NELNET INC 10-Q

nni-20230630 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 001-31924 NELNET, INC. (Exact name of registrant as specified in its charter) Nebraska 84-0748903 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 121 South 13th Street, Suite 100 Lincoln, Nebraska 68508 (Address of principal executive offices) (Zip Code) ( 402 ) 458-2370 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol Name of each exchange on which registered Class A Common Stock, Par Value $0.01 per Share NNI New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of July 31, 2023, there were 26,650,991 and 10,668,460 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding a total of 11,305,731 shares of Class A Common Stock held by wholly owned subsidiaries). NELNET, INC. FORM 10-Q INDEX June 30, 2023 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 3. Quantitative and Qualitative Disclosures About Market Risk 67 Item 4. Controls and Procedures 72 PART II. OTHER INFORMATION Item 1. Legal Proceedings 73 Item 1A. Risk Factors 73 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 73 Item 5. Other Information 74 Item 6. Exhibits 74 Signatures 75 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NELNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) (unaudited) As of As of June 30, 2023 December 31, 2022 Assets: Loans and accrued interest receivable (net of allowance for loan losses of $ 114,263 and $ 131,827 , respectively) $ 14,360,612 15,243,889 Cash and cash equivalents: Cash and cash equivalents - not held at a related party 24,834 24,584 Cash and cash equivalents - held at a related party 96,935 93,562 Total cash and cash equivalents 121,769 118,146 Investments and notes receivable 2,006,306 2,111,917 Restricted cash 484,223 945,159 Restricted cash - due to customers 208,033 294,311 Accounts receivable (net of allowance for doubtful accounts of $ 4,855 and $ 3,079 , respectively) 135,690 194,851 Goodwill 176,902 176,902 Intangible assets, net 57,293 63,501 Property and equipment, net 130,451 122,526 Other assets 126,353 102,842 Total assets $ 17,807,632 19,374,044 Liabilities: Bonds and notes payable $ 13,070,140 14,637,195 Accrued interest payable 35,926 36,049 Bank deposits 731,046 691,322 Other liabilities 423,454 461,259 Due to customers 299,552 348,317 Total liabilities 14,560,118 16,174,142 Commitments and contingencies Equity: Nelnet, Inc. shareholders' equity: Preferred stock, $ 0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding — — Common stock: Class A, $ 0.01 par value. Authorized 600,000,000 shares; issued and outstanding 26,646,490 shares and 26,461,651 shares, respectively 266 265 Class B, convertible, $ 0.01 par value. Authorized 60,000,000 shares; issued and outstanding 10,668,460 shares 107 107 Additional paid-in capital 10,114 1,109 Retained earnings 3,270,250 3,234,844 Accumulated other comprehensive loss, net ( 21,458 ) ( 37,366 ) Total Nelnet, Inc. shareholders' equity 3,259,279 3,198,959 Noncontrolling interests ( 11,765 ) 943 Total equity 3,247,514 3,199,902 Total liabilities and equity $ 17,807,632 19,374,044 Supplemental information - assets and liabilities of consolidated education and other lending variable interest entities: Loans and accrued interest receivable $ 13,756,107 14,585,491 Restricted cash 451,792 867,961 Bonds and notes payable ( 12,999,867 ) ( 14,233,586 ) Accrued interest payable and other liabilities ( 192,978 ) ( 145,309 ) Net assets of consolidated education and other lending variable interest entities $ 1,015,054 1,074,557 See accompanying notes to consolidated financial statements. 2 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (unaudited) Three months ended Six months ended June 30, June 30, 2023 2022 2023 2022 Interest income: Loan interest $ 243,045 134,706 468,288 246,083 Investment interest 40,982 16,881 81,707 30,700 Total interest income 284,027 151,587 549,995 276,783 Interest expense on bonds and notes payable and bank deposits 233,148 73,642 432,597 121,721 Net interest income 50,879 77,945 117,398 155,062 Less provision for loan losses 9,592 9,409 43,867 8,974 Net interest income after provision for loan losses 41,287 68,536 73,531 146,088 Other income (expense): Loan servicing and systems revenue 122,020 124,873 261,247 261,241 Education technology, services, and payment processing revenue 109,858 91,031 243,462 203,317 Solar construction revenue 4,735 — 13,386 — Other, net ( 7,011 ) 12,647 ( 21,083 ) 22,524 Gain on sale of loans, net 15,511 — 27,323 2,989 Impairment expense — ( 6,284 ) — ( 6,284 ) Derivative market value adjustments and derivative settlements, net 2,070 45,024 ( 12,005 ) 187,949 Total other income (expense), net 247,183 267,291 512,330 671,736 Cost of services: Cost to provide education technology, services, and payment processing services 40,407 30,852 88,110 66,397 Cost to provide solar construction services 9,122 — 17,422 — Total cost of services 49,529 30,852 105,532 66,397 Operating expenses: Salaries and benefits 144,706 141,398 297,416 290,813 Depreciation and amortization 18,652 18,250 35,279 35,206 Other expenses 45,997 36,940 86,781 76,439 Total operating expenses 209,355 196,588 419,476 402,458 Income before income taxes 29,586 108,387 60,853 348,969 Income tax expense 10,491 25,483 18,741 81,180 Net income 19,095 82,904 42,112 267,789 Net loss attributable to noncontrolling interests 9,172 2,225 12,642 3,987 Net income attributable to Nelnet, Inc. $ 28,267 85,129 54,754 271,776 Earnings per common share: Net income attributable to Nelnet, Inc. shareholders - basic and diluted $ 0.75 2.26 1.46 7.18 Weighted average common shares outstanding - basic and diluted 37,468,397 37,710,214 37,406,843 37,875,108 See accompanying notes to consolidated financial statements. 3 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (unaudited) Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Net income $ 19,095 82,904 42,112 267,789 Other comprehensive income (loss): Net changes related to foreign currency translation adjustments $ — ( 8 ) ( 3 ) 1 Net changes related to available-for-sale debt securities: Unrealized holding gains (losses) arising during period, net 8,649 ( 33,822 ) 17,300 ( 50,520 ) Reclassification of (gains) losses recognized in net income, net ( 918 ) ( 849 ) 4,064 ( 3,642 ) Amortization of net unrealized loss on securities transferred from available-for-sale to held-to-maturity 70 — 70 — Income tax effect ( 1,872 ) 5,929 8,321 ( 26,350 ) ( 5,144 ) 16,290 12,999 ( 41,163 ) Net changes related to equity method investee's other comprehensive income: Loss on cash flow hedges ( 501 ) — ( 499 ) — Income tax effect 120 ( 381 ) — — 120 ( 379 ) — — Other comprehensive income (loss) 5,548 ( 26,358 ) 15,908 ( 41,162 ) Comprehensive income 24,643 56,546 58,020 226,627 Comprehensive loss attributable to noncontrolling interests 9,172 2,225 12,642 3,987 Comprehensive income attributable to Nelnet, Inc. $ 33,815 58,771 70,662 230,614 See accompanying notes to consolidated financial statements. 4 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) (unaudited) Nelnet, Inc. Shareholders Preferred stock shares Common stock shares Preferred stock Class A common stock Class B common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Noncontrolling interests Total equity Class A Class B Balance as of March 31, 2022 — 27,151,270 10,674,892 $ — 272 107 1,208 3,092,226 ( 5,500 ) ( 3,250 ) 3,085,063 Issuance of noncontrolling interests — — — — — — — — — 9,275 9,275 Net income (loss) — — — — — — — 85,129 — ( 2,225 ) 82,904 Other comprehensive loss — — — — — — — — ( 26,358 ) — ( 26,358 ) Distribution to noncontrolling interests — — — — — — — — — ( 10,037 ) ( 10,037 ) Cash dividends on Class A and Class B common stock - $ 0.24 per share — — — — — — — ( 8,973 ) — — ( 8,973 ) Issuance of common stock, net of forfeitures — 20,720 — — — — 2,116 — — — 2,116 Compensation expense for stock based awards — — — — — — 3,187 — — — 3,187 Repurchase of common stock — ( 558,257 ) — — ( 6 ) — ( 5,331 ) ( 40,695 ) — — ( 46,032 ) Balance as of June 30, 2022 — 26,613,733 10,674,892 $ — 266 107 1,180 3,127,687 ( 31,858 ) ( 6,237 ) 3,091,145 Balance as of March 31, 2023 — 26,623,662 10,668,460 $ — 266 107 4,639 3,251,677 ( 27,006 ) ( 6,354 ) 3,223,329 Issuance of noncontrolling interests — — — — — — — — — 11,703 11,703 Net income (loss) — — — — — — — 28,267 — ( 9,172 ) 19,095 Other comprehensive income — — — — — — — — 5,548 — 5,548 Distribution to noncontrolling interests — — — — — — — — — ( 7,942 ) ( 7,942 ) Cash dividends on Class A and Class B common stock - $ 0.26 per share — — — — — — — ( 9,694 ) — — ( 9,694 ) Issuance of common stock, net of forfeitures — 27,562 — — — — 2,056 — — — 2,056 Compensation expense for stock based awards — — — — — — 3,884 — — — 3,884 Repurchase of common stock — ( 4,734 ) — — — — ( 465 ) — — — ( 465 ) Balance as of June 30, 2023 — 26,646,490 10,668,460 $ — 266 107 10,114 3,270,250 ( 21,458 ) ( 11,765 ) 3,247,514 See accompanying notes to consolidated financial statements. 5 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) (unaudited) Nelnet, Inc. Shareholders Preferred stock shares Common stock shares Preferred stock Class A common stock Class B common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Noncontrolling interests Total equity Class A Class B Balance as of December 31, 2021 — 27,239,654 10,676,642 $ — 272 107 1,000 2,940,523 9,304 1,632 2,952,838 Issuance of noncontrolling interests — — — — — — — — — 11,279 11,279 Net income (loss) — — — — — — — 271,776 — ( 3,987 ) 267,789 Other comprehensive loss — — — — — — — — ( 41,162 ) — ( 41,162 ) Distribution to noncontrolling interests — — — — — — — — — ( 15,161 ) ( 15,161 ) Cash dividends on Class A and Class B common stock - $ 0.48 per share — — — — — — — ( 18,035 ) — — ( 18,035 ) Issuance of common stock, net of forfeitures — 310,639 — — 3 — 6,498 — — — 6,501 Compensation expense for stock based awards — — — — — — 6,027 — — — 6,027 Repurchase of common stock — ( 938,310 ) — — ( 9 ) — ( 12,345 ) ( 66,577 ) — — ( 78,931 ) Conversion of common stock — 1,750 ( 1,750 ) — — — — — — — — Balance as of June 30, 2022 — 26,613,733 10,674,892 $ — 266 107 1,180 3,127,687 ( 31,858 ) ( 6,237 ) 3,091,145 Balance as of December 31, 2022 — 26,461,651 10,668,460 $ — 265 107 1,109 3,234,844 ( 37,366 ) 943 3,199,902 Issuance of noncontrolling interests — — — — — — — — — 12,904 12,904 Net income (loss) — — — — — — — 54,754 — ( 12,642 ) 42,112 Other comprehensive income — — — — — — — — 15,908 — 15,908 Distribution to noncontrolling interests — — — — — — — — — ( 12,970 ) ( 12,970 ) Cash dividends on Class A and Class B common stock - $ 0.52 per share — — — — — — — ( 19,348 ) — — ( 19,348 ) Issuance of common stock, net of forfeitures — 226,086 — — 1 — 5,119 — — — 5,120 Compensation expense for stock based awards — — — — — — 7,653 — — — 7,653 Repurchase of common stock — ( 41,247 ) — — — — ( 3,767 ) — — — ( 3,767 ) Balance as of June 30, 2023 — 26,646,490 10,668,460 $ — 266 107 10,114 3,270,250 ( 21,458 ) ( 11,765 ) 3,247,514 See accompanying notes to consolidated financial statements. 6 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) Six months ended June 30, 2023 2022 Net income attributable to Nelnet, Inc. $ 54,754 271,776 Net loss attributable to noncontrolling interests ( 12,642 ) ( 3,987 ) Net income 42,112 267,789 Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisition: Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs 93,573 74,080 Loan discount accretion ( 15,412 ) ( 19,554 ) Provision for loan losses 43,867 8,974 Derivative market value adjustments 35,407 ( 186,135 ) Proceeds from termination of derivative instruments 164,079 68,021 (Payments to) proceeds from clearinghouse - initial and variation margin, net ( 209,886 ) 133,622 Gain on sale of loans, net ( 27,323 ) ( 2,989 ) Loss on investments, net 47,260 3,207 Proceeds from sale of equity securities, net 75 42,398 Deferred income tax (benefit) expense ( 16,144 ) 49,890 Non-cash compensation expense 7,810 6,171 Impairment expense — 6,284 (Increase) decrease in loan and investment accrued interest receivable ( 4,884 ) 184 Decrease in accounts receivable 59,142 44,786 Increase in other assets, net ( 11,480 ) ( 9,086 ) Decrease in the carrying amount of ROU asset, net 2,390 2,735 (Decrease) increase in accrued interest payable ( 123 ) 8,397 Decrease in other liabilities ( 8,916 ) ( 12,200 ) Decrease in the carrying amount of lease liability ( 2,568 ) ( 2,860 ) Net cash provided by operating activities 198,979 483,714 Cash flows from investing activities: Purchases and originations of loans ( 411,868 ) ( 396,486 ) Purchases of loans from a related party ( 467,519 ) ( 7,675 ) Net proceeds from loan repayments, claims, and capitalized interest 1,348,827 1,792,930 Proceeds from sale of loans 290,957 15,278 Purchases of available-for-sale securities ( 296,468 ) ( 735,140 ) Proceeds from sales of available-for-sale securities 577,548 319,752 Proceeds from beneficial interest in loan securitizations 13,237 13,212 Purchases of other investments and issuance of notes receivable ( 140,129 ) ( 147,400 ) Proceeds from other investments 14,403 23,955 Purchases of held-to-maturity debt securities ( 2,889 ) — Redemption of held-to-maturity debt securities 1,487 — Purchases of property and equipment ( 37,253 ) ( 34,152 ) Business acquisition, net of cash acquired — ( 7,320 ) Net cash provided by investing activities 890,333 836,954 7 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Six months ended June 30, 2023 2022 Cash flows from financing activities: Payments on bonds and notes payable $ ( 2,417,622 ) ( 1,695,697 ) Proceeds from issuance of bonds and notes payable 806,148 159,931 Payments of debt issuance costs ( 2,214 ) ( 851 ) Increase in bank deposits, net 39,724 244,159 (Decrease) increase in due to customers ( 48,728 ) 43,544 Dividends paid ( 19,348 ) ( 18,035 ) Repurchases of common stock ( 3,767 ) ( 78,931 ) Proceeds from issuance of common stock 890 801 Issuance of noncontrolling interests 14,018 5,142 Distribution to noncontrolling interests ( 1,920 ) ( 699 ) Net cash used in financing activities ( 1,632,819 ) ( 1,340,636 ) Effect of exchange rate changes on cash ( 84 ) ( 179 ) Net decrease in cash, cash equivalents, and restricted cash ( 543,591 ) ( 20,147 ) Cash, cash equivalents, and restricted cash, beginning of period 1,357,616 1,194,189 Cash, cash equivalents, and restricted cash, end of period $ 814,025 1,174,042 Supplemental disclosures of cash flow information: Cash disbursements made for interest $ 386,686 89,281 Cash disbursements made for income taxes, net of refunds and credits received (a) $ 43,510 21,137 Cash disbursements made for operating leases $ 3,476 3,538 Noncash operating, investing, and financing activity: ROU assets obtained in exchange for lease obligations $ 18,485 746 Receipt of beneficial interest in consumer loan securitizations as consideration from sale of loans $ 53,896 3,660 Receipt of asset-backed investment securities as consideration from sale of loans $ 58,182 — Distribution to noncontrolling interests $ 11,050 14,462 Issuance of noncontrolling interests $ 1,114 6,137 (a) The Company utilized $ 13.9 million and $ 4.1 million of federal and state tax credits related primarily to renewable energy during the six months ended June 30, 2023 and 2022, respectively. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows. As of As of As of As of June 30, 2023 December 31, 2022 June 30, 2022 December 31, 2021 Total cash and cash equivalents $ 121,769 118,146 128,499 125,563 Restricted cash 484,223 945,159 754,693 741,981 Restricted cash - due to customers 208,033 294,311 290,850 326,645 Cash, cash equivalents, and restricted cash $ 814,025 1,357,616 1,174,042 1,194,189 See accompanying notes to consolidated financial statements. 8 NELNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, unless otherwise noted) (unaudited) 1. Basis of Financial Reporting The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2022 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report"). 2. Loans and Accrued Interest Receivable and Allowance for Loan Losses Loans and accrued interest receivable consisted of the following: As of As of June 30, 2023 December 31, 2022 Non-Nelnet Bank: Federally insured loans: Stafford and other $ 3,245,540 3,389,178 Consolidation 9,574,202 10,177,295 Total 12,819,742 13,566,473 Private education loans 230,056 252,383 Consumer and other loans 189,327 350,915 Non-Nelnet Bank loans 13,239,125 14,169,771 Nelnet Bank: Federally insured loans 61,501 65,913 Private education loans 352,319 353,882 Consumer and other loans 30,668 — Nelnet Bank loans 444,488 419,795 Accrued interest receivable 818,709 816,864 Loan discount, net of unamortized loan premiums and deferred origination costs ( 27,447 ) ( 30,714 ) Allowance for loan losses: Non-Nelnet Bank: Federally insured loans ( 74,061 ) ( 83,593 ) Private education loans ( 14,322 ) ( 15,411 ) Consumer and other loans ( 20,005 ) ( 30,263 ) Non-Nelnet Bank allowance for loan losses ( 108,388 ) ( 129,267 ) Nelnet Bank: Federally insured loans ( 154 ) ( 170 ) Private education loans ( 2,905 ) ( 2,390 ) Consumer and other loans ( 2,816 ) — Nelnet Bank allowance for loan losses ( 5,875 ) ( 2,560 ) $ 14,360,612 15,243,889 9 The following table summarizes the allowance for loan losses as a percentage of the ending loan balance for each of the Company's loan portfolios. As of As of June 30, 2023 December 31, 2022 Non-Nelnet Bank: Federally insured loans (a) 0.58 % 0.62 % Private education loans 6.23 % 6.11 % Consumer and other loans 10.57 % 8.62 % Nelnet Bank: Federally insured loans (a) 0.25 % 0.26 % Private education loans 0.82 % 0.68 % Consumer and other loans 9.18 % — (a) As of June 30, 2023 and December 31, 2022, the allowance for loan losses as a percent of the risk sharing component of federally insured student loans not covered by the federal guaranty for non-Nelnet Bank was 21.7 % and 22.4 %, respectively, and for Nelnet Bank was 10.0 % and 10.3 %, respectively. Loan Sales The Company has sold portfolios of loans to unrelated third parties who securitized such loans. As partial consideration received for the loans sold, the Company received residual interest in the loan securitizations that are included in "investments and notes receivable" on the Company's consolidated balance sheets. The following table summarizes the loans sold and gains/losses recognized by the Company during the six months ended June 30, 2023 and 2022. Loans sold (par value) Gain (loss) Loan type Residual interest received in securitization Six months ended June 30, 2023 January 31 $ 97,350 ( 1,441 ) Home equity 64.8 % (a) January 31 42,275 4,350 Consumer 13.3 March 2 122,277 8,903 Consumer 24.6 (a) April 4 5,633 659 Consumer — April 13 24,980 3,123 Consumer 11.3 May 2 127,663 11,729 Consumer 26.5 $ 420,178 27,323 Six months ended June 30, 2022 January 26 $ 18,125 2,989 Consumer 6.6 % June 30 114 — Home equity — $ 18,239 2,989 (a) In addition to receiving a residual interest in the securitizations, the Company also received $ 14.5 million and $ 43.7 million of asset-backed investment securities as part of the January 31 and March 2, 2023 transactions, respectively, that are included in "investments and notes receivable" on the Company's consolidated balance sheet. 10 Activity in the Allowance for Loan Losses The following table presents the activity in the allowance for loan losses by portfolio segment. Balance at beginning of period Provision (negative provision) for loan losses Charge-offs Recoveries Initial allowance on loans purchased with credit deterioration Loan sales Balance at end of period Three months ended June 30, 2023 Non-Nelnet Bank: Federally insured loans $ 79,331 — ( 5,270 ) — — — 74,061 Private education loans 15,175 — ( 1,069 ) 216 — — 14,322 Consumer and other loans 35,317 8,099 ( 2,881 ) 441 — ( 20,971 ) 20,005 Nelnet Bank: Federally insured loans 160 ( 4 ) ( 2 ) — — — 154 Private education loans 2,894 517 ( 506 ) — — — 2,905 Consumer and other loans 1,827 989 — — — — 2,816 $ 134,704 9,601 ( 9,728 ) 657 — ( 20,971 ) 114,263 Three months ended June 30, 2022 Non-Nelnet Bank: Federally insured loans $ 95,995 2,365 ( 5,788 ) — 21 — 92,593 Private education loans 14,622 1,217 ( 707 ) 118 — 3 15,253 Consumer and other loans 5,710 5,245 ( 531 ) 152 — — 10,576 Nelnet Bank: Federally insured loans 247 13 ( 2 ) — — — 258 Private education loans 1,251 569 ( 73 ) — — ( 3 ) 1,744 $ 117,825 9,409 ( 7,101 ) 270 21 — 120,424 Six months ended June 30, 2023 Non-Nelnet Bank: Federally insured loans $ 83,593 2,411 ( 11,949 ) — 6 — 74,061 Private education loans 15,411 240 ( 1,709 ) 380 — — 14,322 Consumer and other loans 30,263 37,306 ( 5,148 ) 661 — ( 43,077 ) 20,005 Nelnet Bank: Federally insured loans 170 ( 12 ) ( 4 ) — — — 154 Private education loans 2,390 1,129 ( 614 ) — — — 2,905 Consumer and other loans — 2,816 — — — — 2,816 $ 131,827 43,890 ( 19,424 ) 1,041 6 ( 43,077 ) 114,263 Six months ended June 30, 2022 Non-Nelnet Bank: Federally insured loans $ 103,381 ( 383 ) ( 10,549 ) — 144 — 92,593 Private education loans 16,143 817 ( 2,006 ) 295 — 4 15,253 Consumer and other loans 6,481 7,529 ( 1,469 ) 319 — ( 2,284 ) 10,576 Nelnet Bank: Federally insured loans 268 ( 8 ) ( 2 ) — — — 258 Private education loans 840 995 ( 87 ) — — ( 4 ) 1,744 $ 127,113 8,950 ( 14,113 ) 614 144 ( 2,284 ) 120,424 The primary item impacting provision for loan losses was the establishment of an initial allowance for consumer loans originated and acquired during the periods presented above. 11 The following table summarizes annualized net charge-offs as a percentage of average loans for each of the Company's loan portfolios. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Non-Nelnet Bank: Federally insured loans 0.16 % 0.14 % 0.18 % 0.13 % Private education loans 1.45 % 0.85 % 1.11 % 1.22 % Consumer and other loans 4.07 % 1.51 % 3.22 % 3.24 % Nelnet Bank: Federally insured loans 0.01 % 0.01 % 0.01 % 0.00 % Private education loans 0.57 % 0.09 % 0.35 % 0.06 % Consumer and other loans — — — — Unfunded Loan Commitments As of June 30, 2023, Nelnet Bank has a liability of approximately $ 62,000 related to $ 4.1 million of unfunded private education and consumer loan commitments. The liability for unfunded loan commitments is included in "other liabilities" on the consolidated balance sheets. During the six months ended June 30, 2023 and 2022, Nelnet Bank recognized negative provision for loan losses of approximately $ 23,000 and provision for loan losses of approximately $ 24,000 , respectively, related to unfunded loan commitments. Loan Modifications to Borrowers Experiencing Financial Difficulty On January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments – Credit Losses: Troubled Debt Restructurings and Vintage Disclosures, 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 and vintage disclosures reflecting gross charge-offs by year of origination. Under the Higher Education Act, FFELP loan borrowers may be granted a deferment or forbearance for a period of time based on need. In addition, eligible borrowers may qualify for income-driven repayment plans offered by the Department. Because FFELP loan modifications are driven by the Higher Education Act, the Company does not consider these events as part of its loan modification programs. Administrative forbearances (e.g. bankruptcy, military service, death and disability, and disaster forbearance) are required by law and therefore are also not considered as part of the Company's loan modification programs. The Company does offer payment delays in the form of deferments or forbearances on certain private education and consumer loan programs for short-term periods. The Company generally considers payment delays to be insignificant when the delay is 3 months or less. The amortized cost of the Company’s private education and consumer loans in which the borrower is experiencing financial difficulty and the financial effect of such loan modifications is not material. 