NELNET INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and nine months ended September 30, 2022 and 2021. All dollars are in thousands, except per share amounts, unless otherwise noted.) The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company’s consolidated financial statements included in the 2021 Annual Report. Forward-looking and cautionary statements This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2021 Annual Report, the "Risk Factors" section of this report, and elsewhere in this report, and include such risks and uncertainties as: • risks and uncertainties related to the duration, ultimate severity, and continuing impacts of the coronavirus disease 2019 (“COVID-19”) pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on various activities intended to combat the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets; • risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 29 percent of the Company's revenue in 2021, risks to the Company related to the Biden-Harris Administration's student debt relief plan announced on August 24, 2022 that may significantly decrease the number of borrowers serviced and revenue earned by the Company under such contracts, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the pending and uncertain nature of the Department's procurement process, 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, consumer, and other loans, or investment interests therein, and initiatives to purchase additional FFELP, private education, consumer, and other loans, and risks from changes in levels of loan prepayment or default rates; • financing and liquidity risks, including risks of changes in the interest rate environment, such as risks from the recent increases in interest rates resulting from inflationary pressures and the transition from LIBOR to an alternative reference rate, and changes in the securitization and other financing markets for loans, including adverse changes resulting from recent market volatility resulting from rising interest rates and other economic pressures and 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; 32 • 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 government initiatives or proposals to consolidate existing FFELP loans to Federal Direct Loan Program loans, otherwise encourage or allow FFELP loans to be refinanced with Federal Direct Loan Program loans, and/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 a disclosure of confidential loan borrower and other customer information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches; • uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; • risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; • risks related to the expected benefits to the Company from its continuing investment in ALLO Holdings, LLC (referred to collectively with its subsidiary ALLO Communications LLC as "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 (and anticipated income therefrom), acquisitions, and other activities, 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 climate change, including extreme weather events and related natural disasters, which could result in increased loan portfolio credit risks and other asset and operational risks, as well as risks and uncertainties associated with efforts to address climate change; and • 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. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law. 33 OVERVIEW The Company is a diverse, innovative company with a purpose to serve others and a vision to make dreams possible. The largest operating businesses engage in loan servicing and education technology, services, and payment processing, and the Company also has a significant investment in communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify both within and outside of its historical core education-related businesses including, but not limited to, investments in early-stage and emerging growth companies, real estate, and renewable energy (solar). The Company is also actively expanding its private education, consumer, and other loan portfolios, and in November 2020 launched Nelnet Bank. GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments The Company prepares its financial statements and presents its financial results in accordance with GAAP. 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 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 GAAP net income attributable to Nelnet, Inc. $ 104,798 53,138 376,573 260,603 Realized and unrealized derivative market value adjustments (52,991) (7,260) (239,125) (44,455) Tax effect (a) 12,718 1,742 57,390 10,669 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 64,525 47,620 194,838 226,817 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 2.80 1.38 9.99 6.74 Realized and unrealized derivative market value adjustments (1.42) (0.19) (6.34) (1.15) Tax effect (a) 0.35 0.04 1.52 0.28 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 1.73 1.23 5.17 5.87 (a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate. (b) "Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that 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. The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period. The Comp any believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, 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. 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. 34 Operating Segments The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in the 2021 Annual Report. They include: • Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Services ("NDS") • Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS") • Asset Generation and Management ("AGM") • Nelnet Bank The Company earns fee-based revenue through its NDS and NBS operating segments. The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its AGM operating segment. This segment is expected to generate significant amounts of cash as the FFELP portfolio amortizes. 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. On November 2, 2020, the Company obtained final approval for federal deposit insurance from the Federal Deposit Insurance Corporation ("FDIC") and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah. Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions. On July 1, 2022, the Company purchased 80 percent of the ownership interests of GRNE Solar. See note 6 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The operating results from this acquisition are also included in Corporate. The information below provides the operating results (income (loss) before income taxes) for each reportable operating segment and Corporate and Other Activities for the three and nine months ended September 30, 2022 and 2021. See "Results of Operations" for each reportable operating segment under this Item 2 for additional detail. Three months ended September 30, 2022 2021 Certain Items Impacting Comparability (All dollar amounts below are pre-tax) NDS $ 21,914 (3,042) • The recognition of an impairment charge of $13.2 million in the third quarter of 2021 related primarily to building and building improvement assets due to an evaluation of the use of office space as a large number of employees continued to work from home as a result of the COVID-19 pandemic NBS 18,655 13,992 • The recognition of $3.7 million of interest income in the third quarter of 2022 as compared to $0.3 million in the same period of 2021 due to higher interest rates AGM 111,872 60,085 • A net gain of $53.0 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the third quarter of 2022 as compared to a net gain of $7.3 million for the same period in 2021 • An increase of $6.2 million in net interest income due to an increase in FFELP core loan spread in 2022 as compared to 2021 • A decrease of $14.3 million in net interest income due to the decrease in the average balance of FFELP loans in the third quarter of 2022 as compared to 2021 • The recognition of a $6.3 million investment loss during the third quarter of 2021 Nelnet Bank 1,055 836 Corporate (26,442) (5,003) • The recognition of a net loss of $17.6 million in the third quarter of 2022 related to the Company’s investment in ALLO, as compared to a net loss of $10.5 million for the same period in 2021 • Investment income of $10.5 million in the third quarter of 2022 as compared to $21.9 million for the same period in 2021. In 2022, the Company recognized $5.9 million in gains from the sale of real estate investments, as compared to $11.2 million in 2021. In addition, the Company recognized $5.8 million in net realized and unrealized gains from marketable securities in 2021. Income before income taxes 127,055 66,868 Income tax expense (26,586) (15,649) Net loss attributable to noncontrolling interests 4,329 1,919 Net income $ 104,798 53,138 35 Nine months ended September 30, 2022 2021 Certain Items Impacting Comparability (All dollar amounts below are pre-tax) NDS $ 47,494 28,554 • The recognition of an impairment charge of $13.2 million in the third quarter of 2021 related primarily to building and building improvement assets due to an evaluation of the use of office space as a large number of employees continued to work from home as a result of the COVID-19 pandemic NBS 66,454 62,199 • The recognition of $4.9 million of interest income in the first three quarters of 2022 as compared to $0.8 million in the same period of 2021 due to higher interest rates AGM 424,647 280,613 • A net gain of $239.1 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the first three quarters of 2022 as compared to a net gain of $44.5 million for the same period in 2021 • A decrease of $23.8 million 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 recognition of provision for loan losses of $17.2 million in the first three quarters of 2022 as compared to negative provision of $11.2 million for the same period in 2021 • The recognition of $18.7 million of gains from the sale of loans during the first three quarters of 2021 compared to $5.6 million for the same period in 2022 • An increase of $13.5 million in net interest income due to an increase in FFELP core loan spread in 2022 as compared to 2021 • A decrease of $32.4 million in net interest income due to the decrease in the average balance of FFELP loans in the first three quarters of 2022 as compared to 2021 Nelnet Bank 2,489 (686) Corporate (65,061) (36,796) • The recognition of a net loss of $47.6 million for the first three quarters of 2022 related to the Company’s investment in ALLO, as compared to a net loss of $31.6 million for the same period in 2021 • Investment income of $37.2 million for the first three quarters of 2022 as compared to $43.7 million for the same period in 2021. Investment income in 2022 included $13.5 million in gains from the sale of real estate investments and a $15.2 million gain as a result of the revaluation of the Company's previously held 50 percent ownership interests in NextGen. In 2021, the Company recognized $22.2 million from the sale of real estate investments and $6.3 million in net realized and unrealized gains from marketable securities. • The recognition of an impairment charge of $6.3 million in the second quarter of 2022 related primarily to a venture capital investment and certain real estate leases (as the Company continues to downsize its facility footprint as a result of associates working from home) Income before income taxes 476,023 333,883 Income tax expense (107,765) (76,747) Net loss attributable to noncontrolling interests 8,315 3,467 Net income $ 376,573 260,603 Recent Developments On August 24, 2022, the Department issued a bulletin titled “Biden-Harris Administration Announces Final Student Loan Pause Extension Through December 31 and Targeted Debt Cancellation