What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-10 · 333 added, 291 removed, 492 unchanged (56% of the section changed)

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

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three months ended March 31, 2021 and 2020.

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and six months ended June 30, 2021 and 2020.

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

10 unchanged sentences

• 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 27 percent of the Company's revenue in 2020, 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 for an extended period of time 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 27 percent of the Company's revenue in 2020, 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 procurement process (under which awards of new contracts have been made to other service providers), 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"), 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, or investment interests therein, and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment or default rates;

• financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and changes in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in the Company's securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;

• risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or proposals to consolidate existing FFELP loans to the Federal Direct Loan Program, otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, or create additional loan forgiveness or broad debt cancellation programs;

loan interest income due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or proposals to consolidate existing FFELP loans to the Federal Direct Loan Program, otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, or create additional loan forgiveness or broad debt cancellation programs;

• risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential loan borrower and other customer information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches;

2 unchanged sentences

• risks related to the expected benefits to the Company and to ALLO Communications LLC (“ALLO”) from the recapitalization and additional funding for ALLO and the Company’s continuing investment in ALLO, and 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;

• risks and uncertainties related to other initiatives to pursue additional strategic investments, acquisitions, and other activities, such as the completed and additional planned transactions associated with the sale by Wells Fargo of its private education loan portfolio (including potential errors in converting loan servicing portfolio acquisitions to the Company's servicing platform), including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses;

• risks and uncertainties related to other initiatives to pursue additional strategic investments, acquisitions, and other activities, such as the completed and additional planned transactions associated with the sale by Wells Fargo of its private education loan portfolio for which the Company was selected as the new servicer (including risks associated with errors that occasionally occur in converting loan servicing portfolio acquisitions to a new servicing platform), including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses;

• risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.

8 unchanged sentences

However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance.

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

Three months ended March 31,

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

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

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

2021 2020 2021 2020

GAAP net income attributable to Nelnet, Inc.

$ 83,867 86,482 207,465 45,950

Realized and unrealized derivative market value adjustments

2 unchanged sentences

(388) (939) 8,927 (5,883)

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

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

$ 85,094 89,454 179,198 64,580

Earnings per share:

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

GAAP net income attributable to Nelnet, Inc.

$ 2.16 2.21 5.36 1.16

Realized and unrealized derivative market value adjustments

0.04 0.10 (0.96) 0.62

Tax effect (a)

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

— (0.03) 0.23 (0.15)

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

$ 2.20 2.28 4.63 1.63

(a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.

11 unchanged sentences

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 March 31, 2021 compared to the same period in 2020 primarily due to the following factors:

GAAP net income decreased for the three months ended June 30, 2021 compared to the same period in 2020 primarily due to 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.

This factor was partially offset by the following items:

• The recognition of net investment gains and income of $15.6 million ($11.8 million after tax) on certain venture capital and real estate investments during the three months ended June 30, 2021;

• The recognition of a gain of $15.3 million ($11.6 million after tax) from the sale of a portfolio of consumer loans during the second quarter of 2021;

• The recognition of a net loss by ALLO of $7.1 million ($5.4 million after tax) during the three months ended June 30, 2020, prior to the deconsolidation of ALLO in December 2020;

• An increase of $6.2 million ($4.7 million after tax) in interest income from the Company's consumer loan beneficial interest investments;

• An increase in net income in the second quarter of 2021 as compared to 2020 of $5.5 million ($4.2 million after tax) from the Education Technology, Services, and Payment Processing operating segment.

GAAP net income increased for the six months ended June 30, 2021 compared to the same period in 2020 primarily due to the following factors:

• The recognition of $97.1 million ($73.8 million after tax) of certain expenses during the first quarter of 2020 as a result of the COVID-19 pandemic, consisting of the recognition of an incremental provision for loan losses of $63.0 million ($47.9 million after tax), provision expense of $26.3 million ($20.0 million after tax) related to the Company's investment in certain consumer loan beneficial interest securitizations, and $7.8 million ($5.9 million after tax) impairment expense on certain venture capital investments;

• An increase of $45.5 million ($34.6 million after tax) in net interest income due to improved loan spread (including derivative settlements) on the Company's loan portfolio in the first quarter of 2021 as compared to 2020, including an increase in fixed rate floor income.

• A net gain of $38.8 million ($29.5 million after tax) related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the first quarter of 2021 as compared to a net loss of $20.6 million ($15.7 million after tax) in 2020.

• A decrease of $23.8 million ($18.1 million after tax) in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid.

The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013.

• The recognition of $17.0 million ($13.0 million after tax) negative provision for loan losses on the Company's loan portfolio in the first quarter of 2021 as a result of management's estimate of certain continued improved economic conditions as of March 31, 2021 in comparison to management's estimate of certain economic conditions used to determine the allowance for loan losses as of December 31, 2020.

• The recognition of net investment gains during the first quarter of 2021 of $8.5 million ($6.5 million after tax), primarily from the sale of certain real estate investments.

• The recognition of a net loss by ALLO of $7.3 million ($5.5 million after tax) during the three months ended March 31, 2020.

• Net income of $37.2 million ($28.3 million after tax) related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the six months ended June 30, 2021 as compared to a net loss of $24.5 million ($18.6 million after tax) in 2020;

• An increase of $26.7 million ($20.3 million after tax) in net interest income due to improved loan spread (including derivative settlements) on the Company's loan portfolio in the six months ended June 30, 2021 as compared to the same period in 2020, including an increase in fixed rate floor income;

• A decrease of $23.8 million ($18.1 million after tax) in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds (initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013), which liability the Company determined is no longer probable of being required to be paid;

• The recognition of net investment gains of $24.1 million ($18.3 million after tax) on certain venture capital and real estate investments during the six months ended June 30, 2021;

• The recognition of $16.7 million ($12.7 million after tax) negative provision for loan losses on the Company's loan portfolio during the six months ended June 30, 2021 as a result of management's estimate of certain continued improved economic conditions as compared to a provision expense (excluding the incremental provision for loan losses related to COVID-19) of $16.3 million ($12.4 million after tax) during 2020;

• The recognition of a $15.3 million ($11.6 million after tax) gain from the sale of consumer loans in the second quarter of 2020;

• The recognition of a net loss by ALLO of $14.3 million ($10.9 million after tax) during the six months ended June 30, 2020.

ALLO was deconsolidated in December 2020;

• An increase in net income in the first quarter of 2021 as compared to 2020 of $3.6 million ($2.8 million after tax) and $2.5 million ($1.9 million after tax) from the Education Technology, Services, and Payment Processing and Loan Servicing and Systems operating segments, respectively.

• An increase in net income during the six months ended June 30, 2021 as compared to 2020 of $9.2 million ($7.0 million after tax) from the Education Technology, Services, and Payment Processing operating segment;

• An increase of $5.9 million ($4.5 million after tax) in interest income from the Company's consumer loan beneficial interest investments;

• An increase in net income during the six months ended June 30, 2021 as compared to 2020 of $3.4 million ($2.6 million after tax) from the Loan Servicing and Systems operating segment.

These factors were partially offset by the following items:

• The recognition of a net loss of $19.9 million ($15.1 million after tax) during the first quarter of 2021 related to the Company's investments in ALLO.

• 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 of $10.4 million ($7.9 million after tax) in net interest income due to the decrease in the average balance of loans in the first quarter of 2021 as compared to 2020 as a result of the amortization of the FFELP loan portfolio.

• The recognition of a net loss of $16.8 million ($12.8 million after tax) during the six months of 2021 related to the Company's investment in ALLO;

• A decrease of $9.9 million ($7.6 million after tax) in net interest income due to the decrease in the average balance of loans during the six months ended June 30, 2021 as compared to 2020 as a result of the amortization of the FFELP loan portfolio.

Operating Results

1 unchanged sentence

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

As of March 31, 2021, AGM had a $19.0 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.5 years.

As of June 30, 2021, AGM had a $19.3 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.5 years.

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

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.

The Company currently believes that in the short-term it will most likely not be able to invest the excess cash generated from the FFELP loan portfolio into assets that immediately generate the rates of return historically realized from that portfolio.

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

8 unchanged sentences

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

In addition, the Corporate segment includes direct incremental costs associated with Nelnet Bank prior to the UDFI’s approval for its bank charter and certain shared service and

support costs incurred by the Company that will not be reflected in Nelnet Bank’s operating results through 2023 (the bank’s de novo period).

Such Nelnet Bank-related costs included in the Corporate segment totaled $0.7 million (pre-tax) and $1.2 million (pre-tax) for the three months ended March 31, 2021 and 2020, respectively.

The information below provides the operating results for each reportable operating segment for the three months ended March 31, 2021 and 2020 (dollars in millions).

In addition, the Corporate segment includes direct incremental costs associated with Nelnet Bank prior to the UDFI’s approval for its bank charter and certain shared service and support costs incurred by the Company that will not be reflected in Nelnet Bank’s operating results through 2023 (the bank’s de novo period).

Such Nelnet Bank-related costs included in the Corporate segment totaled $1.0 million (pre-tax) and $1.3 million (pre-tax) for the three months ended June 30, 2021 and 2020, respectively, and $1.7 million (pre-tax) and $2.5 million (pre-tax) for the six months ended June 30, 2021 and 2020, respectively.