12 Key Credit Quality Indicators Loan Status and Delinquencies Key credit quality indicators for the Company’s federally insured, private education, consumer, and other loan portfolios are loan status, including delinquencies. The impact of changes in loan status is incorporated into the allowance for loan losses calculation. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. The following table presents the Company’s loan status and delinquency amounts. As of June 30, 2023 As of December 31, 2022 As of June 30, 2022 Federally insured loans - Non-Nelnet Bank: Loans in-school/grace/deferment $ 612,357 4.8 % $ 637,919 4.7 % $ 763,957 4.9 % Loans in forbearance 930,629 7.3 1,103,181 8.1 1,246,882 8.1 Loans in repayment status: Loans current 9,609,634 85.2 % 10,173,859 86.0 % 11,551,817 86.1 % Loans delinquent 31-60 days 496,953 4.4 415,305 3.5 464,234 3.5 Loans delinquent 61-90 days 360,728 3.2 253,565 2.2 309,252 2.3 Loans delinquent 91-120 days 157,685 1.4 180,029 1.5 187,452 1.4 Loans delinquent 121-270 days 457,100 4.1 534,410 4.5 638,189 4.7 Loans delinquent 271 days or greater 194,656 1.7 268,205 2.3 267,828 2.0 Total loans in repayment 11,276,756 87.9 100.0 % 11,825,373 87.2 100.0 % 13,418,772 87.0 100.0 % Total federally insured loans 12,819,742 100.0 % 13,566,473 100.0 % 15,429,611 100.0 % Accrued interest receivable 810,489 808,150 775,337 Loan discount, net of unamortized premiums and deferred origination costs ( 33,764 ) ( 35,468 ) ( 26,674 ) Allowance for loan losses ( 74,061 ) ( 83,593 ) ( 92,593 ) Total federally insured loans and accrued interest receivable, net of allowance for loan losses $ 13,522,406 $ 14,255,562 $ 16,085,681 Private education loans - Non-Nelnet Bank: Loans in-school/grace/deferment $ 10,440 4.6 % $ 12,756 5.1 % $ 15,403 5.6 % Loans in forbearance 1,874 0.8 2,017 0.8 2,447 0.9 Loans in repayment status: Loans current 212,522 97.6 % 232,539 97.9 % 250,268 98.1 % Loans delinquent 31-60 days 1,643 0.7 2,410 1.0 1,980 0.8 Loans delinquent 61-90 days 1,253 0.6 767 0.3 782 0.3 Loans delinquent 91 days or greater 2,324 1.1 1,894 0.8 2,063 0.8 Total loans in repayment 217,742 94.6 100.0 % 237,610 94.1 100.0 % 255,093 93.5 100.0 % Total private education loans 230,056 100.0 % 252,383 100.0 % 272,943 100.0 % Accrued interest receivable 2,196 2,146 2,058 Loan premium, net of unaccreted discount 183 ( 38 ) 94 Allowance for loan losses ( 14,322 ) ( 15,411 ) ( 15,253 ) Total private education loans and accrued interest receivable, net of allowance for loan losses $ 218,113 $ 239,080 $ 259,842 Consumer and other loans - Non-Nelnet Bank: Loans in deferment $ 102 0.1 % $ 109 0.0 % $ 64 0.0 % Loans in repayment status: Loans current 181,864 96.1 % 346,812 98.9 % 150,812 98.9 % Loans delinquent 31-60 days 2,794 1.5 1,906 0.5 515 0.3 Loans delinquent 61-90 days 2,533 1.3 764 0.2 435 0.3 Loans delinquent 91 days or greater 2,034 1.1 1,324 0.4 757 0.5 Total loans in repayment 189,225 99.9 100.0 % 350,806 100.0 100.0 % 152,519 100.0 100.0 % Total consumer and other loans 189,327 100.0 % 350,915 100.0 % 152,583 100.0 % Accrued interest receivable 2,246 3,658 1,376 Loan premium, net of unaccreted discount 750 ( 588 ) ( 1,965 ) Allowance for loan losses ( 20,005 ) ( 30,263 ) ( 10,576 ) Total consumer and other loans and accrued interest receivable, net of allowance for loan losses $ 172,318 $ 323,722 $ 141,418 13 As of June 30, 2023 As of December 31, 2022 As of June 30, 2022 Federally insured loans - Nelnet Bank (a): Loans in-school/grace/deferment $ 239 0.4 % $ 241 0.4 % $ 283 0.4 % Loans in forbearance 665 1.1 981 1.5 1,029 1.3 Loans in repayment status: Loans current 59,041 97.5 % 63,225 97.8 % 74,883 98.4 % Loans delinquent 30-59 days 320 0.5 436 0.7 587 0.8 Loans delinquent 60-89 days 301 0.5 466 0.7 165 0.2 Loans delinquent 90-119 days 372 0.6 222 0.3 245 0.3 Loans delinquent 120-270 days 448 0.7 183 0.3 236 0.3 Loans delinquent 271 days or greater 115 0.2 159 0.2 — — Total loans in repayment 60,597 98.5 100.0 % 64,691 98.1 100.0 % 76,116 98.3 100.0 % Total federally insured loans 61,501 100.0 % 65,913 100.0 % 77,428 100.0 % Accrued interest receivable 1,973 1,758 1,381 Loan premium 18 20 23 Allowance for loan losses ( 154 ) ( 170 ) ( 258 ) Total federally insured loans and accrued interest receivable, net of allowance for loan losses $ 63,338 $ 67,521 $ 78,574 Private education loans - Nelnet Bank (a): Loans in-school/grace/deferment $ 16,996 4.8 % $ 11,580 3.3 % $ 1,160 0.3 % Loans in forbearance 1,797 0.5 864 0.2 1,236 0.4 Loans in repayment status: Loans current 332,205 99.6 % 340,830 99.8 % 343,148 99.8 % Loans delinquent 30-59 days 691 0.2 167 0.1 169 0.1 Loans delinquent 60-89 days 241 0.1 32 0.0 412 0.1 Loans delinquent 90 days or greater 389 0.1 409 0.1 — — Total loans in repayment 333,526 94.7 100.0 % 341,438 96.5 100.0 % 343,729 99.3 100.0 % Total private education loans 352,319 100.0 % 353,882 100.0 % 346,125 100.0 % Accrued interest receivable 1,591 1,152 539 Deferred origination costs, net of unaccreted discount 5,366 5,360 5,909 Allowance for loan losses ( 2,905 ) ( 2,390 ) ( 1,744 ) Total private education loans and accrued interest receivable, net of allowance for loan losses $ 356,371 $ 358,004 $ 350,829 Consumer and other loans - Nelnet Bank (a): Loans in deferment $ 6 — % Loans in repayment status: Loans current 30,120 98.2 % Loans delinquent 30-59 days 277 0.9 Loans delinquent 60-89 days 205 0.7 Loans delinquent 90 days or greater 60 0.2 Total loans in repayment 30,662 100.0 100.0 % Total consumer and other loans 30,668 100.0 % Accrued interest receivable 214 Loan premium — Allowance for loan losses ( 2,816 ) Total consumer and other loans and accrued interest receivable, net of allowance for loan losses $ 28,066 (a) For the periods presented for Nelnet Bank, the delinquency bucket periods conform with the delinquency bucket periods reflected in Nelnet Bank's Call Reports filed with the Federal Deposit Insurance Corporation. 14 FICO Scores - Nelnet Bank Private Education Loans An additional key credit quality indicator for Nelnet Bank private education loans is FICO scores at the time of origination. The following tables highlight the gross principal balance of Nelnet Bank's private education loan portfolio, by year of origination, stratified by FICO score at the time of origination. Loan balance as of June 30, 2023 Six months ended June 30, 2023 2022 2021 2020 Total FICO at origination: Less than 705 $ 1,731 5,869 5,100 342 13,042 705 - 734 3,936 22,881 9,776 506 37,099 735 - 764 4,109 34,497 15,794 1,401 55,801 765 - 794 1,938 54,989 29,021 1,531 87,479 Greater than 794 5,896 82,963 64,415 5,624 158,898 $ 17,610 201,199 124,106 9,404 352,319 Loan balance as of December 31, 2022 2022 2021 2020 Total FICO at origination: Less than 705 $ 5,898 5,389 348 11,635 705 - 734 23,392 10,543 542 34,477 735 - 764 35,456 16,686 1,473 53,615 765 - 794 57,141 31,035 1,622 89,798 Greater than 794 87,959 70,135 6,263 164,357 $ 209,846 133,788 10,248 353,882 Nonaccrual Status The Company does not place federally insured loans on nonaccrual status due to the government guaranty. The amortized cost of private education, consumer, and other loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of December 31, 2022 and June 30, 2023, was not material. Amortized Cost Basis by Origination Year The following table presents the amortized cost of the Company's private education, consumer, and other loans by loan status and delinquency amount as of June 30, 2023 based on year of origination. Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made under the Federal Direct Loan Program. As such, all the Company’s federally insured loans were originated prior to July 1, 2010. Six months ended June 30, 2023 2022 2021 2020 2019 Prior years Total Private education loans - Non-Nelnet Bank: Loans in-school/grace/deferment $ — 1,390 4,831 1,122 1,907 1,190 10,440 Loans in forbearance — — 62 311 451 1,050 1,874 Loans in repayment status: Loans current 115 4,270 4,610 49,726 39,948 113,853 212,522 Loans delinquent 31-60 days — 12 3 221 95 1,312 1,643 Loans delinquent 61-90 days — — — 311 71 871 1,253 Loans delinquent 91 days or greater — 29 5 100 110 2,080 2,324 Total loans in repayment 115 4,311 4,618 50,358 40,224 118,116 217,742 Total private education loans $ 115 5,701 9,511 51,791 42,582 120,356 230,056 Accrued interest receivable 2,196 Loan premium, net of unaccreted discount 183 Allowance for loan losses ( 14,322 ) Total private education loans and accrued interest receivable, net of allowance for loan losses $ 218,113 Gross charge-offs - six months ended June 30, 2023 $ — — 5 2 381 1,321 1,709 15 Six months ended June 30, 2023 2022 2021 2020 2019 Prior years Total Consumer and other loans - Non-Nelnet Bank: Loans in deferment $ 43 40 19 — — — 102 Loans in repayment status: Loans current 120,588 53,714 5,662 457 956 487 181,864 Loans delinquent 31-60 days 1,040 1,565 153 24 8 4 2,794 Loans delinquent 61-90 days 1,458 770 227 20 50 8 2,533 Loans delinquent 91 days or greater 337 970 131 61 199 336 2,034 Total loans in repayment 123,423 57,019 6,173 562 1,213 835 189,225 Total consumer and other loans $ 123,466 57,059 6,192 562 1,213 835 189,327 Accrued interest receivable 2,246 Loan premium, net of unaccreted discount 750 Allowance for loan losses ( 20,005 ) Total consumer and other loans and accrued interest receivable, net of allowance for loan losses $ 172,318 Gross charge-offs - six months ended June 30, 2023 $ 265 4,272 439 27 55 90 5,148 Private education loans - Nelnet Bank (a): Loans in-school/grace/deferment $ 2,787 11,980 1,168 1,061 — — 16,996 Loans in forbearance — 969 828 — — — 1,797 Loans in repayment status: Loans current 14,772 187,799 121,291 8,343 — — 332,205 Loans delinquent 30-59 days — 391 300 — — — 691 Loans delinquent 60-89 days 31 48 162 — — — 241 Loans delinquent 90 days or greater 20 12 357 — — — 389 Total loans in repayment 14,823 188,250 122,110 8,343 — — 333,526 Total private education loans $ 17,610 201,199 124,106 9,404 — — 352,319 Accrued interest receivable 1,591 Deferred origination costs, net of unaccreted discount 5,366 Allowance for loan losses ( 2,905 ) Total private education loans and accrued interest receivable, net of allowance for loan losses $ 356,371 Gross charge-offs - six months ended June 30, 2023 $ — 614 — — — — 614 Consumer and other loans - Nelnet Bank (a): Loans in deferment $ 6 — — — — — 6 Loans in repayment status: Loans current 29,547 518 55 — — — 30,120 Loans delinquent 30-59 days 277 — — — — — 277 Loans delinquent 60-89 days 205 — — — — — 205 Loans delinquent 90 days or greater 60 — — — — — 60 Total loans in repayment 30,089 518 55 — — — 30,662 Total consumer and other loans $ 30,095 518 55 — — — 30,668 Accrued interest receivable 214 Loan premium — Allowance for loan losses ( 2,816 ) Total consumer and other loans and accrued interest receivable, net of allowance for loan losses $ 28,066 Gross charge-offs - six months ended June 30, 2023 $ — — — — — — — (a) For the periods presented for Nelnet Bank, the delinquency bucket periods conform with the delinquency bucket periods reflected in Nelnet Bank's Call Reports filed with the Federal Deposit Insurance Corporation. 16 3. Bonds and Notes Payable The following tables summarize the Company’s outstanding debt obligations by type of instrument: As of June 30, 2023 Carrying amount Interest rate range Final maturity Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: Bonds and notes based on indices $ 10,494,458 5.37 % - 7.15 % 8/26/30 - 9/25/69 Bonds and notes based on auction 91,335 0.00 % - 6.18 % 3/22/32 - 11/26/46 Total FFELP variable-rate bonds and notes 10,585,793 Fixed-rate bonds and notes issued in FFELP loan asset-backed securitizations 519,156 1.42 % - 3.45 % 10/25/67 - 8/27/68 FFELP loan warehouse facilities 1,530,429 5.15 % - 5.42 % 11/22/24 / 4/2/25 Private education loan warehouse facility 42,200 5.37 % 12/31/23 Consumer loan warehouse facility 32,324 5.44 % 11/14/25 Variable-rate bonds and notes issued in private education loan asset-backed securitizations 16,628 6.65 % 6/25/49 Fixed-rate bonds and notes issued in private education loan asset-backed securitization 19,606 5.35 % 12/28/43 Unsecured line of credit — — 9/22/26 Participation agreement 6,781 5.84 % 5/4/24 Repurchase agreements 415,514 5.81 % - 6.47 % 7/26/23 - 11/27/24 Other - due to related party 6,174 3.55 % - 6.05 % 3/1/24 - 11/15/30 13,174,605 Discount on bonds and notes payable and debt issuance costs ( 104,465 ) Total $ 13,070,140 As of December 31, 2022 Carrying amount Interest rate range Final maturity Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: Bonds and notes based on indices $ 11,868,190 4.47 % - 6.39 % 8/26/30 - 9/25/69 Bonds and notes based on auction 178,960 0.00 % - 4.02 % 3/22/32 - 11/26/46 Total FFELP variable-rate bonds and notes 12,047,150 Fixed-rate bonds and notes issued in FFELP loan asset-backed securitizations 594,051 1.42 % - 3.45 % 10/25/67 - 8/27/68 FFELP loan warehouse facility 978,956 4.69 % / 4.71 % 5/22/24 Private education loan warehouse facility 64,356 4.72 % 12/31/23 Consumer loan warehouse facility 89,000 4.73 % 11/14/25 Variable-rate bonds and notes issued in private education loan asset-backed securitizations 19,865 5.90 % / 6.14 % 12/26/40 / 6/25/49 Fixed-rate bonds and notes issued in private education loan asset-backed securitization 23,032 3.60 % / 5.35 % 12/26/40 / 12/28/43 Unsecured line of credit — — 9/22/26 Participation agreement 395,432 5.02 % 5/4/23 Repurchase agreements 567,254 0.97 % - 5.60 % 1/4/23 - 11/27/24 Other - due to related party 6,187 3.55 % - 6.05 % 3/1/24 - 11/15/30 14,785,283 Discount on bonds and notes payable and debt issuance costs ( 148,088 ) Total $ 14,637,195 17 Warehouse Facilities The Company funds a portion of its loan acquisitions using warehouse facilities. Loan warehousing allows the Company to buy and manage loans prior to transferring them into more permanent financing arrangements. The following table summarizes the Company's warehouse facilities as of June 30, 2023. Type of loans Maximum financing amount Amount outstanding Amount available Expiration of liquidity provisions Final maturity date Advance rate Advanced as equity support FFELP (a) $ 1,250,000 1,119,030 130,970 11/22/2023 11/22/2024 note (b) $ 99,220 FFELP (c) 432,000 411,399 20,601 4/2/2024 4/2/2025 92 % 34,497 $ 1,682,000 1,530,429 151,571 $ 133,717 Private (d) 42,200 42,200 — 8/31/2023 12/31/2023 — 18,720 Consumer 250,000 32,324 217,676 11/14/2024 11/14/2025 70 % 13,901 (a) On March 31, 2023, this facility was amended to increase the aggregate maximum financing amount available from $ 1.20 billion to $ 1.25 billion. On May 22, 2023, this facility was amended to extend the expiration of liquidity provisions and final maturity date to November 22, 2023 and November 22, 2024, respectively. (b) This facility has a static advance rate until the expiration date of the liquidity provisions. The maximum advance rates for this facility are 90 % to 96 %, and the minimum advance rates are 84 % to 90 %. In the event the liquidity provisions are not extended, the valuation agent has the right to perform a one-time mark to market on the underlying loans funded in this facility, subject to a floor. The loans would then be funded at this new advance rate until the final maturity date of the facility. (c) On April 3, 2023, the Company closed on this $ 250.0 million FFELP facility. On May 25, 2023, this facility was amended to increase the maximum financing amount from $ 250.0 million to $ 432.0 million. (d) On June 30, 2023, this facility was amended to extend the expiration of liquidity provisions to August 31, 2023. No additional amounts can be borrowed under this facility. Unsecured Line of Credit The Company has a $ 495.0 million unsecured line of credit that has a maturity date of September 22, 2026. As of June 30, 2023, no amount was outstanding on the line of credit and $ 495.0 million was available for future use. Participation Agreement The Company has an agreement with Union Bank and Trust Company ("Union Bank"), a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in FFELP loan asset-backed securities (bond investments). As of June 30, 2023, $ 6.8 million (par value) of FFELP loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. On May 4, 2023, the agreement automatically renewed for another year through May 4, 2024. The Company can participate FFELP loan asset-backed securities to Union Bank to the extent of availability under the grantor trusts, up to $ 400.0 million or an amount in excess of $ 400.0 million if mutually agreed to by both parties. The Company maintains legal ownership of the FFELP loan asset-backed securities and, in its discretion, approves and accomplishes any sale, assignment, transfer, encumbrance, or other disposition of the securities. As such, the FFELP loan asset-backed securities subject to this agreement are included on the Company's consolidated balance sheets as "investments and notes receivable" and the participation interests outstanding have been accounted for by the Company as a secured borrowing. See note 5 for additional information about the FFELP loan asset-backed securities investments serving as collateral under this participation agreement. Repurchase Agreements On May 3, 2021 and June 23, 2021, the Company entered into repurchase agreements with non-affiliated third parties, the proceeds of which are collateralized by certain private education and FFELP loan asset-backed securities (bond investments). The first agreement has various maturity dates through November 27, 2024 or earlier if either party provides 180 days’ prior written notice, and the maturity date of the second agreement (as of June 30, 2023) was July 26, 2023. Subsequent to June 30, 2023, the remaining outstanding balance of this facility was paid in full. Under the first agreement, the Company is subject to margin deficit payment requirements if the fair value of the securities subject to the agreement is less than the original purchase price of such securities on any scheduled reset date, and under the second agreement, the Company was subject to margin deficit payment requirements if the fair value of the securities subject to the agreement was less than the original purchase price 18 of such securities and the counter-party provided notice requiring such payment. Included in “bonds and notes payable” in the consolidated balance sheets as of June 30, 2023 was $ 347.6 million subject to the first agreement and $ 67.9 million subject to the second agreement. See note 5 and below under "Debt Repurchases" for additional information about the private education and FFELP loan asset-backed securities investments, respectively, serving as collateral for these repurchase agreements. Nelnet Bank Nelnet Bank has unsecured Federal Funds lines of credit with correspondent banks totaling $ 30.0 million at a stated interest rate at the time of borrowing. Nelnet Bank has also established an account at the Federal Reserve Bank (FRB), the Federal Home Loan Bank (FHLB), and an additional $ 10.0 million Federal Funds line of credit with a correspondent bank which must be fully collateralized. The FRB, FHLB, and secured Federal Funds line of credit accepts pledges of eligible securities. In addition, FFELP and private education loans are accepted as collateral for FRB borrowings. As of June 30, 2023 and December 31, 2022, Nelnet Bank had no amounts drawn on their Federal Funds, FRB, or FHLB lines of credit. As of June 30, 2023, the Bank has $ 20.0 million of collateral pledged with the FRB that it may borrow against. Debt Repurchases The following table summarizes the Company's repurchases of its own debt. Gains/losses recorded by the Company from the repurchase of debt are included in "other, net" in "other income (expense)" on the Company's consolidated statements of income. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Purchase price $ — ( 35,643 ) ( 828 ) ( 54,096 ) Par value — 36,700 908 55,229 Remaining unamortized cost of issuance — ( 17 ) ( 2 ) ( 62 ) Gain $ — 1,040 78 1,071 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. As of June 30, 2023, the Company holds $ 253.7 million (par value) of its own FFELP loan asset-backed securities. As of June 30, 2023, $ 197.5 million (par value) of the Company's repurchased FFELP loan asset-backed securities were serving as collateral on amounts outstanding under the Company's repurchase agreements (as discussed above). In April 2023, the Company redeemed $ 188.6 million of FFELP loan asset-backed debt securities (bonds and notes payable) prior to their maturity, of which the Company owned $ 140.5 million of the bonds that were redeemed. The remaining unamortized debt discount associated with these bonds at the time of redemption was written-off, resulting in a $ 25.9 million non-cash expense recognized in April 2023. This expense is included in "interest expense on bonds and notes payable and bank deposits" on the consolidated statements of income. 19 4. Derivative Financial Instruments The Company uses derivative financial instruments primarily to manage interest rate risk. Derivative instruments used as part of the Company's interest rate risk management strategy are further described in note 6 of the notes to consolidated financial statements included in the 2022 Annual Report. A tabular presentation of such derivatives outstanding as of June 30, 2023 and December 31, 2022 is presented below. Non-Nelnet Bank Derivatives Basis Swaps The following table summarizes the Company’s outstanding basis swaps, in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). Maturity Notional amount As of As of June 30, 2023 December 31, 2022 2023 $ — 750,000 2024 1,750,000 1,750,000 2026 1,150,000 1,150,000 2027 250,000 250,000 $ 3,150,000 3,900,000 The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2023 and December 31, 2022 was one-month LIBOR plus 10.1 basis points and 9.7 basis points, respectively. Interest Rate Swaps – Floor Income Hedges The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income. As of June 30, 2023 As of December 31, 2022 (a) Maturity Notional amount Weighted average fixed rate paid by the Company (b) Notional amount Weighted average fixed rate paid by the Company (b) 2024 $ — — % $ 2,000,000 0.35 % 2026 — — 500,000 1.02 2030 (c) 50,000 3.44 — — 2031 — — 100,000 1.53 2032 — — 200,000 2.92 $ 50,000 3.44 % $ 2,800,000 0.70 % (a) On March 15, 2023, to minimize the Company's exposure to market volatility, the Company terminated its entire derivative portfolio hedging loans earning fixed rate floor income ($ 2.8 billion in notional amount of derivatives). Through March 15, 2023, the Company had received cash or had a receivable from the clearinghouse related to variation margin equal to the fair value of the $ 2.8 billion notional amount of fixed rate floor derivatives as of March 15, 2023 of $ 183.2 million, which included $ 19.1 million related to current period settlements. (b) For the interest rate derivative maturing in 2030, the Company receives payments based on Secured Overnight Financing Rate (SOFR) that resets quarterly. For the interest rate derivative maturing in 2032, the Company was to receive payments based on SOFR that reset quarterly. For all other interest rate derivatives, the Company received payments based on three-month LIBOR that reset quarterly. (c) The Company entered into this derivative in June 2023. Nelnet Bank Derivatives Interest Rate Swaps Derivative instruments are used by Nelnet Bank to hedge the exposure to variability in cash flows of variable rate intercompany deposits primarily to minimize the exposure to volatility in cash flows from future changes in interest rates. Nelnet Bank has structured these derivatives so that each is economically effective; however, because these derivatives are hedging intercompany deposits, the derivative instruments are not eligible for hedge accounting in the consolidated financial statements. 