019 — 28,411,506 11,279,641 $ — 284 113 3,678 2,343,185 2,890 4,515 2,354,665 Balance as of December 31, 2019 — 28,458,495 11,271,609 $ — 285 113 5,715 2,377,627 2,972 4,382 2,391,094 Issuance of noncontrolling interests — — — — — — — — — 66 66 Net income — — — — — — — 117,452 — 568 118,020 Other comprehensive income — — — — — — — — 1,312 — 1,312 Distribution to noncontrolling interests — — — — — — — — — ( 920 ) ( 920 ) Cash dividends on Class A and Class B common stock - $ 0.60 per share — — — — — — — ( 23,343 ) — — ( 23,343 ) Issuance of common stock, net of forfeitures — 196,407 — — 2 — 5,153 — — — 5,155 Compensation expense for stock based awards — — — — — — 5,459 — — — 5,459 Repurchase of common stock — ( 1,591,314 ) — — ( 16 ) — ( 14,623 ) ( 58,506 ) — — ( 73,145 ) Impact of adoption of new accounting standard — — — — — — — ( 18,867 ) — — ( 18,867 ) Conversion of common stock — 100,000 ( 100,000 ) — 1 ( 1 ) — — — — — Acquisition of noncontrolling interest — — — — — — — ( 1,250 ) — ( 750 ) ( 2,000 ) Balance as of September 30, 2020 — 27,163,588 11,171,609 $ — 272 112 1,704 2,393,113 4,284 3,346 2,402,831 See accompanying notes to consolidated financial statements. 6 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) Nine months ended September 30, 2020 2019 Net income attributable to Nelnet, Inc. $ 117,452 99,423 Net income attributable to noncontrolling interests 568 38 Net income 118,020 99,461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs 149,175 142,519 Loan discount accretion ( 27,814 ) ( 27,554 ) Provision for loan losses 73,476 26,000 Derivative market value adjustments 21,072 73,265 Payments from termination of derivative instruments, net — ( 13,940 ) Payments to clearinghouse - initial and variation margin, net ( 20,405 ) ( 59,967 ) Gain on sale of loans ( 33,023 ) ( 1,712 ) Gain from investments, net ( 37,766 ) ( 4,891 ) (Gain) loss on repurchases and extinguishment of debt, net ( 508 ) 15,679 Deferred income tax benefit ( 10,975 ) ( 9,592 ) Non-cash compensation expense 5,538 4,948 Impairment expense 34,419 — Increase in loan and investment accrued interest receivable ( 27,192 ) ( 57,864 ) Decrease (increase) in accounts receivable 45,475 ( 7,637 ) Decrease (increase) in other assets, net 19,491 ( 28,646 ) Decrease in the carrying amount of ROU asset 9,150 6,529 Decrease in accrued interest payable ( 17,673 ) ( 9,334 ) Increase in other liabilities 32,733 62,757 Decrease in the carrying amount of lease liability ( 8,484 ) ( 6,734 ) Decrease in due to customers ( 151,674 ) ( 60,369 ) Net cash provided by operating activities 173,035 142,918 Cash flows from investing activities: Purchases of loans ( 1,032,636 ) ( 1,360,873 ) Purchases of loans from a related party ( 75,118 ) ( 32,580 ) Net proceeds from loan repayments, claims, and capitalized interest 2,209,797 2,628,156 Proceeds from sale of loans 136,126 42,215 Purchases of available-for-sale securities ( 221,427 ) ( 1,010 ) Proceeds from sales of available-for-sale securities 97,278 169 Proceeds from beneficial interest in loan securitizations 34,371 2,166 Purchases of other investments ( 122,584 ) ( 70,600 ) Proceeds from other investments 8,528 52,653 Purchases of property and equipment ( 80,698 ) ( 67,681 ) Net cash provided by investing activities 953,637 1,192,615 Cash flows from financing activities: Payments on bonds and notes payable ( 2,803,214 ) ( 3,718,851 ) Proceeds from issuance of bonds and notes payable 1,460,524 2,410,363 Payments of debt issuance costs ( 7,144 ) ( 10,527 ) Payments to extinguish debt — ( 14,030 ) Dividends paid ( 23,343 ) ( 21,546 ) Repurchases of common stock ( 73,145 ) ( 40,262 ) Proceeds from issuance of common stock 1,250 1,171 Acquisition of noncontrolling interest ( 2,000 ) — Issuance of noncontrolling interests — 4,138 Distribution to noncontrolling interests ( 660 ) ( 173 ) Net cash used in financing activities ( 1,447,732 ) ( 1,389,717 ) Net decrease in cash, cash equivalents, and restricted cash ( 321,060 ) ( 54,184 ) Cash, cash equivalents, and restricted cash, beginning of period 1,222,601 1,192,391 Cash, cash equivalents, and restricted cash, end of period $ 901,541 1,138,207 7 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) (unaudited) Nine months ended September 30, 2020 2019 Supplemental disclosures of cash flow information: Cash disbursements made for interest $ 259,120 518,557 Cash disbursements made for income taxes, net of refunds and credits received $ 13,413 14,820 Cash disbursements made for operating leases $ 9,457 7,307 Non-cash operating, investing, and financing activity: ROU assets obtained in exchange for lease obligations $ 4,158 7,972 Receipt of beneficial interest in consumer loan securitizations $ 52,501 7,921 Distribution to noncontrolling interest $ 260 3,805 Supplemental disclosures of noncash activities regarding the adoption of the new accounting standard for measurement of credit losses on financial instruments on January 1, 2020 are contained in note 1. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows. As of As of As of As of September 30, 2020 December 31, 2019 September 30, 2019 December 31, 2018 Total cash and cash equivalents $ 96,316 133,906 160,979 121,347 Restricted cash 519,143 650,939 667,919 701,366 Restricted cash - due to customers 286,082 437,756 309,309 369,678 Cash, cash equivalents, and restricted cash $ 901,541 1,222,601 1,138,207 1,192,391 See accompanying notes to consolidated financial statements. 8 NELNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, unless otherwise noted) (unaudited) 1. Basis of Financial Reporting The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2019 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report"). Reclassifications Certain amounts previously reported have been reclassified to conform to the current period presentation. These reclassifications include: • Reclassifying the line item "accrued interest receivable" on the Company's consolidated balance sheet to "loans and accrued interest receivable" and "investments"; and • Reclassifying "gain on sale of loans" that was previously included in "other income" to a new line item on the Company's consolidated statements of income. Accounting Standard Adopted in 2020 In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASC 326”), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. Since its original issuance in 2016, the FASB has issued several updates to the original ASU. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for financial assets measured at amortized cost at the time the financial asset is originated or acquired, including, for the Company, loans receivable, accounts receivable, and held-to-maturity beneficial interests in loan securitizations. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. For available-for-sale debt securities where fair value is less than amortized cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk. On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 (recognizing estimated credit losses expected to occur over the asset's remaining life) while prior period amounts continue to be reported in accordance with previously applicable GAAP (recognizing estimated credit losses using an incurred loss model); therefore, the comparative information for 2019 is not comparable to the information presented for 2020. Adoption of the new guidance primarily impacted the allowance for loan losses related to the Company's loan portfolio. Upon adoption, the Company recorded an increase to the allowance for loan losses of $ 91.0 million, which included a reclassification of the non-accretable discount balance and premiums related to loans purchased with evidence of credit deterioration, and decreased retained earnings, net of tax, by $ 18.9 million. The following table illustrates the impact of the adoption of ASC 326. 