The information below provides the operating results for each reportable operating segment for the three and six months ended June 30, 2021 and 2020 (dollars in millions).

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

4 unchanged sentences

Accordingly, there are no operating results for the (former) Communications operating segment in 2021.

(c) 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 (loss) excludes changes in fair values of derivatives, net of tax.

(c) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of income, excluding from AGM the impact from changes in fair values of derivatives.

Net income (loss) excludes from AGM 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.

4 unchanged sentences

and world markets.

While certain COVID-19 vaccines have been approved and have become widely available for use in the U.S., the Company is unable to predict how widely utilized the vaccines will be or how effective they will be in preventing the spread of COVID-19.

As a result, although the economy has improved since the pandemic began, it is still uncertain when or if normal pre-pandemic economic activity and business operations will resume.

As a result, although the economy has improved since the pandemic began, it is still uncertain when or if economic activity and business operations at pre-pandemic levels for the Company's customers will resume.

In addition, a significant number of the Company's employees continue to work from home, either full-time or dividing their work days between working from home and working in the office as the Company has offered employees flexibility in the amount of time they work in recently re-opened offices.

The results of operations discussion below should be read in conjunction with the Company’s 2020 Annual Report, including the information included in “Risk Factors – Operations – The COVID-19 pandemic has adversely impacted our results of operations, and is expected to continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Impacts of COVID-19 Pandemic.”

CONSOLIDATED RESULTS OF OPERATIONS

An analysis of the Company's operating results for the three months ended March 31, 2021 compared to the same period in 2020 is provided below.

An analysis of the Company's operating results for the three and six months ended June 30, 2021 compared to the same periods in 2020 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.

3 unchanged sentences

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 (except for ALLO, which was deconsolidated from the Company's consolidated financial statements in December 2020).

Three months ended

Three months ended Six months ended

June 30, June 30,

2021 2020 2021 2020 Additional information

1 unchanged sentence

Investment interest 11,578 5,743 16,563 13,141 Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations.

Decrease was due to a decrease in interest rates.

Increase was due to interest income earned on consumer loan beneficial interest investments, partially offset by a decrease in interest rates in 2021 as compared to 2020.

Total interest income 133,583 151,883 262,686 341,074

2 unchanged sentences

The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013.

Net interest income 101,330 55,073 See table below for additional analysis.

Less (negative provision) provision for loan losses (17,048) 76,299 The Company recognized negative provision in the first quarter of 2021 due to management's estimate of improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.

Net interest income 83,592 66,635 184,922 121,708

Less provision (negative provision) for loan losses 374 2,999 (16,674) 79,297 The Company recognized negative provision in the first quarter of 2021 due to management's estimate of improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.

During the first quarter of 2020, the Company recognized an incremental provision of $63.0 million as a result of an increase in expected defaults due to the COVID-19 pandemic.

Net interest income after provision for

loan losses 118,378 (21,226)

Net interest income after provision for loan losses 83,218 63,636 201,596 42,411

Other income/expense:

3 unchanged sentences

Other 22,921 60,127 18,317 68,408 See table below for the components of "other."

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

Gain on sale of loans 15,271 — 15,271 18,206 The Company sold a portfolio of consumer loans in each of May 2021 and January 2020 and recognized gains of $15.3 million and $18.2 million, respectively.

Impairment expense and provision for beneficial interests, net (500) (332) 1,936 (34,419) During the first quarter of 2020, the Company recognized impairments of $26.3 million and $7.8 million related to beneficial interest in consumer loan securitization investments and several venture capital investments, respectively.

1 unchanged sentence

During the first quarter of 2021, the Company reversed the remaining allowance of $2.4 million related to the beneficial interest in consumer loan securitizations due to continued improved economic conditions.

Derivative settlements, net

(4,304) 4,237 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

Derivative settlements, net (5,374) 5,821 (9,678) 10,058 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

Derivative settlements for each applicable period should be evaluated with the Company's net interest income.

See table below for additional analysis.

Derivative market value adjustments, net

38,809 (20,602) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP.

The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps.

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.

See AGM operating segment - results of operations.

Derivative market value adjustments, net (1,615) (3,911) 37,194 (24,513) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP.

The majority of the derivative market value adjustments during the six months ended June 30, 2021 and 2020 related to the changes in fair value of the Company's floor income interest rate swaps.

Total other income/expense 219,499 251,049 458,611 441,676

Cost of services:

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

27,052 22,806 Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment.

Cost to provide education technology, services, and payment processing services 21,676 15,376 48,728 38,181 Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment.

Increase in 2021 compared to 2020 was primarily due to additional instructional services costs.

6 unchanged sentences

Other expenses 32,587 37,052 69,286 80,439 Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs.

Decrease was 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 in the ETS&PP segment;

and (iii) the deconsolidation of ALLO in December 2020.

See the LSS and ETS&PP operating segment results of operations discussions for additional information.

Decrease was due to 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, and the deconsolidation of ALLO in December 2020.

Total operating expenses 171,791 185,692 344,464 376,605

Income (loss) before income taxes 157,765 (49,898)

Income tax (expense) benefit (34,861) 10,133 The effective tax rate was 22.0% and 20.0% for the three months ended March 31, 2021 and 2020, respectively.

Income before income taxes 109,250 107,874 267,015 57,976

Income tax expense 26,237 21,264 61,098 11,131 The effective tax rate was 23.83% and 19.74% for the three months ended June 30, 2021 and 2020, respectively, and 22.75% and 19.50% for the six months ended June 30, 2021 and 2020, respectively.

The Company currently expects its effective tax rate for 2021 will range between 22 and 24 percent.

Net income (loss) 122,904 (39,765)

Net income 83,013 86,610 205,917 46,845

Net loss (income) attributable to noncontrolling interests 854 (128) 1,548 (895)

Net income (loss) attributable to

$ 123,598 (40,532)

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

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.

Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income.

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

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.

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 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in the table below.

Three months ended March 31,

2021 2020 Additional information

Variable loan interest margin $ 61,444 30,367 Represents the yield the Company receives on its loan portfolio less the cost of funding these loans.

Variable loan spread is also impacted by the amortization/accretion of loan premiums and discounts and the 1.05% per year consolidation loan rebate fee paid to the Department.

See AGM operating segment - results of operations.

For the three months ended March 31, 2021, variable loan interest margin also includes a reduction of interest expense of $23.8 million as a result of reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid.

The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013.

Settlements on associated derivatives (19) 2,112 Represents the net settlements (paid) received related to the Company’s 1:3 basis swaps.

Variable loan interest margin, net of settlements on derivatives

61,425 32,479

Fixed rate floor income 35,539 18,758 The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income.

See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information.

Settlements on associated derivatives (4,285) 2,125 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

Net income attributable to Nelnet, Inc.

$ 83,867 86,482 207,465 45,950

Investment interest

Corporate debt interest expense

(639) (1,450) Includes interest expense on the Company's unsecured line of credit, asset-backed securities participation agreement, and Junior Subordinated Hybrid Securities.

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

In addition, in October 2020, the Company redeemed all the outstanding $20.4 million of Hybrid Securities.

These items were partially offset by interest expense incurred on the asset-backed securities participation agreement that was executed in May of 2020.

Net interest income (net of settlements on derivatives)

The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of income.

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

2021 2020 2021 2020

The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of operations.

Three months ended March 31,

Income/gains from investments, net $ 8,498 (1,025)

Investment advisory services (a) 2,697 2,802

Income/gains from investments, net (a) $ 15,591 51,111 24,089 50,085

ALLO preferred return (b) 2,020 — 4,342 —

Management fee revenue (c) 1,113 2,630

Borrower late fee income (d) 442 3,188

Loss from ALLO voting membership interests investment (e) (22,219) —

Loss from solar investments (f) (1,679) (2,839)

Investment advisory services (c) 1,145 922 3,842 3,724

Income (loss) from ALLO voting membership interest investment (d) 1,094 — (21,125) —

Borrower late fee income (e) 744 319 1,184 3,506

Management fee revenue (f) 701 1,914 1,814 4,544

(Loss) income from solar investments (g) (2,302) 2,040 (3,982) (799)

Other 3,928 3,821 8,153 7,348

$ (4,604) 8,281

(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.

Other income $ 22,921 60,127 18,317 68,408

(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.

During the three and six months ended June 30, 2021, the Company recognized (pre-tax) realized and unrealized gains from certain real estate and venture capital investments, including realized gains from the sale of certain real estate investments of $6.0 million and $11.1 million, respectively.

(b) Represents the Company's income on its preferred membership interests in a holding company for ALLO, which was deconsolidated from the Company's financial statements in December 2020.

As of June 30, 2021, the amount of preferred membership interests held by the Company was $129.7 million that earns a preferred annual return of 6.25 percent.

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

WRCM earns annual fees of 25 basis points on the majority of the outstanding balance of asset-backed securities under management and up to 50 percent of the gains from the sale of asset-backed securities or asset-backed securities being called prior to the full contractual maturity for which it provides advisory services.

As of March 31, 2021, the outstanding balance of asset-backed securities under management subject to these arrangements was $1.4 billion.

As of June 30, 2021, the outstanding balance of asset-backed securities under management subject to these arrangements was $1.6 billion.