to Smooth Transition to Repayment” (the “August 24, 2022 Bulletin”). The August 24, 2022 Bulletin extends the CARES Act repayment pause on Department held student loans through December 31, 2022 and indicates the Department will provide targeted student debt cancellation to borrowers with loans held by the Department, and that borrowers whose annual income for either 2020 or 2021 was under $125,000 (for single or married, filing separately) or under $250,000 (for married couples, filing jointly or heads of household) will be eligible for otherwise unconditional loan cancellation in amounts of up to $20,000 for eligible borrowers who received a Pell Grant, or of up to $10,000 for eligible borrowers who did not receive a Pell Grant. Following the initial announcement, the Department provided more specific publicly available guidance on the student debt relief plan through the website of the Department’s Office of Federal Student Aid (“FSA”) on September 29, 2022, which guidance was subsequently revised and published in the Federal Register on October 12, 2022. As of November 7, 2022, the following guidance on loan forgiveness was provided on the FSA website (information on the FSA website is not incorporated by reference in this report): • All loans eligible for the CARES Act student loan payment pause are also eligible for debt relief, including loans held by the Department and guaranty agencies 36 • As of September 29, 2022, borrowers with federal student loans not held by the Department cannot obtain one-time debt relief by consolidating those loans into Federal Direct Loan Program loans by the Department • Borrowers with FFEL Program loans not held by the Department and who applied to consolidate into the Federal Direct Loan Program prior to September 29, 2022, are eligible for one-time debt relief through the Federal Direct Loan Program, subject to meeting the other terms and conditions • The Department has indicated it is assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by the Department, including FFEL Program loans On October 21, 2022, the U.S. Court of Appeals for the Eighth Circuit issued a temporary administrative stay of implementation of the Department's student debt relief plan in response to a legal challenge that was initiated by other parties (not the Company). In view of this recent announcement and guidance by the Department, the Company does not currently expect there to be significant FFELP loan consolidation activity specifically as a result of the one-time student debt relief plan announced in the August 24, 2022 Bulletin. However, since late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of the continued extension of the CARES Act payment pause on Department held loans and the initiatives offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. Sustained higher FFELP loan prepayments will impact net interest income in the Company’s AGM operating segment, FFELP servicing revenue in the Company’s LSS operating segment, investment advisory services revenue earned by the Company’s SEC-registered investment advisor subsidiary (Whitetail Rock Capital Management, LLC) on FFELP loan asset-backed securities under management, and interest income earned on the Company’s FFELP loan asset-backed securities investments in future periods. In addition, as of September 30, 2022, the Company was servicing 15.7 million borrowers under its government servicing contracts. The Company cannot currently estimate how many borrowers meet the eligibility requirements and other terms and conditions for one-time debt relief under the August 24, 2022 Bulletin and subsequent guidance provided by the Department. However, revenue earned by the Company under its contracts will be negatively impacted if the Department’s student debt relief plan or other broad based loan forgiveness is implemented. See Part II, Item 1A, “Risk Factors - Our largest fee-based customer, the Department of Education, represented 29 percent of our revenue in 2021. Failure to extend the Department contracts or obtain new Department contracts in the Department's current or other procurement processes, our inability to consistently surpass competitor performance metrics, unfavorable contract modifications or interpretations, or the loss of servicing borrower volume due to broad based debt cancellation by the Department, could significantly lower servicing revenue and hinder future service opportunities.” and “- Our loan portfolio is subject to prepayment risk, which could reduce the expected cash flows and earnings on our portfolio.” in this report for additional information. Impact of COVID-19 The COVID-19 pandemic has had a significant impact on the economic environment globally and in the U.S. There is uncertainty as to the length and breadth of the impact to the U.S. economy and, consequently, on the Company. As a related matter, on August 24, 2022, the Department announced that the suspension under the CARES Act on federal student loan payments and interest accruals on all loans owned by the Department was extended through December 31, 2022. For a further overview discussion of the impact of the COVID-19 pandemic on the Company, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Recent Transactions/Developments - COVID-19" in the 2021 Annual Report. In addition, for an additional discussion regarding the risks associated with COVID-19, see Part I, Item 1A. "Risk Factors - Operations - The COVID-19 pandemic has adversely impacted our results of operations, and either directly or indirectly through impacts on economic conditions or government policy could adversely impact our results of operations, businesses, financial condition, and/or cash flows going forward." in the 2021 Annual Report. 37 CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's consolidated operating results for the three and nine months ended September 30, 2022 compared to the same periods in 2021 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. The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt. The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 10 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis. Three months ended Nine months ended September 30, September 30, 2022 2021 2022 2021 Additional information Loan interest $ 176,244 124,096 422,327 370,219 Increase was due to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans and in gross fixed rate floor income. Investment interest 26,889 12,558 57,589 29,122 Includes income from interest-earning deposits and investments and funds in asset-backed securitizations. Increase was due to an increase in interest earning investments and an increase in interest rates in 2022 as compared to 2021. Total interest income 203,133 136,654 479,916 399,341 Interest expense 126,625 50,176 248,347 127,939 Increase was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. In addition, during the first quarter of 2021, the Company reduced interest expense by $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. Net interest income 76,508 86,478 231,569 271,402 Less provision (negative provision) for loan losses 9,665 5,827 18,640 (10,847) Represents the current period provision (negative provision) to reflect the lifetime expected credit losses related to the Company's loan portfolio. See note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report for the activity in the Company's allowance for loan losses. Net interest income after provision for loan losses 66,843 80,651 212,929 282,249 Other income/expense: LSS revenue 134,197 112,351 395,438 335,961 See LSS operating segment - results of operations. ETS&PP revenue 106,894 85,324 310,211 257,284 See ETS&PP operating segment - results of operations. Solar construction revenue 9,358 — 9,358 — On July 1, 2022, the Company acquired 80 percent of the ownership interests of GRNE Solar. GRNE Solar designs and installs residential, commercial, and utility-scale solar systems. The acquisition diversifies the Company's position in the renewable energy space to include solar construction. Other 2,225 11,867 24,750 30,183 See table below for the components of "other." Gain on sale of loans 2,627 3,444 5,616 18,715 The Company sold $18.1 million (par value) and $28.9 million (par value) of consumer loans in January 2022 and July 2022, respectively, and recognized a gain of $3.0 million and $2.6 million, respectively. The Company also sold $77.4 million (par value) and $18.4 million (par value) of consumer loans in May 2021 and September 2021, respectively, and recognized gains of $15.3 million and $3.2 million, respectively. Impairment expense and provision for beneficial interests, net 121 (14,159) (6,163) (12,223) During the third quarter of 2021, the Company evaluated the use of office space as a large number of employees continued to work from home due to COVID-19. As a result of this evaluation, the Company recorded an impairment charge during the third quarter of 2021 of $14.2 million. The impairment charge related primarily to building and operating lease assets. During the second quarter of 2022, the Company recorded impairment expense of $6.3 million related primarily to a venture capital investment and certain real estate leases. Derivative settlements, net 10,271 (5,909) 12,085 (15,587) 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 AGM operating segment - results of operations. Derivative market value adjustments, net 52,991 7,260 239,125 44,455 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 such swaps. Total other income/expense 318,684 200,178 990,420 658,788 38 Cost of services: Cost to provide education technology, services, and payment processing services 42,676 31,335 109,073 80,063 Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment. Increase in 2022 compared to 2021 was primarily due to additional instructional services costs. See ETS&PP operating segment - results of operations. Cost to provide solar construction services 5,968 — 5,968 — As noted above, the Company acquired GRNE Solar on July 1, 2022. These amounts represent direct costs related to GRNE providing solar construction services. Total cost of services 48,644 31,335 115,041 80,063 Operating expenses: Salaries and benefits 147,198 128,592 438,010 363,351 Increase was due to an increase in headcount in the (i) LSS operating segment as the Company has been required to prepare for the resumption of federal student loan payments upon the expiration of the CARES Act borrower relief provisions, which have been extended several times; and (ii) ETS&PP operating segment to support the growth of its customer base and the investment in the development of new technologies. Depreciation and amortization 18,772 15,710 53,978 56,129 Includes depreciation of property and equipment and the amortization of intangibles from prior business acquisitions. Other expenses 43,858 38,324 120,297 107,611 Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs. Increase was due to (i) an increase in expenses in the LSS operating segment due to growth of borrowers under the government servicing contracts; and (ii) an increase in expenses in the ETS&PP operating segment due to higher costs for consulting, professional fees, and technology services resulting from investments in new technologies, and an increase in costs for travel and in-person hosted conferences that subsided in 2021 due to the COVID-19 pandemic. Total operating expenses 209,828 182,626 612,285 527,091 Income before income taxes 127,055 66,868 476,023 333,883 Income tax expense 26,586 15,649 107,765 76,747 The effective tax rate was 20.2% and 22.7% for the three months ended September 30, 2022 and 2021, respectively, and 22.2% and 22.7% for the nine months ended September 30, 2022 and 2021, respectively. Net income 100,469 51,219 368,258 257,136 Net loss attributable to noncontrolling interests 4,329 1,919 8,315 3,467 Amounts for noncontrolling interests primarily reflect the net income/loss attributable to the holders of minority membership interests in Whitetail Rock Capital Management, LLC and multiple solar entities. Net income attributable to Nelnet, Inc. $ 104,798 53,138 376,573 260,603 The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of income. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Income/gains from investments, net (a) $ 10,701 16,050 40,685 40,141 Borrower late fee income (b) 2,824 514 7,693 1,698 ALLO preferred return (c) 2,164 2,043 6,420 6,384 Administration/sponsor fee income (d) 1,920 1,670 6,055 1,670 Investment advisory services (e) 1,612 2,400 4,375 6,242 Loss from ALLO voting membership interest investment (f) (17,562) (10,495) (47,633) (31,620) Loss from solar investments (g) (4,216) (3,393) (7,100) (7,375) Other 4,782 3,078 14,255 13,043 Other income $ 2,225 11,867 24,750 30,183 (a) The Company recognized net income/gains from its real estate and venture capital investment portfolios of $9.7 million during both the three months ended September 30, 2022 and 2021, respectively, and $26.6 million and $32.3 million during the nine months ended September 30, 2022 and 2021, respectively. The majority of these gains were from the sale of investments, and thus are not recurring. In addition, during the second quarter of 2022, the Company recognized a $15.2 million (pre-tax) gain as a result of the revaluation of its previously held 50 percent ownership interests in NextGen (previously accounted for under the equity method) as a result of the Company purchasing an additional 30 percent ownership interests in NextGen on April 30, 2022. The remaining amount of income/gains from investments recognized by the Company and included in the table above relate to gains/losses from sales of debt and equity securities and the remeasurement of certain equity securities measured at fair value. 39 (b) Represents borrower late fees earned primarily by the AGM operating segment. The increase in borrower late fees for the three and nine months ended September 30, 2022 as compared to the same periods in 2021 was due to the Company suspending substantially all borrower late fees effective March 13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic. The Company began to recognize borrower late fees again in May 2021 (for private education loans) and October 2021 (for federally insured student loans). (c) 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 September 30, 2022 and 2021, the amount of preferred membership interests held by the Company was $137.3 million and $129.7 million, respectively, which earns a preferred annual return of 6.25 percent. (d) Represents fee income earned by the AGM operating segment as administrator and sponsor for the securitizations completed during 2021 by the joint venture to purchase and securitize private education loans sold by Wells Fargo. (e) 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 10 basis points to 25 basis points on the majority of the outstanding balance of asset-backed securities under management and a share 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 September 30, 2022, the outstanding balance of asset-backed securities under management subject to these arrangements was $3.0 billion, of which all of such securities were FFELP student loan asset-backed securities. In addition, WRCM earns annual management fees of five basis points for Nelnet stock under management (with the Nelnet stock primarily shares of Class B common stock held in various trust estates). (f) Represents the Company's share of loss on its voting membership interests in ALLO. Assuming ALLO continues its planned growth in existing and new communities, it will continue to invest substantial amounts in property and equipment to build the network and connect customers. The resulting recognition of depreciation and development costs could result in continuing net operating losses by ALLO under GAAP. Applying the Hypothetical Liquidation at Book Value ("HLBV") method of accounting, the Company will continue to recognize a significant portion of ALLO’s anticipated losses over the next several years. (g) Represents the Company's share of income or loss from solar investments under 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. Losses from solar investments include losses attributable to third-party minority interest investors of $4.1 million and $2.1 million for the three months ended September 30, 2022 and 2021, respectively, and $8.0 million and $4.0 million for the nine months ended September 30, 2022 and 2021, respectively, that are included in "net loss attributable to noncontrolling interests" in the consolidated statements of income. 40 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Servicing Volumes As of December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 Servicing volume (dollars in millions): Government $ 443,248 453,681 452,450 461,054 478,402 507,653 542,398 545,546 FFELP 30,763 30,084 29,361 28,244 26,916 25,646 24,224 22,412 Private and consumer 16,226 21,397 24,758 24,229 23,702 23,433 22,838 22,461 Total $ 490,237 505,162 506,569 513,527 529,020 556,732 589,460 590,419 Number of servicing borrowers: Government 13,251,930 13,301,364 13,253,051 13,570,056 14,196,520 14,727,860 15,426,607 15,657,942 FFELP 1,300,677 1,233,461 1,198,863 1,150,214 1,092,066 1,034,913 977,785 910,188 Private and consumer 636,136 882,477 1,039,537 1,097,252 1,065,439 1,030,863 998,454 979,816 Total 15,188,743 15,417,302 15,491,451 15,817,522 16,354,025 16,793,636 17,402,846 17,547,946 Number of remote hosted borrowers: 6,555,841 4,307,342 4,338,570 4,548,541 4,799,368 5,487,943 5,738,381 6,025,377 Government Loan Servicing The Company's student loan servicing contracts with the Department are scheduled to expire on December 14, 2023. In 2017, the Department initiated a contract procurement process referred to as the Next Generation Financial Services Environment for a new framework for the servicing of all student loans owned by the Department. The Consolidated Appropriations Act, 2021 contains provisions directing certain aspects of the process, including that any new federal student loan servicing environment is required to provide for the participation of multiple student loan servicers and the allocation of borrower accounts to eligible student loan servicers based on performance. In the second quarter of 2022, the Department released a solicitation entitled Unified Servicing and Data Solution ("USDS") for the new servicing framework. The Company responded to the USDS solicitation. The Company cannot predict the timing, nature, or ultimate outcome of this or any other contract procurement process by the Department. In July 2021, the Pennsylvania Higher Education Assistance Agency ("PHEAA"), a servicer for the Department, announced that it will exit the federal student loan servicing business. All applicable student loans serviced for the Department by PHEAA will be transferred to successor servicers by December 2022. At the time of this announcement, PHEAA serviced approximately 8.5 million borrowers under its contract. As of December 31, 2021, March 31, 2022, June 30, 2022, and September 30, 2022, approximately 603,000, 1,175,000, 1,905,000, and 1,909,000 PHEAA borrowers, respectively, have been transitioned to the Company's platform. In addition, over this same time period, PHEAA borrowers were transferred to other servicers that the Company provides its servicing system (remote hosted servicing customers). This has increased the number of remote hosted borrowers as reflected in the table above. Under the CARES Act, beginning in March 2020, federal student loan payments and interest accruals were suspended for all borrowers that had loans owned by the Department. As a result of the CARES Act, the Company receives less servicing revenue per borrower from the Department based on the borrower forbearance status than what was earned on such accounts prior to these provisions. On April 6, 2022, the Department extended the student loans payment pause under the CARES Act from May 1, 2022 to August 31, 2022, and on August 24, 2022, the Department extended such payment pause from August 31, 2022 to December 31, 2022. Prior to the April 2022 extension (during the fourth quarter of 2021 and first quarter of 2022), the Company earned additional revenue from the Department based on incremental work, including outbound engagement, being performed by the Company to support the anticipated Department borrowers coming out of forbearance. Effective May 1, 2022, the Department increased the monthly per borrower CARES Act forbearance rate paid to its servicers to compensate them for supplemental outreach to certain borrowers and to support the transition of borrowers back to repayment. Once borrowers transition back to repayment, the Company anticipates revenue per borrower from the Department will increase to pre-CARES Act levels. Department of Education Loan Forgiveness The Department's August 24, 2022 Bulletin announcing a broad based student debt relief plan indicates the Department will provide targeted student debt cancellation to borrowers with loans held by the Department, and that borrowers whose annual income for either 2020 or 2021 was under $125,000 (for single or married, filing separately) or under $250,000 (for married 41 couples, filing jointly or heads of household) will be eligible for otherwise unconditional loan cancellation in amounts of up to $20,000 for eligible borrowers who received a Pell Grant, or of up to $10,000 for eligible borrowers who did not receive a Pell Grant. On October 21, 2022, the U.S. Court of Appeals for the Eighth Circuit issued a temporary administrative stay of implementation of the Department's student debt relief plan in response to a legal challenge that was initiated by other parties (not the Company). The Company cannot currently estimate how many borrowers meet the eligibility requirements and other terms and conditions for one-time debt relief under the Department's announcement. If there was a broad $10,000 or $20,000 per borrower forgiveness on all government owned loans, the Company estimates it would decrease the number of borrowers serviced (based on the borrower loan information as of September 30, 2022) by approximately 4.4 million borrowers and 7.5 million borrowers, respectively. The actual impact to the number of borrowers serviced is expected to be less than these amounts due to annual income ceilings for borrowers to qualify for forgiveness and the impact of whether a Pell Grant was received on the amount of forgiveness for a borrower. Revenue earned under the current Department servicing contracts, and software services revenue earned in providing remote hosted services to other Department servicers, will decrease in future periods if the Department's student debt relief plan or other broad based loan forgiveness is implemented. Private Education Loan Servicing In December 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 vast majority of the remaining borrowers converted in the second quarter of 2021. Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Net interest income $ 831 7 1,100 25 Increase was due to higher interest rates in 2022 as compared to 2021. Loan servicing and systems revenue 134,197 112,351 395,438 335,961 See table below for additional information. Intersegment servicing revenue 8,281 8,621 25,142 25,369 Represents revenue earned by the LSS operating segment from servicing loans for the AGM and Nelnet Bank operating segments. Decrease in 2022 compared to 2021 was due to the continued amortization of AGM's FFELP portfolio. Decrease was partially offset by ending COVID-19 pandemic borrower relief policies, which increased servicing activities performed for AGM. FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. Other income 596 727 1,946 2,541 Represents revenue earned from providing administrative support and marketing services. Impairment expense — (13,243) — (13,243) During the third quarter of 2021, the Company evaluated use of office space as a large number of employees continued to work from home due to COVID-19. As a result of this evaluation, the Company recorded a non-cash impairment charge to certain building and building improvement assets during the third quarter of 2021. Total other income 143,074 108,456 422,526 350,628 Salaries and benefits 82,067 75,305 257,259 210,151 Increase in 2022 compared to 2021 was due to the Company hiring contact center operations and support associates to prepare for the resumption of federal student loan payments and other activities after the CARES Act suspension expires. The CARES Act suspension was expected to expire on January 31, 2022 and has been extended three additional times to May 1, 2022, August 31, 2022, and again to December 31, 2022. Depreciation and amortization 5,784 4,245 16,056 20,411 Includes amortization of intangible assets from the Great Lakes acquisition in February 2018 of which the majority of such assets became fully amortized as of June 30, 2021. Amortization of intangible assets for the nine months ended September 30, 2022 and 2021 was $1.1 million and $11.6 million, respectively. Excluding amortization of intangible assets, the increase in 2022 compared to 2021 was due to scaling of the Company's servicing platform for the PHEAA loan volume transferred to its platform. Other expenses 16,654 12,738 46,375 39,296 Increase in 2022 compared to 2021 was due to additional costs associated with the growth of borrowers under the government servicing contracts. Intersegment expenses 17,486 19,217 56,442 52,241 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Total operating expenses 121,991 111,505 376,132 322,099 Income (loss) before income taxes 21,914 (3,042) 47,494 28,554 Income tax (expense) benefit (5,259) 730 (11,399) (6,853) Represents income tax (expense) benefit at an effective tax rate of 24%. Net income (loss) $ 16,655 (2,312) 36,095 21,701 42 GAAP before tax operating margin 15.3 % (2.5) % 11.2 % 7.9 % Before tax operating margin, excluding impairment and amortization expense, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes (excluding impairment and amortization expense) divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income revenue. 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 provides additional information to facilitate an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin, excluding impairment and amortization expense, decreased in the nine months ended September 30, 2022 compared to the same period in 2021 due to increased operating expenses, primarily salaries and benefits, as the Company prepared for a January 31, 2022 expiration of the federal student loan payment pause under the CARES Act, which has been extended three additional times to May 1, 2022, August 31, 2022, and again to December 31, 2022. Impairment expense — 10.9 % — 3.6 % Amortization expense 0.3 % 0.5 % 0.3 % 3.2 % Non-GAAP before tax operating margin, excluding impairment and amortization expense 15.6 % 8.9 % 11.5 % 14.7 % Loan servicing and systems revenue Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Government servicing $ 104,428 84,084 312,368 241,497 Represents revenue from the Company's Department servicing contracts. Increase in 2022 compared to 2021 was due to (i) an increase in the number of borrowers serviced, including PHEAA borrowers transferred to the Company's servicing platform; (ii) a per borrower rate increase beginning September 1, 2021 to reflect the increase in the cost of labor (Employment Cost Index) per the provisions of the contract; and (iii) a CARES Act forbearance rate increase effective May 1, 2022. Increase in the nine months ended September 30, 2022 compared to the same period in 2021 was also due to (i) the recognition of $9.1 million of revenue in the first quarter of 2022 for incremental work related primarily to CARES Act forbearance exit outreach activities to borrowers; and (ii) the recognition of $10.5 million of revenue in the first quarter of 2022 related to the discharge of borrowers under the Total and Permanent Disability ("TPD") discharge program. The Company earns revenue per each borrower that satisfies the requirements for their loan to be discharged under the TPD discharge program. Private education and consumer loan servicing 12,198 13,198 37,194 34,563 Increase for the nine months ended September 30, 2022 compared to the same period in 2021 was due to the addition of the former Wells Fargo private education loan 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 2022 decreased compared to 2021. The decrease in revenue was due to a decrease in servicing volume and client requested enhanced delinquency services. FFELP servicing 4,127 4,557 12,386 13,930 Decrease in 2022 compared to 2021 was due to a decrease in the number of borrowers serviced. Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off. Since late 2021, the Company has experienced accelerated run-off of its FFELP servicing portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of the continued extension of borrower relief under the CARES Act and an initiative offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. Software services 8,229 6,952 23,536 22,779 Increase in 2022 compared to 2021 is due to an increase in the number of remote hosted servicing borrowers primarily from the transfer of PHEAA borrowers to these servicing customers. This increase was partially offset during the nine months ended September 30, 2022 compared to the same period in 2021 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, expiring on January 31, 2021. Outsourced services and other 5,215 3,560 9,954 23,192 The majority of this revenue relates to providing contact center and back office operational outsourcing services. In 2021, these services included assisting state agencies with COVID-19 specific activities. Revenue from providing COVID-19 related services to state agencies was $1.3 million and $16.3 million during the three and nine months ended September 30, 2021. Excluding COVID-19 specific activities, outsourced services revenue has increased in 2022 as compared to 2021 due to additional outsourced opportunities, including assisting existing Department servicers as they wind down their operations. Loan servicing and systems revenue $ 134,197 112,351 395,438 335,961 43 EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS As discussed further in the Company's 2021 Annual Report, this segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. 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. Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Interest income $ 3,707 344 4,920 818 Represents interest income on tuition funds held in custody for schools. Increase was due to higher interest rates in 2022 as compared to 2021. Education technology, services, and payment processing revenue 106,894 85,324 310,211 257,284 See table below for additional information. Intersegment revenue 8 3 16 9 Other — 13 — 13 Total other income 106,902 85,340 310,227 257,306 Cost of services 42,676 31,335 109,073 80,063 See table below for additional information. Salaries and benefits 34,950 29,119 98,356 82,154 Increase in 2022 compared to 2021 was due to an increase in headcount to support the growth of the customer base, and the investment in the development of new technologies. Depreciation and amortization 2,532 2,762 7,544 8,789 Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.2 million and $2.6 million for the three months ended September 30, 2022 and 2021, respectively, and $6.8 million and $8.3 million for the nine months ended September 30, 2022 and 2021, respectively. Amortization of intangible assets is expected to increase in future periods as a result of the recent business acquisition of NextGen. See note 6 of the notes to the consolidated financial statements included under Part I, Item 1 of this report. Other expenses 7,034 4,804 19,549 14,063 Increase was due to higher costs for consulting, professional fees, and technology services resulting from investments in new technologies. Increase was also due to an increase in costs for travel and in-person hosted conferences that subsided in 2021 due to the COVID pandemic. Intersegment expenses, net 4,762 3,672 14,171 10,856 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Total operating expenses 49,278 40,357 139,620 115,862 Income before income taxes 18,655 13,992 66,454 62,199 Income tax expense (4,475) (3,358) (15,947) (14,928) Represents income tax expense at an effective tax rate of 24%. Net income 14,180 10,634 50,507 47,271 Net income attributable to noncontrolling interests (61) — (8) — Amounts for noncontrolling interests reflect the net income attributable to the holders of minority membership interests in NextGen, of which the Company became the majority owner on April 30, 2022. See note 6 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Net income attributable to Nelnet, Inc. $ 14,119 10,634 50,499 47,271 44 Education technology, services, and payment processing revenue The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Tuition payment plan services $ 25,779 23,618 84,131 79,706 Revenue increased for the three and nine months ended September 30, 2022 as compared to the same periods in 2021 due to a higher number of payment plans in the K-12 market. In addition, revenue for the three months ended September 30, 2022 increased compared to the same period in 2021 due to a higher number of payment plans for institutions of higher education. Payment processing 47,957 39,852 113,996 97,898 Payment volumes in 2022 increased as compared to 2021 for both the K-12 and higher education markets due to new customers and an increase in volume from existing customers. Education technology and services 32,548 21,295 110,755 78,752 Increase in 2022 compared to 2021 was due to an increase in revenues from the Company’s school information system software, enrollment and communication products, revenue from the NextGen acquisition, and FACTS Education Solutions instructional and professional development services. FACTS Education Solutions instructional services revenue was the largest component of this increase, driven by the Emergency Assistance to Non-Public Schools (“EANS”) program which provides funds to non-public schools through September 2024 to address the impact the COVID-19 pandemic has had or continues to have on school students and teachers. Other 610 559 1,329 928 Education technology, services, and payment processing revenue 106,894 85,324 310,211 257,284 Cost of services 42,676 31,335 109,073 80,063 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 the primary driver of the increase in 2022 compared to 2021 due to the increase in instructional services resulting from the EANS program as noted for Education technology and services revenue above. Net revenue $ 64,218 53,989 201,138 177,221 Before tax operating margin 23.3 % 25.3 % 30.6% 34.6% Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the ETS&PP segment is calculated as income before income taxes less interest income divided by net revenue. 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 decrease in margin for 2022 as compared to 2021 was due to investments in (i) the development of new services and technologies; and (ii) superior customer experiences to align with the Company’s strategies to grow, retain, and diversify revenues. 