9 Balances at December 31, 2019 Impact of ASC 326 adoption Balances at January 1, 2020 Assets Loans and accrued interest receivable, net of allowance Loans receivable $ 20,798,719 — 20,798,719 Accrued interest receivable 733,497 — 733,497 Loan discount, net ( 35,036 ) 33,790 ( 1,246 ) Non-accretable discount ( 32,398 ) 32,398 — Allowance for loan losses ( 61,914 ) ( 91,014 ) ( 152,928 ) Loans and accrued interest receivable, net of allowance 21,402,868 ( 24,826 ) 21,378,042 Liabilities Other liabilities (deferred taxes) 303,781 ( 5,958 ) 297,823 Equity Retained earnings 2,377,627 ( 18,868 ) 2,358,759 The Company adopted ASC 326 using the prospective transition approach for loans receivable purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI"). In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the unamortized cost basis of the PCD assets were adjusted to reflect the addition of $ 32.4 million in the allowance for loan losses (as reflected in the table above). The remaining noncredit premium on these loans as of January 1, 2020 (based on the adjusted amortized cost basis) will be amortized into interest income over the life of the loans. Changes to the allowance for loan losses on these loans after adoption are recorded through provision expense. Summary of Significant Accounting Policies Affected by Implementation of ASC 326 Allowance for Loan Losses The allowance for loan losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of prepayments. Loans are charged off when management determines the loan is uncollectible. Charge-offs are recognized as a reduction to the allowance for loan losses. Expected recoveries of amounts previously charged off, not to exceed the aggregate of the amount previously charged off, are included in the estimate of the allowance for loan losses at the balance sheet date. The Company aggregates loans with similar risk characteristics into homogeneous pools to estimate its expected credit losses. The Company continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change. The Company determines its estimated credit losses for the following financial assets as follows: Loans receivable Management has determined that the federally insured, private education, and consumer loan portfolios each 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 loan losses. Accordingly, the portfolio segment disclosures are presented on this basis in note 2 for each of these portfolios. The Company does not disaggregate its portfolio segment loan portfolios into classes of financing receivables. The Company utilizes an undiscounted cash flow methodology in determining its lifetime expected credit losses on its federally insured and private education loan portfolios and a remaining life methodology for its consumer loan portfolio. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company has determined that, for modeling current expected credit losses, in general, the Company can reasonably estimate expected losses that incorporate current and forecasted economic conditions up to a one-year period. After this "reasonable and supportable" period, the Company uses a reversion period to the Company's actual long-term historical loss experience over a full economic life cycle. Historical credit loss experience provides 10 the basis for the estimation of expected credit losses. Qualitative and quantitative adjustments to historical loss information are made separately on each of the Company’s federally insured, private education, and consumer loan portfolios. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider the following factors, as applicable, for each of the Company’s loan portfolios: student loans in repayment versus those in nonpaying status; delinquency status; type of private education or consumer loan program; trends in defaults in the portfolio based on Company and industry data; past experience; trends in federally insured student loan claims rejected for payment by guarantors; changes in federal student loan programs; current economic conditions, including changes in unemployment rates and gross domestic product growth; and other relevant qualitative factors. The federal government guarantees 97 percent of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits the Company’s loss exposure on the outstanding balance of the Company’s federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured. The Company places private education loans on nonaccrual status when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days past due. The Company places consumer loans on nonaccrual status when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days or 180 days past due, depending on type of loan program. Collections, if any, are reflected as a recovery through the allowance for loan losses. Purchased Loans Receivable with Credit Deterioration (“PCD”) The Company has purchased federally insured rehabilitation loans that have experienced more than insignificant credit deterioration since origination. Rehabilitation loans are loans that have previously defaulted, but for which the borrower has made a specified number of on-time payments. Although rehabilitation loans benefit from the same guarantees as other federally insured loans, rehabilitation loans have generally experienced redefault rates that are higher than default rates for federally insured loans that have not previously defaulted. These PCD loans are recorded at the amount paid. An allowance for loan losses is determined using the same methodology as for other loans held for investment. The sum of the loans’ purchase price and allowance for loan losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized or accreted into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense. Loan Accrued Interest Receivable The Company has elected to present its loan accrued interest receivable balance combined in its consolidated balance sheets with the loans receivable amortized cost balance. For the Company’s federally insured loan portfolio, the Company has elected to measure an allowance for credit losses for accrued interest receivables. For federally insured loans, accrued interest receivable is typically charged-off when the contractual payment of principal or interest has become greater than 270 days past due. Charge-offs of accrued interest receivable are recognized as a reduction to the allowance for loan losses. For the Company’s private education and consumer loan portfolios, the Company has elected not to measure an allowance for credit losses for accrued interest receivables. For private education and consumer loans, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due. Charge-offs of accrued interest receivable are recognized by reversing interest income. 11 2. Loans and Accrued Interest Receivable and Allowance for Loan Losses Loans and accrued interest receivable consisted of the following: As of As of September 30, 2020 December 31, 2019 Federally insured student loans: Stafford and other $ 4,372,469 4,684,314 Consolidation 14,773,110 15,644,229 Total 19,145,579 20,328,543 Private education loans 273,807 244,258 Consumer loans 100,180 225,918 19,519,566 20,798,719 Accrued interest receivable 760,787 733,497 Loan discount, net of unamortized loan premiums and deferred origination costs ( 17,912 ) ( 35,036 ) Non-accretable discount — ( 32,398 ) Allowance for loan losses: Federally insured loans ( 139,943 ) ( 36,763 ) Private education loans ( 20,013 ) ( 9,597 ) Consumer loans ( 25,943 ) ( 15,554 ) $ 20,076,542 21,402,868 On January 30, 2020 and July 29, 2020, the Company sold $ 124.2 million (par value) and $ 60.8 million (par value), respectively, of consumer loans to an unrelated third party who securitized such loans. The Company recognized a gain of $ 18.2 million (pre-tax) and $ 14.8 million (pre-tax), respectively, as part of these transactions. As partial considerations received for the consumer loans sold, the Company received a 31.4 percent and 25.4 percent residual interest, respectively, in the consumer loan securitizations that are included in "investments" on the Company's consolidated balance sheet. 12 Activity in the Allowance for Loan Losses The following table presents the activity in the allowance for loan losses by portfolio segment. Balance at beginning of period Impact of ASC 326 adoption Provision (negative provision) for loan losses Charge-offs Recoveries Initial allowance on loans purchased with credit deterioration (a) Loan sale Balance at end of period Three months ended September 30, 2020 Federally insured loans $ 144,829 — ( 5,299 ) ( 2,487 ) — 2,900 — 139,943 Private education loans 25,535 — ( 5,650 ) ( 5 ) 133 — — 20,013 Consumer loans 39,081 — 5,128 ( 2,723 ) 381 — ( 15,924 ) 25,943 $ 209,445 — ( 5,821 ) ( 5,215 ) 514 2,900 ( 15,924 ) 185,899 Three months ended September 30, 2019 Federally insured loans $ 39,056 — 2,000 ( 3,380 ) — — — 37,676 Private education loans 10,157 — — ( 459 ) 184 — — 9,882 Consumer loans 13,378 — 8,000 ( 2,759 ) 240 — — 18,859 $ 62,591 — 10,000 ( 6,598 ) 424 — — 66,417 Nine months ended September 30, 2020 Federally insured loans $ 36,763 72,291 32,074 ( 14,885 ) — 13,700 — 139,943 Private education loans 9,597 4,797 6,471 ( 1,360 ) 508 — — 20,013 Consumer loans 15,554 13,926 34,931 ( 9,893 ) 849 — ( 29,424 ) 25,943 $ 61,914 91,014 73,476 ( 26,138 ) 1,357 13,700 ( 29,424 ) 185,899 Nine months ended September 30, 2019 Federally insured loans $ 42,310 — 6,000 ( 10,634 ) — — — 37,676 Private education loans 10,838 — — ( 1,529 ) 573 — — 9,882 Consumer loans 7,240 — 20,000 ( 7,417 ) 536 — ( 1,500 ) 18,859 $ 60,388 — 26,000 ( 19,580 ) 1,109 — ( 1,500 ) 66,417 a) During the three and nine months ended September 30, 2020, the Company acquired $ 137.5 million (par value) and $ 721.4 million (par value), respectively, of federally insured rehabilitation loans. These loans met the definition of PCD loans when they were purchased by the Company. The Company estimated that the expected credit losses relating to these loans was $ 2.9 million and $ 13.7 million, respectively, at the time of purchase. The noncredit discount recorded as part of these acquisitions will be recognized