20 As a result, the change in market value of these derivative instruments is reported in current period earnings and presented in "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income. The following table summarizes the outstanding derivative instruments used by Nelnet Bank to hedge exposure to variability in cash flows related to variable rate intercompany deposits as of June 30, 2023. As of June 30, 2023 Maturity Notional amount Weighted average fixed rate paid by the Company (a) 2028 $ 40,000 3.33 % 2030 (b) 25,000 2.97 $ 65,000 3.19 % (a) For all interest rate derivatives, the Company receives payments based on SOFR that reset quarterly. (b) This derivative with a $ 25 million notional amount has a forward effective start date in April 2026. Unlike the Company's Non-Nelnet Bank derivatives, Nelnet Bank's derivatives are not cleared post-execution at a regulated clearinghouse. As such, the Company records these derivative instruments in the consolidated balance sheets on a gross basis as either an asset or liability measured at fair value. As of June 30, 2023, the gross fair value of Nelnet Bank's interest rate swap derivatives was $ 1.1 million (an asset) that is included in "other assets" on the consolidated balance sheet. Consolidated Financial Statement Impact Related to Derivatives The following table summarizes the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Settlements: 1:3 basis swaps $ ( 65 ) 931 794 1,327 Interest rate swaps - floor income hedges 47 3,692 22,525 487 Interest rate swaps - Nelnet Bank 83 — 83 — Total settlements - income 65 4,623 23,402 1,814 Change in fair value: 1:3 basis swaps 235 ( 148 ) 211 741 Interest rate swaps - floor income hedges 662 40,549 ( 36,726 ) 185,394 Interest rate swaps - Nelnet Bank 1,108 — 1,108 — Total change in fair value - income (expense) 2,005 40,401 ( 35,407 ) 186,135 Derivative market value adjustments and derivative settlements, net - income (expense) $ 2,070 45,024 ( 12,005 ) 187,949 21 5. Investments and Notes Receivable Investments and notes receivable consisted of the following: As of June 30, 2023 As of December 31, 2022 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized cost Gross unrealized gains Gross unrealized losses Fair value Investments (at fair value): Available-for-sale asset-backed securities Non-Nelnet Bank: FFELP loan (a) $ 329,256 5,064 ( 6,372 ) 327,948 463,861 3,498 ( 11,105 ) 456,254 Private education loan (b) 307,084 — ( 25,238 ) 281,846 335,903 — ( 29,438 ) 306,465 Other debt securities 59,631 3,050 ( 670 ) 62,011 158,589 151 ( 3,790 ) 154,950 Total Non-Nelnet Bank 695,971 8,114 ( 32,280 ) 671,805 958,353 3,649 ( 44,333 ) 917,669 Nelnet Bank: FFELP loan (c) 257,418 1,378 ( 2,430 ) 256,366 349,855 955 ( 8,853 ) 341,957 Private education loan 1,707 — ( 92 ) 1,615 1,941 — ( 122 ) 1,819 Other debt securities 120,471 161 ( 2,344 ) 118,288 131,481 18 ( 3,907 ) 127,592 Total Nelnet Bank 379,596 1,539 ( 4,866 ) 376,269 483,277 973 ( 12,882 ) 471,368 Total available-for-sale asset-backed securities $ 1,075,567 9,653 ( 37,146 ) 1,048,074 1,441,630 4,622 ( 57,215 ) 1,389,037 Equity securities 39,576 39,082 Total investments at fair value 1,087,650 1,428,119 Other Investments and Notes Receivable (not measured at fair value): Held to maturity investments Non-Nelnet Bank: Debt securities (d) 4,700 18,554 Nelnet Bank: FFELP loan asset-backed securities (c) 150,840 — Other debt securities 241 220 Total Nelnet Bank 151,081 220 Total held to maturity investments 155,781 18,774 Venture capital and funds: Measurement alternative (e) (f) 193,001 160,052 Equity method 109,988 89,332 Total venture capital and funds 302,989 249,384 Real estate: Equity method 85,284 80,364 Investment in ALLO: Voting interest/equity method (g) 43,588 67,538 Preferred membership interest and accrued and unpaid preferred return (h) 150,449 145,926 Total investment in ALLO 194,037 213,464 Beneficial interest in loan securitizations (i): Consumer loans and other 96,635 39,249 Private education loans 71,322 75,261 Federally insured student loans 23,017 24,228 Total beneficial interest in loan securitizations 190,974 138,738 Solar (j) ( 72,455 ) ( 55,448 ) Notes receivable 54,931 31,106 Tax liens, affordable housing, and other 7,115 7,416 Total investments (not measured at fair value) 918,656 683,798 Total investments and notes receivable $ 2,006,306 $ 2,111,917 22 (a) A portion of FFELP loan asset-backed securities were subject to participation interests held by Union Bank, as discussed in note 3 under "Participation Agreement." As of June 30, 2023, the par value and fair value of these securities was $ 6.8 million and $ 6.3 million, respectively. (b) A portion of private education loan asset-backed securities were subject to a repurchase agreement with a third party, as discussed in note 3 under "Repurchase Agreements." As of June 30, 2023, the par value and fair value of these securities was $ 307.6 million and $ 281.8 million, respectively. (c) On March 31, 2023, securities at Nelnet Bank with a fair value of $ 149.2 million were transferred from available-for-sale to held to maturity. The securities were reclassified at fair value at the time of the transfer, and such transfer represented a non-cash transaction. Accumulated other comprehensive income as of March 31, 2023 included pre-tax unrealized losses of $ 3.7 million related to the transfer. These unrealized losses are being amortized, consistent with the amortization of any discounts on such securities, over the remaining lives of the respective securities as an adjustment of yield. (d) On March 31, 2023, certain Non-Nelnet Bank debt securities were transferred from held to maturity to available-for-sale. (e) The Company has an investment in Agile Sports Technologies, Inc. (doing business as “Hudl”) that is included in “venture capital and funds” in the above table. On February 6, 2023, the Company acquired additional ownership interests in Hudl for $ 31.5 million. Such ownership interests were purchased by the Company from certain existing Hudl investors. The Company accounts for its investment in Hudl using the measurement alternative method, which requires it to adjust its carrying value of the investment for changes resulting from observable market transactions. The February 6, 2023 transaction was not considered an observable market transaction (not orderly) because it was not subject to customary marketing activities, and the price was privately negotiated between the Company and the selling parties. Accordingly, the Company did not adjust its carrying value of its Hudl investment to the February 2023 transaction value. As of June 30, 2023, the carrying amount of the Company's investment in Hudl is $ 165.5 million, and the Company's equity ownership interests did not materially change as a result of the February 6, 2023 transaction. David S. Graff, who has served on the Company's Board of Directors since May 2014, is CEO, co-founder, and a director of Hudl. (f) During the second quarter of 2022, the Company recorded an impairment charge of $ 5.4 million related primarily to one of its venture capital investments accounted for under the measurement alternative method. The impairment expense is included in "impairment expense" on the consolidated statements of income. (g) During the first quarter of 2023, the Company contributed $ 8.4 million of additional equity to ALLO Holdings LLC, a holding company for ALLO Communications LLC (collectively referred to as "ALLO"). As a result of this equity contribution, the Company's voting membership interests percentage in ALLO did not materially change. The Company accounts for its voting membership interests in ALLO under the Hypothetical Liquidation at Book Value (HLBV) method of accounting. During the three months ended June 30, 2023 and 2022, the Company recognized losses of $ 12.2 million and $ 16.9 million, respectively, under the HLBV method of accounting on its ALLO voting membership interests investment, and during the six months ended June 30, 2023 and 2022, the Company recognized losses of $ 32.4 million and $ 30.1 million, respectively. Income and losses from the Company's investment in ALLO are included in "other, net" in "other income (expense)" on the consolidated statements of income. (h) As of June 30, 2023, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $ 145.9 million and $ 4.5 million, respectively. The preferred membership interests of ALLO held by the Company earn a preferred annual return of 6.25 %. The Company recognized income on its ALLO preferred membership interests of $ 2.3 million and $ 2.1 million during the three months ended June 30, 2023 and 2022, respectively, and $ 4.5 million and $ 4.3 million during the six months ended June 30, 2023 and 2022, respectively. This income is included in "other, net" in "other income (expense)" on the consolidated statements of income. (i) The Company has partial ownership in certain consumer, private education, and federally insured student loan securitizations. As of the latest remittance reports filed by the various trusts prior to or as of June 30, 2023, the Company's ownership correlates to approximately $ 680 million, $ 560 million, and $ 360 million of consumer, private education, and federally insured student loans, respectively, included in these securitizations. (j) As of June 30, 2023, the Company has funded a total of $ 312.9 million in solar investments, which includes $ 120.0 million funded by syndication partners. The carrying value of the Company’s investment in a solar project is reduced by tax credits earned when the solar project is placed-in-service. The solar investment balance as of June 30, 2023 represents the sum of total tax credits earned on solar projects placed-in-service through June 30, 2023 and the calculated HLBV net losses being larger than the total investment contributions made by the Company on such projects. As of June 30, 2023, the Company is committed to fund an additional $ 319.2 million on tax equity investments, of which $ 120.5 million is expected to be provided by syndication partners. The Company accounts for its solar investments using the HLBV method of accounting. For the majority of the Company’s solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment. The Company recognized losses on its solar investments of $ 7.9 million and $ 1.9 million during the three months ended June 30, 2023 and 2022, respectively, and $ 9.9 million and $ 2.9 million during the six months ended June 30, 2023 and 2022, respectively. These losses, which include losses attributable to third-party noncontrolling interest investors (syndication partners), are included in “other, net” in "other income (expense)" on the consolidated statements of income. Solar losses attributed to noncontrolling interest investors was $ 7.4 million and $ 2.0 million for the three months ended June 30, 2023 and 2022, respectively, and $ 10.1 million and $ 3.9 million during the six months ended June 30, 2023 and 2022, respectively, and is reflected in “net loss attributable to noncontrolling interests” in the consolidated statements of income. 23 The following table presents, by remaining contractual maturity, the amortized cost and fair value of debt securities at June 30, 2023: As of June 30, 2023 1 year or less After 1 year through 5 years After 5 years through 10 years After 10 years Total Available-for-sale asset-backed securities Non-Nelnet Bank: FFELP loan $ 24,742 11,841 48,079 244,594 329,256 Private education loan — — — 307,084 307,084 Other debt securities — 99 — 59,532 59,631 Total Non-Nelnet Bank 24,742 11,940 48,079 611,210 695,971 Fair value 24,735 11,915 46,921 588,234 671,805 Nelnet Bank: FFELP loan 37,270 — 44,458 175,690 257,418 Private education loan — — — 1,707 1,707 Other debt securities 2,112 19,490 50,919 47,950 120,471 Total Nelnet Bank 39,382 19,490 95,377 225,347 379,596 Fair value 38,911 19,370 93,795 224,193 376,269 Total available-for-sale asset-backed securities at amortized cost $ 64,124 31,430 143,456 836,557 1,075,567 Total available-for-sale asset-backed securities at fair value $ 63,646 31,285 140,716 812,427 1,048,074 Held to maturity investments Non-Nelnet Bank: Debt securities $ 4,700 — — — 4,700 Fair value 4,700 — — — 4,700 Nelnet Bank: FFELP loan asset-backed securities — 3,678 — 147,162 150,840 Other debt securities 241 — — — 241 Total Nelnet Bank 241 3,678 — 147,162 151,081 Fair value 241 3,743 — 147,853 151,837 Total held-to-maturity investments at amortized cost $ 4,941 3,678 — 147,162 155,781 Total held-to-maturity investments at fair value $ 4,941 3,743 — 147,853 156,537 The following table presents securities classified as available-for-sale that have gross unrealized losses at June 30, 2023 and the fair value of such securities as of June 30, 2023. These securities are segregated between investments that had been in a continuous unrealized loss position for less than twelve months and twelve months or more, based on the point in time that the fair value declined below the amortized cost basis. All securities in the table below have been evaluated to determine if a credit loss exists. As part of that assessment, the Company concluded it currently has the intent and ability to retain these investments, and none of the unrealized losses were due to credit losses. As of June 30, 2023 Unrealized loss position less than 12 months Unrealized loss position 12 months or more Total Available-for-sale asset-backed securities Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Fair value Non-Nelnet Bank: FFELP loan $ ( 6,349 ) 208,144 ( 23 ) 532 ( 6,372 ) 208,676 Private education loan ( 4,304 ) 71,534 ( 20,934 ) 210,312 ( 25,238 ) 281,846 Other debt securities ( 670 ) 24,304 — — ( 670 ) 24,304 Total Non-Nelnet Bank ( 11,323 ) 303,982 ( 20,957 ) 210,844 ( 32,280 ) 514,826 Nelnet Bank: FFELP loan ( 827 ) 89,190 ( 1,603 ) 88,972 ( 2,430 ) 178,162 Private education loan ( 92 ) 1,616 — — ( 92 ) 1,616 Other debt securities ( 293 ) 30,671 ( 2,051 ) 57,692 ( 2,344 ) 88,363 Total Nelnet Bank ( 1,212 ) 121,477 ( 3,654 ) 146,664 ( 4,866 ) 268,141 Total available-for-sale asset-backed securities $ ( 12,535 ) 425,459 ( 24,611 ) 357,508 ( 37,146 ) 782,967 24 The following table summarizes the gross proceeds received and gross realized gains and losses related to sales of available-for-sale asset-backed securities. Three months ended Six months ended June 30, June 30, 2023 2022 2023 2022 Gross proceeds from sales $ 85,375 205,772 577,548 319,752 Gross realized gains $ 920 909 2,194 3,874 Gross realized losses ( 2 ) ( 60 ) ( 6,258 ) ( 232 ) Net gains (losses) $ 918 849 ( 4,064 ) 3,642 6. Intangible Assets Intangible assets consisted of the following: Weighted average remaining useful life as of June 30, 2023 (months) As of As of June 30, 2023 December 31, 2022 Amortizable intangible assets, net: Customer relationships (net of accumulated amortization of $ 43,178 and $ 55,116 , respectively) 107 $ 47,529 51,738 Trade names (net of accumulated amortization of $ 2,085 and $ 617 , respectively) 16 6,825 8,293 Computer software (net of accumulated amortization of $ 400 and $ 6,400 , respectively) 46 1,320 1,520 Other (net of accumulated amortization of $ 821 and $ 490 , respectively) 48 1,619 1,950 Total - amortizable intangible assets, net 93 $ 57,293 63,501 The Company recorded amortization expense on its intangible assets of $ 3.5 million and $ 2.9 million for the three months ended June 30, 2023 and 2022, respectively, and $ 6.2 million and $ 5.3 million during the six months ended June 30, 2023 and 2022, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of June 30, 2023, the Company estimates it will record amortization expense as follows: 2023 (July 1 - December 31) $ 10,765 2024 8,775 2025 7,141 2026 6,294 2027 5,814 2028 and thereafter 18,504 $ 57,293 7. Goodwill The following table presents the carrying amount of goodwill as of June 30, 2023 and December 31, 2022 by reportable operating segment: Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Nelnet Bank Corporate and Other Activities Total Goodwill balance $ 23,639 92,507 41,883 — 18,873 176,902 25 8. Bank Deposits 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, Short Term Federal Investment Trusts (STFIT), and commercial and institutional CDs. Union Bank, a related party, is the program manager for the College Savings plans and trustee for the STFIT Trust. CDs are accounts that have a stipulated maturity and interest rate. For savings accounts, the depositor may be required to give written notice of any intended withdrawal no less than seven days before the withdrawal is made. Generally, early withdrawal of brokered CDs is prohibited (except in the case of death or legal incapacity). Nelnet Bank has intercompany deposits from Nelnet, Inc. and its subsidiaries totaling $ 140.4 million, including a $ 40.0 million pledged deposit from Nelnet, Inc. as required under a Capital and Liquidity Maintenance Agreement with the FDIC. All intercompany deposits held at Nelnet Bank are eliminated for consolidated financial reporting purposes. The following table summarizes Nelnet Bank’s interest-bearing deposits, excluding intercompany deposits: As of As of June 30, 2023 December 31, 2022 Brokered CDs, net of brokered deposit fees $ 203,418 254,817 Retail and other savings (529, STFIT, and HSA) 504,858 410,556 Retail and other CDs (commercial and institutional) 22,770 25,949 Total interest-bearing deposits $ 731,046 691,322 The following table presents certificates of deposit remaining maturities as of June 30, 2023: After two years to three years $ 151,559 After three years to four years 74,282 After four years to five years 347 Total $ 226,188 The Educational 529 College Savings, STFIT, and Health Savings plan deposits are large interest-bearing omnibus accounts structured to allow FDIC insurance to flow through to underlying individual depositors. Except for the pledged deposit from Nelnet, Inc. and an earmarked deposit required for intercompany transactions, there were no deposits exceeding the FDIC insurance limits as of June 30, 2023 and December 31, 2022. 26 9. Earnings per Common Share The following table presents the components used to calculate basic and diluted earnings per share. The Company applies the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate earnings per share amounts for common stock and unvested share-based awards. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Three months ended June 30, 2023 2022 Common shareholders Unvested restricted stock shareholders Total Common shareholders Unvested restricted stock shareholders Total Numerator: Net income attributable to Nelnet, Inc. $ 27,665 602 28,267 83,485 1,644 85,129 Denominator: Weighted-average common shares outstanding - basic and diluted 36,670,933 797,464 37,468,397 36,981,990 728,224 37,710,214 Earnings per share - basic and diluted $ 0.75 0.75 0.75 2.26 2.26 2.26 Six months ended June 30, 2023 2022 Common shareholders Unvested restricted stock shareholders Total Common shareholders Unvested restricted stock shareholders Total Numerator: Net income attributable to Nelnet, Inc. $ 53,611 1,143 54,754 266,735 5,041 271,776 Denominator: Weighted-average common shares outstanding - basic and diluted 36,625,819 781,024 37,406,843 37,172,606 702,502 37,875,108 Earnings per share - basic and diluted $ 1.46 1.46 1.46 7.18 7.18 7.18 27 10. Segment Reporting See note 17 of the notes to consolidated financial statements included in the 2022 Annual Report for a description of the Company's operating segments. The following tables present the results of each of the Company's reportable operating segments reconciled to the consolidated financial statements. Three months ended June 30, 2023 Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Nelnet Bank Corporate and Other Activities Eliminations Total Total interest income $ 1,058 5,268 253,763 13,661 25,855 ( 15,578 ) 284,027 Interest expense — — 232,313 8,171 8,242 ( 15,578 ) 233,148 Net interest income 1,058 5,268 21,450 5,490 17,613 — 50,879 Less provision for loan losses — — 8,099 1,493 — — 9,592 Net interest income after provision for loan losses 1,058 5,268 13,351 3,997 17,613 — 41,287 Other income (expense): Loan servicing and systems revenue 122,020 — — — — — 122,020 Intersegment revenue 7,246 65 — — — ( 7,311 ) — Education technology, services, and payment processing revenue — 109,858 — — — — 109,858 Solar construction revenue — — — — 4,735 — 4,735 Other, net 605 — 1,319 620 ( 9,553 ) — ( 7,011 ) Gain on sale of loans, net — — 15,511 — — — 15,511 Impairment expense — — — — — — — Derivative settlements, net — — ( 18 ) 83 — — 65 Derivative market value adjustments, net — — 897 1,108 — — 2,005 Total other income (expense), net 129,871 109,923 17,709 1,811 ( 4,818 ) ( 7,311 ) 247,183 Cost of services: Cost to provide education technology, services, and payment processing services — 40,407 — — — — 40,407 Cost to provide solar construction services — — — — 9,122 — 9,122 Total cost of services — 40,407 — — 9,122 — 49,529 Operating expenses: Salaries and benefits 76,141 38,351 1,096 2,297 26,965 ( 145 ) 144,706 Depreciation and amortization 4,863 2,815 — 51 10,923 — 18,652 Other expenses 13,818 9,692 4,115 1,624 16,747 — 45,997 Intersegment expenses, net 19,079 5,884 8,145 92 ( 26,034 ) ( 7,166 ) — Total operating expenses 113,901 56,742 13,356 4,064 28,601 ( 7,311 ) 209,355 Income (loss) before income taxes 17,028 18,042 17,704 1,744 ( 24,928 ) — 29,586 Income tax (expense) benefit ( 4,086 ) ( 4,327 ) ( 4,249 ) ( 396 ) 2,567 — ( 10,491 ) Net income (loss) 12,942 13,715 13,455 1,348 ( 22,361 ) — 19,095 Net (income) loss attributable to noncontrolling interests — ( 19 ) — — 9,191 — 9,172 Net income (loss) attributable to Nelnet, Inc. $ 12,942 13,696 13,455 1,348 ( 13,170 ) — 28,267 Total assets as of June 30, 2023 $ 173,926 482,922 14,667,357 1,005,043 2,091,500 ( 613,116 ) 17,807,632 28 Three months ended June 30, 2022 Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Nelnet Bank Corporate and Other Activities Eliminations Total Total interest income $ 246 874 140,396 5,212 6,235 ( 1,376 ) 151,587 Interest expense 20 — 69,708 1,639 3,652 ( 1,376 ) 73,642 Net interest income 226 874 70,688 3,573 2,583 — 77,945 Less provision for loan losses — — 8,827 582 — — 9,409 Net interest income after provision for loan losses 226 874 61,861 2,991 2,583 — 68,536 Other income (expense): Loan servicing and systems revenue 124,873 — — — — — 124,873 Intersegment revenue 8,381 7 — — — ( 8,388 ) — Education technology, services, and payment processing revenue — 91,031 — — — — 91,031 Solar construction revenue — — — — — — — Other, net 611 — 5,133 157 6,747 — 12,647 Gain on sale of loans, net — — — — — — — Impairment expense — — — — ( 6,284 ) — ( 6,284 ) Derivative settlements, net — — 4,623 — — — 4,623 Derivative market value adjustments, net — — 40,401 — — — 40,401 Total other income (expense), net 133,865 91,038 50,157 157 463 ( 8,388 ) 267,291 Cost of services: Cost to provide education technology, services, and payment processing services — 30,852 — — — — 30,852 Cost to provide