45 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of September 30, 2022, the AGM operating segment had a $14.8 billion loan portfolio, consisting primarily of federally insured loans. For a summary of the Company’s loan portfolio as of September 30, 2022 and December 31, 2021, 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 in the AGM operating segment: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Beginning balance $ 15,855,137 19,331,725 17,441,790 19,559,108 Loan acquisitions: Federally insured student loans 896 70,844 54,845 833,313 Private education loans 667 1,680 8,177 88,131 Consumer and other loans 120,465 20,939 256,998 61,319 Total loan acquisitions 122,028 93,463 320,020 982,763 Repayments, claims, capitalized interest, participations, and other, net (385,312) (818,554) (1,310,913) (1,415,249) Loans lost to external parties (768,923) (145,270) (1,609,728) (587,841) Loans sold (28,915) (23,670) (47,154) (101,087) Ending balance $ 14,794,015 18,437,694 14,794,015 18,437,694 The Company has also purchased partial ownership in certain private education, consumer, and federally insured student loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "investments and notes receivable" in the Company's consolidated financial statements. As of the latest remittance reports filed by the various trusts prior to or as of September 30, 2022, the Company’s ownership correlates to approximately $630 million, $150 million, and $420 million of private education, consumer, and federally insured student loans, respectively, included in these securitizations. The loans held in these securitizations are not included in the above table. Since late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of the continued extension of the CARES Act payment pause on Department held loans and the initiatives offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. Allowance for Loan Losses and Loan Delinquencies For a summary of the allowance as a percentage of the ending balance for each of AGM's loan portfolios as of September 30, 2022 and December 31, 2021, the activity in AGM's allowance for loan losses for the three and nine months ended September 30, 2022 and 2021, and a summary of AGM's loan status and delinquency amounts as of September 30, 2022, December 31, 2021, and September 30, 2021, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 46 Loan Spread Analysis The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Variable loan yield, gross 5.05 % 2.61 % 3.76 % 2.65 % Consolidation rebate fees (0.84) (0.85) (0.85) (0.84) Discount accretion, net of premium and deferred origination costs amortization 0.02 0.03 0.03 0.01 Variable loan yield, net 4.23 1.79 2.94 1.82 Loan cost of funds - interest expense (a) (b) (3.11) (0.99) (1.95) (1.03) Loan cost of funds - derivative settlements (c) (d) (0.03) (0.02) 0.00 (0.01) Variable loan spread 1.09 0.78 0.99 0.78 Fixed rate floor income, gross 0.19 0.75 0.45 0.75 Fixed rate floor income - derivative settlements (c) (e) 0.30 (0.11) 0.10 (0.10) Fixed rate floor income, net of settlements on derivatives 0.49 0.64 0.55 0.65 Core loan spread 1.58 % 1.42 % 1.54 % 1.43 % Average balance of AGM's loans $ 15,466,505 19,084,320 16,371,092 19,178,788 Average balance of AGM's debt outstanding 15,060,823 18,863,730 15,905,170 18,890,832 (a) In the first quarter of 2021, the Company reversed a historical accrued interest liability of $23.8 million 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 reduction of this liability is reflected in (a reduction of) "interest expense 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 from the table above. (b) In the third quarter of 2021, the Company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of $1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense was excluded from the table above. (c) 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 (loan spread) as presented in this table. 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. 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. 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 2022 and 2021 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 Core loan spread 1.58 % 1.42 % 1.54 % 1.43 % Derivative settlements (1:3 basis swaps) 0.03 0.02 (0.00 ) 0.01 Derivative settlements (fixed rate floor income) (0.30) 0.11 (0.10) 0.10 Loan spread 1.31 % 1.55 % 1.44 % 1.54 % (d) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps. (e) Derivative settlements consist of net settlements received (paid) related to the Company’s floor income interest rate swaps. 47 A trend analysis of AGM's core and variable loan spreads is summarized below. The interest earned on a large portion of AGM's FFELP student loan assets is indexed to the one-month LIBOR rate. AGM funds a portion of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread. The table above (the right axis) shows the difference between AGM's liability base rate and the one-month LIBOR rate by quarter. Variable loan spread increased during the three and nine months ended September 30, 2022 compared to the same periods in 2021 due to a significant increase in short-term interest rates during each of the first three quarters of 2022. In an increasing interest rate environment, student loan spread increases 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 - AGM Operating Segment,” which provides additional detail on 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 Fixed rate floor income, gross $ 7,585 35,850 54,870 108,029 Derivative settlements (a) 11,356 (5,209) 11,843 (14,648) Fixed rate floor income, net $ 18,941 30,641 66,713 93,381 Fixed rate floor income contribution to spread, net 0.49 % 0.64 % 0.55 % 0.65 % (a) Derivative settlements consist of net settlements received (paid) related to the Company's derivatives used to hedge student loans earning fixed rate floor income. The decrease in gross fixed rate floor income for the three and nine months ended September 30, 2022 compared to the same periods in 2021 was due to higher interest rates in 2022 as compared to 2021. Subsequent to September 30, 2022 (on November 2, 2022), the Federal Reserve again increased interest rates, and it is currently anticipated that interest rates may continue to rise 48 as a result of inflationary pressures in the U.S. economy; increases in interest rates will reduce the amount of gross fixed rate floor income the Company is currently receiving. The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge loans earning fixed rate floor income. The increase in net derivative settlements received by the Company during the three and nine months ended September 30, 2022, as compared to net derivative settlements paid during the same periods in 2021, was due to an increase in interest rates, partially offset by a decrease in the notional amount of derivatives outstanding. 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 As of September 30, 2022, the interest earned on a principal amount of $13.3 billion of AGM's FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $13.1 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. The market transition away from the 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 2021 Annual Report for additional information. On March 15, 2022, the President signed into law, as part of the Consolidated Appropriations Act, 2022, the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Act"), which provides a framework for addressing the discontinuation of LIBOR under federal law. The LIBOR Act provides a statutory mechanism to automatically replace LIBOR with a benchmark rate based on the Secured Overnight Financing Rate ("SOFR"), including any applicable tenor adjustment, for certain contracts that reference LIBOR and do not contain sufficient fallback provisions. Parties remain free to agree on a different benchmark replacement rate, and the Company has worked and will continue to work with its asset-backed securitization investors to amend transaction documents to address the discontinuation of LIBOR. On July 19, 2022, the Federal Reserve issued a notice of proposed rulemaking for proposed regulations to implement the LIBOR Act, as required by its terms. The LIBOR Act also amends the Higher Education Act to substitute the current special allowance payment rate-setting mechanism for FFELP loans from the one-month LIBOR to the 30-day average SOFR in effect for each of the days in an applicable quarter, adjusted daily by adding a tenor spread adjustment. Transition of the rate-setting mechanism for special allowance payments from LIBOR to SOFR is expected to occur prior to June 30, 2023. 49 Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Net interest income after provision for loan losses $ 53,708 77,179 189,028 275,092 See table below for additional analysis. Other income (expense) 4,627 (7,275) 16,270 (4,514) Other income includes primarily borrower late fees, income from providing administration activities for third-parties, and income from AGM's investment in a joint venture. Borrower late fees for the three months ended September 30, 2022 and 2021 were $2.8 million and $0.5 million, respectively, and for the nine months ended September 30, 2022 and 2021 were $7.7 million and $1.7 million, respectively. The Company suspended borrower late fees in March 2020 to provide borrowers relief as a result of the COVID-19 pandemic. The Company began to recognize borrower late fees again in May 2021 (for private education loans) and October 2021 (for federally insured student loans). The Company recognized revenue of $1.9 million and $1.7 million for the three months ended September 30, 2022 and 2021, respectively, and $6.1 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively, as administrator and sponsor for the securitizations completed during 2021 by the joint venture to purchase and securitize private education loans sold by Wells Fargo. The Company also recognized losses of $0.3 million and $6.3 million for the three months ended September 30, 2022 and 2021, respectively, and income of $1.3 million and a loss of $5.0 million for the nine months ended September 30, 2022 and 2021, respectively, related to its investment in the joint venture. Gain on sale of loans 2,627 3,444 5,616 18,715 The Company sold $18.1 million (par value) and $28.9 million (par value) of consumer loans in January 2022 and July 2022, respectively, and recognized a gain of $3.0 million and $2.6 million, respectively. The Company also sold $77.4 million (par value) and $18.4 million (par value) of consumer loans in May 2021 and September 2021, respectively, and recognized gains of $15.3 million and $3.2 million, respectively. Impairment expense and provision for beneficial interests, net — — — 2,436 In the first quarter of 2021, due to improved economic conditions, the Company recorded a negative provision of $2.4 million related to its remaining allowance on a consumer loan securitization beneficial interest investment. Such allowance was initially recorded in March 2020 as a result of the COVID-19 pandemic. Derivative settlements, net 10,271 (5,909) 12,085 (15,587) The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. Derivative market value adjustments, net 52,991 7,260 239,125 44,455 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 2022 and 2021 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 such swaps. Total other income/expense 70,516 (2,480) 273,096 45,505 Salaries and benefits 653 542 1,858 1,594 Other expenses 3,349 5,420 9,925 12,763 The primary component of other expenses is servicing fees paid to third parties. The decrease in 2022 as compared to 2021 was due