into interest income using an effective yield over the life of the loans. In March 2020, 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 and a national emergency by the President, and caused significant disruptions in the U.S. and world economies. Apart from the impact of the adoption of ASC 326 effective January 1, 2020, the Company’s allowance for loan losses increased during the first quarter of 2020 primarily as a result of the COVID-19 pandemic and its effects on current and forecasted economic conditions. The Company's provision expense for the three months ended June 30, 2020 was impacted by the Company's estimate of certain improved economic conditions as of June 30, 2020 in comparison to what was used by the Company to determine the allowance for loan losses as of March 31, 2020. These improved economic conditions were partially offset by the Company extending its reversion period (to the Company's actual long-term historical loss experience) as of June 30, 2020, as the Company currently believes the economy will take longer to recover from the COVID-19 pandemic than what was originally estimated as of March 31, 2020. The Company's provision expense for the three months ended September 30, 2020 was impacted by the Company's ongoing loan portfolio amortization; management's estimate of certain continued improved economic conditions as of September 30, 2020 in comparison to what was used by the Company to determine the allowance for loan losses as of June 30, 2020; and a decrease in the amount of loans in forbearance at September 30, 2020 as compared to June 30, 2020. 13 Loan Status and Delinquencies The key credit quality indicators for the Company's federally insured, private education, and consumer loan portfolios are loan status, including delinquencies. The impact of changes in loan status is incorporated into the allowance for loan losses calculation. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. The table below shows the Company’s loan status and delinquency amounts. As of September 30, 2020 As of December 31, 2019 As of September 30, 2019 Federally insured loans: Loans in-school/grace/deferment $ 1,037,754 5.4 % $ 1,074,678 5.3 % $ 1,243,705 6.0 % Loans in forbearance 1,916,906 10.0 1,339,821 6.6 1,391,482 6.7 Loans in repayment status: Loans current 14,845,519 91.7 % 15,410,993 86.0 % 15,646,231 86.7 % Loans delinquent 31-60 days 945,411 5.9 650,796 3.6 662,431 3.8 Loans delinquent 61-90 days 249,523 1.5 428,879 2.4 402,197 2.2 Loans delinquent 91-120 days 129,994 0.8 310,851 1.7 279,524 1.5 Loans delinquent 121-270 days 605 0.0 812,107 4.5 795,230 4.4 Loans delinquent 271 days or greater 19,867 0.1 300,418 1.8 275,037 1.4 Total loans in repayment 16,190,919 84.6 100.0 % 17,914,044 88.1 100.0 % 18,060,650 87.3 100.0 % Total federally insured loans 19,145,579 100.0 % 20,328,543 100.0 % 20,695,837 100.0 % Accrued interest receivable 757,960 730,059 732,608 Loan discount, net of unamortized premiums and deferred origination costs ( 20,554 ) ( 35,822 ) ( 36,210 ) Non-accretable discount (a) — ( 28,036 ) ( 27,809 ) Allowance for loan losses ( 139,943 ) ( 36,763 ) ( 37,676 ) Total federally insured loans and accrued interest receivable, net of allowance for loan losses $ 19,743,042 $ 20,957,981 $ 21,326,750 Private education loans: Loans in-school/grace/deferment $ 3,839 1.4 % $ 4,493 1.8 % $ 3,944 2.1 % Loans in forbearance 5,437 2.0 3,108 1.3 2,242 1.2 Loans in repayment status: Loans current 261,514 98.8 % 227,013 95.9 % 173,883 94.7 % Loans delinquent 31-60 days 1,820 0.7 2,814 1.2 3,011 1.6 Loans delinquent 61-90 days 454 0.2 1,694 0.7 1,370 0.7 Loans delinquent 91 days or greater 743 0.3 5,136 2.2 5,462 3.0 Total loans in repayment 264,531 96.6 100.0 % 236,657 96.9 100.0 % 183,726 96.7 100.0 % Total private education loans 273,807 100.0 % 244,258 100.0 % 189,912 100.0 % Accrued interest receivable 1,960 1,558 1,440 Loan premium, net of unaccreted discount 1,137 46 ( 1,421 ) Non-accretable discount (a) — ( 4,362 ) ( 4,798 ) Allowance for loan losses ( 20,013 ) ( 9,597 ) ( 9,882 ) Total private education loans and accrued interest receivable, net of allowance for loan losses $ 256,891 $ 231,903 $ 175,251 Consumer loans: Loans in deferment $ 1,084 1.1 % $ — $ — Loans in repayment status: Loans current 96,038 96.9 % 220,404 97.5 % 315,708 98.3 % Loans delinquent 31-60 days 1,044 1.1 2,046 0.9 2,249 0.7 Loans delinquent 61-90 days 776 0.8 1,545 0.7 1,617 0.5 Loans delinquent 91 days or greater 1,238 1.2 1,923 0.9 1,625 0.5 Total loans in repayment 99,096 98.9 100.0 % 225,918 100.0 % 321,199 100.0 % Total consumer loans 100,180 100.0 % 225,918 321,199 Accrued interest receivable 867 1,880 2,605 Loan premium 1,505 740 1,148 Allowance for loan losses ( 25,943 ) ( 15,554 ) ( 18,859 ) Total consumer loans and accrued interest receivable, net of allowance for loan losses $ 76,609 $ 212,984 $ 306,093 (a) Upon adoption of ASC 326 on January 1, 2020, the Company reclassified the non-accretable discount balance related to loans purchased with evidence of credit deterioration to allowance for loan losses. 14 On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. The CARES Act, among other things, provides broad relief, effective March 13, 2020 through September 30, 2020, for borrowers that have student loans owned by the Department of Education (the "Department"). On August 8, 2020, the President directed the Secretary of the Department to continue to suspend loan payments, stop collections, and waive interest on student loans owned by the Department until December 31, 2020. This relief package excluded Federal Family Education Loan Program ("FFELP" or "FFEL Program"), private education, and consumer loans. Although the Company's loans are excluded from the provisions of the CARES Act, the Company is providing relief for its borrowers. For the Company's federally insured and private education loans, effective March 13, 2020 through June 30, 2020, the Company proactively applied a 90 day natural disaster forbearance to any loan that was 31-269 days past due (for federally insured loans) and 80 days past due (for private education loans), and to any current loan upon request. Beginning July 1, 2020, the Company discontinued proactively applying 90 day natural disaster forbearances on past due loans. However, the Company will continue to apply a natural disaster forbearance with an end date of December 31, 2020 to any federally insured and private education loan upon request. In addition, for both federally insured and private education loans, effective March 13, 2020 through December 31, 2020, borrower late fees are being waived and borrower payments made after March 13, 2020 are refunded upon a borrower's request. For the majority of the Company's consumer loans, borrowers are generally being offered, upon request and/or documented evidence of financial distress, a two-month deferral of payments, with an option of additional deferrals if the COVID-19 pandemic continues. In addition, effective March 13, 2020 through September 30, 2020, the majority of fees (non-sufficient funds, late charges, check fees) and credit bureau reporting were suspended. The specific relief terms on the Company's consumer loan portfolio vary depending on the loan program and servicer of such loans. The Company will continue to review whether additional and/or extended borrower relief policies and activities are needed. When providing relief for its borrowers, the Company follows the guidance under the CARES Act to determine if a modification is subject to troubled debt restructuring classification. All relief provided to borrowers by the Company through September 30, 2020 have met the criteria under the CARES Act and the modifications have not been accounted for as troubled debt restructuring. Nonaccrual Status The Company does not place federally insured loans on nonaccrual status due to the government guaranty. The amortized cost of private and consumer loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of December 31, 2019 and September 30, 2020, was not material. 15 Amortized Cost Basis by Origination Year The following table presents the amortized cost of the Company's private education and consumer loans by loan status and delinquency amount as of September 30, 2020 based on year of origination. Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made under the Federal Direct Loan Program. As such, all the Company’s federally insured loans were originated prior to July 1, 2010. Nine months ended September 30, 2020 2019 2018 2017 2016 Prior Years Total Private education loans: Loans in school/grace/deferment $ — 909 — — 169 2,761 3,839 Loans in forbearance 273 683 — — 333 4,148 5,437 Loans in repayment status: Loans current 30,088 89,772 1,053 — 5,917 134,684 261,514 Loans delinquent 31-60 days — 71 — — 17 1,732 1,820 Loans delinquent 61-90 days — — — — — 454 454 Loans delinquent 91 days or greater — — — — — 743 743 Total loans in repayment 30,088 89,843 1,053 — 5,934 137,613 264,531 Total private education loans $ 30,361 91,435 1,053 — 6,436 144,522 273,807 Accrued interest receivable 1,960 Loan premium, net of unaccreted discount 1,137 Allowance for loan losses ( 20,013 ) Total private education loans and accrued interest receivable, net of allowance for loan losses $ 256,891 Consumer loans: Loans in deferment $ 72 497 495 20 — — 1,084 Loans in repayment status: Loans current 38,927 26,259 27,419 3,433 — — 96,038 Loans delinquent 31-60 days 228 589 226 1 — — 1,044 Loans delinquent 61-90 days 146 322 280 28 — — 776 Loans delinquent 91 days or greater 326 339 535 38 — — 1,238 Total loans in repayment 39,627 27,509 28,460 3,500 — — 99,096 Total consumer loans $ 39,699 28,006 28,955 3,520 — — 100,180 Accrued interest receivable 867 Loan premium 1,505 Allowance for loan losses ( 25,943 ) Total consumer loans and accrued interest receivable, net of allowance for loan losses $ 76,609 16 3. Bonds and Notes Payable The following tables summarize the Company’s outstanding debt obligations by type of instrument: As of September 30, 2020 Carrying amount Interest rate range Final maturity Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: Bonds and notes based on indices $ 17,265,435 0.32 % - 2.05 % 5/27/25 - 3/26/68 Bonds and notes based on auction 751,675 1.15 % - 2.11 % 3/22/32 - 11/26/46 Total FFELP variable-rate bonds and notes 18,017,110 Fixed-rate bonds and notes issued in FFELP loan asset-backed securitizations 939,132 1.42 % - 3.45 % 10/25/67 - 8/27/68 FFELP warehouse facilities 145,149 0.34 % / 0.46 % 11/22/21 / 2/26/23 Private education loan warehouse facility 102,564 0.45 % 2/13/22 Consumer loan warehouse facility 30,290 0.33 % 4/23/22 Variable-rate bonds and notes issued in private education loan asset-backed securitizations 54,122 1.65 % / 1.90 % 12/26/40 / 6/25/49 Fixed-rate bonds and notes issued in private education loan asset-backed securitization 39,977 3.60 % / 5.35 % 12/26/40 / 12/28/43 Unsecured line of credit — — 12/16/24 Unsecured debt - Junior Subordinated Hybrid Securities 20,381 3.60 % 9/15/61 Other borrowings 113,672 0.85 % / 1.91 % 5/4/21 / 5/30/22 19,462,397 Discount on bonds and notes payable and debt issuance costs ( 247,344 ) Total $ 19,215,053 As of December 31, 2019 Carrying amount Interest rate range Final maturity Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: Bonds and notes based on indices $ 18,428,998 1.98 % - 3.61 % 5/27/25 - 1/25/68 Bonds and notes based on auction 768,626 2.75 % - 3.60 % 3/22/32 - 11/26/46 Total FFELP variable-rate bonds and notes 19,197,624 Fixed-rate bonds and notes issued in FFELP loan asset-backed securitizations 512,836 2.00 % - 3.45 % 10/25/67 / 11/25/67 FFELP warehouse facilities 778,094 1.98 % / 2.07 % 5/20/21 / 5/31/22 Consumer loan warehouse facility 116,570 1.99 % 4/23/22 Variable-rate bonds and notes issued in private education loan asset-backed securitizations 73,308 3.15 % / 3.54 % 12/26/40 / 6/25/49 Fixed-rate bonds and notes issued in private education loan asset-backed securitization 49,367 3.60 % / 5.35 % 12/26/40 / 12/28/43 Unsecured line of credit 50,000 3.29 % 12/16/24 Unsecured debt - Junior Subordinated Hybrid Securities 20,381 5.28 % 9/15/61 Other borrowings 5,000 3.44 % 5/30/22 20,803,180 Discount on bonds and notes payable and debt issuance costs ( 274,126 ) Total $ 20,529,054 17 FFELP Warehouse Facilities The Company funds the majority of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of September 30, 2020, the Company had two FFELP warehouse facilities as summarized below. NFSLW-I (a) NHELP-II (b) Total Maximum financing amount $ 300,000 250,000 550,000 Amount outstanding 68,099 77,050 145,149 Amount available $ 231,901 172,950 404,851 Expiration of liquidity provisions November 20, 2020 February 26, 2021 Final maturity date November 22, 2021 February 26, 2023 Advanced as equity support $ 4,524 6,644 11,168 (a) On May 20, 2020, the Company decreased the maximum financing amount for this warehouse facility to $ 300 million, extended the expiration of liquidity provisions to November 20, 2020, and extended the maturity date to November 22, 2021. (b) On May 29, 2020, the Company decreased the maximum financing amount for this warehouse facility to $ 250 million, extended the expiration of liquidity provisions to February 26, 2021, and extended the maturity date to February 26, 2023. On November 2, 2020, the Company decreased the maximum financing amount for each of its FFELP warehouse facilities to $ 50.0 million. Asset-Backed Securitizations The following table summarizes the asset-backed securitization transactions completed during the first nine months of 2020. 2020-1 2020-2 2020-3 2020-4 (a) Total Date securities issued 2/20/20 3/11/20 3/19/20 8/27/20 Total original principal amount $ 435,600 272,100 352,600 191,300 1,251,600 Class A senior notes: Total principal amount $ 424,600 264,300 343,600 191,300 1,223,800 Bond discount — ( 44 ) ( 1,503 ) ( 19 ) ( 1,566 ) Issue price $ 424,600 264,256 342,097 191,281 1,222,234 Cost of funds 1-month LIBOR plus 0.74 % 1.83 % 1-month LIBOR plus 0.92 % 1.42 % Final maturity date 3/26/68 4/25/68 3/26/68 8/27/68 Class B subordinated notes: Total principal amount $ 11,000 7,800 9,000 27,800 Bond discount — ( 574 ) ( 284 ) ( 858 ) Issue price $ 11,000 7,226 8,716 26,942 Cost of funds 1-month LIBOR plus 1.75 % 2.50 % 1-month LIBOR plus 1.90 % Final maturity date 3/26/68 4/25/68 3/26/68 (a) Total original principal amount excludes the Class B subordinated tranche for the 2020-4 transaction totaling $ 5.0 million that was retained by the Company at issuance. As of September 30, 2020, the Company had a total of $ 20.8 million (par value) of its own asset-backed securities that were retained upon initial issuance or repurchased in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated in the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. Upon sale, these notes would be 18 shown as "bonds and notes payable" in the Company's consolidated balance sheet. The Company believes the market value of such notes is currently less than par value. Any excess of the par value over the market value on the date of sale would be recognized by the Company as interest expense over the life of the bonds. Private Education Loan Warehouse Facility On February 13, 2020, the Company 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 September 30, 2020, $ 102.6 million was outstanding under this warehouse facility and $ 97.4 million was available for future funding. Additionally, as of September 30, 2020, the Company had $ 11.1 million advanced as equity support under this facility. Consumer Loan Warehouse Facility The Company has a consumer loan warehouse facility that as of September 30, 2020 had an aggregate maximum financing amount available of $ 200.0 million. The facility has an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022. As of September 30, 2020, $ 30.3 million was outstanding under this warehouse facility and $ 169.7 million was available for future funding. Additionally, as of September 30, 2020, the Company had $ 13.8 million advanced as equity support under this facility. On November 3, 2020, the Company decreased the maximum financing amount on this facility to $ 100.0 million. Unsecured Line of Credit The Company has a $ 455.0 million unsecured line of credit that has a maturity date of December 16, 2024. As of September 30, 2020, no amount was outstanding on the line of credit and $ 455.0 million was available for future use. The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of $ 550.0 million, subject to certain conditions. Junior Subordinated Hybrid Securities ("Hybrid Securities") Subsequent to September 30, 2020, the Company redeemed all the outstanding $ 20.4 million of Hybrid Securities at par. Other Borrowings During the second quarter of 2020, the Company entered into an agreement with Union Bank and Trust Company ("Union Bank"), a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loan asset-backed securities. As of September 30, 2020, $ 108.7 million of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. The Company can participate student loan asset-backed securities to Union Bank to the extent of availability under the grantor trusts, up to $ 100.0 million or an amount in excess of $ 100.0 million if mutually agreed to by both parties. Student loan asset-backed securities under this agreement have been accounted for by the Company as a secured borrowing. 