solar construction services — — — — — — — Total cost of services — 30,852 — — — — 30,852 Operating expenses: Salaries and benefits 83,220 32,120 614 1,714 23,729 — 141,398 Depreciation and amortization 5,318 2,698 — 4 10,230 — 18,250 Other expenses 13,507 6,750 3,543 899 12,241 — 36,940 Intersegment expenses, net 18,558 4,805 8,513 57 ( 23,545 ) ( 8,388 ) — Total operating expenses 120,603 46,373 12,670 2,674 22,655 ( 8,388 ) 196,588 Income (loss) before income taxes 13,488 14,687 99,348 474 ( 19,609 ) — 108,387 Income tax (expense) benefit ( 3,237 ) ( 3,525 ) ( 23,844 ) ( 106 ) 5,228 — ( 25,483 ) Net income (loss) 10,251 11,162 75,504 368 ( 14,381 ) — 82,904 Net (income) loss attributable to noncontrolling interests — 53 — — 2,172 — 2,225 Net income (loss) attributable to Nelnet, Inc. $ 10,251 11,215 75,504 368 ( 12,209 ) — 85,129 Total assets as of June 30, 2022 $ 240,437 546,235 17,388,228 864,659 2,273,216 ( 688,762 ) 20,624,013 29 Six months ended June 30, 2023 Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Nelnet Bank Corporate and Other Activities Eliminations Total Total interest income $ 2,095 11,304 488,482 25,920 47,054 ( 24,860 ) 549,995 Interest expense — — 421,511 15,385 20,560 ( 24,860 ) 432,597 Net interest income 2,095 11,304 66,971 10,535 26,494 — 117,398 Less provision for loan losses — — 39,957 3,910 — — 43,867 Net interest income after provision for loan losses 2,095 11,304 27,014 6,625 26,494 — 73,531 Other income (expense): Loan servicing and systems revenue 261,247 — — — — — 261,247 Intersegment revenue 15,036 121 — — — ( 15,157 ) — Education technology, services, and payment processing revenue — 243,462 — — — — 243,462 Solar construction revenue — — — — 13,386 — 13,386 Other, net 1,213 — 4,164 830 ( 27,287 ) — ( 21,083 ) Gain on sale of loans, net — — 27,323 — — — 27,323 Impairment expense — — — — — — — Derivative settlements, net — — 23,319 83 — — 23,402 Derivative market value adjustments, net — — ( 36,515 ) 1,108 — — ( 35,407 ) Total other income (expense), net 277,496 243,583 18,291 2,021 ( 13,901 ) ( 15,157 ) 512,330 Cost of services: Cost to provide education technology, services, and payment processing services — 88,110 — — — — 88,110 Cost to provide solar construction services — — — — 17,422 — 17,422 Total cost of services — 88,110 — — 17,422 — 105,532 Operating expenses: Salaries and benefits 160,701 76,264 1,851 4,361 54,384 ( 145 ) 297,416 Depreciation and amortization 9,377 5,393 — 56 20,454 — 35,279 Other expenses 27,131 17,755 9,131 2,406 30,358 — 86,781 Intersegment expenses, net 40,136 11,684 16,841 173 ( 53,822 ) ( 15,012 ) — Total operating expenses 237,345 111,096 27,823 6,996 51,374 ( 15,157 ) 419,476 Income (loss) before income taxes 42,246 55,681 17,482 1,650 ( 56,203 ) — 60,853 Income tax (expense) benefit ( 10,139 ) ( 13,393 ) ( 4,196 ) ( 362 ) 9,348 — ( 18,741 ) Net income (loss) 32,107 42,288 13,286 1,288 ( 46,855 ) — 42,112 Net (income) loss attributable to noncontrolling interests — 119 — — 12,523 — 12,642 Net income (loss) attributable to Nelnet, Inc. $ 32,107 42,407 13,286 1,288 ( 34,332 ) — 54,754 Total assets as of June 30, 2023 $ 173,926 482,922 14,667,357 1,005,043 2,091,500 ( 613,116 ) 17,807,632 30 Six months ended June 30, 2022 Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Nelnet Bank Corporate and Other Activities Eliminations Total Total interest income $ 313 1,213 258,994 8,241 10,227 ( 2,205 ) 276,783 Interest expense 44 — 115,711 2,494 5,678 ( 2,205 ) 121,721 Net interest income 269 1,213 143,283 5,747 4,549 — 155,062 Less provision for loan losses — — 7,963 1,011 — — 8,974 Net interest income after provision for loan losses 269 1,213 135,320 4,736 4,549 — 146,088 Other income (expense): Loan servicing and systems revenue 261,241 — — — — — 261,241 Intersegment revenue 16,860 10 — — — ( 16,870 ) — Education technology, services, and payment processing revenue — 203,317 — — — — 203,317 Solar construction revenue — — — — — — — Other, net 1,350 — 11,644 1,659 7,872 — 22,524 Gain on sale of loans, net — — 2,989 — — — 2,989 Impairment expense — — — — ( 6,284 ) — ( 6,284 ) Derivative settlements, net — — 1,814 — — — 1,814 Derivative market value adjustments, net — — 186,135 — — — 186,135 Total other income (expense), net 279,451 203,327 202,582 1,659 1,588 ( 16,870 ) 671,736 Cost of services: Cost to provide education technology, services, and payment processing services — 66,397 — — — — 66,397 Cost to provide solar construction services — — — — — — — Total cost of services — 66,397 — — — — 66,397 Operating expenses: Salaries and benefits 175,192 63,406 1,205 3,268 47,742 — 290,813 Depreciation and amortization 10,272 5,013 — 7 19,914 — 35,206 Other expenses 29,721 12,514 6,576 1,584 26,045 — 76,439 Intersegment expenses, net 38,955 9,410 17,344 102 ( 48,941 ) ( 16,870 ) — Total operating expenses 254,140 90,343 25,125 4,961 44,760 ( 16,870 ) 402,458 Income (loss) before income taxes 25,580 47,800 312,777 1,434 ( 38,623 ) — 348,969 Income tax (expense) benefit ( 6,139 ) ( 11,472 ) ( 75,066 ) ( 328 ) 11,826 — ( 81,180 ) Net income (loss) 19,441 36,328 237,711 1,106 ( 26,797 ) — 267,789 Net (income) loss attributable to noncontrolling interests — 53 — — 3,934 — 3,987 Net income (loss) attributable to Nelnet, Inc. $ 19,441 36,381 237,711 1,106 ( 22,863 ) — 271,776 Total assets as of June 30, 2022 $ 240,437 546,235 17,388,228 864,659 2,273,216 ( 688,762 ) 20,624,013 31 11. Disaggregated Revenue The following tables present disaggregated revenue by service offering or customer type for the Company's fee-based operating segments. Loan Servicing and Systems Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Government loan servicing $ 95,736 98,815 204,618 207,940 Private education and consumer loan servicing 12,063 12,122 24,225 24,995 FFELP loan servicing 3,554 4,011 6,921 8,259 Software services 5,962 7,907 15,660 15,308 Outsourced services 4,705 2,018 9,823 4,739 Loan servicing and systems revenue $ 122,020 124,873 261,247 261,241 Education Technology, Services, and Payment Processing Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Tuition payment plan services $ 30,825 27,637 65,012 58,352 Payment processing 31,827 27,968 75,868 66,039 Education technology and services 46,216 34,956 101,004 78,207 Other 990 470 1,578 719 Education technology, services, and payment processing revenue $ 109,858 91,031 243,462 203,317 Solar Construction GRNE Solar was acquired on July 1, 2022; accordingly, there are no results for the three and six months ended June 30, 2022. Three months ended June 30, 2023 Six months ended June 30, 2023 Commercial revenue $ 2,004 8,238 Residential revenue 2,406 5,181 Other 325 ( 33 ) Solar construction revenue $ 4,735 13,386 Other Income (Expense) The following table presents the components of "other, net" in "other income (expense)" on the consolidated statements of income: Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 ALLO preferred return $ 2,274 2,140 4,523 4,257 Borrower late fee income 2,168 2,436 4,414 4,867 Administration/sponsor fee income 1,697 2,012 3,468 4,134 Investment advisory services 1,639 1,482 3,251 2,764 Loss from ALLO voting membership interest investment ( 12,169 ) ( 16,941 ) ( 32,382 ) ( 30,071 ) Loss from solar investments ( 7,929 ) ( 1,854 ) ( 9,876 ) ( 2,884 ) Investment activity, net ( 3,574 ) 18,091 ( 7,154 ) 29,924 Other 8,883 5,281 12,673 9,533 Other, net $ ( 7,011 ) 12,647 ( 21,083 ) 22,524 32 12. Major Customer Government Loan Servicing Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes Educational Loan Services, Inc. (Great Lakes), both subsidiaries of the Company, are two of the current six private sector entities that have student loan servicing contracts with the Department. Revenue earned by the Company related to these contracts was $ 95.7 million and $ 98.8 million for the three months ended June 30, 2023 and 2022, respectively, and $ 204.6 million and $ 207.9 million for the six months ended June 30, 2023 and 2022, respectively. The Company also licensed its hosted servicing software to two of the six servicers for the Department. Contract Modifications and Award Effective April 1, 2023, the Department modified the student loan servicing contracts between the Department and each of Nelnet Servicing and Great Lakes (the “servicing contracts”) to reduce the monthly fee under the servicing contracts by $ 0.19 per borrower on certain borrower statuses. The Company's current student loan servicing contracts with the Department were scheduled to expire on December 14, 2023. In April 2023, Nelnet Diversified Solutions, LLC (NDS), a subsidiary of the Company, received a contract award from the Department, pursuant to which NDS was selected to provide continued servicing capabilities for the Department's student aid recipients under a new Unified Servicing and Data Solution (USDS) contract (the "New Government Servicing Contract") which will replace the existing legacy Department student loan servicing contracts. The New Government Servicing Contract is effective April 24, 2023 and has a five year base period, with 2 two-year and 1 one-year possible extensions. The Department's total loan servicing volume of more than 37 million existing borrowers will be allocated by the Department to NDS and four other third-party servicers that were awarded a USDS contract based on service and performance levels. Under the New Government Servicing Contract, NDS will begin immediately to make required servicing platform enhancements, for which NDS will be compensated from the Department on certain of these investments. In April 2023, the Department indicated that servicing under the USDS contracts will go live in 2024 and it will extend the current legacy servicing contracts from December 14, 2023 to December 2024. Until servicing under the USDS contracts goes live, the Company will continue to earn revenue for servicing borrowers under its current legacy servicing contracts with the Department. The new USDS servicing contracts have multiple revenue components with tiered pricing based on borrower volume, while revenue earned under the legacy servicing contracts is primarily based on borrower status. Assuming borrower volume remains consistent under the USDS servicing contract, the Company expects revenue earned on a per borrower blended basis will decrease under the USDS contract versus the current legacy contracts. However, consistent with the current legacy contracts, the Company expects to earn additional revenue from the Department under the USDS servicing contract for change requests, consolidations, and other support services. As discussed below, during the second quarter of 2023, the Company completed the transfer of Great Lakes direct loan servicing volume to the Nelnet servicing platform. The associated cost savings with moving government borrowers to one servicing platform will be partially offset under the USDS contract as the Company will incur additional costs for cybersecurity and other system specifications as required under the new contract. Loan Volume Transfers - Full Service Borrowers In February 2023, the Department notified the Company of its intention to transfer up to one million of the Company’s existing Department servicing borrowers to another third-party servicer. This transfer decision was not based on the Company's performance. These transfers began in the second quarter of 2023 and were completed in July 2023. In addition, the Company completed the transfer of active borrowers of Great Lakes direct loan servicing volume to the Nelnet servicing platform (the GreatNet Federal servicing platform) during the second quarter of 2023. The Company anticipates the decommissioning of the Great Lakes' platform to be completed by the end of 2023. Therefore, potential associated cost savings as a result of transferring direct loan servicing volume to one platform will not be recognized in operating results until 2024. Loan Volume Transfers - Remote Hosted Servicing Borrowers Edfinancial Services, LLC ("Edfinancial"), a current servicer for the Department, utilized Nelnet Servicing's platform to service their loans for the Department (remote hosted servicing customer). In the fourth quarter of 2022, Nelnet Servicing and Edfinancial reached an agreement on a decommission schedule transferring Edfinancial’s direct loan servicing volume to another third-party servicing platform. As of December 31, 2022, Edfinancial was servicing 4.5 million borrowers for the Department on the Company’s platform. The Company began transferring Edfinancial's servicing volume to another servicing platform in the first quarter of 2023 which reduced the number of Edfinancial's borrowers serviced on the Company's platform 33 to 3.5 million borrowers as of March 31, 2023 and 579,000 borrowers as of June 30, 2023. Edfinancial's remaining borrowers were transferred off of the Company's platform in July 2023. In February 2023, the Company’s other remote hosted servicing customer notified the Company the Department intended to move that customer’s servicing borrowers to a different third-party servicing platform. This transfer decision was the result of this customer not being one of the servicers awarded a USDS contract. As of March 31, 2023, this remote hosted servicing customer was servicing 1.4 million borrowers for the Department on the Company's platform. The majority of this volume was transferred to another third-party servicing platform during the second quarter of 2023, and the remaining borrowers were transferred off of the Company's platform in July 2023. As a result of the transfers discussed above, the Company has no remaining Department remote hosted servicing borrowers on its platform and software services revenue will be negatively impacted in future periods. Department of Education Debt Relief In August 2022, the Department announced a broad based student debt relief plan that would provide targeted student debt cancellation to borrowers with loans held by the Department with 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. Federal courts blocked implementation of the Department's broad based student debt relief plan and on June 30, 2023, the Supreme Court struck down the Department's plan. While the current version of the Department's forgiveness plan has been invalidated, the Department recently announced that it has begun a new rulemaking process to consider other ways to provide debt relief to borrowers. The Company cannot predict the timing, nature, or ultimate outcome of any future potential student loan forgiveness programs as a result of the rulemaking process. Revenue earned under the current Department servicing contracts will decrease in future periods if the Department successfully implements broad based loan forgiveness. 13. Fair Value The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis. As of June 30, 2023 As of December 31, 2022 Level 1 Level 2 Total Level 1 Level 2 Total Assets: Investments: Asset-backed debt securities - available-for-sale $ 99 1,047,975 1,048,074 100 1,388,937 1,389,037 Equity securities 105 — 105 6,719 — 6,719 Equity securities measured at net asset value (a) 39,471 32,363 Total investments 204 1,047,975 1,087,650 6,819 1,388,937 1,428,119 Derivative instruments (b) — 1,108 1,108 — — — Total assets $ 204 1,049,083 1,088,758 6,819 1,388,937 1,428,119 (a) In accordance with the Fair Value Measurements Topic of the FASB Accounting Standards Codification, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. (b) Nelnet Bank derivatives are accounted for at fair value on a recurring basis. The fair value of derivative financial instruments is determined using a market approach in which derivative pricing models use the stated terms of the contracts and observable yield curves and volatilities from active markets. When determining the fair value of derivatives, Nelnet Bank takes into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty. 34 The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets: As of June 30, 2023 Fair value Carrying value Level 1 Level 2 Level 3 Financial assets: Loans receivable $ 13,809,016 13,541,903 — — 13,809,016 Accrued loan interest receivable 818,709 818,709 — 818,709 — Cash and cash equivalents 121,769 121,769 121,769 — — Investments (at fair value) 1,087,650 1,087,650 204 1,047,975 — Investments - held to maturity 156,537 155,781 — 156,537 — Notes receivable 54,931 54,931 — 54,931 — Beneficial interest in loan securitizations 228,603 190,974 — — 228,603 Restricted cash 484,223 484,223 484,223 — — Restricted cash – due to customers 208,033 208,033 208,033 — — Derivative instruments 1,108 1,108 — 1,108 — Financial liabilities: Bonds and notes payable 12,724,618 13,070,140 — 12,724,618 — Accrued interest payable 35,926 35,926 — 35,926 — Bank deposits 704,116 731,046 449,297 254,819 — Due to customers 299,552 299,552 299,552 — — As of December 31, 2022 Fair value Carrying value Level 1 Level 2 Level 3 Financial assets: Loans receivable $ 14,586,794 14,427,025 — — 14,586,794 Accrued loan interest receivable 816,864 816,864 — 816,864 — Cash and cash equivalents 118,146 118,146 118,146 — — Investments (at fair value) 1,428,119 1,428,119 6,819 1,388,937 — Investments - held to maturity 18,996 18,774 — 18,996 — Notes receivable 31,106 31,106 — 31,106 — Beneficial interest in loan securitizations 162,360 138,738 — — 162,360 Restricted cash 945,159 945,159 945,159 — — Restricted cash – due to customers 294,311 294,311 294,311 — — Financial liabilities: Bonds and notes payable 14,088,666 14,637,195 — 14,088,666 — Accrued interest payable 36,049 36,049 — 36,049 — Bank deposits 664,573 691,322 355,282 309,291 — Due to customers 348,317 348,317 348,317 — — The methodologies for estimating the fair value of financial assets and liabilities are described in note 24 of the notes to consolidated financial statements included in the 2022 Annual Report. 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 six months ended June 30, 2023 and 2022. 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 2022 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 35 words “anticipate,” “assume,” “believe,” “continue,” “could,” “ensure,” “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 2022 Annual Report and include such risks and uncertainties as: • risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and future servicing contracts with the U.S. Department of Education (the "Department") 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, 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; • 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; • risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors; • 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; and • risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses. 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. 36 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 Non-GAAP net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 GAAP net income attributable to Nelnet, Inc. $ 28,267 85,129 54,754 271,776 Realized and unrealized derivative market value adjustments (2,005) (40,401) 35,407 (186,135) Tax effect (a) 481 9,696 (8,498) 44,672 Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 26,743 54,424 81,663 130,313 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 0.75 2.26 1.46 7.18 Realized and unrealized derivative market value adjustments (0.05) (1.07) 0.95 (4.91) Tax effect (a) 0.01 0.25 (0.23) 1.17 Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 0.71 1.44 2.18 3.44 (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 in the consolidated financial statements. 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. 37 Operating Segments The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in the 2022 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 reportable operating segments. The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its AGM reportable 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 from its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. Nelnet Bank operates as an internet industrial bank franchise focused on the private education and unsecured consumer loan markets, 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 also includes income earned on the majority of the Company’s investments, interest expense incurred on unsecured and other corporate related debt transactions, and certain shared service activities related to internal audit, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These shared services are allocated to each operating segment based on estimated use of such activities and services. In addition, Corporate includes corporate costs and overhead functions not allocated to operating segments, including executive management, investments in innovation, and other holding company organizational costs. The information below presents the operating results (net income (loss) before taxes) for each reportable operating segment and Corporate and Other Activities for the three and six months ended June 30, 2023 and 2022. See "Results of Operations" for each reportable operating segment and Corporate and Other Activities under this Item 2 for additional detail. Three months ended June 30, Six months ended June 30, Certain Items Impacting Comparability (All dollar amounts below are pre-tax) 2023 2022 2023 2022 NDS $ 17,028 13,488 42,246 25,580 • An increase in before tax operating margin in 2023 compared with 2022 due to a decrease in operating expenses, primarily salaries and benefits. In 2022, the Company was fully staffed in preparation for the resumption of federal student loan payments once the CARES Act suspension was to expire. The expiration of the CARES Act was extended multiple times throughout 2022. The Company reduced staff in the first and second quarters of 2023 to manage expenses due to the delays in the government's student debt relief and return to repayment programs and lower pricing and reduced servicing volume for the Company's Department servicing contracts. NBS 18,042 14,687 55,681 47,800 • The recognition of $5.3 million and $11.3 million of interest income for the three and six months ended June 30, 2023, respectively, compared with $0.9 million and $1.2 million for the same periods in 2022, due to higher interest rates. • A decrease in before tax operating margin, excluding net interest income, in 2023 compared with 2022 due to additional investments in the development of new services and technologies and superior customer experiences to align with the Company's strategies to grow, retain, and diversify revenue. Additionally, the Company has had significant growth in FACTS Education Solutions instructional services revenue which has a lower before tax operating margin compared to the rest of the Company's services. 