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

The Company currently anticipates that assets under management will decrease from current levels and that opportunities to earn meaningful performance fees in future periods will be more limited.

(b) Represents the Company's income on its preferred membership interests in ALLO, which was deconsolidated from the Company's financial statements in December 2020.

As of March 31, 2021, the amount of preferred membership interests held by the Company was $129.7 million and earns a preferred annual return of 6.25 percent.

(c) Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company under a contract that expired in January 2021.

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

The decrease in borrower late fees for the three months ended March 31, 2021 as compared to the same period in 2020 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.

(e) Represents the Company's loss on its voting membership interests in ALLO.

The Company accounts for its voting membership interests investment in ALLO under the Hypothetical Liquidation at Book Value ("HLBV") method of accounting.

Applying the HLBV method of accounting, the Company will continue to recognize a significant portion of ALLO’s anticipated losses over the next several years due to expected investments by ALLO of substantial amounts in property and equipment to build its communications network and connect customers.

(f) Represents the Company's share of income or loss from solar investments accounted for using the HLBV method of accounting.

(d) Represents the Company's share of income or loss on its voting membership interests in a holding company for ALLO.

See note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information regarding the accounting for and income statement impact of this investment during 2021.

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

The decrease in borrower late fees for the six months ended June 30, 2021 as compared to the same period in 2020 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.

(f) Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company under a contract that expired in January 2021.

(g) Represents the Company's share of income or loss from solar investments accounted for using the 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 years of investment.

6 unchanged sentences

2020 March 31,

2021 June 30,

Servicing volume (dollars in millions):

Nelnet Servicing:

Government $ 183,790 185,477 185,315 189,932 191,678 195,875 195,030

4 unchanged sentences

Number of servicing borrowers:

Nelnet Servicing:

Government 5,574,001 5,498,872 5,496,662 5,604,685 5,645,946 5,664,094 5,636,781

6 unchanged sentences

Government Loan Servicing

Nelnet Servicing and Great Lakes' servicing contracts with the Department are currently scheduled to expire on June 14, 2021, but provide the potential for an additional six-month extension at the Department's discretion through December 14, 2021.

The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to December 14, 2023.

Nelnet Servicing's and Great Lakes' current student loan servicing contracts with the Department are currently scheduled to expire on December 14, 2021.

The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of performance for the servicing contracts for up to two additional years to December 14, 2023.

The Department is conducting a contract procurement process for a new framework for the servicing of all student loans owned by the Department.

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

Nelnet Servicing and Great Lakes are two of the four large private sector companies (referred to as Title IV Additional Servicers, or "TIVAS") that have student loan servicing contracts with the Department.

In addition, the Department has contracts with four not-for-profit ("NFP") entities to service loans owned by the Department.

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 recent publicly announced performance metrics measurements used by the Department for the quarterly periods July 1, 2020 through December 31, 2020, Great Lakes’ and Nelnet Servicing’s overall rankings among the eight current servicers for the Department were second 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, 2021 through August 31, 2021 are 15% and 14%, respectively.

On July 8, 2021 and July 19, 2021, the Pennsylvania Higher Education Assistance Agency ("PHEAA"), one of the TIVAS, and the New Hampshire Higher Education Association Foundation Network ("Granite State"), one of the NFP servicers that utilizes Nelnet Servicing's platform to service its loans for the Department, announced that they will exit the federal student loan servicing business after their current contracts with the Department expire in December 2021.

PHEAA and Granite State service approximately 8.5 million and 1.3 million borrowers, respectively, under their contracts.

As of the filing of this report, the Department has not yet indicated how or when the PHEAA and Granite State servicing volume will be transitioned to other servicers for the Department.

Private Education Loan Servicing

1 unchanged sentence

In conjunction with the sale, the Company was selected as servicer of the portfolio.

During March 2021, approximately 261,000 borrowers were converted to the Company's servicing platform, with the remaining borrowers converted in April 2021.

During March 2021, approximately 261,000 borrowers were converted to the Company's servicing platform, with the remaining borrowers converted in the second quarter of 2021.

Summary and Comparison of Operating Results

Three months ended March 31,

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

2021 2020 2021 2020 Additional information

2 unchanged sentences

Intersegment servicing revenue 8,480 8,537 16,748 19,591 Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM and Nelnet Bank operating segments.

Decrease in 2021 compared to 2020 was due to the impact of borrower relief policies implemented by AGM in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio.

Decrease in the six months ended June 30, 2021 compared to the same period in 2020 was due to the impact of borrower relief policies implemented in March 2020 in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio.

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

1 unchanged sentence

Total other income 121,275 121,493 242,173 247,913

Salaries and benefits 66,458 70,493 Decrease in 2021 compared to 2020 was due to a decrease in contact center operations and support as a result of federal student loan payments being suspended (through September 30, 2021) under the CARES Act.

Salaries and benefits 68,388 68,401 134,846 138,894 Decrease in the six months ended June 30, 2021 compared to the same period in 2020 was due to a decrease in contact center operations and support as a result of federal student loan payments being suspended in March 2020 under the CARES Act, which suspension has been extended through at least September 30, 2021.

The Company currently expects salaries and benefits will increase as it prepares for the provisions of the CARES Act to expire.

Depreciation and amortization 8,192 8,848 Decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated.

Other expenses 13,285 17,489 Decrease in 2021 compared to 2020 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.

The Company currently expects these costs will increase when the provisions of the CARES Act expire, currently scheduled for September 30, 2021.

Depreciation and amortization 7,974 9,142 16,166 17,990 Includes depreciation on property and equipment and amortization of intangibles from the Great Lakes acquisition in February 2018.

Amortization of intangible assets for the three months ended June 30, 2021 and 2020 was $5.5 million and $5.0 million, respectively, and for the six months ended June 30, 2021 and 2020 was $11.0 million and $9.8 million, respectively.

The majority of the Great Lakes' intangible assets became fully amortized at June 30, 2021.

The Company expects amortization expense for the second half of 2021 to be approximately $1.4 million.

Excluding amortization of intangible assets, the decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated.

Other expenses 13,273 13,380 26,557 30,870 Decrease in the six months ended June 30, 2021 compared to same period in 2020 was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act (which became effective March 13, 2020), primarily associated with the fact that while student loan payments are suspended there is a significant reduction of borrower statement printing and postage costs.

The Company currently expects these costs will increase when the provisions of the CARES Act expire, currently scheduled for September 30, 2021 but subject to possible further extension.

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

7 unchanged sentences

Before tax operating margin increased in 2021 as compared to 2020 primarily due to operating expenses decreasing as a result of federal student loan payments being suspended under the CARES Act as discussed above.

The Company currently expects these costs will increase as it prepares for the provisions of the CARES Act to expire.

The Company currently expects these costs will increase and operating margin to decrease from recent historical levels as it prepares for the provisions of the CARES Act to expire.

Loan servicing and systems revenue

Three months ended March 31,

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

2021 2020 2021 2020 Additional information

Government servicing - Nelnet $ 35,376 37,360 70,248 76,010 Represents revenue from Nelnet Servicing's Department servicing contract.

Decrease in 2021 compared to 2020 was due to a decrease in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program, decrease in fees earned from the Department for originating consolidation loans, and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act.

Decrease in the six months ended June 30, 2021 compared to the same period in 2020 was due to a decrease in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program, decrease in fees earned from the Department for originating consolidation loans, and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act suspending federal student loan payments through at least September 30, 2021.

Decrease in revenue for the three months ended June 30, 2021 compared to the same period in 2020 was due to a further decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020.

The decrease in revenue in 2021 as compared to 2020 was partially offset as a result of an increase in the number of borrowers serviced.

The Company expects future revenue per borrower to continue to be lower while the loan payment suspension provisions of the CARES Act remain in effect.

Government servicing - Great Lakes 43,863 45,213 87,165 91,660 Represents revenue from Great Lakes' Department servicing contract.

Decrease in 2021 compared to 2020 was due to a decrease in fees earned from the Department for originating consolidation loans and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act.

Private education and consumer loan servicing 8,548 8,609 Decrease in 2021 compared to 2020 was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fees, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic.

The decrease was partially offset by an increase in borrowers as a result of the Wells Fargo private education loan conversion activity in March 2021.

The private education loans converted in 2021 reflect revenue from the conversation date, and thus does not reflect a full quarter of revenue.

See "Private Education Loan Servicing" included above under "Loan Servicing and Systems Operating Segment - Results of Operations."

FFELP servicing 4,670 5,614 Decrease in 2021 compared to 2020 was due to a decrease in the number of borrowers serviced and the impact of borrower relief policies implemented by lenders in response to the COVID-19 pandemic.

Decrease in the six months ended June 30, 2021 compared to the same period in 2020 was due to a decrease in fees earned from the Department for originating consolidation loans and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act suspending federal student loan payments through at least September 30, 2021.

The decrease in revenue in 2021 as compared to 2020 was partially offset as a result of an increase in the number of borrowers serviced.

The Company expects future revenue per borrower to continue to be lower while the loan payment suspension provisions of the CARES Act remain in effect.

Private education and consumer loan servicing 12,816 8,196 21,364 16,805 Increase for the three and six months ended June 30, 2021 compared to the same periods in 2020 was due to the former Wells Fargo borrowers converted to the Company's servicing platform during March and the second quarter of 2021.