19 4. Derivative Financial Instruments The Company uses derivative financial instruments to manage interest rate risk. Derivative instruments used as part of the Company's risk management strategy are further described in note 5 of the notes to consolidated financial statements included in the 2019 Annual Report. A tabular presentation of such derivatives outstanding as of September 30, 2020 and December 31, 2019 is presented below. Basis Swaps The following table summarizes the Company’s outstanding basis swaps as of December 31, 2019 and September 30, 2020, in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). Maturity Notional amount As of As of September 30, 2020 December 31, 2019 2020 $ — 1,000,000 2021 250,000 250,000 2022 2,000,000 2,000,000 (a) 2023 750,000 750,000 2024 1,750,000 1,750,000 2026 1,150,000 1,150,000 2027 250,000 250,000 $ 6,150,000 7,150,000 (a) $ 750 million of the notional amount of these derivatives had forward effective start dates in May 2020. The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 2020 and December 31, 2019 was one-month LIBOR plus 9.1 basis points and 9.7 basis points, respectively. Interest Rate Swaps – Floor Income Hedges The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income. As of September 30, 2020 As of December 31, 2019 Maturity Notional amount Weighted average fixed rate paid by the Company (a)(c) Notional amount Weighted average fixed rate paid by the Company (a) 2020 $ — — % $ 1,500,000 1.01 % 2021 600,000 2.15 600,000 2.15 2022 (b) 500,000 0.94 250,000 1.65 2023 400,000 1.00 150,000 2.25 2024 250,000 0.28 — — $ 1,750,000 1.28 % $ 2,500,000 1.42 % (a) For all interest rate derivatives, the Company receives discrete three-month LIBOR. (b) $ 250.0 million of the derivatives outstanding at December 31, 2019 and September 30, 2020 have forward effective start dates in June 2021. (c) Excluding the derivatives with forward effective start dates, the weighted average fixed rate paid by the Company as of September 30, 2020, on its $ 1.5 billion floor income derivative portfolio was 1.21 %. 20 Consolidated Financial Statement Impact Related to Derivatives - Statements of Income The following table summarizes the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income. Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Settlements: 1:3 basis swaps $ 1,197 234 10,438 3,375 Interest rate swaps - floor income hedges ( 3,588 ) 7,064 ( 2,772 ) 35,931 Total settlements - (expense) income ( 2,391 ) 7,298 7,666 39,306 Change in fair value: 1:3 basis swaps ( 161 ) 6,636 ( 1,475 ) 4,427 Interest rate swaps - floor income hedges 3,601 ( 12,094 ) ( 19,597 ) ( 75,657 ) Interest rate swap options - floor income hedges — ( 1 ) — ( 1,465 ) Interest rate caps — ( 171 ) — ( 570 ) Total change in fair value - income (expense) 3,440 ( 5,630 ) ( 21,072 ) ( 73,265 ) Derivative market value adjustments and derivative settlements, net - income (expense) $ 1,049 1,668 ( 13,406 ) ( 33,959 ) 21 5. Investments A summary of the Company's investments follows: As of September 30, 2020 As of December 31, 2019 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized cost Gross unrealized gains Gross unrealized losses Fair value Investments (at fair value): Student loan asset-backed and other debt securities - available-for-sale (a) $ 173,327 6,049 ( 414 ) 178,962 48,790 3,911 — 52,701 Equity securities 26,793 6,465 ( 2,792 ) 30,466 9,622 4,561 ( 1,283 ) 12,900 Total investments (at fair value) $ 200,120 12,514 ( 3,206 ) 209,428 58,412 8,472 ( 1,283 ) 65,601 Other Investments (not measured at fair value): Venture capital and funds: Measurement alternative 143,221 72,760 Equity method 14,104 15,379 Other 938 1,301 Total venture capital and funds 158,263 89,440 Real estate and solar: Equity and HLBV method (b) 44,634 51,721 Other 852 867 Total real estate and solar 45,486 52,588 Beneficial interest in federally insured loan securitizations (c) 30,726 — Beneficial interest in consumer loan securitizations, net of allowance for credit losses of $ 20,947 as of September 30, 2020 (c) 27,751 33,187 Tax liens and affordable housing 5,173 6,283 Total investments (not measured at fair value) 267,399 181,498 Total investments $ 476,827 $ 247,099 (a) As of September 30, 2020, $ 108.7 million (par value) of student loan asset-backed securities were subject to participation interests held by Union Bank, as discussed in note 3 under "Other Borrowings." As of September 30, 2020, the stated maturities of a majority of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years; however, such securities with a fair value of $ 30.9 million as of September 30, 2020 are scheduled to mature within the next 10 years, including $ 2.0 million, $ 24.4 million, and $ 4.5 million scheduled to mature within the next one year, 1-5 years, and 6-10 years, respectively. (b) The Company makes investments in entities that promote renewable energy sources (solar). The Company’s investments in these entities generate a return primarily through the realization of federal income tax credits, operating cash flows, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods which range from 5 to 6 years. As of September 30, 2020, the Company has funded or is committed to fund $ 153.6 million in solar investments. The carrying value of the Company’s solar investments are reduced by tax credits earned when the solar project is placed in service. The Company accounts for its solar investments using the Hypothetical Liquidation at Book Value (“HLBV”) method of accounting. HLBV is a balance sheet-oriented method of accounting that provides an approach for allocating pre-tax net income or loss to an investor. HLBV allocates pre-tax net income or loss to the partners (investors) and calculates at the end of each balance sheet date the amount each partner would receive in the event the partnership were liquidated at book value. The amount allocated to each partner requires an analysis of each partners’ capital account as adjusted according to the liquidation provisions of the partnership agreement. For the majority of the Company’s solar investments, the HLBV 22 method of accounting results in accelerated losses in the initial year of investment. During the three and nine months ended September 30, 2020, the Company recognized pre-tax losses of $ 11.8 million and $ 12.6 million, respectively, on its solar investments. These losses are included in "other income" in the consolidated statements of income. The losses recognized for the same periods in 2019 were not significant. (c) The Company has purchased partial ownership in certain federally insured and consumer loan securitizations. As of the latest remittance reports filed by the various trusts prior to September 30, 2020, the Company's ownership correlates to approximately $ 530 million and $ 350 million of federally insured and consumer loans, respectively, included in these securitizations. Investment in Agile Sports Technologies, Inc. (doing business as "Hudl") On May 20, 2020, the Company made an additional equity investment of approximately $ 26 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 second quarter of 2020 to adjust its carrying value to reflect the May 20, 2020 transaction value. This gain is included in "other income" on the consolidated statements of income. David S. Graff, who has served on the Company’s Board of Directors since May 2014, is CEO, co-founder, and a director of Hudl. Impairment Expense During the first quarter of 2020, the Company recorded a total of $ 34.1 million (pre-tax) in impairment charges related to its investments, which included $ 26.3 million and $ 7.8 million in impairments related to the Company's beneficial interest in consumer loan securitizations and several of its venture capital investments, respectively. As of March 31, 2020, the Company's estimate of future cash flows from the beneficial interest in consumer loan securitizations was lower than previously anticipated due to the expectation of increased consumer loan defaults within such securitizations due to the distressed economic conditions resulting from the COVID-19 pandemic. The Company measured the allowance for credit losses on the consumer loan beneficial interests by comparing the present value of expected cash flows to the amortized cost basis and recorded an allowance for credit losses of $ 26.3 million, which represented the amount by which the fair value was less than the amortized cost basis. Additionally, as of March 31, 2020, the Company identified several venture capital investments, a majority of which were accounted for under the measurement alternative, that were also negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic during the first quarter of 2020, and estimated that the fair value of such investments was significantly reduced from their previous carrying value. 