38 AGM 17,704 99,348 17,482 312,777 • A net gain of $0.9 million and net loss of $36.5 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting for the three and six months ended June 30, 2023, respectively, compared with a net gain of $40.4 million and $186.1 million for the same periods in 2022. • The recognition of a $25.9 million non-cash expense in the second quarter of 2023 as the result of redeeming certain asset-backed debt securities prior to their maturity and writing off the remaining unamortized debt discount at the time of redemption. • A decrease of $18.7 million and $15.2 million in net interest income due to a decrease in core loan spread for the three and six months ended June 30, 2023, respectively, compared with the same periods in 2022. • A decrease of $7.5 million and $19.8 million in net interest income due to the decrease in the average balance of loans for the three and six months ended June 30, 2023, respectively, compared with the same periods in 2022. • The recognition of $15.5 million and $27.3 million in gains from the sale of loans for the three and six months ended June 30, 2023, respectively, compared with no gains and $3.0 million for the same periods in 2022. • The recognition of $8.1 million and $40.0 million in provision for loan losses for the three and six months ended June 30, 2023, respectively, compared with $8.8 million and $8.0 million for the same periods in 2022. Nelnet Bank 1,744 474 1,650 1,434 Corporate (24,928) (19,609) (56,203) (38,623) • An increase of $14.5 million and $20.9 million in net interest income from the Company's cash and investment (bond) portfolio due to an increase in interest rates for the three and six months ended June 30, 2023, respectively, compared with the same periods in 2022. • The recognition of net investment losses of $1.6 million and $4.8 million for the three and six months ended June 30, 2023, respectively, compared with net investment income of $18.3 million and $26.7 million for the same periods in 2022. In the second quarter or 2022, the Company recognized a $15.2 million gain as a result of the revaluation of the Company's previously held 50% ownership interest in NGWeb Solutions, LLC ("NextGen") (previously accounted for under the equity method) as a result of the Company purchasing an additional 30% ownership interests. • The recognition of a net loss of $12.2 million and $32.4 million related to the Company’s equity investment in ALLO for the three and six months ended June 30, 2023, respectively, compared with a net loss of $16.9 million and $30.1 million for the same periods in 2022. • The recognition of $8.2 million and $11.3 million of losses for the three and six months ended June 30, 2023, respectively, from the Company's acquisition of GRNE Solar on July 1, 2022. • The recognition of an impairment charge of $6.3 million in the second quarter of 2022 related primarily to a venture capital investment. Income before income taxes 29,586 108,387 60,853 348,969 Income tax expense (10,491) (25,483) (18,741) (81,180) Net loss attributable to noncontrolling interests 9,172 2,225 12,642 3,987 Net income $ 28,267 85,129 54,754 271,776 39 CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's consolidated operating results for the three and six months ended June 30, 2023 compared with the same periods in 2022 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 Six months ended June 30, June 30, 2023 2022 2023 2022 Additional information Loan interest $ 243,045 134,706 468,288 246,083 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 40,982 16,881 81,707 30,700 Includes income from interest-earning deposits and investments and restricted cash in asset-backed securitizations. Increase was due to an increase in interest earning investments and an increase in interest rates. Total interest income 284,027 151,587 549,995 276,783 Interest expense 233,148 73,642 432,597 121,721 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 second quarter of 2023, the Company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of a $25.9 million non-cash expense from the write-off of the remaining debt discount associated with these bonds at the time of redemption. Net interest income 50,879 77,945 117,398 155,062 Less provision for loan losses 9,592 9,409 43,867 8,974 Represents the current period provision to reflect the lifetime expected credit losses related to the Company's loan portfolio. The primary item impacting provision for loan losses was the establishment of an initial allowance for consumer loans originated and acquired during the periods presented. Net interest income after provision for loan losses 41,287 68,536 73,531 146,088 Other income (expense): LSS revenue 122,020 124,873 261,247 261,241 See LSS operating segment - results of operations. ETS&PP revenue 109,858 91,031 243,462 203,317 See ETS&PP operating segment - results of operations. Solar construction revenue 4,735 — 13,386 — On July 1, 2022, the Company acquired 80% 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, net (7,011) 12,647 (21,083) 22,524 See table below for the components of "other, net." Gain on sale of loans, net 15,511 — 27,323 2,989 The Company sold $261.9 million (par value) and $158.3 million (par value) of consumer and other loans in the first and second quarter of 2023, respectively and recognized net gains of $11.8 million and $15.5 million, respectively. The Company also sold $18.1 million (par value) of consumer loans in the first quarter of 2022 and recognized a gain of $3.0 million. Impairment expense — (6,284) — (6,284) During the second quarter of 2022, the Company recorded impairment expense of $6.3 million related primarily to a venture capital investment. Derivative settlements, net 65 4,623 23,402 1,814 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. The majority of derivative settlements received by the Company was from the Company's derivatives used to hedge loans earning fixed rate floor income. To minimize the Company's exposure to market volatility, the Company terminated this derivative portfolio on March 15, 2023. Derivative market value adjustments, net 2,005 40,401 (35,407) 186,135 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 were 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. To minimize the Company's exposure to market volatility, the Company terminated this derivative portfolio on March 15, 2023. As such, the Company expects the derivative market value adjustments in future periods will be less substantial. 40 Total other income (expense), net 247,183 267,291 512,330 671,736 Cost of services: Cost to provide education technology, services, and payment processing services 40,407 30,852 88,110 66,397 Represents direct costs to provide payment processing and instructional services in ETS&PP. Increase was primarily due to additional instructional services costs. See ETS&PP operating segment - results of operations. Cost to provide solar construction services 9,122 — 17,422 — 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 49,529 30,852 105,532 66,397 Operating expenses: Salaries and benefits 144,706 141,398 297,416 290,813 Increase was due to an increase in headcount in ETS&PP to support the growth of its customer base and the investment in the development of new technologies. This increase was partially offset by staff reductions in LSS in the first and second quarters of 2023 to manage expenses due to delays in the government's student debt relief and return to repayment programs and lower pricing and reduced servicing volume for LSS's Department servicing contracts. In addition, increase was due to the acquisition of GRNE Solar on July 1, 2022. Depreciation and amortization 18,652 18,250 35,279 35,206 Includes depreciation of property and equipment and the amortization of intangibles from prior business acquisitions. Other expenses 45,997 36,940 86,781 76,439 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 an increase in expenses in ETS&PP 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 had previously subsided due to the COVID-19 pandemic. Total operating expenses 209,355 196,588 419,476 402,458 Income before income taxes 29,586 108,387 60,853 348,969 Income tax expense 10,491 25,483 18,741 81,180 The effective tax rate was 27.1% and 23.0% for the three months ended June 30, 2023 and 2022, respectively, and 25.5% and 23.0% for the six months ended June 30, 2023 and 2022, respectively. The increase in the effective tax rate in 2023 compared with 2022 was due to an increase in the Company's state effective tax rate due to the composition of income earned in certain states. The Company expects its effective tax rate will range between 24% and 25% for the remainder of 2023. Net income 19,095 82,904 42,112 267,789 Net loss attributable to noncontrolling interests 9,172 2,225 12,642 3,987 Amounts for noncontrolling interests reflect the net income/loss attributable to the holders of noncontrolling membership interests in WRCM, NextGen, multiple solar entities (including GRNE Solar), and multiple entities investing in federal opportunity zone programs. Net income attributable to Nelnet, Inc. $ 28,267 85,129 54,754 271,776 Additional information: 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. Net income attributable to Nelnet, Inc. $ 28,267 85,129 54,754 271,776 Derivative market value adjustments, net (2,005) (40,401) 35,407 (186,135) Tax effect 481 9,696 (8,498) 44,672 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 26,743 54,424 81,663 130,313 41 The following table summarizes the components of "other, net" in "other income (expense)" on the consolidated statements of income. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information ALLO preferred return $ 2,274 2,140 4,523 4,257 See Corporate - results of operations. Borrower late fee income 2,168 2,436 4,414 4,867 See AGM operating segment - results of operations. Administration/sponsor fee income 1,697 2,012 3,468 4,134 See AGM operating segment - results of operations. Investment advisory services 1,639 1,482 3,251 2,764 See Corporate - results of operations. Loss from ALLO voting membership interest investment (12,169) (16,941) (32,382) (30,071) See Corporate - results of operations. Loss from solar investments (7,929) (1,854) (9,876) (2,884) See Corporate - results of operations. Investment activity, net (3,574) 18,091 (7,154) 29,924 See Corporate - results of operations and note (a) below for additional information. Other 8,883 5,281 12,673 9,533 Other, net $ (7,011) 12,647 (21,083) 22,524 (a) The Company anticipates fluctuations in future periodic earnings resulting from investment sales and valuation adjustments. Investment activity by operating segment and investment type follows: Real Estate Venture Capital Equity / Bonds Total Real Estate Venture Capital Equity / Bonds Total Three months ended June 30, 2023 2022 Corporate $ (1,090) (956) 406 (1,640) 3,629 17,318 (2,649) 18,298 AGM — (2,545) — (2,545) — (352) — (352) Nelnet Bank — (10) 621 611 — (15) 160 145 $ (1,090) (3,511) 1,027 (3,574) 3,629 16,951 (2,489) 18,091 Six months ended June 30, 2023 2022 Corporate $ (314) (892) (3,636) (4,842) 7,980 22,194 (3,465) 26,709 AGM — (2,649) (476) (3,125) — 1,575 — 1,575 Nelnet Bank — (272) 1,085 813 — 372 1,268 1,640 $ (314) (3,813) (3,027) (7,154) 7,980 24,141 (2,197) 29,924 42 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Servicing Volumes As of December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 March 31, 2023 June 30, 2023 Servicing volume (dollars in millions): Government $ 478,402 507,653 542,398 545,546 545,373 537,291 519,308 FFELP 26,916 25,646 24,224 22,412 20,226 19,815 19,021 Private and consumer 23,702 23,433 22,838 22,461 21,866 21,484 20,805 Total $ 529,020 556,732 589,460 590,419 587,465 578,590 559,134 Number of servicing borrowers: Government 14,196,520 14,727,860 15,426,607 15,657,942 15,777,328 15,518,751 14,898,901 FFELP 1,092,066 1,034,913 977,785 910,188 829,939 819,791 788,686 Private and consumer 1,065,439 1,030,863 998,454 979,816 951,866 925,861 899,095 Total 16,354,025 16,793,636 17,402,846 17,547,946 17,559,133 17,264,403 16,586,682 Number of remote hosted borrowers: 4,799,368 5,487,943 5,738,381 6,025,377 6,135,760 5,048,324 716,908 Government Loan Servicing Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes Educational Loan Services, Inc. (Great Lakes), both subsidiaries of the Company, are two of the current six private sector entities that have student loan servicing contracts with the Department to service loans that include Federal Direct Loan Program loans originated directly by the Department and FFEL Program loans purchased by the Department. The Company currently licenses its hosted servicing software to two of the six servicers for the Department. Contract Modifications and Award Effective April 1, 2023, the Department modified the student loan servicing contracts between the Department and each of Nelnet Servicing and Great Lakes (the “servicing contracts”) to reduce the monthly fee under the servicing contracts by $0.19 per borrower on certain borrower statuses. The Company's current student loan servicing contracts with the Department were scheduled to expire on December 14, 2023. In April 2023, Nelnet Diversified Solutions, LLC (NDS), a subsidiary of the Company, received a contract award from the Department, pursuant to which NDS was selected to provide continued servicing capabilities for the Department's student aid recipients under a new Unified Servicing and Data Solution (USDS) contract (the "New Government Servicing Contract") which will replace the existing legacy Department student loan servicing contracts. The New Government Servicing Contract is effective April 24, 2023 and has a five year base period, with 2 two-year and 1 one-year possible extensions. The Department's total loan servicing volume of more than 37 million existing borrowers will be allocated by the Department to NDS and four other third-party servicers that were awarded a USDS contract based on service and performance levels. Under the New Government Servicing Contract, NDS will begin immediately to make required servicing platform enhancements, for which NDS will be compensated from the Department on certain of these investments. In April 2023, the Department indicated that servicing under the USDS contracts will go live in 2024 and it will extend the current legacy servicing contracts from December 14, 2023 to December 2024. Until servicing under the USDS contracts goes live, the Company will continue to earn revenue for servicing borrowers under its current legacy servicing contracts with the Department. The new USDS servicing contracts have multiple revenue components with tiered pricing based on borrower volume, while revenue earned under the legacy servicing contracts is primarily based on borrower status. Assuming borrower volume remains consistent under the USDS servicing contract, the Company expects revenue earned on a per borrower blended basis will decrease under the USDS contract versus the current legacy contracts. However, consistent with the current legacy contracts, the Company expects to earn additional revenue from the Department under the USDS servicing contract for change requests, consolidations, and other support services. As discussed below, during the second quarter of 2023, the Company completed the transfer of Great Lakes direct loan servicing volume to the Nelnet servicing platform. The associated cost savings with moving government borrowers to one servicing platform will be partially offset under the USDS contract as the Company will incur additional costs for cybersecurity and other system specifications as required under the new contract. 43 Loan Volume Transfers - Full Service Borrowers In July 2021, the Pennsylvania Higher Education Assistance Agency (PHEAA) announced its exit from the federal student loan servicing business. All applicable student loans serviced for the Department by PHEAA were transferred to successor servicers. As of December 31, 2021 and 2022, approximately 603,000 and 1,910,000 PHEAA borrowers, respectively, have been transferred from PHEAA to the Company's platform. In addition, over this same time period, PHEAA borrowers were transferred to other servicers to which the Company provided its servicing system (remote hosted servicing customers). In February 2023, the Department notified the Company of its intention to transfer up to one million of the Company’s existing Department servicing borrowers to another third-party servicer. This transfer decision was not based on the Company's performance. These transfers began in the second quarter of 2023 and were completed in July 2023. In addition, the Company completed the transfer of active borrowers of Great Lakes direct loan servicing volume to the Nelnet servicing platform (the GreatNet Federal servicing platform) during the second quarter of 2023. The Company anticipates the decommissioning of the Great Lakes' platform to be completed by the end of 2023. Therefore, potential associated cost savings as a result of transferring direct loan servicing volume to one platform will not be recognized in operating results until 2024. Loan Volume Transfers - Remote Hosted Servicing Borrowers Edfinancial Services, LLC ("Edfinancial"), a current servicer for the Department, utilized Nelnet Servicing's platform to service their loans for the Department (remote hosted servicing customer). In the fourth quarter of 2022, Nelnet Servicing and Edfinancial reached an agreement on a decommission schedule transferring Edfinancial’s direct loan servicing volume to another third-party servicing platform. As of December 31, 2022, Edfinancial was servicing 4.5 million borrowers for the Department on the Company’s platform. The Company began transferring Edfinancial's servicing volume to another servicing platform in the first quarter of 2023 which reduced the number of Edfinancial's borrowers serviced on the Company's platform to 3.5 million borrowers as of March 31, 2023 and 579,000 borrowers as of June 30, 2023. Edfinancial's remaining borrowers were transferred off of the Company's platform in July 2023. In February 2023, the Company’s other remote hosted servicing customer notified the Company the Department intended to move that customer’s servicing borrowers to a different third-party servicing platform. This transfer decision was the result of this customer not being one of the servicers awarded a USDS contract. As of March 31, 2023, this remote hosted servicing customer was servicing 1.4 million borrowers for the Department on the Company's platform. The majority of this volume was transferred to another third-party servicing platform during the second quarter of 2023, and the remaining borrowers were transferred off of the Company's platform in July 2023. As a result of the transfers discussed above, the Company has no remaining Department remote hosted servicing borrowers on its platform and software services revenue will be negatively impacted in future periods. Department of Education Debt Relief In August 2022, the Department announced a broad based student debt relief plan that would provide targeted student debt cancellation to borrowers with loans held by the Department with 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. Federal courts blocked implementation of the Department's broad based student debt relief plan and on June 30, 2023, the Supreme Court struck down the Department's plan. While the current version of the Department's forgiveness plan has been invalidated, the Department recently announced that it has begun a new rulemaking process to consider other ways to provide debt relief to borrowers. The Company cannot predict the timing, nature, or ultimate outcome of any future potential student loan forgiveness programs as a result of the rulemaking process. Revenue earned under the current Department servicing contracts will decrease in future periods if the Department successfully implements broad based loan forgiveness. The CARES Act 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. After multiple extensions of the student loans payment pause under the CARES Act, the payment and interest accrual suspension will end August 31, 2023, and borrowers are scheduled to return to repayment on September 1, 2023. Once borrowers transition back to repayment under the legacy government contracts, the Company anticipates revenue per borrower from the Department will increase from the current CARES Act levels. 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 44 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. Effective April 1, 2023, the Department decreased the monthly per borrower CARES Act forbearance rate by $0.19 per borrower (as discussed above). Reduction in Staff On January 18, 2023, the Company announced a reduction in staff to manage expenses due to delays in the government's student debt relief and return to repayment programs under the CARES Act. Approximately 350 associates who were hired within the prior six months were laid off with a 60 day notice period and approximately 210 associates were immediately terminated for performance. On March 23, 2023, the Company announced a reduction in staff due to the March 2023 government servicing contract price modifications (as discussed above) and the notification by the Department in February 2023 of its intention to transfer up to one million of the Company's existing Department servicing borrowers to another servicer (as discussed above). Approximately 550 associates who work in LSS, including some in related shared services areas that support LSS, were notified their positions were being eliminated. The Company estimates incurring a charge of $4.3 million related to the staff reductions, of which $2.7 million was recognized in the first quarter of 2023. The remaining expense was incurred primarily during the second quarter of 2023. Summary and Comparison of Operating Results Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Net interest income $ 1,058 226 2,095 269 Increase in 2023 compared with 2022 was due to higher interest rates. Loan servicing and systems revenue 122,020 124,873 261,247 261,241 See table below for additional information. Intersegment servicing revenue 7,246 8,381 15,036 16,860 Represents revenue earned by LSS from servicing loans for AGM and Nelnet Bank. Decrease in 2023 compared with 2022 was due to the continued amortization of AGM's FFELP portfolio. FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. Other income 605 611 1,213 1,350 Represents revenue earned from providing administrative support and marketing services. Total other income 129,871 133,865 277,496 279,451 Salaries and benefits 76,141 83,220 160,701 175,192 Decrease in 2023 compared with 2022 was due to the Company being fully staffed with contact center operations and support associates in 2022 in preparation for the resumption of federal student loan payments and other activities after the CARES Act suspension. During the first and second quarters of 2023, the Company reduced staff to manage expenses due to delays in the government's student debt relief and return to repayment programs and lower pricing and reduced servicing volume for government servicing contracts. See "Reduction in Staff" above for additional details. Depreciation and amortization 4,863 5,318 9,377 10,272 Other expenses 13,818 13,507 27,131 29,721 Decrease in the first half of 2023 compared with 2022 was due to a decrease in professional fees and facility costs. Over the last year, the Company has reduced its office space as a large number of employees continue to work from home. Intersegment expenses 19,079 18,558 40,136 38,955 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 113,901 120,603 237,345 254,140 Income before income taxes 17,028 13,488 42,246 25,580 Income tax expense (4,086) (3,237) (10,139) (6,139) Represents income tax expense at an effective tax rate of 24%. Net income $ 12,942 10,251 32,107 19,441 Before tax operating margin 13.1 % 10.1 % 15.2 % 9.2 % Before tax operating margin represents before tax operating profitability as a percentage of revenue, and for LSS is calculated as income before income taxes 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 increased in 2023 compared with 2022 due primarily to a decrease in salaries and benefits expense as described above. 