Excluding revenue earned on the former Wells Fargo portfolio, revenue for the three and six months ended June 30, 2021 decreased from the comparable periods in 2020.

The decrease in revenue was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fee revenue, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic.

FFELP servicing 4,703 4,917 9,373 10,531 Decrease in 2021 compared to 2020 was due to a decrease in the number of borrowers serviced.

In addition, decrease during the six months ended June 30, 2021 as compared to the same period in 2020 was due to the impact of borrower relief policies implemented by lenders in response to the COVID-19 pandemic.

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

Software services 8,454 11,318 The decrease in revenue in 2021 as compared to 2020 was due to many of the services provided under the Company's remote hosted servicing and system support contract with Great Lakes' former parent, representing 2.3 million borrowers, decreasing and/or expiring in January 2021.

Software services 7,374 10,651 15,827 21,969 Decrease in 2021 compared to 2020 was due to many of the services provided under the Company's remote hosted servicing and system support contract with Great Lakes' former parent, representing 2.3 million borrowers, decreasing and/or expiring in January 2021.

This decrease in revenue was partially offset by an increase in the number of remote hosted servicing borrowers in 2021 as compared to 2020.

Outsourced services 7,962 4,705 19,634 6,803 The majority of this revenue relates to providing contact center and back office operational outsourcing activities.

Increase in 2021 compared to 2020 was due to shorter-term contracts with state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support).

Revenue from providing these services to state agencies was $9.7 million during the three months ended March 31, 2021.

Increase in 2021 compared to 2020 was due to contracts with state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support).

Revenue from providing these services to state agencies was $5.4 million and $15.1 million during the three and six months ended June 30, 2021, and $3.1 million during the three and six months ended June 30, 2020.

Outsourcing activities provided to state agencies are performed under shorter-term contracts, and thus revenue in future periods could decrease from current levels depending on agencies' needs for such services.

Loan servicing and systems revenue $ 112,094 111,042 223,611 223,778

2 unchanged sentences

Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year.

On December 31, 2020, the Company acquired HigherSchool Instructional Services, a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC, a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding.

The results of HigherSchool Instructional Services and CD2 LLC are reported in the Company’s consolidated financial statements from the date of acquisition.

Revenue recognized by these acquisitions during the three months ended March 31, 2021 was $8.0 million.

On December 31, 2020, the Company acquired HigherSchool Instructional Services ("HigherSchool"), a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC ("CD2"), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding.

The results of HigherSchool and CD2 are reported in the Company’s consolidated financial statements from the date of acquisition.

Revenue recognized by these acquisitions during the three and six months ended June 30, 2021 was $7.1 million and $15.1 million, respectively.

Summary and Comparison of Operating Results

Three months ended March 31,

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

2021 2020 2021 2020 Additional information

Net interest income $ 210 399 473 2,373 Represents interest income on tuition funds held in custody for schools.

Decrease was due to a decrease in interest rates in 2021 as compared with 2020.

Decrease was due to a significant decrease in interest rates in March 2020.

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

3 unchanged sentences

Cost to provide education technology, services, and payment processing services 21,676 15,376 48,728 38,181 See table below for additional information.

Salaries and benefits 25,941 23,696 Increase in 2021 compared to 2020 was due to an increase in headcount to support the growth of the customer base, the investment in the development of new technologies, and the acquisitions of HigherSchool Instructional Services and CD2 LLC.

Salaries and benefits 27,094 24,522 53,035 48,218 Increase in 2021 compared to 2020 was due to an increase in headcount to support the growth of the customer base, the investment in the development of new technologies, and the acquisitions of HigherSchool and CD2.

Depreciation and amortization 2,956 2,362 6,027 4,749 Represents primarily amortization of intangible assets from prior business acquisitions.

Amortization of intangible assets related to business acquisitions was $2.9 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively.

Other expenses 4,822 6,092 Decrease in 2021 compared to 2020 was due to a reduction of travel expenses due to COVID-19.

In addition, during the three months ended March 31, 2020, the Company recognized an additional expense to increase the allowance for doubtful accounts for the increased risk of uncollectible balances due to uncertain economic conditions resulting from the COVID-19 pandemic.

Amortization of intangible assets related to business acquisitions was $2.8 million and $2.2 million for the three months ended June 30, 2021 and 2020, respectively, and $5.7 million and $4.4 million for the six months ended June 30, 2021 and 2020, respectively.

The increase in 2021 compared to 2020 was due to the acquisitions of HigherSchool and CD2.

Other expenses 4,437 2,326 9,259 8,418 Other expenses decreased during the first quarter of 2021 compared to the first quarter of 2020 due to a reduction of travel expenses due to COVID-19 which was partially offset due to the acquisitions of HigherSchool and CD2.

Other expenses increased during the second quarter of 2021 as compared to the second quarter of 2020 due to higher costs for consulting and professional fees due to investments in new technologies and due to the acquisitions of HigherSchool and CD2, partially offset by a decrease in costs for travel related expenses.

Intersegment expenses, net 3,520 3,429 7,184 6,756 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.

5 unchanged sentences

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

Three months ended March 31,

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

2021 2020 2021 2020 Additional information

Tuition payment plan services $ 29,550 31,587 Revenue recognized during the first three months of 2021 was primarily related to payment plans for the 2020-2021 academic year for K-12 schools and the spring 2021 semester for institutions of higher education.

Revenues from tuition payment plans for these terms were impacted by COVID-19 resulting in lower volumes of plans compared to historical periods.

Payment processing 33,038 31,742 Payment volumes in the first quarter of 2021 increased as compared to 2020 in both the K-12 and higher education markets.

The increase in volumes in the higher education market was driven primarily by growth in volumes from existing customers.

Education technology and services 32,322 20,054 Increase in 2021 compared to 2020 was primarily the result of the 2020 acquisitions.

Additionally, revenues from the Company’s application and enrollment products, grant and aid assessments, and FACTS Education instructional and professional development services increased compared to the prior year.

Tuition payment plan services $ 26,538 22,947 56,088 54,534 Revenue increased for the three and six months ended June 30, 2021 as compared to the same periods in 2020 as a result of a higher number of payment plans in the K-12 market.

Revenue recognized during the first three months of 2021 was negatively impacted due to enrollment for institutions of higher education decreasing as a result of COVID-19.

Payment processing 25,008 21,168 58,046 52,910 Payment volumes in 2021 increased as compared to 2020 in both the K-12 and higher education markets.

The increase in payments volume is driven by both new customers and an increase in volumes from existing customers.

Education technology and services 24,733 14,927 57,055 34,980 Increase in 2021 compared to 2020 was primarily the result of the HigherSchool and CD2 acquisitions.

Additionally, revenues from the Company’s application and enrollment products, grant and aid assessments, and FACTS Education Solutions instructional and professional development services increased compared to the prior year.

Other 423 262 771 555

Education technology, services, and payment processing revenue 76,702 59,304 171,960 142,979

Cost to provide education technology, services, and payment processing services 27,052 22,806 Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment revenue.

Costs to provide instructional services are also included as a component of this expense and were the primary driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool Instructional Services and growth in the FACTS Education Solutions division.

Cost to provide education technology, services, and payment processing services 21,676 15,376 48,728 38,181 Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment volumes.

Costs to provide instructional services are also included as a component of this expense and were a driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool and growth in the FACTS Education Solutions division.

Net revenue $ 55,026 43,928 123,232 104,798

1 unchanged sentence

The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods.

The increase in before tax operating margin in 2021 as compared to 2020 was due to operating leverage.

Proposed Community College Legislation

4 unchanged sentences

Loan Portfolio

As of March 31, 2021, the AGM operating segment had a $19.0 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.5 years.

For a summary of the Company’s loan portfolio as of March 31, 2021 and December 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

As of June 30, 2021, the AGM operating segment had a $19.3 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.5 years.

For a summary of the Company’s loan portfolio as of June 30, 2021 and December 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Loan Activity

The following table sets forth the activity of loans:

Three months ended March 31,

The following table sets forth the activity of loans in the AGM operating segment:

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

2021 2020 2021 2020

Beginning balance $ 19,030,223 20,605,065 19,559,108 20,798,719

4 unchanged sentences

Total loan acquisitions 782,075 516,796 889,300 976,293

Repayments, claims, capitalized interest, and other (406,565) (312,579)

Repayments, claims, capitalized interest, participations, and other, net (190,130) (1,124,686) (596,695) (1,437,265)

Consolidation loans lost to external parties (213,026) (166,778) (442,571) (383,105)

1 unchanged sentence

Ending balance $ 19,331,725 19,830,397 19,331,725 19,830,397

The Company has also purchased partial ownership in certain federally insured and consumer loan securitizations.

As of the latest remittance reports filed by the various trusts prior to March 31, 2021, the Company’s ownership correlates to approximately $500 million and $230 million of federally insured and consumer loans, respectively, included in these securitizations.

The Company has also purchased partial ownership in certain private education, federally insured, and consumer loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "investments" in the Company's consolidated financial statements.

As of the latest remittance reports filed by the various trusts prior to June 30, 2021, the Company’s ownership correlates to approximately $460 million, $495 million, and $280 million of private education, federally insured, and consumer loans, respectively, included in these securitizations.