6. Intangible Assets A summary of the Company's intangible assets follows: Weighted average remaining useful life as of September 30, 2020 (months) As of As of September 30, 2020 December 31, 2019 Amortizable intangible assets, net: Customer relationships (net of accumulated amortization of $ 80,448 and $ 60,553 , respectively) 82 $ 52,004 71,900 Trade names (net of accumulated amortization of $ 4,253 and $ 2,792 , respectively) 76 6,018 7,478 Computer software (net of accumulated amortization of $ 4,708 and $ 3,233 , respectively) 6 679 2,154 Total - amortizable intangible assets, net 81 $ 58,701 81,532 The Company recorded amortization expense on its intangible assets of $ 8.0 million during each of the three months ended September 30, 2020 and 2019, and $ 22.8 million and $ 24.8 million during the nine months ended September 30, 2020 and 2019, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of September 30, 2020, the Company estimates it will record amortization expense as follows: 23 2020 (October 1 - December 31) $ 7,979 2021 19,687 2022 6,431 2023 6,184 2024 5,771 2025 and thereafter 12,649 $ 58,701 7. Goodwill The carrying amount of goodwill as of December 31, 2019 and September 30, 2020 by reportable operating segment was as follows: Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management Corporate and Other Activities Total Goodwill balance $ 23,639 70,278 21,112 41,883 — 156,912 8. Property and Equipment A summary of the Company's property and equipment follows: As of As of Useful life September 30, 2020 December 31, 2019 Non-communications: Computer equipment and software 1 - 5 years $ 185,066 160,319 Building and building improvements 5 - 48 years 39,995 37,904 Office furniture and equipment 1 - 10 years 22,234 21,245 Leasehold improvements 1 - 15 years 9,621 9,517 Transportation equipment 5 - 10 years 4,897 5,049 Land — 1,400 1,400 Construction in progress — 30,301 13,738 293,514 249,172 Accumulated depreciation - non-communications ( 174,263 ) ( 142,270 ) Non-communications, net property and equipment 119,251 106,902 Communications: Network plant and fiber 4 - 15 years 273,754 254,560 Customer located property 2 - 4 years 31,844 27,011 Central office 5 - 15 years 19,801 17,672 Transportation equipment 4 - 10 years 7,157 6,611 Computer equipment and software 1 - 5 years 6,088 5,574 Other 1 - 39 years 3,761 3,702 Land — 70 70 Construction in progress — 4,129 54 346,604 315,254 Accumulated depreciation - communications ( 105,365 ) ( 73,897 ) Communications, net property and equipment 241,239 241,357 Total property and equipment, net $ 360,490 348,259 The Company recorded depreciation expense on its property and equipment of $ 22.3 million and $ 19.7 million during the three months ended September 30, 2020 and 2019, respectively, and $ 64.6 million and $ 51.6 million during the nine months ended September 30, 2020 and 2019, respectively. 24 9. Earnings per Common Share Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate earnings per share amounts for common stock and unvested share-based awards. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Three months ended September 30, 2020 2019 Common shareholders Unvested restricted stock shareholders Total Common shareholders Unvested restricted stock shareholders Total Numerator: Net income attributable to Nelnet, Inc. $ 70,483 1,020 71,503 32,778 434 33,212 Denominator: Weighted-average common shares outstanding - basic and diluted 37,988,584 549,892 38,538,476 39,356,311 520,818 39,877,129 Earnings per share - basic and diluted $ 1.86 1.86 1.86 0.83 0.83 0.83 Nine months ended September 30, 2020 2019 Common shareholders Unvested restricted stock shareholders Total Common shareholders Unvested restricted stock shareholders Total Numerator: Net income attributable to Nelnet, Inc. $ 115,794 1,658 117,452 98,125 1,298 99,423 Denominator: Weighted-average common shares outstanding - basic and diluted 38,676,092 553,840 39,229,932 39,574,868 523,478 40,098,346 Earnings per share - basic and diluted $ 2.99 2.99 2.99 2.48 2.48 2.48 25 10. Segment Reporting See note 14 of the notes to consolidated financial statements included in the 2019 Annual Report for a description of the Company's operating segments. The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements. Three months ended September 30, 2020 Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management Corporate and Other Activities Eliminations Total Total interest income $ 34 367 — 137,959 1,646 ( 261 ) 139,745 Interest expense 24 16 — 57,755 888 ( 261 ) 58,423 Net interest income (expense) 10 351 — 80,204 758 — 81,322 Less (negative provision) provision for loan losses — — — ( 5,821 ) — — ( 5,821 ) Net interest income after provision for loan losses 10 351 — 86,025 758 — 87,143 Other income/expense: Loan servicing and systems revenue 113,794 — — — — — 113,794 Intersegment revenue 8,287 3 — — — ( 8,290 ) — Education technology, services, and payment processing revenue — 74,121 — — — — 74,121 Communications revenue — — 20,211 — — — 20,211 Gain on sale of loans — — — 14,817 — — 14,817 Other income 2,353 373 511 1,004 ( 2,737 ) — 1,502 Impairment expense — — — — — — — Derivative settlements, net — — — ( 2,391 ) — — ( 2,391 ) Derivative market value adjustments, net — — — 3,440 — — 3,440 Total other income/expense 124,434 74,497 20,722 16,870 ( 2,737 ) ( 8,290 ) 225,494 Cost of services: Cost to provide education technology, services, and payment processing services — 25,243 — — — — 25,243 Cost to provide communications services — — 5,914 — — — 5,914 Total cost of services — 25,243 5,914 — — — 31,157 Operating expenses: Salaries and benefits 72,912 25,460 5,485 438 21,801 — 126,096 Depreciation and amortization 9,951 2,366 11,152 — 6,839 — 30,308 Other expenses 12,407 3,126 2,219 3,672 13,320 — 34,744 Intersegment expenses, net 15,834 3,610 491 8,868 ( 20,513 ) ( 8,290 ) — Total operating expenses 111,104 34,562 19,347 12,978 21,447 ( 8,290 ) 191,148 Income (loss) before income taxes 13,340 15,043 ( 4,539 ) 89,917 ( 23,426 ) — 90,332 Income tax (expense) benefit ( 3,201 ) ( 3,610 ) 1,089 ( 21,580 ) 8,146 — ( 19,156 ) Net income (loss) 10,139 11,433 ( 3,450 ) 68,337 ( 15,280 ) — 71,176 Net loss (income) attributable to noncontrolling interests — — — — 327 — 327 Net income (loss) attributable to Nelnet, Inc. $ 10,139 11,433 ( 3,450 ) 68,337 ( 14,953 ) — 71,503 Total assets as of September 30, 2020 $ 211,726 382,608 305,276 20,686,478 770,621 ( 134,183 ) 22,222,526 26 Three months ended September 30, 2019 Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management Corporate and Other Activities Eliminations Total Total interest income $ 532 3,499 — 233,225 2,859 ( 1,171 ) 238,945 Interest expense 51 12 — 171,485 2,110 ( 1,171 ) 172,488 Net interest income (expense) 481 3,487 — 61,740 749 — 66,457 Less (negative provision) provision for loan losses — — — 10,000 — — 10,000 Net interest income after provision for loan losses 481 3,487 — 51,740 749 — 56,457 Other income/expense: Loan servicing and systems revenue 113,286 — — — — — 113,286 Intersegment revenue 11,611 — — — — ( 11,611 ) — Education technology, services, and payment processing revenue — 74,251 — — — — 74,251 Communications revenue — — 16,470 — — — 16,470 Gain on sale of loans — — — — — — — Other income 2,291 — 532 3,384 7,231 — 13,439 Impairment expense — — — — — — — Derivative settlements, net — — — 7,298 — — 7,298 Derivative market value adjustments, net — — — ( 5,630 ) — — ( 5,630 ) Total other income/expense 127,188 74,251 17,002 5,052 7,231 ( 11,611 ) 219,114 Cost of services: Cost to provide education technology, services, and payment processing services — 25,671 — — — — 25,671 Cost to provide communications services — — 5,236 — — — 5,236 Total cost of services — 25,671 5,236 — — — 30,907 Operating expenses: Salaries and benefits 69,209 23,826 5,763 394 17,479 — 116,670 Depreciation and amortization 8,565 2,997 10,926 — 5,212 — 27,701 Other expenses 16,686 5,325 3,842 19,054 13,422 — 58,329 Intersegment expenses, net 12,955 3,194 701 11,678 ( 16,917 ) ( 11,611 ) — Total operating expenses 107,415 35,342 21,232 31,126 19,196 ( 11,611 ) 202,700 Income (loss) before income taxes 20,254 16,725 ( 9,466 ) 25,666 ( 11,216 ) — 41,964 Income tax (expense) benefit ( 4,861 ) ( 4,014 ) 2,272 ( 6,160 ) 3,935 — ( 8,829 ) Net income (loss) 15,393 12,711 ( 7,194 ) 19,506 ( 7,281 ) — 33,135 Net loss (income) attributable to noncontrolling interests — — — — 77 — 77 Net income (loss) attributable to Nelnet, Inc. $ 15,393 12,711 ( 7,194 ) 19,506 ( 7,204 ) — 33,212 Total assets as of September 30, 2019 $ 222,606 413,076 306,743 22,520,688 685,998 ( 212,392 ) 23,936,719 27 Nine months ended September 30, 2020 Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management Corporate and Other Activities Eliminations Total Total interest income $ 403 2,777 — 474,468 4,397 ( 1,228 ) 480,818 Interest expense 97 54 — 275,492 3,373 ( 1,228 ) 277,788 Net interest income (expense) 306 2,723 — 198,976 1,024 — 203,030 Less (negative provision) provision for loan losses — — — 73,476 — — 73,476 Net interest income after provision for loan losses 306 2,723 — 125,500 1,024 — 129,554 Other income/expense: Loan servicing and systems revenue 337,571 — — — — — 337,571 Intersegment revenue 27,878 17 — — — ( 27,895 ) — Education technology, services, and payment processing revenue — 217,100 — — — — 217,100 Communications revenue — — 57,390 — — — 57,390 Gain on sale of loans — — — 33,023 — — 33,023 Other income 6,897 373 1,256 4,951 56,435 — 69,910 Impairment expense — — — ( 26,303 ) ( 8,116 ) — ( 34,419 ) Derivative settlements, net — — — 7,666 — — 7,666 Derivative market