45 Loan servicing and systems revenue Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Government loan servicing $ 95,736 98,815 204,618 207,940 Represents revenue from the Company's Department servicing contracts. Decrease in the three and six months ended June 30, 2023 compared with the same periods in 2022 was due to (i) the monthly fee earned per borrower on certain borrower statuses being reduced by $0.19 effective April 1, 2023; and (ii) a decrease of borrowers in June 2023 as part of the Department's plan to transfer up to one million of the Company's existing borrowers to another third-party servicer. Decrease in the first half of 2023 compared with the same period in 2022 was also due to (i) the recognition of $6.7 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). The decrease in revenue for the first half of 2023 compared with the same period in 2022 was partially offset by (i) an increase in borrowers serviced due to the PHEAA servicing volume transferred to the Company's platform in 2022; (ii) a per borrower CARES Act forbearance rate increase on May 1, 2022; and (iii) a per borrower rate increase on certain statuses on September 1, 2022 (5.0%) to reflect the increase in the cost of labor (Employment Cost Index) per the provisions of the contracts. Private education and consumer loan servicing 12,063 12,122 24,225 24,995 Decrease in 2023 compared with 2022 was due to a decrease in servicing volume and client requested enhanced delinquency services. FFELP loan servicing 3,554 4,011 6,921 8,259 Decrease in 2023 compared with 2022 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 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. Software services 5,962 7,907 15,660 15,308 Decrease in the three months ended June 30, 2023 compared with the same period in 2022 was due to the transfer of remote hosted borrowers to other third-party servicers. See “Government Loan Servicing - Loan Volume Transfers - Remote Hosted Servicing Borrowers” above for additional details. Increase in the six months ended June 30, 2023 compared with the same period in 2022 was due to annual rate increases on Department remote hosted servicing customers, contract programming associated with loan transfers and change requests, and growth in LSS's technology outsourcing opportunities. These increases were offset by the transfer of remote hosted borrowers to other third-party servicers. As a result of the transfers, the Company has no remaining Department remote hosted servicing borrowers on its platform and software services revenue will be negatively impacted in future periods. Outsourced services 4,705 2,018 9,823 4,739 Represents primarily revenue to provide contact center and back office operational outsourcing services. Increase in 2023 compared with 2022 was due to additional outsourced opportunities, including assisting existing Department servicers as operations transition from exiting servicers. Contracts for support provided to Department servicers expired at the end of July 2023. Loan servicing and systems revenue $ 122,020 124,873 261,247 261,241 46 EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS As discussed further in the Company's 2022 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 before tax operating margin are higher in the first quarter compared with the remainder of the year. Summary and Comparison of Operating Results Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Net interest income $ 5,268 874 11,304 1,213 Represents interest income on tuition funds held in custody for schools. Increase in 2023 compared with 2022 was due to higher interest rates. Education technology, services, and payment processing revenue 109,858 91,031 243,462 203,317 See table below for additional information. Intersegment revenue 65 7 121 10 Total other income 109,923 91,038 243,583 203,327 Cost of services 40,407 30,852 88,110 66,397 See table below for additional information. Salaries and benefits 38,351 32,120 76,264 63,406 Increase in 2023 compared with 2022 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 2,815 2,698 5,393 5,013 Represents primarily amortization of intangible assets from prior business acquisitions and depreciation of capitalized software development costs. Other expenses 9,692 6,750 17,755 12,514 Increase in 2023 compared with 2022 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 previously subsided due to the COVID pandemic. In addition, during the second quarter of 2023 the Company increased its allowance for uncollectible accounts due to the age of certain receivables primarily driven by economic conditions and the increase in volume of FACTS Education Solutions instructional services revenue. Intersegment expenses, net 5,884 4,805 11,684 9,410 Represents 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 56,742 46,373 111,096 90,343 Income before income taxes 18,042 14,687 55,681 47,800 Income tax expense (4,327) (3,525) (13,393) (11,472) Represents income tax expense at an effective tax rate of 24%. Net income 13,715 11,162 42,288 36,328 Net (income) loss attributable to noncontrolling interests (19) 53 119 53 Amounts for noncontrolling interests reflect the net (income) loss attributable to the holders of minority membership interests in NextGen, of which the Company became the majority owner on April 30, 2022. Net income $ 13,696 11,215 42,407 36,381 47 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Tuition payment plan services $ 30,825 27,637 65,012 58,352 Increase in 2023 compared with 2022 was due to a higher number of payment plans in the K-12 and higher education market for both new and existing customers. Payment processing 31,827 27,968 75,868 66,039 Increase in 2023 compared with 2022 was due to increase in payment volumes 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 46,216 34,956 101,004 78,207 Increase in 2023 compared with 2022 was due to an increase in revenue from the Company’s school information system software, enrollment and communication services, the NextGen acquisition completed in April 2022, 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 COVID-19 has had or continues to have on students and teachers. Other 990 470 1,578 719 Education technology, services, and payment processing revenue 109,858 91,031 243,462 203,317 Cost of services 40,407 30,852 88,110 66,397 Represents costs relating to payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also a component of this expense and were the primary driver of the increase in 2023 compared with 2022 due to the increase in instructional services resulting from the EANS program as noted above. In addition, the cost of providing instructional services has increased as a percentage of revenue in 2023 compared with 2022. Net revenue $ 69,451 60,179 155,352 136,920 GAAP before tax operating margin 26.0 % 24.4 % 35.8 % 34.9 % Before tax operating margin, excluding net interest income, is a non-GAAP 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. Before tax operating margin, excluding net interest income, decreased in 2023 compared with 2022 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. Additionally, the Company has had significant growth in FACTS Education Solutions instructional services revenue which has a lower before tax operating margin compared to the rest of the Company's services. The Company anticipates before tax operating margin, excluding net interest income, will be impacted over the next several years as it continues to invest in the development of new services and customer experiences but could see some improvement when the EANS program ends in September 2024. Net interest income (7.6) (1.4) (7.2) (0.9) Non-GAAP before tax operating margin, excluding net interest income 18.4 % 23.0 % 28.6 % 34.0 % 48 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of June 30, 2023, the AGM operating segment had a $13.2 billion loan portfolio, consisting primarily of federally insured loans. For a summary of the Company’s loan portfolio as of June 30, 2023 and December 31, 2022, 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Beginning balance $ 13,482,620 16,618,627 14,169,771 17,441,790 Loan acquisitions: Federally insured student loans 512,611 43,747 515,591 53,949 Private education loans — 6,484 — 7,510 Consumer and other loans 59,972 118,012 310,678 136,534 Total loan acquisitions 572,583 168,243 826,269 197,993 Repayments, claims, capitalized interest, participations, and other, net (443,068) (478,461) (853,307) (925,601) Loans lost to external parties (214,734) (453,158) (483,430) (840,806) Loans sold (158,276) (114) (420,178) (18,239) Ending balance $ 13,239,125 15,855,137 13,239,125 15,855,137 The Company has partial ownership in certain consumer, private education, 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 June 30, 2023, the Company’s ownership correlates to approximately $680 million, $560 million, and $360 million of consumer, private education, 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, Loan Delinquencies, and Loan Charge-offs For a summary of the allowance as a percentage of the ending balance and loan status and delinquency amounts for each of AGM's loan portfolios as of June 30, 2023 and December 31, 2022; and the activity in AGM's allowance for loan losses and net charge-offs as a percentage of average loans for the three and six months ended June 30, 2023 and 2022, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 49 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Variable loan yield, gross 7.73 % 3.59 % 7.42 % 3.16 % Consolidation rebate fees (0.80) (0.85) (0.81) (0.85) Discount accretion, net of premium and deferred origination costs amortization 0.06 0.03 0.05 0.03 Variable loan yield, net 6.99 2.77 6.66 2.34 Loan cost of funds - interest expense (a) (5.94) (1.73) (5.73) (1.41) Loan cost of funds - derivative settlements (b) (c) (0.00 ) 0.02 0.01 0.02 Variable loan spread 1.05 1.06 0.94 0.95 Fixed rate floor income, gross 0.01 0.46 0.03 0.57 Fixed rate floor income - derivative settlements (b) (d) 0.00 0.09 0.34 0.01 Fixed rate floor income, net of settlements on derivatives 0.01 0.55 0.37 0.58 Core loan spread 1.06 % 1.61 % 1.31 % 1.53 % Average balance of AGM's loans $ 13,616,889 16,437,861 13,804,065 16,823,385 Average balance of AGM's debt outstanding 13,011,224 15,923,648 13,187,073 16,335,310 (a) In the second quarter of 2023, the Company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of $25.9 million in interest expense from the write-off of the remaining unamortized debt discount associated with these bonds at the time of redemption. This expense was excluded from the table above. (b) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. 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 Non-Nelnet Bank derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2023 and 2022 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Core loan spread 1.06 % 1.61 % 1.31 % 1.53 % Derivative settlements (1:3 basis swaps) 0.00 (0.02) (0.01) (0.02) Derivative settlements (fixed rate floor income) (0.00 ) (0.09) (0.34) (0.01) Loan spread 1.06 % 1.50 % 0.96 % 1.50 % (c) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps. (d) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps. 50 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. In addition, the Company faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the interest rate resets on its assets, which generally occur daily. In an increasing interest rate environment, student loan spread on FFELP loans increases. 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Fixed rate floor income, gross $ 456 18,292 1,567 47,285 Derivative settlements (a) 47 3,692 22,525 487 Fixed rate floor income, net $ 503 21,984 24,092 47,772 Fixed rate floor income contribution to spread, net 0.01 % 0.55 % 0.37 % 0.58 % (a) Derivative settlements consist of net settlements received 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 six months ended June 30, 2023 compared with the same periods in 2022 was due to higher interest rates in 2023 compared with 2022. The Company had a significant portfolio of derivative instruments in which the Company paid a fixed rate and received a floating rate to economically hedge loans earning fixed rate floor income. On March 15, 2023, to minimize the Company's exposure to market volatility, the Company terminated its entire derivative portfolio hedging loans earning fixed rate floor income ($2.8 billion in notional amount of derivatives). Through March 15, 2023, the Company had received cash or had a receivable from its clearinghouse related to variation margin equal to the fair value of the $2.8 billion notional amount of fixed rate floor derivatives as of March 15, 2023 of $183.2 million, which included $19.1 million related to current period settlements. In June 2023, the Company entered into a derivative with a notional amount of $50.0 million to hedge a portion of loans remaining that earn fixed rate floor income. The decrease in net derivative settlements received by the Company during the three months ended June 30, 2023, compared with the same period in 2022, was due to the termination of the fixed rate floor derivatives in March 2023. The increase in net derivative settlements received by the Company during the six months ended June 30, 2023, compared with the same period in 2022, was due to an increase in settlements on the Company's derivatives outstanding during this period as a result of an increase in interest rates. 51 Summary and Comparison of Operating Results Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Net interest income after provision for loan losses $ 13,351 61,861 27,014 135,320 See table below for additional analysis. Other income, net 1,319 5,133 4,164 11,644 Represents primarily borrower late fees, income from providing administration activities for third parties, gain/losses from repurchases of debt, and income/losses from AGM's investment in joint ventures. AGM recognized joint venture losses of $2.5 million and $2.6 million for the three and six months ended June 30, 2023, respectively, compared with losses of $0.4 million and income of $1.6 million for the same periods in 2022. Gain on sale of loans, net 15,511 — 27,323 2,989 The Company sold $261.9 million (par value) and $158.3 million (par value) of consumer and other loans in the first and second quarter of 2023, respectively, and recognized net gains of $11.8 million and $15.5 million, respectively. The Company also sold $18.1 million (par value) of consumer loans in the first quarter of 2022 and recognized a gain of $3.0 million. Derivative settlements, net (18) 4,623 23,319 1,814 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. The majority of derivative settlements received in 2023 was from the Company's derivative portfolio used to hedge loans earning fixed rate floor income. This derivative portfolio was terminated on March 15, 2023 to minimize the Company's exposure to market volatility. Derivative market value adjustments, net 897 40,401 (36,515) 186,135 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 2023 and 2022 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. On March 15, 2023, AGM terminated its portfolio of floor income interest rate swaps to minimize the Company's exposure to market volatility. As such, the Company expects the derivative market value adjustments in future periods will be less substantial. Total other income, net 17,709 50,157 18,291 202,582 Salaries and benefits 1,096 614 1,851 1,205 Increase in 2023 compared with 2022 was due to additional headcount as the Company actively expands into new asset loan classes. Other expenses 4,115 3,543 9,131 6,576 Represents primarily servicing fees paid to third parties. Also includes certain professional and legal fees. Increase in 2023 compared with 2022 was due to incurring additional professional fees as the Company actively expands into new asset loan classes. Intersegment expenses 8,145 8,513 16,841 17,344 Represents fees paid to LSS for the servicing of AGM’s loan portfolio. These amounts exceed the actual cost of servicing the loans. Intersegment expenses also includes 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 13,356 12,670 27,823 25,125 Total operating expenses were 39 basis points and 31 basis points of the average balance of loans for the three months ended June 30, 2023 and 2022, respectively, and 40 basis points and 30 basis points for the six months ended June 30, 2023 and 2022, respectively. The increase in operating expenses as a percent of the average balance of loans in 2023 compared with 2022 was due to an increase in costs as the Company actively expands into new asset loan classes. Income before income taxes 17,704 99,348 17,482 312,777 Income tax expense (4,249) (23,844) (4,196) (75,066) Represents income tax expense at an effective tax rate of 24%. Net income $ 13,455 75,504 13,286 237,711 Additional information: Net income $ 13,455 75,504 13,286 237,711 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional details about non-GAAP net income, excluding derivative market value adjustments. Derivative market value adjustments, net (897) (40,401) 36,515 (186,135) Tax effect 215 9,696 (8,764) 44,672 Net income, excluding derivative market value adjustments $ 12,773 44,799 41,037 96,248 52 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Variable interest income, gross $ 262,771 146,911 509,364 262,663 Increase in 2023 compared with 2022 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 (27,211) (34,952) (55,610) (71,723) Decrease in 2023 compared with 2022 was due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization 1,890 1,474 3,497 2,934 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 237,450 113,433 457,251 193,874 Interest on bonds and notes payable (218,602) (68,616) (400,665) (113,825) Increase in 2023 compared with 2022 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 second quarter of 2023, the Company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of a $25.9 million non-cash expense from the write-off of the remaining debt discount associated with these bonds at the time of redemption. Derivative settlements, net (a) (65) 931 794 1,327 Represents net derivative settlements (paid) received related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives 18,783 45,748 57,380 81,376 Fixed rate floor income, gross 456 18,292 1,567 47,285 Decrease in 2023 compared with 2022 was due to higher interest rates. Derivative settlements, net (a) 47 3,692 22,525 487 Represents net derivative settlements received related to the Company's floor income interest rate swaps. On March 15, 2023, to minimize the Company's exposure to market volatility, the Company terminated its entire derivative portfolio hedging loans earning fixed rate floor income. The decrease in net derivative settlements received by the Company during the three months ended June 30, 2023, compared with the same period in 2022, was due to the termination of the fixed rate floor derivatives in March 2023. The increase in net derivative settlements received by the Company during the six months ended June 30, 2023, compared with the same period in 2022, was due to an increase in settlements on the Company's derivatives outstanding during this period as a result of an increase in interest rates. Fixed rate floor income, net of settlements on derivatives 503 21,984 24,092 47,772 Core loan interest income (a) 19,286 67,732 81,472 129,148 Investment interest 15,857 8,671 29,664 17,835 Increase in 2023 compared with 2022 was due to an increase of interest earned on restricted cash due to higher interest rates. Intercompany interest (13,711) (1,092) (20,846) (1,886) Increase in 2023 compared with 2022 was due to an increase in the balance of borrowings and higher rates. (Provision) negative provision for loan losses - federally insured loans — (2,365) (2,411) 383 The primary item impacting provision for loan losses was the establishment of an initial allowance for consumer loans acquired during the periods presented. For additional information, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. (Provision) for loan losses - private education loans — (1,217) (240) (817) (Provision) for loan losses - consumer and other loans (8,099) (5,245) (37,306) (7,529) Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 13,333 66,484 50,333 137,134 Decrease in 2023 compared with 2022 was due to (i) a decrease in the average balance of loans; (ii) a decrease in core loan spread, primarily related to the termination of floor interest rate swaps in March 2023; (iii) the recognition of a $25.9 million non-cash expense from the write-off of a debt discount associated with bonds redeemed prior to their maturity; and (iv) an increase in provision for loan losses related to an initial allowance for consumer loans acquired during the periods presented. These items were partially offset by an increase in investment interest income due to higher interest rates. (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 (a) 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 2023 and 2022 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. 53 NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of June 30, 2023, Nelnet Bank had a $444.5 million loan portfolio, consisting of $352.3 million of private education loans, $61.5 million of FFELP loans, and $30.7 million of consumer and other loans. For a summary of the allowance as a percentage of the ending balance and loan status, delinquency amounts, and other key credit quality indicators of each of Nelnet Bank's loan portfolios as of June 30, 2023 and December 31, 2022; and the activity in Nelnet Bank's allowance for loan losses and net charge-offs as a percentage of average loans for the three and six months ended June 30, 2023 and 2022, 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 June 30, Six months ended June 30, 2023 2022 2023 2022 Beginning balance $ 439,007 368,257 419,795 257,901 Loan originations: Private education loans 7,359 75,204 21,585 205,546 Consumer and other loans 13,168 — 32,800 — Total loan originations 20,527 75,204 54,385 205,546 Repayments (15,046) (17,373) (29,575) (35,767) Loans sold to AGM — (2,535) (117) (4,127) Ending balance $ 444,488 423,553 444,488 423,553 Deposits As of June 30, 2023, Nelnet Bank had $871.4 million of deposits. 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 saving deposits include deposits from Educational 529 College Savings and Health Savings plans, Short Term Federal Investment Trust (STFIT), and commercial and institutional CDs. Union Bank, a related party, is the program manager for the Educational 529 College Savings plans and trustee for the STFIT. Nelnet Bank’s deposits include $140.4 million from Nelnet, Inc. (the parent company) and its subsidiaries (intercompany), and thus eliminated for consolidated financial reporting purposes. 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 NBS custodial deposits consisting of collected tuition payments which are subsequently remitted to the appropriate school. Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Three months ended June 30, (a) Six months ended June 30, (a) 2023 2022 2023 2022 Balance Rate Balance Rate Balance Rate Balance Rate Average assets Federally insured student loans $ 62,476 6.38 % $ 80,424 2.18 % $ 63,559 6.15 % $ 82,832 1.79 % Private education loans 354,124 3.75 331,584 3.08 354,907 3.68 280,542 3.01 Consumer and other loans 25,530 13.11 — — 16,469 12.93 — — Cash and investments 541,618 6.31 354,336 2.53 541,069 6.13 309,965 2.16 Total interest-earning assets 983,748 5.57 % 766,344 2.73 % 976,004 5.36 % 673,339 2.47 % Non-interest-earning assets 7,992 17,144 8,654 16,214 Total assets $ 991,740 $ 783,488 $ 984,658 $ 689,553 Average liabilities and equity Brokered deposits $ 204,158 1.37 % $ 249,830 1.31 % $ 204,781 1.38 % $ 197,783 1.27 % Intercompany deposits 149,120 6.54 137,812 0.83 168,388 5.67 104,380 0.62 Retail and other deposits 507,701 3.98 287,656 0.75 480,009 3.89 278,393 0.68 Total interest-bearing liabilities 860,979 3.77 % 675,298 0.97 % 853,178 3.62 % 580,556 0.87 % Non-interest-bearing liabilities 4,890 5,226 5,247 5,509 Equity 125,871 102,964 126,233 103,488 Total liabilities and equity $ 991,740 $ 783,488 $ 984,658 $ 689,553 (a) Calculated using average daily balances. 