The loans held in these securitizations are not included in the above table.

The Company's federally insured student loan acquisitions include the purchase of rehabilitated loans purchased from guaranty agencies.

4 unchanged sentences

Allowance for Loan Losses and Loan Delinquencies

For a summary of the Company's activity in the allowance for loan losses for the three months ended March 31, 2021 and 2020, and a summary of the Company's loan status and delinquency amounts as of March 31, 2021, December 31, 2020, and March 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

The Company recorded a negative provision for loan losses for its federally insured and consumer loan portfolios of $7.5 million and $11.4 million, respectively, for the three months ended March 31, 2021 due to management's estimate of certain continued improved economic conditions (including the improvement in certain macroeconomic variables (unemployment rates, gross domestic product, and consumer price index) used in the Company's loan loss models) as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.

The Company recorded a $1.4 million provision expense on its private education loan portfolio during the three months ended March 31, 2021 as a result of an increase of loans in forbearance, which was partially offset by management's estimate of certain continued improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.

AGM's total allowance for loan losses of $156.7 million at March 31, 2021 represents reserves equal to 0.7% of AGM's federally insured loans (or 25.5% of the risk sharing component of the loans that is not covered by the federal guaranty), 6.6% of AGM's private education loans, and 12.8% of AGM's consumer loans.

For a summary of the Company's activity in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020, and a summary of the Company's loan status and delinquency amounts as of June 30, 2021, December 31, 2020, and June 30, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

AGM recorded a negative provision for loan losses for its federally insured and consumer loan portfolios of $7.5 million and $11.4 million, respectively, for the three months ended March 31, 2021 due to management's estimate of certain continued improved economic conditions (including the improvement in certain macroeconomic variables (unemployment rates, gross domestic product, and consumer price index) used in the Company's loan loss models) as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.

AGM recorded a $1.4 million provision expense on its private education loan portfolio during the three months ended March 31, 2021 as a result of an increase of loans in forbearance, which was partially offset by management's estimate of certain continued improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.

During the second quarter of 2021, AGM recorded a negative provision for loan losses of $0.4 million and $1.0 million for its federally insured and private education loan portfolios, respectively, due to management's estimate of certain continued improved economic conditions as of June 30, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of March 31, 2021.

These amounts were partially offset due to the Company establishing an initial allowance for federally insured and private education loans acquired during the period.

The Company recorded a provision for loan losses of $1.7 million on its consumer loan portfolio during the second quarter of 2021 as a result of establishing an initial allowance for consumer loans acquired during the period, which was partially offset by management's estimate of certain continued improved economic conditions as of June 30, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of March 31, 2021.

AGM's total allowance for loan losses of $144.9 million at June 30, 2021 represents reserves equal to 0.6% of AGM's federally insured loans (or 23.8% of the risk sharing component of the loans that is not covered by the federal guaranty), 5.5% of AGM's private education loans, and 11.0% of AGM's consumer loans.

Loan Spread Analysis

1 unchanged sentence

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 March 31,

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

2021 2020 2021 2020

Variable loan yield, gross 2.63 % 3.09 % 2.67 % 3.55 %

13 unchanged sentences

The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013.

The reduction of this liability is reflected in (a reduction of) "interest on bonds and notes payable and bank deposits" in the consolidated statements of operations and the impact of this reduction to interest expense was excluded in the table above.

The reduction of this liability is reflected in (a reduction of) "interest on bonds and notes payable and bank deposits" in the consolidated statements of income and the impact of this reduction to interest expense was excluded in the table above.

(b) 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.

4 unchanged sentences

Company for each type of derivative for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table.

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

derivative settlements follows.

Three months ended March 31,

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

2021 2020 2021 2020

Core loan spread 1.41 % 1.35 % 1.43 % 1.19 %

9 unchanged sentences

This table (the right axis) shows the difference between AGM's liability base rate and the one-month LIBOR rate by quarter.

See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets.

Variable loan spread increased during the three months ended March 31, 2021 compared to the same period in 2020 due to a narrowing of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

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

See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets.

Variable loan spread increased during the three and six months ended June 30, 2021 compared to the same periods in 2020 due to a narrowing 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 a significant decrease in interest rates during March 2020 and the first half of the second quarter of 2020.

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.

See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the AGM’s FFELP student loan assets and related funding for those assets.

See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on the AGM’s FFELP student loan assets and related funding for those assets.

The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio.

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

Three months ended March 31,

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

2021 2020 2021 2020

Fixed rate floor income, gross $ 36,639 31,866 72,178 50,625

3 unchanged sentences

(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 months ended March 31, 2021 compared to the same period in 2020 was due to lower interest rates in 2021 as compared to 2020.

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 change from being in a net positive settlement position on such derivatives during the first quarter of 2020 to being in a net negative settlement position during the first quarter of 2021 was due to 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.

The increase in gross fixed rate floor income for the three and six months ended June 30, 2021 compared to the same periods in 2020 was due to lower interest rates in 2021 as compared to 2020.

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.

See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” 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

3 unchanged sentences

As a result, immediately after the announced LIBOR discontinuation dates specified above, respectively, LIBOR will no longer be representative of the underlying market and economic reality that the rates are intended to measure.

As of March 31, 2021, the interest earned on a principal amount of $17.3 billion of the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $16.7 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR.

As of June 30, 2021, the interest earned on a principal amount of $17.7 billion of AGM's FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $17.0 billion of AGM’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR.

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

New LIBOR contracts are generally not expected to be entered into after December 31, 2021.

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.

The 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 2020 Annual Report for additional information.

Summary and Comparison of Operating Results

Three months ended March 31,

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

2021 2020 2021 2020 Additional information

Net interest income (expense) after provision for loan losses $ 116,922 (23,622) See table below for additional analysis.

Other income 445 3,215 Represents primarily borrower late fees.

The decrease in borrower late fees in 2021 compared to 2020 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.

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

Net interest income after provision for loan losses $ 80,990 63,095 197,912 39,475 See table below for additional analysis.

Other income 2,316 732 2,760 3,947 During the second quarter of 2021, the Company recognized income of $1.5 million on certain investments.

Excluding income from these investments, other income consists primarily of borrower late fees.

Borrower late fees for the three months ended June 30, 2021 and 2020 was $0.7 million and $0.3 million, respectively, and for the six months ended June 30, 2021 and 2020 was $1.2 million and $3.5 million, respectively.

Gain on sale of loans 15,271 — 15,271 18,206 The Company sold $77.4 million (par value) and $124.2 million (par value) of consumer loans in May 2021 and January 2020, respectively, and recognized gains of $15.3 million and $18.2 million, respectively.

Impairment expense and provision for beneficial interests, net — — 2,436 (26,303) In March 2020, the Company recognized a provision expense of $26.3 million related to its beneficial interest in consumer loan securitization investments as a result of the expected impacts of the COVID-19 pandemic.

3 unchanged sentences

The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps.

The majority of the derivative market value adjustments during the six months ended June 30, 2021 and 2020 related to the changes in fair value of the Company's floor income interest rate swaps.

Total other income/expense 10,598 2,642 47,983 (18,605)

1 unchanged sentence

Other expenses 3,567 4,863 7,344 8,581 The primary component of other expenses is servicing fees paid to third parties.

Intersegment expenses 8,427 11,916 Amounts include fees paid to the LSS operating segment for the servicing of the Company’s loan portfolio.

Intersegment expenses 8,549 9,055 16,976 20,971 Amounts include fees paid to the LSS operating segment for the servicing of the AGM’s loan portfolio.

These amounts exceed the actual cost of servicing the loans.

The decrease in servicing fees in 2021 compared to 2020 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 six months ended June 30, 2021 as compared to the same period in 2020 was due to the expected amortization of AGM'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 months ended June 30, 2021 as compared to the same period in 2020 was due to the expected amortization of AGM's FFELP portfolio.

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 12,699 16,076 Total operating expenses were 26 basis points and 31 basis points of the average balance of loans for the three months ended March 31, 2021 and 2020, respectively.

The decrease in 2021 as compared to 2020 was due to a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic.

Total operating expenses 12,672 14,339 25,371 30,415 Total operating expenses were 27 basis points and 28 basis points of the average balance of loans for the three months ended June 30, 2021 and 2020, respectively, and 26 basis points and 30 basis points for the six months ended June 30, 2021 and 2020, respectively.

The decrease for the six months ended June 30, 2021 as compared to the same period in 2020 was due to a decrease in certain servicing activities beginning in March 2020 due to borrower relief initiatives and policies as a result of the COVID-19 pandemic.

Income (loss) before income taxes 78,916 51,398 220,524 (9,545)

Income tax (expense) benefit (18,940) (12,336) (52,926) 2,291 Represents income tax (expense) benefit at an effective tax rate of 24%.

Net income (loss) $ 107,622 (46,318)

Net income (loss) $ 59,976 39,062 167,598 (7,254) The increase in GAAP net income for the three months ended June 30, 2021 as compared to the same period in 2020 was due to (i) an increase in core loan spread;

(ii) a gain on sale of consumer loans during the second quarter of 2021;

and (iii) an increase in interest income from consumer loan beneficial interests.

These items were partially offset by a decrease in the average balance of loans in 2021 as compared to 2020.