value adjustments, net — — — ( 21,072 ) — — ( 21,072 ) Total other income/expense 372,346 217,490 58,646 ( 1,735 ) 48,319 ( 27,895 ) 667,169 Cost of services: Cost to provide education technology, services, and payment processing services — 63,424 — — — — 63,424 Cost to provide communications services — — 17,240 — — — 17,240 Total cost of services — 63,424 17,240 — — — 80,664 Operating expenses: Salaries and benefits 211,806 73,678 16,471 1,301 61,964 — 365,220 Depreciation and amortization 27,941 7,115 32,482 — 19,811 — 87,349 Other expenses 43,277 11,544 9,681 12,253 38,428 — 115,184 Intersegment expenses, net 48,069 10,366 1,650 29,839 ( 62,030 ) ( 27,895 ) — Total operating expenses 331,093 102,703 60,284 43,393 58,173 ( 27,895 ) 567,753 Income (loss) before income taxes 41,559 54,086 ( 18,878 ) 80,372 ( 8,830 ) — 148,306 Income tax (expense) benefit ( 9,974 ) ( 12,981 ) 4,531 ( 19,289 ) 7,426 — ( 30,286 ) Net income (loss) 31,585 41,105 ( 14,347 ) 61,083 ( 1,404 ) — 118,020 Net loss (income) attributable to noncontrolling interests — — — — ( 568 ) — ( 568 ) Net income (loss) attributable to Nelnet, Inc. $ 31,585 41,105 ( 14,347 ) 61,083 ( 1,972 ) — 117,452 Total assets as of September 30, 2020 $ 211,726 382,608 305,276 20,686,478 770,621 ( 134,183 ) 22,222,526 28 Nine months ended September 30, 2019 Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management Corporate and Other Activities Eliminations Total Total interest income $ 1,579 7,175 3 723,388 7,170 ( 2,995 ) 736,319 Interest expense 70 32 — 544,319 9,796 ( 2,995 ) 551,221 Net interest income (expense) 1,509 7,143 3 179,069 ( 2,626 ) — 185,098 Less (negative provision) provision for loan losses — — — 26,000 — — 26,000 Net interest income after provision for loan losses 1,509 7,143 3 153,069 ( 2,626 ) — 159,098 Other income/expense: Loan servicing and systems revenue 342,169 — — — — — 342,169 Intersegment revenue 35,426 — — — — ( 35,426 ) — Education technology, services, and payment processing revenue — 213,753 — — — — 213,753 Communications revenue — — 46,770 — — — 46,770 Gain on sale of loans — — — 1,712 — — 1,712 Other income 6,642 — 1,019 10,084 19,200 — 36,946 Impairment expense — — — — — — — Derivative settlements, net — — — 39,306 — — 39,306 Derivative market value adjustments, net — — — ( 73,265 ) — — ( 73,265 ) Total other income/expense 384,237 213,753 47,789 ( 22,163 ) 19,200 ( 35,426 ) 607,391 Cost of services: Cost to provide education technology, services, and payment processing services — 62,601 — — — — 62,601 Cost to provide communications services — — 15,096 — — — 15,096 Total cost of services — 62,601 15,096 — — — 77,697 Operating expenses: Salaries and benefits 201,924 69,656 15,692 1,153 50,517 — 338,942 Depreciation and amortization 26,236 9,832 26,025 — 14,305 — 76,398 Other expenses 52,732 16,440 11,184 29,098 38,107 — 147,562 Intersegment expenses, net 40,317 9,642 2,081 35,630 ( 52,244 ) ( 35,426 ) — Total operating expenses 321,209 105,570 54,982 65,881 50,685 ( 35,426 ) 562,902 Income (loss) before income taxes 64,537 52,725 ( 22,286 ) 65,025 ( 34,111 ) — 125,890 Income tax (expense) benefit ( 15,489 ) ( 12,654 ) 5,349 ( 15,606 ) 11,971 — ( 26,429 ) Net income (loss) 49,048 40,071 ( 16,937 ) 49,419 ( 22,140 ) — 99,461 Net loss (income) attributable to noncontrolling interests — — — — ( 38 ) — ( 38 ) Net income (loss) attributable to Nelnet, Inc. $ 49,048 40,071 ( 16,937 ) 49,419 ( 22,178 ) — 99,423 Total assets as of September 30, 2019 $ 222,606 413,076 306,743 22,520,688 685,998 ( 212,392 ) 23,936,719 29 11. Disaggregated Revenue and Deferred Revenue The following tables provide disaggregated revenue by service offering and/or customer type for the Company's fee-based reportable operating segments. Loan Servicing and Systems Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Government servicing - Nelnet $ 36,295 38,645 112,305 118,744 Government servicing - Great Lakes 45,350 46,234 137,010 139,285 Private education and consumer loan servicing 7,928 9,561 24,733 28,026 FFELP servicing 4,912 6,089 15,443 19,208 Software services 10,426 10,493 32,395 30,255 Outsourced services and other 8,883 2,264 15,685 6,651 Loan servicing and systems revenue $ 113,794 113,286 337,571 342,169 Education Technology, Services, and Payment Processing Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Tuition payment plan services $ 22,477 25,760 77,011 80,589 Payment processing 35,420 35,138 88,329 85,428 Education technology and services 15,840 13,067 50,820 46,872 Other 384 286 940 864 Education technology, services, and payment processing revenue $ 74,121 74,251 217,100 213,753 Communications Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Internet $ 12,794 9,899 35,926 27,641 Television 4,446 4,068 12,913 12,020 Telephone 2,931 2,487 8,436 7,062 Other 40 16 115 47 Communications revenue $ 20,211 16,470 57,390 46,770 Residential revenue $ 15,173 12,397 42,946 35,351 Business revenue 4,918 4,025 14,002 11,256 Other 120 48 442 163 Communications revenue $ 20,211 16,470 57,390 46,770 Other Income The following table provides the components of "other income" on the consolidated statements of income: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Investment advisory services $ 4,463 753 8,187 2,194 Management fee revenue 2,353 2,291 6,897 6,642 Borrower late fee income 871 3,196 4,377 9,870 Gain (loss) on investments, net ( 10,152 ) 1,948 39,134 5,779 Other 3,967 5,251 11,315 12,461 Other income $ 1,502 13,439 69,910 36,946 30 Deferred Revenue Activity in the deferred revenue balance, which is included in "other liabilities" on the consolidated balance sheets, is shown below: Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Corporate and Other Activities Total Three months ended September 30, 2020 Balance, beginning of period $ 2,115 19,924 3,728 1,676 27,443 Deferral of revenue 365 41,471 11,331 851 54,018 Recognition of revenue ( 970 ) ( 19,490 ) ( 11,139 ) ( 800 ) ( 32,399 ) Balance, end of period $ 1,510 41,905 3,920 1,727 49,062 Three months ended September 30, 2019 Balance, beginning of period $ 3,315 21,489 3,080 1,611 29,495 Deferral of revenue 881 42,752 9,302 953 53,888 Recognition of revenue ( 1,149 ) ( 21,820 ) ( 9,158 ) ( 850 ) ( 32,977 ) Balance, end of period $ 3,047 42,421 3,224 1,714 50,406 Nine months ended September 30, 2020 Balance, beginning of period $ 2,712 32,074 3,232 1,628 39,646 Deferral of revenue 1,547 78,891 31,898 2,585 114,921 Recognition of revenue ( 2,749 ) ( 69,060 ) ( 31,210 ) ( 2,486 ) ( 105,505 ) Balance, end of period $ 1,510 41,905 3,920 1,727 49,062 Nine months ended September 30, 2019 Balance, beginning of period $ 4,413 30,556 2,551 1,602 39,122 Deferral of revenue 2,761 81,484 26,366 2,530 113,141 Recognition of revenue ( 4,127 ) ( 69,619 ) ( 25,693 ) ( 2,418 ) ( 101,857 ) Balance, end of period $ 3,047 42,421 3,224 1,714 50,406 12. Major Customer 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 $ 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 $ 45.4 million and $ 46.2 million for the three months ended September 30, 2020 and 2019, and $ 137.0 million and $ 139.3 million for the nine months ended September 30, 2020 and 2019, respectively. Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019. 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 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: 31 • NextGen Enhanced Processing Solution ("EPS") • NextGen Business Process Operations ("BPO") • NextGen Optimal Processing Solution ("OPS") On April 1, 2019, October 4, 2019, and February 3, 2020, the Company responded to the EPS solicitation component. In addition, on August 1, 2019 and January 30, 2020, the Company responded to the BPO solicitation component. The EPS solicitation component was for a transitional technology system and certain processing functions the Department planned to use under NextGen to service the Department's student loan customers for a period of time before eventually moving to OPS in the future. 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 and April 27, 2020, the Company filed protests with the Government Accountability Office ("GAO") challenging the Department's decision to cancel the OPS solicitation component without amending the EPS solicitation component and the Department's competitive range exclusion of the Company's proposal from the EPS solicitation component. On July 10, 2020, the Department cancelled the solicitation for the EPS component. Based on the Department's cancellation of the EPS procurement, on July 14, 2020, the GAO dismissed the Company's protests as moot. 