to a decrease in AGM's loan portfolio. These decreases were partially offset by increased costs due to ending COVID-19 pandemic borrower relief policies which increased servicing activities in 2022 as compared to 2021. Intersegment expenses 8,350 8,652 25,694 25,627 Amounts include fees paid to the LSS operating segment for the servicing of AGM’s loan portfolio. These amounts exceed the actual cost of servicing the loans. The increase in servicing fees for the nine months ended September 30, 2022 as compared to the same period in 2021 was due to ending COVID-19 pandemic borrower relief policies which increased servicing activities in 2022 as compared to 2021. These increases were partially offset by 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 12,352 14,614 37,477 39,984 Total operating expenses were 32 basis points and 31 basis points of the average balance of loans for the three months ended September 30, 2022 and 2021, respectively, and 31 basis points and 28 basis points for the nine months ended September 30, 2022 and 2021, respectively. The increase in operating expenses as a percent of the average balance of loans in 2022 as compared to 2021 was due to ending COVID-19 pandemic borrower relief policies which increased servicing activities in 2022 as compared to 2021. Income before income taxes 111,872 60,085 424,647 280,613 Income tax expense (26,849) (14,421) (101,915) (67,347) Represents income tax expense at an effective tax rate of 24%. Net income $ 85,023 45,664 322,732 213,266 Additional information: Net income $ 85,023 45,664 322,732 213,266 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. Derivative market value adjustments, net (52,991) (7,260) (239,125) (44,455) Tax effect 12,718 1,742 57,390 10,669 Net income, excluding derivative market value adjustments $ 44,750 40,146 140,997 179,480 50 Net interest income after provision for loan losses, net of settlements on derivatives The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net." Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Variable interest income, gross $ 196,910 126,270 459,575 379,705 Increase in 2022 compared to 2021 was due to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans. Consolidation rebate fees (32,612) (40,340) (104,335) (121,662) Decrease in 2022 compared to 2021 was due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization 737 1,230 3,669 1,776 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years. Variable interest income, net 165,035 87,160 358,909 259,819 Interest on bonds and notes payable (118,135) (48,549) (231,960) (123,861) Increase in 2022 compared to 2021 was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. In addition, during the first quarter of 2021, the Company reduced interest expense by $23.8 million as a result of reversing a historical accrued interest liability on certain bonds. Derivative settlements, net (a) (1,085) (700) 242 (939) Derivative settlements include the net settlements (paid) received related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives (a) 45,815 37,911 127,191 135,019 Fixed rate floor income, gross 7,585 35,850 54,870 108,029 Decrease in 2022 compared to 2021 was due to higher interest rates in 2022 as compared to 2021. Subsequent to September 30, 2022 (on November 2, 2022), the Federal Reserve again increased interest rates, and it is currently anticipated that interest rates may continue to rise as a result of inflationary pressures in the U.S. economy; increases in interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. Derivative settlements, net (a) 11,356 (5,209) 11,843 (14,648) Derivative settlements include the settlements received (paid) related to the Company's floor income interest rate swaps. The increase in net derivative settlements received by the Company during 2022, as compared to net derivative settlements paid during 2021, was due to an increase in interest rates, partially offset by a decrease in the notional amount of derivatives outstanding. Fixed rate floor income, net of settlements on derivatives 18,941 30,641 66,713 93,381 Core loan interest income (a) 64,756 68,552 193,904 228,400 Investment interest 10,312 8,771 28,147 20,301 Increase in 2022 compared to 2021 was due to an increase in the Company's loan beneficial interest investments throughout 2021. Intercompany interest (1,874) (113) (3,760) (421) (Provision) negative provision for loan losses - federally insured loans (888) (4,452) (505) 3,428 The Company has recognized provision for loan losses during the three and nine months ended September 30, 2022 due to management's estimate of declining economic conditions, as well as establishing an initial allowance for loans acquired and originated during the period. See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations" and note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. (Provision) negative provision for loan losses - private education loans (1,154) 1,208 (1,971) 781 (Provision) negative provision for loan losses - consumer and other loans (7,173) (2,696) (14,702) 7,016 Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 63,979 71,270 201,113 259,505 Decrease for the three and nine months ended September 30, 2022 as compared to the same periods in 2021 was due to (i) a decrease in the average balance of loans; and (ii) an increase in provision for loan losses. These items were partially offset by (i) an increase in core loan spread; (ii) an increase in interest income as a result of an increase in the Company's loan beneficial interest investments; and (iii) for the year to date comparison, the reversal of a historical accrued interest liability on certain bonds in the first quarter of 2021. (a) Core loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures. For an explanation of GAAP accounting for derivative settlements and the reasons why the Company reports these non-GAAP measures (and the limitations thereof), see footnote (c) to the table immediately under the caption “Loan Spread Analysis” above. 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 2022 and 2021 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. 51 NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of September 30, 2022, Nelnet Bank had a $429.5 million loan portfolio, consisting of $356.6 million of private education loans and $72.9 million of FFELP loans. For a summary of the allowance as a percentage of the ending balance of each of Nelnet Bank's loan portfolios as of September 30, 2022 and December 31, 2021, the activity in Nelnet Bank's allowance for loan losses for the three and nine months ended September 30, 2022 and 2021, and a summary of Nelnet Bank's loan status, delinquency amounts, and other key credit quality indicators as of September 30, 2022, December 31, 2021, and September 30, 2021, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The following table sets forth the activity in Nelnet Bank's loan portfolio: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Beginning balance $ 423,553 190,571 257,901 17,543 Federally insured student loan acquisitions — — — 99,973 Private education loan acquisitions 6,856 — 6,856 — Private education loan originations 14,311 13,006 219,857 99,161 Repayments (15,244) (10,865) (51,011) (21,863) Sales to AGM segment — (387) (4,127) (2,489) Ending balance $ 429,476 192,325 429,476 192,325 Deposits As of September 30, 2022, Nelnet Bank had $751.4 million of deposits, of which $170.5 million were deposits from Nelnet, Inc. (the parent company) and its subsidiaries (intercompany), and thus eliminated for consolidated financial reporting purposes. All of Nelnet Bank’s deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs) and retail and other savings deposits and CDs. Retail and other deposits include savings deposits from Educational 529 College Savings and Health Savings plans and commercial and institutional CDs. Union Bank, a related party, is the program manager for the College Savings plans. The intercompany deposits include a pledged deposit of $40.0 million from Nelnet, Inc. as required under the Capital and Liquidity Maintenance Agreement with the FDIC, deposits required for intercompany transactions, operating and savings deposits, and Nelnet Business Services custodial deposits consisting of collected tuition payments which are subsequently remitted to the appropriate school. 52 Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Balance Rate Balance Rate Balance Rate Balance Rate Average assets Federally insured student loans $ 75,124 3.69 % $ 95,510 1.36 % $ 80,234 2.39 % $ 56,000 1.36 % Private education loans 350,668 3.31 95,752 3.14 304,174 3.13 75,522 3.19 Cash and investments 424,899 3.67 206,802 1.87 348,697 2.78 215,213 1.93 Total interest-earning assets 850,691 3.52 % 398,064 2.05 % 733,105 2.88 % 346,735 2.11 % Non-interest-earning assets 8,914 10,452 13,754 8,758 Total assets $ 859,605 $ 408,516 $ 746,859 $ 355,493 Average liabilities and equity Brokered deposits $ 296,257 1.42 % $ 84,175 0.84 % $ 230,968 1.33 % $ 53,459 0.84 % Intercompany deposits 155,350 2.24 98,436 0.24 121,557 1.32 83,004 0.25 Retail and other deposits 293,209 1.84 117,360 0.62 283,386 1.08 112,255 0.61 Total interest-bearing liabilities 744,816 1.76 % 299,971 0.56 % 635,911 1.22 % 248,718 0.54 % Non-interest-bearing liabilities 4,106 5,340 5,037 4,178 Equity 110,683 103,205 105,911 102,597 Total liabilities and equity $ 859,605 $ 408,516 $ 746,859 $ 355,493 Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Additional information Total interest income $ 7,551 2,061 15,792 5,479 Represents interest earned on Nelnet Bank's FFELP and private education student loans, cash, and investments. Increase was due to an increase of these balances and interest rates in 2022 as compared to 2021. Interest expense 3,298 421 5,792 1,007 Represents interest expense on deposits. Increase was due to an increase of deposits and interest rates in 2022 as compared to 2021. Net interest income 4,253 1,640 10,000 4,472 Provision (negative provision) for loan losses 450 (113) 1,462 378 Represents the current period provision expense to reflect the current lifetime expected credit losses related to Nelnet Bank's loan portfolio. Increase was due to an increase in loans originated in 2022 as compared to 2021 as well as management's estimate of declining economic conditions. Net interest income after provision for loan losses 3,803 1,753 8,538 4,094 Other income 566 450 2,224 475 Represents primarily income and gains from investments. Salaries and benefits 1,814 890 5,082 3,956 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Depreciation 4 — 11 — Other expenses 1,427 445 3,009 1,227 Represents various expenses such as consulting and professional fees, Nelnet Bank director fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses. Increase was due to the overall growth of Nelnet Bank activities. Intersegment expenses 69 32 171 72 Represents primarily servicing costs paid to the LSS operating segment. Certain shared service and support costs incurred by the Company to support Nelnet Bank are not and will not be reflected as part of the Nelnet Bank operating segment through 2023 (when the bank's de novo period will end). The shared service and support costs incurred by the Company related to Nelnet Bank and not reflected in the bank's operating segment were $1.6 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $4.4 million and $2.5 million for the nine months ended September 30, 2022 and 2021, respectively. Total operating expenses 3,314 1,367 8,273 5,255 Income (loss) before income taxes 1,055 836 2,489 (686) Income tax (expense) benefit (246) (200) (574) 151 Represents income tax (expense) benefit at an effective tax rate of 23.3% and 24.0% for the three months