The increase in GAAP net income for the six months ended June 30, 2021 as compared to the same period in 2020 was due to (i) an increase in core loan spread;

(ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds;

(iii) the recognition of a negative provision in the first quarter of 2021 as compared to provision for loan losses in 2020 as a result of the COVID-19 pandemic;

(iv) provision expense recognized during the first quarter of 2020 related to beneficial interest investments in consumer loans as a result of the expected impacts of the COVID-19 pandemic;

and (v) an increase in interest income from consumer loan beneficial interests.

These items were partially offset due to (i) a decrease in the average balance of loans in 2021 as compared to 2020;

and (ii) a decrease in servicing costs beginning in March 2020 due to borrower relief initiatives and policies as a result of the COVID-19 pandemic.

Additional information:

Net income (loss) $ 59,976 39,062 167,598 (7,254) 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 GAAP and non-GAAP net income was due to (i) an increase in core loan spread;

(ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds;

and (iii) the recognition of a negative provision in the first quarter of 2021 related to loans and consumer loan residual investments as compared to provision expense on such assets in 2020 as a result of the COVID-19 pandemic.

These items were partially offset by (i) a decrease in the average balance of loans in 2021 as compared to 2020 and (ii) a gain in 2020 from the sale of consumer loans.

Derivative market value adjustments, net 1,615 3,911 (37,194) 24,513

Tax effect (388) (939) 8,927 (5,883)

Net income (loss), excluding derivative market value adjustments $ 78,127 (30,660)

Net income, excluding derivative market value adjustments $ 61,203 42,034 139,331 11,376

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

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

Three months ended March 31,

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,

2021 2020 2021 2020 Additional information

14 unchanged sentences

Derivative settlements, net (a) (5,153) (1,308) (9,438) 816 Derivative settlements include the settlements (paid) received related to the Company's floor income interest rate swaps.

The increase in net settlements paid in 2021 as compared to the same periods in 2020 was due to a decrease in interest rates.

Fixed rate floor income, net of settlements on derivatives 31,486 30,558 62,740 51,441

Core loan interest income (a) 67,167 67,820 159,847 121,182

Investment interest 2,648 4,133 Decrease in 2021 compared to 2020 was due to lower interest rates and lower weighted average cash and restricted cash balances in 2021 as compared to 2020.

Investment interest 8,882 4,443 11,530 8,577 Increase in 2021 compared to 2020 was due to an increase in interest income on the Company's consumer loan beneficial interest investments, partially offset by lower interest rates and lower weighted average cash and restricted cash balances in 2021 as compared to 2020.

Intercompany interest (128) (348) (308) (929) Decrease in 2021 compared to 2020 was due to lower interest rates and lower weighted average debt outstanding in 2021 as compared to 2020.

Provision for loan losses - federally insured loans 7,483 (39,323) 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 (1,431) (9,800)

Provision for loan losses - consumer loans 11,418 (27,176)

Net interest income (loss) after

provision for loan losses (net of

settlements on derivatives) (a) $ 112,618 (19,385) Increase in 2021 as compared to 2020 was due to (i) an increase in core loan spread;

Negative provision (provision) for loan losses - federally insured loans 397 1,950 7,880 (37,373) See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations."

Negative provision (provision) for loan losses - private education loans 1,004 (2,322) (427) (12,121)

(Provision) negative provision for loan losses - consumer loans (1,706) (2,627) 9,712 (29,803)

Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 75,616 68,916 188,234 49,533 Increase for the three months ended June 30, 2021 as compared to the same period in 2020 was due to (i) an increase in core loan spread;

and (ii) an increase in interest income on the Company's consumer loan beneficial interest investments.

These items were partially offset by a decrease in the average balance of loans.

Increase for the six months ended June 30, 2021 as compared to the same period in 2020 was due to (i) an increase in core loan spread;

(ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds;

and (iii) the recognition of a negative provision for loan losses in 2021 as compared to provision for loan losses in 2020 as a result of the COVID-19 pandemic.

(iii) an increase in interest income on the Company's consumer loan beneficial interest investments;

and (iv) the recognition of a negative provision for loan losses in 2021 as compared to provision for loan losses in 2020 as a result of the COVID-19 pandemic.

These items were partially offset by a decrease in the average balance of loans.

5 unchanged sentences

See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in this table.

See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table.

NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS

Loan Portfolio

As of March 31, 2021, Nelnet Bank had a $79.2 million loan portfolio, consisting of private education loans.

As of March 31, 2021, Nelnet Bank's allowance for loan losses on its portfolio was $0.7 million, which represents a reserve equal to 0.9% of Nelnet Bank's private education loan portfolio.

There were no charge offs recognized by the bank during the three months ended March 31, 2021.

As of June 30, 2021, Nelnet Bank had a $190.6 million loan portfolio, consisting of $97.2 million of FFELP loans and $93.4 million of private education loans.

As of June 30, 2021, Nelnet Bank's allowance for loan losses on its portfolio was $0.8 million, which represents reserves equal to 0.3% of Nelnet Bank's federally insured loans (or 10.0% of the risk sharing component of the loans that is not covered by the federal guaranty), and 0.6% of Nelnet Bank's private education loans.

There were no charge offs recognized by the bank during the three and six months ended June 30, 2021.

The following table sets forth the activity in Nelnet Bank's loan portfolio:

Three months ended

March 31, 2021

Three months ended Six months ended

June 30, 2021 June 30, 2021

Beginning balance:

Originations 64,909

$ 79,231 17,543

Federally insured student loan acquisitions 99,973 99,973

Private education loan originations 21,246 86,155

Repayments (9,004) (10,998)

1 unchanged sentence

Ending balance:

As of March 31, 2021, Nelnet Bank had $190.3 million of deposits.

$ 190,571 190,571

As of June 30, 2021, Nelnet Bank had $299.4 million of deposits.

All of Nelnet Bank’s deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs), intercompany savings deposits, and retail and other savings deposits and CDs.

6 unchanged sentences

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities.

Three months ended

March 31, 2021

Three months ended Six months ended

June 30, 2021 June 30, 2021

Balance Rate Balance Rate

Average assets

Federally insured student loans $ 71,440 1.35 % 35,917 1.35 %

Private education loans 86,497 3.16 65,240 3.23

14 unchanged sentences

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on Nelnet Bank's business, results of operations, and financial condition.

On January 1, 2020, the Community Bank Leverage Ratio ("CBLR") framework, as issued jointly by the OCC, the Federal Reserve Board, and the FDIC, became effective.

On January 1, 2020, the Community Bank Leverage Ratio ("CBLR") framework, as issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC, became effective.

Any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly.

1 unchanged sentence

The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio.

Nelnet Bank has opted into the CBLR framework for the quarter ended March 31, 2021 with a leverage ratio of 38.6%.

Nelnet Bank has opted into the CBLR framework for the quarter ended June 30, 2021 with a leverage ratio of 26.4%.

Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework and the minimum level required by the FDIC.

4 unchanged sentences

In addition, certain shared service and support costs incurred by the Company are not and will not be reflected as part of the Nelnet Bank operating segment through 2023 (the bank's de novo period).

The shared service and support costs incurred by the Company related to Nelnet Bank and not reflected in the bank's operating segment were $0.7 million for the three months ended March 31, 2021.

Three months ended

March 31, 2021 Additional information

Total interest income $ 1,376 Represents interest earned on Nelnet Bank's private education student loans and investments.

The shared service and support costs incurred by the Company related to Nelnet Bank and not reflected in the bank's operating segment were $1.0 million and $1.7 million for the three and six months ended June 30, 2021, respectively.

Three months ended Six months ended

June 30, 2021 June 30, 2021 Additional information

Total interest income $ 2,041 3,418 Represents interest earned on Nelnet Bank's FFELP and private education student loans, cash, and investments.

Interest expense 392 586 Represents interest expense on deposits.

Net interest income 1,649 2,832

Provision for loan losses 422 Represents provision expense during the period, primarily related to loans originated during the current period.

Provision for loan losses 69 491 Represents provision expense during the period, primarily related to loans originated or purchased during the current period.

Net interest income after provision for loan losses 1,580 2,341

1 unchanged sentence

Salaries and benefits 1,578 3,065 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor.

Other expenses 545 Represents various expenses such as postage, consulting and professional fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses.

Intersegment expenses 3 Represents servicing costs paid to the LSS operating segment.

Other expenses 237 781 Represents various expenses such as postage, consulting and professional fees, Nelnet Bank director fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses.

Intersegment expenses 37 40 Represents primarily servicing costs paid to the LSS operating segment.

Total operating expenses 1,852 3,886

Loss before income taxes (268) (1,519)

Income tax benefit 286 Represents income tax benefit at an effective tax rate of 22.8%.

Income tax benefit 64 351 Represents income tax benefit at an effective tax rate of 24.1% and 23.1% for the three and six months ended June 30, 2021, respectively.

Net loss $ (204) (1,168)

2 unchanged sentences

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.

Sources of Liquidity

The Company has historically generated positive cash flow from operations.

For the year ended December 31, 2020 and the three months ended March 31, 2021, the Company’s net cash provided by operating activities was $212.8 million and $48.7 million, respectively.