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. On June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO solicitation. On July 13, 2020, July 20, 2020 and July 28, 2020, the Company filed protests with the GAO challenging the Department's determination that the Company's BPO response did not meet small business participation requirements and the Department's decision to proceed with awards of contracts for the BPO component, when it cancelled the EPS component and a new EPS solicitation is expected to be released. On October 19, 2020, the GAO denied the Company's protests concerning the BPO solicitation component. In the Department's description of its July 10, 2020 cancellation of the EPS solicitation component, the Department indicated that it continues to be committed to the goals and vision of NextGen, and that it would be introducing a new solicitation to continue the NextGen strategy in the future. On October 28, 2020, the Department issued a new federal loan servicing solicitation for an Interim Servicing Solution ("ISS"). Responses for the ISS solicitation are due December 9, 2020. ISS is a follow-on to the existing Title IV Additional Servicing and Not-for-Profit Servicing contracts, which would award a full system and servicing solution to two providers. The Department anticipates awarding a five-year contract followed by five, one-year optional ordering periods. Under ISS, the selected providers will provide the technology platform to host the Department's student loan portfolio; customer service (including contact centers) and back-office processing; digital engagement layer including borrower-facing website and mobile-applications; intake, imaging, and fulfillment; and portfolio-level operations. As the companies awarded BPO contracts are onboarded, contact center and back-office operations will shift from the ISS contract to the BPO providers. The Company fully intends to respond to the ISS solicitation. 13. Fair Value The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis. As of September 30, 2020 As of December 31, 2019 Level 1 Level 2 Total Level 1 Level 2 Total Assets: Investments: Student loan asset-backed securities - available-for-sale $ — 178,859 178,859 — 52,597 52,597 Equity securities 6 — 6 6 — 6 Equity securities measured at net asset value (a) 30,460 12,894 Debt securities - available-for-sale 103 — 103 104 — 104 Total investments 109 178,859 209,428 110 52,597 65,601 Total assets $ 109 178,859 209,428 110 52,597 65,601 (a) In accordance with the Fair Value Measurements Topic of the FASB Accounting Standards Codification, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. 32 The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets: As of September 30, 2020 Fair value Carrying value Level 1 Level 2 Level 3 Financial assets: Loans receivable $ 20,136,583 19,315,755 — — 20,136,583 Accrued loan interest receivable 760,787 760,787 — 760,787 — Cash and cash equivalents 96,316 96,316 96,316 — — Investments (at fair value) 209,428 209,428 109 178,859 — Beneficial interest in loan securitizations 58,477 58,477 — — 58,477 Restricted cash 519,143 519,143 519,143 — — Restricted cash – due to customers 286,082 286,082 286,082 — — Financial liabilities: Bonds and notes payable 18,983,969 19,215,053 — 18,983,969 — Accrued interest payable 29,612 29,612 — 29,612 — Due to customers 286,082 286,082 286,082 — — As of December 31, 2019 Fair value Carrying value Level 1 Level 2 Level 3 Financial assets: Loans receivable $ 21,477,630 20,669,371 — — 21,477,630 Accrued loan interest receivable 733,497 733,497 — 733,497 — Cash and cash equivalents 133,906 133,906 133,906 — — Investments (at fair value) 65,601 65,601 110 52,597 — Beneficial interest in loan securitizations 33,258 33,187 — — 33,258 Restricted cash 650,939 650,939 650,939 — — Restricted cash – due to customers 437,756 437,756 437,756 — — Financial liabilities: Bonds and notes payable 20,479,095 20,529,054 — 20,479,095 — Accrued interest payable 47,285 47,285 — 47,285 — Due to customers 437,756 437,756 437,756 — — The methodologies for estimating the fair value of financial assets and liabilities are described in note 21 of the notes to consolidated financial statements included in the 2019 Annual Report. 14. Subsequent Events Recapitalization and Additional Funding for ALLO Communications LLC ("ALLO") On October 1, 2020, Nelnet, Inc. entered into various agreements with SDC ALLO Holdings, LLC (“SDC”), a third party global digital infrastructure investor, and ALLO, the Company's communication's subsidiary, for various transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO. The agreements provide for a series of initial interrelated transactions (the “Initial Transactions”) whereby (i) on October 15, 2020, ALLO issued non-voting preferred membership units of ALLO to SDC for an aggregate purchase price payment of approximately $ 197.0 million from SDC to ALLO, and ALLO redeemed certain non-voting preferred membership units of ALLO held by Nelnet, Inc. in exchange for an aggregate redemption price payment to Nelnet, Inc. of $ 160.0 million; (ii) ALLO will use its reasonable best efforts to incur and undertake private debt financing from one or more unrelated third-party lender(s) in the aggregate approximate amount of $ 100.0 million; and (iii) subject to ALLO obtaining such debt financing, ALLO will redeem certain additional preferred return membership units of ALLO held by Nelnet, Inc. in exchange for an aggregate redemption price payment to Nelnet, Inc. of approximately $ 100.0 million (subject to the amount of gross proceeds actually received in the debt financing). 33 Upon the receipt of required regulatory approvals from the Federal Communications Commission and other applicable regulatory authorities, the non-voting preferred membership units of ALLO held by SDC will automatically convert into voting membership units of ALLO. As a result of such conversion, SDC, Nelnet, Inc., and members of ALLO's management will own approximately 48 percent, 45 percent and 7 percent, respectively, of the outstanding voting membership interests of ALLO and Nelnet, Inc. will deconsolidate ALLO from the Company’s consolidated financial statements. It is currently anticipated that such regulatory conditions will be satisfied by December 31, 2020. Upon deconsolidation of ALLO by Nelnet, Inc., the Company will initially record its 45 percent voting membership interests in ALLO at fair value, and thereafter account for such investment under the equity method of accounting. In addition, upon deconsolidation of ALLO, the Company will initially record its remaining non-voting preferred membership units in ALLO at fair value, and account for such investment as a separate equity investment. The agreements also provide for secondary transactions (the “Secondary Transactions”) subsequent to the completion of the Initial Transactions, whereby (i) Nelnet, Inc., SDC, and ALLO will use commercially reasonable efforts (which expressly excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause ALLO to redeem, on or before the three and one-half year anniversary (subject to adjustment) of the completion of ALLO’s redemptions from Nelnet, Inc. in the Initial Transactions, the remaining preferred membership units of ALLO held by Nelnet, Inc. in exchange for an aggregate redemption price payment to Nelnet, Inc. of approximately $ 126 million, plus the amount of accrued and unpaid preferred return on such units and the amount of any contributions or other amounts funded by Nelnet, Inc. to ALLO subsequent to ALLO’s redemptions from Nelnet, Inc. in the Initial Transactions; and (ii) Nelnet, Inc. will have a contingent payment obligation to pay SDC a contingent payment amount of $ 25 million to $ 35 million in the event Nelnet, Inc. disposes of other voting membership units of ALLO that it holds and realizes from such disposition certain targeted return levels relative to the implied value of its investment in such units upon SDC's initial investment in ALLO on October 15, 2020. The Company currently estimates the above transactions will result in the Company recognizing incremental net income before tax of approximately $ 230 million, which reflects the Company recognizing a gain as a result of the deconsolidation of ALLO and recording its voting and non-voting membership interests in ALLO at fair value, net of compensation expense for the modification of certain equity awards previously granted to members of ALLO's management and an expense to record the Company's contingent payment obligation to SDC at fair value. The amount of incremental net income the Company ultimately recognizes as a result of these transactions will be impacted by the timing of when, or if, regulatory approval is obtained. 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. Nelnet Bank will operate as an internet Utah-chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah. Nelnet Bank was funded by the Company with an initial capital contribution of $ 100 million, consisting of $ 55.9 million of cash and $ 44.1 million of student loan asset-backed securities. In addition, the Company made a pledged deposit of $ 40.0 million with Nelnet Bank, as required under an agreement with the FDIC. Nelnet Bank will operate as a subsidiary of the Company, and the industrial bank charter allows the Company to maintain its other diversified business offerings.