ended September 30, 2022 and 2021, respectively, and 23.1% and 22.0% for the nine months ended September 30, 2022 and 2021, respectively. Net income (loss) $ 809 636 1,915 (535) 53 LIQUIDITY AND CAPITAL RESOURCES The Company’s Loan Servicing and Systems, and Education Technology, Services, and Payment Processing operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and the Company's other initiatives to pursue additional strategic investments. Sources of Liquidity As of September 30, 2022, the Company's sources of liquidity included: Cash and cash equivalents $ 63,198 Less: Cash and cash equivalents held at Nelnet Bank (1) (11,806) Net cash and cash equivalents 51,392 Available-for-sale (AFS) debt securities (investments) - at fair value 1,378,071 Less: AFS debt securities held at Nelnet Bank - at fair value (1) (428,360) AFS debt securities serving as collateral on participation agreement - at fair value (2) (383,340) AFS debt securities serving as collateral on repurchase agreements - at fair value (3) (315,903) Net AFS debt securities (investments) - at fair value 250,468 Unencumbered private, consumer, and other loans (Non-Nelnet Bank) - at par 319,997 Repurchased Nelnet issued asset-backed debt securities - at par (not included on consolidated financial statements) (4) 431,460 Less: Repurchased Nelnet issued asset-backed debt securities serving as collateral on repurchase agreements - at par (230,600) 200,860 Unused capacity on unsecured line of credit (5) 495,000 Sources of liquidity as of September 30, 2022 $ 1,317,717 (1) Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. (2) See the caption "Other Debt Facilities" below. (3) See the caption "Repurchase Agreements" below. (4) The Company has repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. Certain of these securities serve as collateral on amounts outstanding under the Company's repurchase agreements as reflected in the table above. (5) The Company has a $495.0 million unsecured line of credit that matures on September 22, 2026. As of September 30, 2022, there was no amount outstanding on the unsecured line of credit and $495.0 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 $737.5 million, subject to certain conditions. The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, consumer, and other loan acquisitions (or investment interests therein); strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances. 54 Cash Flows The Company has historically generated positive cash flow from operations. During the nine months ended September 30, 2022 and 2021, the Company generated $656.9 million and $336.5 million, respectively, in cash from operating activities. See the caption "Reclassification of Prior Period Cash Flows Presentation" in note 1 of the notes to the consolidated financial statements under Part I, Item 1 of this report for additional information. The increase in 2022 as compared to 2021 was due to: • An increase in net income; • An increase in proceeds from the Company's clearinghouse for margin payments on derivatives for the nine months ended September 30, 2022 compared to the same period in 2021; • Proceeds from termination of derivative instruments for the nine months ended September 30, 2022 compared to no proceeds from terminations in the same period in 2021; • Net proceeds from the sale of equity securities for the nine months ended September 30, 2022 compared to net purchases in the same period in 2021; • Adjustments to net income for the impact of provision for loan losses, gain on sale of loans, gain/loss on investments, and the non-cash change in deferred income taxes; and • The impact of changes to accounts receivable and accrued interest receivable and payable during the nine months ended September 30, 2022 as compared to the same period in 2021. These factors were partially offset by: • The adjustments to net income for derivative market value adjustments; and • The impact of changes to other assets and other liabilities during the nine months ended September 30, 2022 as compared to the same period in 2021. The primary items included in the statement of cash flows for investing activities are the purchase, origination, and repayment of loans and the purchase and sale of available-for-sale securities. The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable and Nelnet Bank deposits used to fund loans. Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2022 was $1.7 billion and $2.5 billion, respectively. Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2021 was $543.4 million and $587.1 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 AGM's debt obligations outstanding that are secured by loan assets and related collateral. As of September 30, 2022 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 13,957,942 8/26/30 - 9/25/69 FFELP and private education loan warehouse facilities 335,697 10/31/23 / 11/22/23 $ 14,293,639 Bonds and Notes Issued in Asset-backed Securitizations The majority of AGM’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. Cash generated from student loans funded in asset-backed securitizations provide the sources of liquidity to satisfy all obligations related to the outstanding bonds and notes issued in such securitizations. In addition, due to (i) the difference between the yield AGM receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees AGM earns from these transactions, AGM has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. As of September 30, 2022, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, AGM currently expects future undiscounted cash flows from its portfolio to be approximately $1.66 billion as detailed below. The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of September 30, 2022. As of September 30, 2022, AGM had $14.1 billion of loans included in asset-backed securitizations, which represented 55 95.3 percent of its total loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities, unencumbered private education and consumer loans funded with operating cash, loans acquired subsequent to September 30, 2022, 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 and notes receivable" on the Company's consolidated balance sheets). Asset-backed Securitization Cash Flow Forecast $1.66 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $1.66 billion include approximately $1.01 billion (as of September 30, 2022) 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 $0.65 billion, or approximately $0.49 billion after income taxes based on the estimated effective tax rate, represents estimated future net interest income (earnings) from the portfolio and is expected to be accretive to the Company's September 30, 2022 balance of consolidated shareholders' equity. The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below. Prepayments : The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the amount of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect estimated prepayment rates, including the level of consolidation activity, borrower default rates, and utilization of debt management options such as income-based repayment, deferments, and forbearance. Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates of 4 percent for consolidation loans and 5 percent for all other loan types. These prepayment rates are generally consistent with those utilized in the Company’s most recent asset-backed securitization transactions. On April 19, 2022, the Department issued a press release, and the Department's Office of Federal Student Aid ("FSA") posted a related public announcement, which together announced, among other things, several adjustments, updates, and other changes under income-driven repayment ("IDR") plans for federal student loans. In the announcements, the Department and FSA indicated that as part of these changes, any borrower with loans that have accumulated time in repayment, including time in certain forbearances and deferments, of at least 20 or 25 years will see automatic forgiveness, even if the borrower is not 56 currently in an IDR plan, and that if a borrower has a commercially held FFEL Program loan, the borrower can only benefit from these changes if they consolidate their FFEL Program loan to a Federal Direct Loan Program loan. These changes were reflected in executive actions announced by the Department on October 25, 2022 and final regulations announced by the Department on October 31, 2022. The final regulations are to become effective on July 1, 2023, and the fact sheet accompanying the October 25, 2022 announcement indicates that if a borrower has a commercially held FFEL Program loan, the borrower must apply for consolidation to a Federal Direct Loan Program loan by May 1, 2023 to receive the IDR plan and other benefits set forth in the announcement. These announced changes have increased, and the Company currently believes these announced changes may continue to increase, FFEL Program loan prepayments. In addition, if the federal government and the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, consolidation loan programs, or further extend the suspension of borrower payments under the CARES Act, such initiatives could also significantly increase prepayments. For example, since late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of the continued extension of the CARES Act and an initiative offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. See Part II, Item 1A, "Risk Factors" in this report for additional information related to these announcements and other risks associated with loan prepayments. The following table summarizes the estimated impact to the above forecasted cash flows if prepayments were greater than the prepayment rate assumptions used to calculate the forecasted cash flows. Increase in prepayment rate Reduction in forecasted cash flow from table above Forecasted cash flow using increased prepayment rate 2x $0.12 billion $1.54 billion 4x $0.31 billion $1.35 billion 10x $0.56 billion $1.10 billion If the entire AGM student loan portfolio prepaid, the Company would receive the full amount of overcollateralization included in the asset-backed securitizations of approximately $1.01 billion (as of September 30, 2022); however, the Company would not receive the $0.65 billion ($0.49 billion after tax) of estimated future earnings from the portfolio. Interest rates : The Company funds a large portion of its student loans with three-month LIBOR indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to a one-month LIBOR rate. The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk. The Company’s cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices. If the forecast is computed assuming a spread of 24 basis points between three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $60 million to $80 million. As the percentage of the Company's outstanding debt financed by three-month LIBOR declines, the Company's basis risk will be reduced. In addition, the Company attempts to mitigate the impact of this basis risk by entering into certain derivative instruments. The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by entering into certain derivative instruments. 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 - AGM Operating Segment" for additional information about various interest rate risks which may impact future cash flows from AGM's loan assets. In addition, 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 - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2021 Annual Report for additional information. 57 Warehouse Facilities The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facility. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of September 30, 2022, the Company's warehouse facility had a maximum financing amount available of $300.0 million, of which $249.5 million was outstanding and $50.5 million was available for additional funding. On November 1, 2022, the Company amended its FFELP warehouse facility and inc reased the maximum financing amount available to $1.2 billion and extended the liquidity provisions and final maturity to May 22, 2023 and May 22, 2024, respectively. The increased capacity was used to fund a FFELP loan portfolio of approximately $670 million that was acquired by the Company on November 1, 2022. In the event the liquidity provisions are not extended on the FFELP warehouse facility, 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. The Company has a private education loan warehouse facility that, as of September 30, 2022, had an aggregate maximum financing amount available of $175.0 million, an advance rate of 80 to 90 percent, liquidity provisions through October 31, 2022, and a final maturity date of October 31, 2023. As of September 30, 2022, $86.2 million was outstanding under this warehouse facility, $88.8 million was available for future funding, and $9.8 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. Other Uses of Liquidity The Company no longer originates 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, consumer, and other loans (or investment interests therein). The Company plans to fund additional loan acquisitions and related investments using current cash; using proceeds from the sale of certain investments; 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); increasing the capacity under existing and/or establishing new warehouse facilities; and continuing to access the asset-backed securities market. Repurchase Agreements In December 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education loans representing approximately 445,000 borrowers. The Company entered into a joint venture with other investors to acquire the loans, and under the joint venture, the Company had an approximately 8 percent interest in the loans and has a corresponding 8 percent interest in residual interests in the 2021 securitizations of the loans discussed below. The joint venture established a limited partnership that purchased the private education loans and funded such loans with a temporary warehouse facility. During 2021, the Company sponsored four asset-backed securitization transactions to permanently finance a total of $8.7 billion of private education loans sold by Wells Fargo (which represented the total remaining loans originally purchased from Wells Fargo, factoring in borrower payments from the date of purchase). 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 notes receivable" and as of September 30, 2022, the fair value of these bonds was $315.9 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, of which a portion of the proceeds from such agreements were used to purchase the asset-backed investments, and such investments serve as collateral on the repurchase obligations. In addition, as discussed above, the Company has repurchased certain of its own asset-backed securities in the secondary market that serve as collateral on amounts outstanding under the Company's repurchase agreements. As of September 30, 2022, $507.0 million was outstanding on the Company's repurchase agreements, of which $304.1 million was borrowed to fund private education loan securitization bonds subject to the Company’s risk retention requirement and 58 $202.9 million was borrowed to fund repurchased FFELP loan asset-backed securities. The repurchase agreements have various maturity dates (as of September 30, 2022) between October 7, 2022 and November 27, 2024, but one of the agreements is subject to early termination upon required notice provided by the Company or the applicable counterparty prior to the maturity dates. The Company is 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, consider the sale of assets (subject to any restrictions described above), or transfer collateral 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 September 30, 2022, $859.3 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $900.0 million or an amount in excess of $900.0 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Asset-backed Securities Transactions The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations. Depending on market conditions, the Company currently anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations. There were no asset-backed securitization transactions completed during the nine months ended September 30, 2022. Liquidity Impact Related to Nelnet Bank Nelnet Bank launched operations in November 2020. Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million, consisting of $55.9 million of cash and $44.1 million of student loan asset-backed securities. In addition, the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC discussed below. Prior to Nelnet Bank’s launch of operations, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent; (ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank. Under the regulatory framework for prompt corrective action, Nelnet Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI and must meet specific capital standards. 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 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. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. 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 September 30, 2022 with a leverage ratio of 14.7%. 59 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. Nelnet, Inc. made additional capital contributions to Nelnet Bank in each the second and third quarters of 2022 of $15.0 million. Liquidity Impact Related to ALLO Upon the deconsolidation of ALLO on December 21, 2020, the Company recorded its 45 percent voting membership interests in ALLO at fair value, and accounts for such investment under the HLBV method of accounting. In addition, the Company recorded its remaining non-voting preferred membership units of ALLO at fair value, and accounts for such investment as a separate equity investment. As of September 30, 2022, the outstanding preferred membership interests of ALLO held by the Company was $137.3 million that earns a preferred annual return of 6.25 percent. Agreements among the Company, SDC (a third party global digital infrastructure investor), and ALLO provide that they will use commercially reasonable efforts (which 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 in ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests. However, if the non-voting preferred membership interests are not redeemed on or before April 2024, the preferred annual return is increased from 6.25 percent to 10.00 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. Although ALLO has obtained third-party debt financing to fund a large portion of its current growth plans, the Company contributed $34.7 million of additional equity to ALLO on February 25, 2022. As a result of this equity contribution, the Company’s voting membership interests percentage did not materially change. Based on ALLO's business plan for growth and current financial condition, the Company currently believes it may make additional capital contributions to ALLO during the fourth quarter of 2022 and during 2023 and 2024. Liquidity Impact Related to Hedging Activities The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. Based on the derivative portfolio outstanding as of September 30, 2022, 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. The variation margin, if significant, could negatively impact the Company's liquidity and capital resources. In addition, clearing rules require the Company to post amounts of liquid collateral when executing new derivative instruments, which could prevent or limit the Company from utilizing additional derivative instruments to manage interest rate sensitivity and risks. See note 4 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative portfolio. Other Debt Facilities As discussed above, the Company has a $495.0 million unsecured line of credit with a maturity date of September 22, 2026. As of September 30, 2022, the unsecured line of credit had no amount outstanding and $495.0 million was available for future use. Upon the maturity date of this facility, there can be no assurance that the Company will be able to maintain this line of credit, increase or maintain the amount outstanding under the line, 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 federally insured student loan asset-backed securities. As of September 30, 2022, $399.7 million (par value) of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. This participation agreement has been accounted for by the Company as a secured borrowing. Upon termination or expiration of this agreement, the Company would expect to use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. Stock Repurchases In 2019, the Board of Directors 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 ended May 7, 2022. On May 9, 2022, the Board of Directors 60 authorized a new 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 8, 2025. The five million shares authorized under the new program include the remaining unpurchased shares from the prior program, which the new program replaced. As of September 30, 2022, 4,517,936 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, 2022, June 30, 2022, and September 30, 2022 are shown below. For additional information on stock repurchases during the third quarter of 2022, see "Stock Repurchases" under Part II, Item 2 of this report. Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) Quarter ended March 31, 2022 380,053 $ 32,899 86.56 Quarter ended June 30, 2022 558,257 46,032 82.46 Quarter ended September 30, 2022 169,860 14,293 84.14 Total 1,108,170 $ 93,224 84.12 Dividends On September 15, 2022, the Company paid a third quarter 2022 cash dividend on the Company's Class A and Class B common stock of $0.24 per share. In addition, the Company's Board of Directors has declared a fourth quarter 2022 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.26 per share. The fourth quarter cash dividend will be paid on December 15, 2022 to shareholders of record at the close of business on December 1, 2022. The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 3 of the notes to consolidated financial statements included in the Company’s 2021 Annual Report includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are most “critical” — that is, they are most important to the portrayal of the Company’s financial condition and results of operations and they require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy and estimate, as discussed further under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Loan Losses” in the Company’s 2021 Annual Report. For additional information regarding changes in the Company’s allowance for loan losses for the three and nine months ended September 30, 2022 and 2021, see the caption “Activity in the Allowance for Loan Losses” in note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. There have been no material changes to the Company’s critical accounting policy and estimate since December 31, 2021. RECENT ACCOUNTING PRONOUNCEMENTS Financial Instruments - Credit Losses In March 2022, the FASB issued accounting guidance which eliminates the troubled debt restructurings recognition and measurement guidance and instead requires an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan. The guidance also enhances the disclosure requirements for certain modifications of receivables made to borrowers experiencing financial difficulty. This guidance will be effective for the Company beginning January 1, 2023 with early adoption permitted. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting. 61