As of March 31, 2021, the Company had cash and cash equivalents of $144.2 million.

The Company also had a portfolio of student loan asset-backed securities (classified as available-for-sale) with a fair value of $379.2 million as of March 31, 2021.

The Company invests excess cash in student loan asset-backed securities, and the cash proceeds from the sale of these securities could be used for operating and/or other investing opportunities.

Cash and investments held by Nelnet Bank are generally not available for Company activities outside of Nelnet Bank.

Excluding Nelnet Bank, cash and cash equivalents and the fair value of student-loan asset backed securities as of March 31, 2021 was $120.5 million and $187.9 million, respectively.

As of March 31, 2021, the Company had participated $113.5 million of its student-loan asset backed securities, and such participation is reflected as debt on the Company's consolidated balance sheet.

For the year ended December 31, 2020 and the six months ended June 30, 2021, the Company’s net cash provided by operating activities was $212.8 million and $187.6 million, respectively.

As of June 30, 2021, the Company had cash and cash equivalents of $213.0 million.

Cash held by Nelnet Bank is generally not available for Company activities outside of Nelnet Bank.

Excluding Nelnet Bank, cash and cash equivalents as of June 30, 2021 was $190.1 million.

The Company invests excess cash in federally insured asset-backed securities, and the cash proceeds from the sale of these securities could be used for operating and/or other investing opportunities.

The Company had a portfolio of federally insured student loan asset-backed securities (classified as available-for-sale) with a fair value of $371.4 million as of June 30, 2021.

Investments held by Nelnet Bank are generally not available for Company activities outside of Nelnet Bank.

Excluding Nelnet Bank, the fair value of federally insured student loan asset-backed securities as of June 30, 2021 was $183.4 million.

As of June 30, 2021, the Company had participated $132.1 million of its non-Nelnet Bank federally insured student loan asset-backed securities, and such participation is reflected as debt on the Company's consolidated balance sheet.

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

As of March 31, 2021, there was no amount outstanding on the unsecured line of credit and $455.0 million was available for future use.

As of June 30, 2021, there was $85.0 million outstanding on the unsecured line of credit and $370.0 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.

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

As of March 31, 2021, the secured line of credit had $5.0 million outstanding and $17.0 million was available for future use.

As of June 30, 2021, 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.

2 unchanged sentences

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

As of March 31, 2021, the Company holds $24.3 million (par value) of its own asset-backed securities.

As of June 30, 2021, the Company holds $42.6 million (par value) of its own asset-backed securities.

The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions (or investment interests therein);

2 unchanged sentences

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

During the three months ended March 31, 2021, the Company generated $48.7 million in operating activities, compared to using $144.5 million for the same period in 2020.

During the six months ended June 30, 2021, the Company generated $187.6 million in operating activities, compared to using $105.6 million for the same period in 2020.

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 gains from the sale of loans during the three months ended March 31, 2020 and the non-cash change in deferred income taxes;

• Proceeds from the Company's clearinghouse for margin payments on derivatives for the three months ended March 31, 2021 compared to payments to the clearinghouse in 2020;

• The impact of changes to the due to customers liability account, other liabilities, and accrued interest receivable during the three months ended March 31, 2021 as compared to the same period in 2020.

• An increase in net income;

• Adjustments to net income for the impact of loss from investments during the six months ended June 30, 2021, as compared to a gain for the same period in 2020, and the non-cash change in deferred income taxes;

• Proceeds from the Company's clearinghouse for margin payments on derivatives for the six months ended June 30, 2021 compared to payments to the clearinghouse in 2020;

• The impact of changes to the due to customers liability account, other liabilities, accrued interest receivable, and other assets during the six months ended June 30, 2021 as compared to the same period in 2020.

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 non-cash provision for loan losses, beneficial interests, and impairment charges;

• The impact of changes to accounts receivable, other assets, and accrued interest payable during the three months ended March 31, 2021 as compared to the same period in 2020.

• Adjustments to net income for the impact of the non-cash provision for loan losses, beneficial interests, and impairment charges (a significant portion of which during the six months ended June 30, 2020 were related to COVID-19), and depreciation and amortization;

• Purchases of equity securities classified as trading;

• The impact of changes to accounts receivable and accrued interest payable during the six months ended June 30, 2021 as compared to the same period in 2020.

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

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

Cash provided by investing activities and used in financing activities for the three months ended March 31, 2021 was $468.4 million and $528.1 million, respectively.

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

Cash used in investing activities and provided by financing activities for the six months ended June 30, 2021 was $243.4 million and $174.9 million, respectively.

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

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

Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral

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

As of March 31, 2021

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

As of June 30, 2021

Carrying amount

6 unchanged sentences

In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.

As of March 31, 2021, 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 $2.17 billion as detailed below.

The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of March 31, 2021.

As of March 31, 2021, the Company had $18.4 billion of loans included in asset-backed securitizations, which represented 96.8 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 March 31, 2021, private education and consumer loans funded with operating cash, loans acquired subsequent to March 31, 2021, and loans owned by Nelnet Bank.

As of June 30, 2021, 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 $2.22 billion as detailed below.

The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of June 30, 2021.

As of June 30, 2021, the Company had $18.7 billion of loans included in asset-backed securitizations, which represented 96.8 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 June 30, 2021, private education and consumer loans funded with operating cash, loans acquired subsequent to June 30, 2021, loans owned by Nelnet Bank, and cash flows relating to the Company's ownership of beneficial interest in loan securitizations (such beneficial interest investments are classified as "investments" on the Company's consolidated balance sheets).

Asset-backed Securitization Cash Flow Forecast

1 unchanged sentence

(dollars in millions)

The forecasted future undiscounted cash flows of approximately $2.17 billion include approximately $1.19 billion (as of March 31, 2021) 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 $0.98 billion, or approximately $0.74 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's March 31, 2021 balance of consolidated shareholders' equity.

The forecasted future undiscounted cash flows of approximately $2.22 billion include approximately $1.23 billion (as of June 30, 2021) 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 $0.99 billion, or approximately $0.75 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's June 30, 2021 balance of consolidated shareholders' equity.

The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast.

14 unchanged sentences

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

LIBOR is in the process of being discontinued as a benchmark rate, and any market transition away from the current LIBOR framework could result in significant changes to the forecasted cash flows from the Company's asset-backed securitizations.

LIBOR is in the process of being discontinued as a benchmark rate, and the market transition away from the current LIBOR framework could result in significant changes to the forecasted cash flows from the Company's asset-backed securitizations.

See "Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate" above and Item 1A, "Risk Factors - Loan Portfolio -

5 unchanged sentences

The forecasted cash flow does not include cash flows the Company expects to pay/receive related to derivative instruments used by the Company to manage interest rate risk.

See Item 3, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk."

See Item 3, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk - AGM Operating Segment."

Warehouse Facilities

1 unchanged sentence

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

As of March 31, 2021, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $310.0 million, of which $247.0 million was outstanding and $63.0 million was available for additional funding.

One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 20, 2021).

As of June 30, 2021, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $360.0 million, of which $301.1 million was outstanding and $58.9 million was available for additional funding.

One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (November 22, 2021).

In the event the liquidity provisions are not extended, the valuation agent has the right to perform a one-time mark to market on the underlying loans funded in this facility, subject to a floor.

The loans would then be funded at this new advance rate until the final maturity date of the facility (May 20, 2022).

The loans would then be funded at this new advance rate until the final maturity date of the facility (November 22, 2022).

The other warehouse facility has a static advance rate that requires initial equity for loan funding and does not require increased equity based on market movements.

As of March 31, 2021, the Company had $20.5 million advanced as equity support on these facilities.

For further discussion of the Company's FFELP warehouse facilities outstanding at March 31, 2021, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

The Company has a private education loan warehouse facility that, as of March 31, 2021, had an aggregate maximum financing amount available of $175.0 million, an advance rate of 80 to 90 percent, liquidity provisions through February 13, 2022, and a final maturity date of February 13, 2023.

As of March 31, 2021, $158.2 million was outstanding under this warehouse facility, $16.8 million was available for future funding, and $17.0 million was advanced as equity support.

As of June 30, 2021, the Company had $24.8 million advanced as equity support on these facilities.

For further discussion of the Company's FFELP warehouse facilities outstanding at June 30, 2021, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

On July 27, 2021, the Company downsized its warehouse facility with a previous maximum financing amount of $310.0 million as of June 30, 2021 to a maximum financing amount of $60.0 million.

Upon the downsizing of this warehouse facility, a portion of the loans previously funded in this facility were funded via the participation agreement with Union Bank.

The Company has a private education loan warehouse facility that, as of June 30, 2021, had an aggregate maximum financing amount available of $175.0 million, an advance rate of 80 to 90 percent, liquidity provisions through February 13, 2022, and a final maturity date of February 13, 2023.

As of June 30, 2021, $140.8 million was outstanding under this warehouse facility, $34.2 million was available for future funding, and $15.0 million was advanced as equity support.

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.

3 unchanged sentences

The Company no longer originates new FFELP loans, but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist, including opportunities to purchase private education and consumer loans (or investment interests therein).

In December of 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education student loans representing approximately 445,000 borrowers.

In conjunction with the sale, the Company was selected as servicer of the portfolio.

During March 2021, approximately 261,000 borrowers were converted to the Company's servicing platform, with the remaining borrowers converted in April 2021.

In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio.

In total (during March and April 2021), the Company has invested approximately $70 million in the joint venture for an approximate 8 percent of the interest in the loans.

In addition, the Company will serve as the sponsor and administrator for loan securitizations on behalf of the purchaser group as the loans are securitized, and provide the required level of risk retention as the loans are permanently financed.

The Company plans to fund additional loan acquisitions and related investments using current cash and investments;

using its unsecured line of credit, using its Union Bank student loan participation agreement (as described below);

using its Union Bank student loan asset-backed securities participation agreement (as described below) and/or establishing similar secured borrowing facilities;

using its unsecured line of credit, Union Bank student loan participation agreement, Union Bank student loan asset-backed securities participation agreement, and third-party repurchase agreements (each as described below), and/or establishing similar secured and unsecured borrowing facilities;

using its existing warehouse facilities (as described above);

1 unchanged sentence

and continuing to access the asset-backed securities market.

Private Education Loan Investment

In December of 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education loans representing approximately 445,000 borrowers.

The Company has entered into a joint venture with other investors to acquire the loans, and under the joint venture, the Company has an approximately 8 percent interest in the loans.

In conjunction with the sale, the Company was selected as servicer of the portfolio.

During March and throughout the second quarter of 2021, the borrowers were converted to the Company's servicing platform.

The joint venture established a limited partnership that purchased the private education loans and funded such loans with a temporary warehouse facility.

As of June 30, 2021, the Company has contributed a net amount of $8.3 million into the limited partnership.

On May 20, 2021 and June 30, 2021, the joint venture completed asset-backed securitization transactions to permanently finance a total of $5.8 billion of the private education loans purchased by the joint venture.

The Company is accounting for its approximately 8 percent residual interest in these securitizations as held-to-maturity beneficial interest investments.

These investments are reflected on the Company's consolidated balance sheet as "investments." On behalf of the joint venture, the Company is the sponsor and administrator for these loan securitizations.

As sponsor, the Company is required to provide a certain level of risk retention, and has purchased bonds issued in such securitizations to satisfy this requirement.

The bonds purchased to satisfy the risk retention requirement are reflected on the Company's consolidated balance sheet as "investments" and as of June 30, 2021, the fair value of these bonds was $307.3 million.

The Company must retain these investment securities until the latest of (i) two years from the closing date of the securitization, (ii) the date the aggregate outstanding principal balance of the loans in the securitization is 33% or less of the initial loan balance, and (iii) the date the aggregate outstanding principal balance of the bonds is 33% or less of the aggregate initial outstanding principal balance of the bonds, at which time the Company can sell its investment securities (bonds) to a third-party.

The Company entered into repurchase agreements with third-parties, the proceeds of which were used to purchase a portion of the asset-backed investments, and such investments serve as collateral on the repurchase obligations.

As of June 30, 2021, $255.3 million was outstanding on the repurchase agreements.

The maturity dates on the repurchase agreements are various dates between September 24, 2021 and December 20, 2023, but are subject to early termination upon required notice provided by the Company or the applicable counterparty prior to the maturity dates.

The Company pays interest on amounts outstanding on the repurchase agreements based on LIBOR plus an applicable spread, and is also required to pay additional cash in the event the fair value of the securities subject to a repurchase agreement becomes less than the original purchase price of such securities.

Upon termination or expiration of the repurchase agreements, the Company would use cash and/or cash proceeds from its unsecured line of credit to satisfy any outstanding obligations subject to the repurchase agreements.

Union Bank Participation Agreement

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

As of March 31, 2021, $945.8

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

As of June 30, 2021, $771.6 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.

4 unchanged sentences

Asset-backed Securities Transactions

On June 30, 2021, the Company completed a FFELP asset-backed securitization totaling $797.0 million (par value).

The proceeds from this transaction was used primarily to refinance student loans included in the Company's FFELP warehouse facilities.

See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on this securitization.

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

1 unchanged sentence

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.

There were no asset-backed securitization transactions completed during the first three months of 2021.

Liquidity Impact Related to Nelnet Bank

6 unchanged sentences

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;

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 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.;

1 unchanged sentence

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

Based on the current business plan for Nelnet Bank and its strong financial condition after the first few months of operations, the Company currently believes that the initial capital contribution of $100.0 million and pledged deposit of $40.0 million should provide sufficient capital and liquidity to Nelnet Bank for the next two to three years.

Based on Nelnet Bank's business plan and current financial condition, the Company currently believes that the initial capital contribution of $100.0 million and pledged deposit of $40.0 million should provide sufficient capital and liquidity to Nelnet Bank for the next two to three years.

Liquidity Impact Related to ALLO Communications LLC

As previously disclosed, on October 1, 2020, the Company entered into various agreements with SDC, a third party global digital infrastructure investor, and ALLO, for various transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO.

After completion of the initial transactions subject to these agreements, SDC, the Company, and members of ALLO's management own approximately 48 percent, 45 percent, and 7 percent, respectively, of the outstanding voting membership interests of ALLO, and upon the receipt of regulatory approvals for the transactions on December 21, 2020 the Company deconsolidated ALLO from the Company's consolidated financial statements.

In addition, on January 19, 2021, ALLO closed on certain private debt financing facilities from unrelated third-party lenders providing for aggregate financing of up to $230.0 million.

With proceeds from this transaction, ALLO redeemed a portion of its non-voting preferred membership interests held by the Company in exchange for an aggregate redemption price payment to the Company of $100.0 million.

The agreements among the Company, SDC, and ALLO provide that they 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 April 2024, the remaining non-voting preferred membership interests of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests.

As of March 31, 2021, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $131.2 million.

After completion of the initial transactions subject to these agreements, SDC, the Company, and members of ALLO's management own approximately 48 percent, 45 percent, and 7 percent, respectively, of the outstanding voting membership interests of a holding company for ALLO, and upon the receipt of regulatory approvals for the transactions on December 21, 2020 the Company deconsolidated ALLO from the Company's consolidated financial statements.

In addition, on January 19, 2021, ALLO obtained certain private debt financing facilities from unrelated third-party lenders providing for aggregate financing of up to $230.0 million.

With proceeds from this transaction, a portion of the non-voting preferred membership interests of a holding company for ALLO held by the Company were redeemed in exchange for an aggregate redemption price payment to the Company of $100.0 million.

The agreements among the Company, SDC, and ALLO provide that they will use commercially reasonable efforts (which expressly excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause the redemption, on or before April 2024, of the remaining non-voting preferred membership interests of a holding company for ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests.

As of June 30, 2021, such outstanding preferred membership interests and accrued and unpaid preferred return held by the Company was $129.7 million and $3.6 million, respectively.

The non-voting preferred membership interests earn a preferred annual return of 6.25 percent.

If ALLO needs additional capital to support its growth in existing or new markets, the Company has the option to contribute additional capital to maintain its voting equity interest.

However, ALLO has obtained third-party debt financing to support its

current growth plans, and thus the Company currently believes additional equity contributions to ALLO are not likely in the immediate future.

However, ALLO has obtained third-party debt financing to support its current growth plans, and thus the Company currently believes additional equity contributions to ALLO are not likely in the immediate future.

Liquidity Impact Related to Hedging Activities

1 unchanged sentence

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

Based on the derivative portfolio outstanding as of March 31, 2021, 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 make variation margin payments to its third-party clearinghouse.

Based on the derivative portfolio outstanding as of June 30, 2021, 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 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 make variation margin payments to its third-party clearinghouse.

4 unchanged sentences

As discussed above, the Company has a $455.0 million unsecured line of credit with a maturity date of December 16, 2024.

As of March 31, 2021, the unsecured line of credit had no amount outstanding and $455.0 million was available for future use.

As of June 30, 2021, the unsecured line of credit had $85.0 million outstanding and $370.0 million was available for future use.

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

As of March 31, 2021, 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.

As of June 30, 2021, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use.

The secured 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.

During 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 March 31, 2021, $113.5 million of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

As of June 30, 2021, $132.1 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.

2 unchanged sentences

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 March 31, 2021, 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, 2021 are shown below.

As of June 30, 2021, 3,246,732 shares remained authorized for repurchase under the Company's stock repurchase program.

Shares may be repurchased from time to time on the open market, in private transactions (including with related parties), or otherwise, 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, 2021 and June 30, 2021 are shown below.

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

2 unchanged sentences

Quarter ended March 31, 2021 26,199 $ 2,009 76.70

On March 15, 2021, the Company paid a first quarter 2021 cash dividend on the Company's Class A and Class B common stock of $0.22 per share.

In addition, the Company's Board of Directors has declared a second quarter 2021 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.22 per share.

The second quarter cash dividend will be paid on June 14, 2021 to shareholders of record at the close of business on May 31, 2021.

Quarter ended June 30, 2021 5,368 399 74.25

Total 31,567 $ 2,408 76.28

On June 14, 2021, the Company paid a second quarter 2021 cash dividend on the Company's Class A and Class B common stock of $0.22 per share.

In addition, the Company's Board of Directors has declared a third quarter 2021 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.22 per share.

The third quarter cash dividend will be paid on September 15, 2021 to shareholders of record at the close of business on September 1, 2021.

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

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