54 Summary and Comparison of Operating Results Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Additional information Total interest income $ 13,661 5,212 25,920 8,241 Represents interest earned on loans, cash, and investments. Increase in 2023 compared with 2022 was due to an increase of these balances and interest rates. Interest expense 8,171 1,639 15,385 2,494 Represents interest expense on deposits. Increase in 2023 compared with 2022 was due to an increase of deposits and interest rates. Net interest income 5,490 3,573 10,535 5,747 Provision for loan losses 1,493 582 3,910 1,011 Increase in provision for loan losses was due to the mix of loans, including the mix of loans originated in 2023 compared with 2022. For additional information, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Net interest income after provision for loan losses 3,997 2,991 6,625 4,736 Other income 620 157 830 1,659 Represents primarily net gains and income from investments. Derivative settlements, net 83 — 83 — During the second quarter of 2023, Nelnet Bank entered into derivatives to hedge its exposure related to variable rate intercompany deposits to minimize volatility from future changes in interest rates. Nelnet Bank has designated its derivative instruments as cash flow hedges; however, because the hedged items are intercompany deposits, the derivative instruments are not eligible for hedge accounting in the consolidated financial statements. Accordingly, all changes in fair value of such derivatives are recorded through earnings and presented as "derivative market value adjustments, net" in the statements of operations. Derivative market value adjustments, net 1,108 — 1,108 — Total other income/expense 1,811 157 2,021 1,659 Salaries and benefits 2,297 1,714 4,361 3,268 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Increase in 2023 compared with 2022 was due to the overall growth of Nelnet Bank activities. Depreciation 51 4 56 7 Other expenses 1,624 899 2,406 1,584 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 in 2023 compared with 2022 was due to the overall growth of Nelnet Bank activities. Intersegment expenses 92 57 173 102 Represents primarily servicing costs paid to LSS. Certain shared service and support costs incurred by the Company to support Nelnet Bank are not and will not be reflected as part of Nelnet Bank 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 $1.8 million and $1.5 million for the three months ended June 30, 2023 and 2022, respectively, and $3.5 million and $2.8 million for the six months ended June 30, 2023 and 2022, respectively. Total operating expenses 4,064 2,674 6,996 4,961 Income before income taxes 1,744 474 1,650 1,434 Income tax expense (396) (106) (362) (328) Represents income tax expense at an effective tax rate of 22.7% and 22.3% for the three months ended June 30, 2023 and 2022, respectively, and 21.9% and 22.9% for the six months ended June 30, 2023 and 2022, respectively. Net income $ 1,348 368 1,288 1,106 Additional information: Net income $ 1,348 368 1,288 1,106 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional details about non-GAAP net income, excluding derivative market value adjustments. Derivative market value adjustments, net (1,108) — (1,108) — Tax effect 266 — 266 — Net income, excluding derivative market value adjustments $ 506 368 446 1,106 55 CORPORATE AND OTHER ACTIVITIES – RESULTS OF OPERATIONS Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities (“Corporate”). The following table summarizes the operating results of these activities. Income taxes are allocated based on 24% of income (loss) before taxes for each activity. The difference between the Corporate income tax expense and the sum of taxes calculated for each activity is included in income taxes in “other” in the table below. Summary and Comparison of Operating Results Nelnet Renewable Energy (c) Shared services (a) WRCM (b) Tax equity investments / syndication / administration GRNE Solar ALLO investment (d) Real estate investments (e) Venture capital investments (f) Interest income/expense, net (g) Other Total Three months ended June 30, 2023 Interest income $ — 3 — 59 — 141 1,214 24,459 (21) 25,855 Interest expense — — — (422) — — — (7,527) (293) (8,242) Net interest income — 3 — (363) — 141 1,214 16,932 (314) 17,613 Solar construction revenue — — — 4,735 — — — — — 4,735 Other, net 921 1,638 (7,929) 58 (9,711) (1,089) (957) 192 7,324 (9,553) Impairment expense — — — — — — — — — — Cost to provide solar construction services — — — (9,122) — — — — — (9,122) Salaries and benefits (23,003) (53) (878) (1,471) — (57) (226) — (1,277) (26,965) Depreciation and amortization (9,218) — — (1,581) — (8) — — (116) (10,923) Other expenses (9,820) (82) (97) 47 (1,375) (31) (20) (424) (4,945) (16,747) Intersegment expenses, net 27,145 (3) (754) (539) — (93) (12) (97) 387 26,034 Income (loss) before income taxes (13,975) 1,503 (9,658) (8,236) (11,086) (1,137) (1) 16,603 1,059 (24,928) Income tax (expense) benefit 3,354 (324) 461 1,597 2,661 267 — (3,985) (1,464) 2,567 Net (income) loss attributable to noncontrolling interests — (151) 7,737 1,582 — 23 — — — 9,191 Net income (loss) $ (10,621) 1,028 (1,460) (5,057) (8,425) (847) (1) 12,618 (405) (13,170) Three months ended June 30, 2022 Interest income $ — — — — — 318 106 5,683 128 6,235 Interest expense — — — — — — — (3,220) (432) (3,652) Net interest income — — — — — 318 106 2,463 (304) 2,583 Solar construction revenue — — — — — — — — — — Other, net 461 1,482 (1,854) — (14,801) 3,756 17,293 (2,568) 2,978 6,747 Impairment expense (875) — — — — — (5,409) — — (6,284) Cost to provide solar construction services — — — — — — — — — — Salaries and benefits (21,547) (56) (308) — (71) (55) (153) — (1,539) (23,729) Depreciation and amortization (10,159) — — — — — — — (71) (10,230) Other expenses (9,262) (82) (258) — — 11 (23) (692) (1,935) (12,241) Intersegment expenses, net 24,147 (3) (3) — — (95) — (55) (446) 23,545 Income (loss) before income taxes (17,235) 1,341 (2,423) — (14,872) 3,935 11,814 (852) (1,317) (19,609) Income tax (expense) benefit 4,136 (290) 28 — 3,569 (942) (2,835) 204 1,358 5,228 Net (income) loss attributable to noncontrolling interests — (134) 2,305 — — (8) — — 9 2,172 Net income (loss) $ (13,099) 917 (90) — (11,303) 2,985 8,979 (648) 50 (12,209) 56 Nelnet Renewable Energy (c) Shared services (a) WRCM (b) Tax equity investments / syndication / administration GRNE Solar ALLO investment (d) Real estate investments (e) Venture capital investments (f) Interest income/expense, net (g) Other Total Six months ended June 30, 2023 Interest income $ — 5 — 100 — 282 1,884 44,696 87 47,054 Interest expense — — — (695) — — — (19,504) (361) (20,560) Net interest income — 5 — (595) — 282 1,884 25,192 (274) 26,494 Solar construction revenue — — — 13,386 — — — — — 13,386 Other, net 1,547 3,250 (9,877) 102 (27,575) (289) (890) (3,749) 10,194 (27,287) Impairment expense — — — — — — — — — — Cost to provide solar construction services — — — (17,422) — — — — — (17,422) Salaries and benefits (46,387) (109) (1,885) (2,667) (30) (138) (403) — (2,765) (54,384) Depreciation and amortization (18,048) — — (2,198) — (14) — — (194) (20,454) Other expenses (20,386) (163) (918) (901) (1,363) (47) (185) (2,642) (3,753) (30,358) Intersegment expenses, net 56,310 (6) (739) (1,051) — (188) (22) (194) (288) 53,822 Income (loss) before income taxes (26,964) 2,977 (13,419) (11,346) (28,968) (394) 384 18,607 2,920 (56,203) Income tax (expense) benefit 6,471 (643) 667 2,207 6,953 87 (92) (4,466) (1,836) 9,348 Net (income) loss attributable to noncontrolling interests — (297) 10,640 2,151 — 29 — — — 12,523 Net income (loss) $ (20,493) 2,037 (2,112) (6,988) (22,015) (278) 292 14,141 1,084 (34,332) Six months ended June 30, 2022 Interest income $ — — — — — 607 106 9,286 228 10,227 Interest expense — — — — — — — (4,965) (713) (5,678) Net interest income — — — — — 607 106 4,321 (485) 4,549 Solar construction revenue — — — — — — — — — — Other, net 1,150 2,763 (2,723) — (25,815) 8,228 22,195 (3,432) 5,506 7,872 Impairment expense (875) — — — — — (5,409) — — (6,284) Cost to provide solar construction services — — — — — — — — — — Salaries and benefits (43,415) (111) (566) — (155) (165) (392) — (2,938) (47,742) Depreciation and amortization (19,774) — — — — — — — (140) (19,914) Other expenses (21,523) (182) (360) — (24) 9 (46) (1,141) (2,778) (26,045) Intersegment expenses, net 49,902 (6) (6) — — (190) — (111) (648) 48,941 Income (loss) before income taxes (34,535) 2,464 (3,655) — (25,994) 8,489 16,454 (363) (1,483) (38,623) Income tax (expense) benefit 8,288 (533) (125) — 6,238 (2,034) (3,949) 87 3,854 11,826 Net (income) loss attributable to noncontrolling interests — (246) 4,174 — — (14) — — 20 3,934 Net income (loss) $ (26,247) 1,685 394 — (19,756) 6,441 12,505 (276) 2,391 (22,863) (a) Includes corporate activities related to internal audit, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services. Certain shared service costs incurred to support Nelnet Bank will not be allocated to Nelnet Bank until the end of the Bank’s de novo period (November 2023). The amount allocated to operating segments is reflected as “intersegment expenses, net” in the table above. Also includes corporate costs and overhead functions not allocated to operating segments, including executive management, investments in innovation, and other holding company organizational costs. (b) 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 earned management fees of $1.6 million and $1.5 million during the three months ended June 30, 2023 and 2022, respectively, and $3.2 million and $2.7 million during the six months ended June 30, 2023 and 2022, respectively. Fees earned by WRCM are included in "other, net" in the table above. 57 (c) Nelnet Renewable Energy, which includes solar tax equity investments made by the Company, administrative and management services provided by the Company on tax equity investments made by third parties, and solar development. As of June 30, 2023, the Company has invested a total of $312.9 million (which includes $120.0 million syndicated to third-party investors) in solar tax equity investments. Due to the management and control of each of these investment partnerships, the tax equity investments are consolidated on the Company’s consolidated financial statements, with the co-investor’s portion being presented as non-controlling interests. Included in tax equity investments is the Company's share of income or loss from solar investments under the Hypothetical Liquidation at Book Value (HLBV) method of accounting. For the majority of the Company's solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment. Nelnet Renewable Energy recognized losses on its tax equity investments of $7.9 million and $1.9 million during the three months ended June 30, 2023 and 2022, respectively, and $9.9 million and $2.9 million during the six months ended June 30, 2023 and 2022, respectively. These losses, which include losses attributable to third-party noncontrolling interest investors, are included in “other, net” in the table above. Solar losses attributable to third-party noncontrolling interest investors was $7.4 million and $2.0 million for the three months ended June 30, 2023 and 2022, respectively, and $10.1 million and $3.9 million for the six months ended June 30, 2023 and 2022, respectively, and are reflected in “net (income) loss attributable to noncontrolling interests” in the table above. Nelnet Renewable Energy syndicates tax equity investments to third parties and earns management and performance fees. Management fee income recognized by Nelnet Renewable Energy was $0.3 million and $0.2 million for the three months ended June 30, 2023 and 2022, respectively, and $0.6 million and $0.4 million for the six months ended June 30, 2023 and 2022, respectively, which is included in "other, net" in the table above. In addition to solar tax equity investments, the Company has a strategy to own solar energy project assets. Accordingly, the Company has begun to execute a multi-faceted approach to originate, acquire, finance, own, and manage these assets. As part of this strategy, on July 1, 2022, the Company acquired 80% of the ownership interest in two subsidiaries of GRNE Solutions, LLC named GRNE-Nelnet, LLC (GRNE) and ENRG-Nelnet, LLC (ENRG) (collectively referred to as “GRNE Solar”). GRNE is a solar contracting company that provides full-service engineering, procurement, and construction (EPC) services to residential homes and commercial entities. Since the acquisition of GRNE, it has incurred low and, in some cases, negative margins on certain projects. As existing contracts are completed and revenue from new projects grows as a percent of overall revenue, the Company expects margin to improve in future periods. (d) Represents primarily the Company's share of loss on its voting membership interests and income on its preferred membership interest in ALLO. The Company accounts for its approximately 45% voting membership interests in ALLO Holdings LLC, a holding company for ALLO Communications LLC (collectively referred to as "ALLO") under the HLBV method of accounting. The Company recognized losses under the HLBV method of accounting on its ALLO voting membership interests investment of $12.2 million and $16.9 million during the three months ended June 30, 2023 and 2022, respectively, and $32.4 million and $30.1 million during the six months ended June 30, 2023 and 2022, respectively. These amounts are reflected in “other, net” in the table above. As of June 30, 2023, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $145.9 million and $4.5 million, respectively. The preferred membership interests of ALLO held by the Company earn a preferred annual return of 6.25%. The Company recognized income on its ALLO preferred membership interests of $2.3 million and $2.1 million during the three months ended June 30, 2023 and 2022, respectively, and $4.5 million and $4.3 million during the six months ended June 30, 2023 and 2022, respectively. These amounts are reflected in “other, net” in the table above. As part of the ALLO recapitalization transaction, the Company and SDC entered into an agreement, in which the Company has contingent payment obligation to pay SDC a contingent payment amount of $25.0 million to $35.0 million in the event the Company disposes of its voting membership interests of ALLO that it holds and realizes from such disposition certain targeted return levels. The Company recognized an expense of $1.4 million associated with this obligation for the three months ended June 30, 2023, which is included in “other expenses” in the table above. (e) Represents the operating results of the Company’s real estate investments and the administrative costs to manage this portfolio. (f) Represents the operating results of the Company’s venture capital investments and the administrative costs to manage this portfolio. In April 2022, the Company recognized a $15.2 million gain as a result of the revaluation of its previously held 50% ownership interests in NextGen (previously accounted for under the equity method) as a result of the Company purchasing an additional 30% ownership interests in NextGen. (g) Represents interest income earned on cash and investment debt securities (primarily student loan and other asset-backed securities), interest expense incurred on unsecured and certain other corporate related debt transactions, unrealized gains/losses on marketable equity securities, realized gains/losses on marketable equity securities and investment debt securities, and other costs to manage these investments and facilities. 58 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. Nelnet Bank launched operations in November 2020. Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million and the Company contributed an additional $30.0 million to Nelnet Bank during 2022. Based on Nelnet Bank's business plan for growth and current financial condition, the Company believes it will make additional capital contributions to the bank in future periods. Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. See “Liquidity Impact Related to Nelnet Bank” included below for additional information. 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 June 30, 2023, the Company's sources of liquidity included: Cash and cash equivalents $ 121,769 Less: Cash and cash equivalents held at Nelnet Bank (1) (15,629) Net cash and cash equivalents 106,140 Available-for-sale (AFS) debt securities (investments) - at fair value 1,048,074 Less: AFS debt securities held at Nelnet Bank - at fair value (1) (376,269) AFS debt securities serving as collateral on participation agreement - at fair value (2) (6,303) AFS debt securities serving as collateral on repurchase agreements - at fair value (3) (281,846) AFS restricted debt securities - at fair value (15,956) Unencumbered AFS debt securities (investments) - at fair value 367,700 Unencumbered private, consumer, and other loans (Non-Nelnet Bank) - at par 231,107 Repurchased Nelnet issued asset-backed debt securities - at par (not included on consolidated financial statements) (4) 253,731 Less: Repurchased Nelnet issued asset-backed debt securities serving as collateral on repurchase agreements - at par (197,500) Unencumbered repurchased Nelnet issued asset-backed debt securities - at par 56,231 Unused capacity on unsecured line of credit (5) 495,000 Sources of liquidity as of June 30, 2023 $ 1,256,178 (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 June 30, 2023, there was no amount outstanding on the unsecured line of credit and $495.0 million was available for future use. 59 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. Cash Flows The Company has historically generated positive cash flow from operations. During the six months ended June 30, 2023 and 2022, the Company generated $199.0 million and $483.7 million, respectively, in cash from operating activities. The decrease in 2023 compared with 2022 was due to: • A decrease in net income; • Payments to the Company's clearinghouse for margin payments on derivatives for the six months ended June 30, 2023 compared with proceeds received in 2022; • Adjustments to net income for the impact of the non-cash change in deferred income taxes and gain on sale of loans; and • A decrease in net proceeds from the sale of equity securities in 2023 compared to 2022. These factors were partially offset by: • An increase in proceeds from termination of derivative instruments in 2023 compared with 2022; • Adjustments to net income for derivative market value adjustments, the impact of provision for loan losses, and loss on investments; • An increase of non-cash depreciation and amortization during the six months ended June 30, 2023 compared with the same period in 2022; and • The impact of changes to accounts receivable during the six months ended June 30, 2023 compared with the same period in 2022. 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 and investment activity. Cash provided by investing activities and used in financing activities for the six months ended June 30, 2023 was $890.3 million and $1.6 billion, respectively. Cash provided by investing activities and used in financing activities for the six months ended June 30, 2022 was $837.0 million and $1.3 billion, 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 June 30, 2023 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 11,141,183 8/26/30 - 9/25/69 FFELP, private education, and consumer loan warehouse facilities 1,604,953 12/31/23 - 11/14/25 $ 12,746,136 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 June 30, 2023, 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 $1.37 billion as detailed below. 60 The forecasted cash flow presented below includes all loans, the majority of which are federally insured student loans, funded in asset-backed securitizations as of June 30, 2023. As of June 30, 2023, AGM had $11.3 billion of loans included in asset-backed securitizations, which represented 85.6% 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, consumer, and other loans funded with operating cash, loans acquired subsequent to June 30, 2023, 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 $1.37 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $1.37 billion include approximately $0.84 billion (as of June 30, 2023) 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 $0.53 billion, or approximately $0.40 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 June 30, 2023 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 5% for consolidation loans and 6% for all other loan types. 61 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. 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 significantly increase prepayments. See note 12 of the notes to the consolidated financial statements included in Part I, Item 1 of this report for additional details regarding the federal government's actions with respect to student loan forgiveness and cancellations. In addition, on July 10, 2023, the Department issued final regulations on income-driven repayment plans for Federal Direct loans. Eligible FFELP borrowers can access the new changes by consolidating their loans into the Federal Direct Loan Program. The new regulations are effective July 1, 2024; however, the Department has elected early implementation for some features starting July 30, 2023. The regulations provide a lower monthly loan payment on a Direct loan by decreasing discretionary income, decreasing the percentage of discretionary income that must be paid toward a Direct loan, and providing the option for married borrowers to exclude their spouse’s income from being factored by filing a separate tax return. Other changes provide for the elimination of accrued interest that is not covered by the monthly payment amount, provide credit towards loan forgiveness that counts certain periods of deferment and forbearance, a shorter loan forgiveness period for borrowers with an original principal balance less than or equal to $12,000, and credit toward loan forgiveness for eligible payments on a Direct or FFELP loan that is repaid by a Direct Consolidation loan. This new income-driven repayment plan may increase consolidation activity in the future as FFELP borrowers consolidate their loans into the Federal Direct Loan Program in order to be eligible for the new income-driven repayment plan. See Part I, Item 1A, "Risk Factors - Loan Portfolio - Prepayments risk" in the Company's 2022 Annual Report for additional information related to 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 $0.10 billion $1.27 billion 4x $0.26 billion $1.11 billion 10x $0.47 billion $0.90 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 $0.84 billion (as of June 30, 2023); however, the Company would not receive the $0.53 billion ($0.40 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 $40 million to $65 million. 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. 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. On June 30, 2023, LIBOR was discontinued as a benchmark rate. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - LIBOR Transition" in this report and Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2022 Annual Report. The Company does not expect the replacement of LIBOR as a benchmark rate to significantly impact its asset-backed securitization cash flow forecast. 62 Warehouse Facilities Warehousing allows the Company to buy and manage FFELP, private education, and consumer loans prior to transferring them into more permanent financing arrangements. For a summary of the Company's warehouse facilities see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 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; proceeds from the sale of certain investments; its unsecured line of credit, its Union Bank student loan participation agreement, its 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% interest in the loans and has a corresponding 8% 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 sheets as "investments and notes receivable" and as of June 30, 2023, the fair value of these bonds was $281.8 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 June 30, 2023, $415.5 million was outstanding on the Company's two repurchase agreements, of which $257.2 million was borrowed to fund private education loan securitization bonds subject to the Company’s risk retention requirement and $158.3 million was borrowed to fund repurchased FFELP loan asset-backed securities. The repurchase agreements have various maturity dates (as of June 30, 2023) from July 26, 2023 through November 27, 2024. Subsequent to June 30, 2023, the Company paid down the outstanding balance of one of the facilities, and as of August 7, 2023, the maturity dates on the remaining facility vary from November 20, 2023 through November 27, 2024. The remaining facility 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 the repurchase agreement becomes less than the original purchase price of such securities. Upon termination or expiration of the remaining repurchase agreement, 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. 63 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 June 30, 2023, $262.7 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 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 six months ended June 30, 2023. 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 and the Company contributed an additional $30.0 million to Nelnet Bank during 2022. 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%; (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% 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, or 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 June 30, 2023 with a leverage ratio of 12.7%. 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 Bank has a portfolio of asset-backed securities investments that were accounted for and classified as available-for-sale. Accordingly, these securities were carried at fair value, with the changes in fair value, net of taxes, carried as a separate component of equity. To reduce Nelnet Bank's market exposure related to decreases in fair value on these investments, on March 31, 2023, securities at Nelnet Bank with a fair value of $149.2 million were transferred from available-for-sale to held to maturity. The securities were reclassified at fair value at the time of the transfer, and such transfer represented a non-cash transaction. Accumulated other comprehensive income as of the date of the transfer (March 31, 2023) included pre-tax unrealized losses of $3.7 million. These unrealized losses will be amortized, consistent with the amortization of any discounts on such securities, over the remaining lives of the respective securities as an adjustment of yield. 64 Based on Nelnet Bank's business plan for growth and current financial condition, the Company believes it will make additional capital contributions to the bank in future periods. Liquidity Impact Related to Nelnet Renewable Energy The Company’s Nelnet Renewable Energy business makes solar tax equity investments. Through June 30, 2023, the Company has invested a total of $312.9 million (which includes $120.0 million syndicated to third-party investors) in tax equity investments in renewable energy solar partnerships. These investments provide a federal income tax credit under the Internal Revenue Code, equaling either 26% or 30% of the eligible project costs, with the tax credit available when the project is placed-in-service. The Company is allowed to reduce its tax estimates paid to the U.S. Treasury based on the credits earned. Based on the timing of when the Company funds a project and decreases its tax estimate to the U.S. Treasury due to earning of the tax credit, the amount of capital committed to solar tax equity investments at any point in time is not significant and has a minimal impact on the Company’s liquidity. As of June 30, 2023, the Company is committed to fund an additional $319.2 million on tax equity investments, of which $120.5 million is expected to be provided by syndication partners. In addition to solar tax equity investments, the Company has a strategy to own solar energy project assets. These assets provide long-term, predictable, and recurring cash flows. Accordingly, the Company has begun to execute a multi-faceted approach to originate, acquire, finance, own, and manage these assets. The Company plans to fund a large portion of its current growth plans in owning solar energy projects using third-party debt and third-party tax equity. The collateral on any third-party debt would be limited to the assets of the specific solar projects. Any capital requirements for the origination or purchase of solar projects not funded by third-party debt and third-party tax equity would be provided by the Company using operating cash, borrowings on its unsecured line of credit, and/or the sale of investments. Liquidity Impact Related to ALLO Upon the deconsolidation of ALLO on December 21, 2020, the Company recorded its 45% 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 June 30, 2023, the outstanding preferred membership interests of ALLO held by the Company was $145.9 million that earns a preferred annual return of 6.25%. Accrued and unpaid preferred returns are converted to additional preferred membership interests each December 31. As of June 30, 2023 the accrued and unpaid preferred return was $4.5 million. If the non-voting preferred membership interests are not redeemed on or before April 2024, the preferred annual return is increased from 6.25% to 10.00%. In June 2023, ALLO, the Company, and SDC (a third-party global digital infrastructure investor and member of ALLO) agreed to amend the terms of the ALLO non-voting preferred membership units owned by Nelnet. Such amended terms provide that commencing January 1, 2025, the preferred annual return will increase to 13.5%, commencing July 1, 2025, the return will increase to 15.0%, commencing January 1, 2026, the preferred return will increase to 17.5%, and beginning on January 1, 2027 and on each January 1 of each calendar year thereafter, the annual return will increase by an additional 2.5%. In addition, any preferred return accruing on or after January 1, 2025 is expected to be paid on a quarterly basis in cash rather than through an increase to the outstanding preferred membership interests. As part of the ALLO recapitalization transaction in December 2020, the Company and SDC entered into an agreement, in which the Company has a contingent payment obligation to pay SDC a contingent payment amount of $25.0 million to $35.0 million in the event the Company disposes of its voting membership interests of ALLO that it holds and realizes from such disposition certain targeted return levels. As of June 30, 2023, the estimated fair value of the contingent payment is $9.0 million. In June 2023, ALLO closed on an asset-backed securities transaction with an aggregate size of $576.0 million. The proceeds from this transaction were used to refinance the majority of ALLO's prior debt and fund a portion of its current growth plans. 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 debt financing to fund a large portion of its growth plans, the Company contributed $8.4 million of additional equity to ALLO in the first quarter of 2023. 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 believes it will make additional capital contributions to ALLO in future periods. 65 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. All Non-Nelnet Bank over-the-counter derivative contracts executed by the Company are cleared post-execution at a regulated clearinghouse. Clearing is a process by which a third party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default. To minimize the Company's exposure to market volatility, on March 15, 2023, the Company terminated its derivative portfolio hedging loans earning fixed rate floor income ($2.8 billion in notional amount of derivatives). Through March 15, 2023, the Company had received cash or had a receivable from the clearinghouse related to variation margin equal to the fair value as of March 15, 2023 of the derivatives used to hedge loans earning fixed rate floor income of $183.2 million, which included $19.1 million related to current period settlements. Based on the derivative portfolio outstanding as of June 30, 2023, the Company does not 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. 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 June 30, 2023, 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 June 30, 2023, $6.8 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 The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 8, 2025. No shares were repurchased under this program during the first half of 2023. As of June 30, 2023, 4,467,021 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. During the first half of 2023, the Company repurchased 41,247 shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. These repurchased shares are excluded from the Company's repurchase program. See "Stock Repurchases" under Part II, Item 2 of this report. Dividends On June 15, 2023, the Company paid a second quarter 2023 cash dividend on the Company's Class A and Class B common stock of $0.26 per share. In addition, the Company's Board of Directors has declared a third quarter 2023 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.26 per share. The third quarter cash dividend will be paid on September 15, 2023 to shareholders of record at the close of business on September 1, 2023. The Company 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 66 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 2022 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 2022 Annual Report. For additional information regarding changes in the Company’s allowance for loan losses for the three and six months ended June 30, 2023 and 2022, 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, 2022. RECENT ACCOUNTING PRONOUNCEMENTS Investments - Proportional Amortization Method In March 2023, the FASB issued accounting guidance which permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than at the reporting entity level or for individual investments. This guidance will be effective for the Company beginning January 1, 2024 with early adoption permitted. Management believes this pronouncement will not have a material impact on the Company's consolidated financial statements upon adoption. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (All dollars are in thousands, except share amounts, unless otherwise noted) LIBOR Transition On June 30, 2023, the LIBOR administrator ceased publication (on a representative basis) of all USD LIBOR rates. When possible, the Company relied on fallback provisions or negotiated with counterparties to transition financial contracts from LIBOR to SOFR. Due to certain noteholder consent requirements, it was not practicable to modify certain of the Company's asset-backed securities transactions. The SAP formula for the Company's FFELP loans, the majority of which were indexed to one-month LIBOR, were not able to be modified without legislative action. On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act) was signed into law. The LIBOR Act provides that for contracts that contain no fallback provision or contain fallback provisions that do not identify a specific USD LIBOR benchmark replacement (including the SAP formula for FFELP loans), a benchmark replacement based on SOFR will automatically replace the USD LIBOR benchmark in the contract after June 30, 2023. Following the enactment and implementation of the LIBOR Act, all of the Company's financial instruments which are currently indexed to USD LIBOR have transitioned, or will transition, to SOFR after June 30, 2023. Specifically, after June 30, 2023, the SAP formula for FFELP loans will transition to 30-day Average SOFR and the Company's LIBOR-indexed FFELP asset-backed securities will also transition to a short-term SOFR index. The Company does not expect the transition from LIBOR to SOFR to significantly impact its asset-backed securitization cash flow forecast as discussed under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral - Bonds and Notes Issued in Asset-backed Securitizations." The Company's LIBOR-indexed derivatives will transition to the fallback rate (SOFR) as defined in the individual agreements and/or published industry guidelines, as applicable. For a discussion of the risks related to the LIBOR transition, see Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2022 Annual Report for additional information. 67 Interest Rate Risk - AGM Operating Segment AGM’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact AGM due to shifts in market interest rates. The following table sets forth AGM’s loan assets and debt instruments by rate characteristics: As of June 30, 2023 As of December 31, 2022 Dollars Percent Dollars Percent Fixed-rate loan assets $ 724,882 5.5 % $ 1,339,900 9.5 % Variable-rate loan assets 12,514,243 94.5 12,829,871 90.5 Total $ 13,239,125 100.0 % $ 14,169,771 100.0 % Fixed-rate debt instruments $ 538,762 4.2 % $ 617,083 4.5 % Variable-rate debt instruments 12,207,374 95.8 13,199,327 95.5 Total $ 12,746,136 100.0 % $ 13,816,410 100.0 % FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the special allowance payment (SAP) formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its FFELP student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, the Company’s FFELP student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income. Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for those loans to the Department. No variable-rate floor income was earned by the Company in 2023 or 2022. A summary of fixed rate floor income earned by the AGM operating segment follows. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Fixed rate floor income, gross $ 456 18,292 1,567 47,285 Derivative settlements (a) 47 3,692 22,525 487 Fixed rate floor income, net $ 503 21,984 24,092 47,772 (a) Derivative settlements consist of settlements received related to the Company's derivatives used to hedge student loans earning fixed rate floor income. Gross fixed rate floor income decreased for the three and six months ended June 30, 2023 compared with the same periods in 2022 due to higher interest rates in 2023 compared with 2022. The Company had a significant portfolio of derivative instruments in which the Company paid a fixed rate and received a floating rate to economically hedge loans earning fixed rate floor income. On March 15, 2023, to minimize the Company's exposure to market volatility, the Company terminated its entire derivative portfolio hedging loans earning fixed rate floor income ($2.8 billion in notional amount of derivatives). Through March 15, 2023, the Company had received cash or had a receivable from its clearinghouse related to variation margin equal to the fair value of the $2.8 billion notional amount of fixed rate floor derivatives as of March 15, 2023 of $183.2 million, which included $19.1 million related to current period settlements. The decrease in net derivative settlements received by the Company during the three months ended June 30, 2023, compared with the same period in 2022, was due to the termination of the fixed rate floor derivatives in March 2023. The increase in net derivative settlements received by the Company during the six months ended June 30, 2023, compared with the same period in 2022, was due to an increase in settlements on the Company's derivatives outstanding during this period as a result of an increase in interest rates. 68 The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 2023. Fixed interest rate range Borrower/lender weighted average yield Estimated variable conversion rate (a) Loan balance 7.5 - 7.99% 7.87% 5.23% $ 32,997 8.0 - 8.99% 8.20% 5.56% 256,171 > 9.0% 9.05% 6.41% 130,844 $ 420,012 (a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of June 30, 2023, the weighted average estimated variable conversion rate was 5.80% and the short-term interest rate was 518 basis points. In June 2023, the Company entered into a derivative with a notional amount of $50.0 million and a maturity date in 2030 to hedge a portion of loans remaining that earn fixed rate floor income. Based on the terms of this derivative, the Company pays a weighted average fixed rate of 3.44% and receives payments based on SOFR that resets quarterly. AGM is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of AGM’s assets do not match the interest rate characteristics of the funding for those assets. The following table presents AGM’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of June 30, 2023. Index Frequency of variable resets Assets Funding of student loan assets 1 month LIBOR (a) (b) Daily $ 12,002,100 — 3 month H15 financial commercial paper Daily 414,602 — 3 month Treasury bill Daily 403,040 — 1 month LIBOR (a) Monthly — 7,239,176 3 month LIBOR (a) (b) Quarterly — 3,255,282 Asset-backed commercial paper (c) Varies — 1,530,429 Fixed rate — — 519,156 Auction-rate (d) Varies — 91,335 Other (e) — 1,248,304 1,432,668 $ 14,068,046 14,068,046 (a) Have transitioned, or will transition, to SOFR after June 30, 2023. See "LIBOR Transition" above. (b) The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps outstanding as of June 30, 2023. Maturity Notional amount (i) 2024 $ 1,750,000 2026 1,150,000 2027 250,000 $ 3,150,000 (i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2023 was one-month LIBOR plus 10.1 basis points. (c) The interest rate on the Company's FFELP warehouse facilities is indexed to asset-backed commercial paper rates. (d) As of June 30, 2023, the Company was sponsor for $91.3 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (the “Auction Rate Securities”). Since the auction feature has essentially been inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents. (e) Assets include accrued interest receivable and restricted cash. Funding represents overcollateralization (equity) and other liabilities included in FFELP loan asset-backed securitizations and warehouse facility. 69 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 interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets. See "LIBOR Transition" above and Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2022 Annual Report for additional information. Sensitivity Analysis The following tables summarize the effect on the Company’s consolidated earnings, based upon a sensitivity analysis performed on AGM’s assets and liabilities assuming hypothetical increases and decreases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant. In addition, a sensitivity analysis was performed assuming the funding index increases 10 basis points and 30 basis points while holding the asset index constant, if the funding index is different than the asset index. The sensitivity analysis was performed on AGM’s variable rate assets (including loans earning fixed rate floor income) and liabilities. Interest rates Change from increase of 100 basis points Change from increase of 300 basis points Change from decrease of 100 basis points Change from decrease of 300 basis points Dollars Percent Dollars Percent Dollars Percent Dollars Percent Three months ended June 30, 2023 Effect on earnings: Increase (decrease) in pre-tax net income before impact of derivative settlements $ 712 2.4 % $ 3,029 10.2 % $ 314 1.1 % $ 3,762 12.7 % Impact of derivative settlements (a) 33 0.1 99 0.3 (33) (0.1) (99) (0.3) Increase (decrease) in net income before taxes $ 745 2.5 % $ 3,128 10.5 % $ 281 1.0 % $ 3,663 12.4 % Increase (decrease) in basic and diluted earnings per share $ 0.02 $ 0.06 $ 0.01 $ 0.07 Three months ended June 30, 2022 Effect on earnings: Increase (decrease) in pre-tax net income before impact of derivative settlements $ (5,927) (5.4) % $ (10,505) (9.7) % Impact of derivative settlements 7,729 7.1 23,187 21.4 Increase (decrease) in net income before taxes $ 1,802 1.7 % $ 12,682 11.7 % Increase (decrease) in basic and diluted earnings per share $ 0.04 $ 0.26 Six months ended June 30, 2023 Effect on earnings: Increase (decrease) in pre-tax net income before impact of derivative settlements $ 1,484 2.4 % $ 7,432 12.2 % $ 390 0.6 % $ 7,412 12.2 % Impact of derivative settlements (a) 33 0.1 99 0.2 (33) (0.1) (99) (0.2) Increase (decrease) in net income before taxes $ 1,517 2.5 % $ 7,531 12.4 % $ 357 0.5 % $ 7,313 12.0 % Increase (decrease) in basic and diluted earnings per share $ 0.03 $ 0.15 $ 0.01 $ 0.15 Six months ended June 30, 2022 Effect on earnings: Increase (decrease) in pre-tax net income before impact of derivative settlements $ (16,068) (4.6) % $ (28,152) (8.1) % Impact of derivative settlements 18,455 5.3 55,365 15.9 Increase (decrease) in net income before taxes $ 2,387 0.7 % $ 27,213 7.8 % Increase (decrease) in basic and diluted earnings per share $ 0.05 $ 0.55 (a) On March 15, 2023, the Company terminated its existing derivative portfolio hedging loans earning fixed rate floor income. The table above excludes the impact of these derivatives for the entire period. 70 Asset and funding index mismatches Increase of 10 basis points Increase of 30 basis points Increase of 10 basis points Increase of 30 basis points Dollars Percent Dollars Percent Dollars Percent Dollars Percent Three months ended June 30, 2023 Three months ended June 30, 2022 Effect on earnings: Increase (decrease) in pre-tax net income before impact of derivative settlements $ (1,182) (4.0) % $ (3,547) (12.0) % $ (1,199) (1.1) % $ (3,597) (3.3) % Impact of derivative settlements 785 2.7 2,356 8.0 1,222 1.1 3,664 3.4 Increase (decrease) in net income before taxes $ (397) (1.3) % $ (1,191) (4.0) % $ 23 0.0 % $ 67 0.1 % Increase (decrease) in basic and diluted earnings per share $ (0.01) $ (0.02) $ 0.00 $ 0.00 Six months ended June 30, 2023 Six months ended June 30, 2022 Effect on earnings: Increase (decrease) in pre-tax net income before impact of derivative settlements $ (2,295) (3.8) % $ (6,886) (11.3) % $ (2,461) (0.7) % $ (7,383) (2.1) % Impact of derivative settlements 1,562 2.6 4,686 7.7 2,677 0.8 8,028 2.3 Increase (decrease) in net income before taxes $ (733) (1.2) % $ (2,200) (3.6) % $ 216 0.1 % $ 645 0.2 % Increase (decrease) in basic and diluted earnings per share $ (0.01) $ (0.04) $ 0.00 $ 0.01 Interest Rate Risk - Nelnet Bank To manage Nelnet Bank's risk from fluctuations in market interest rates, the Company actively monitors interest rates and other interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income, and cash flow. To achieve this objective, the Company manages and mitigates Nelnet Bank’s exposure to fluctuations in market interest rates through several techniques, including managing the maturity, repricing, and mix of fixed and variable rate assets and liabilities and the use of derivative instruments. The following table presents Nelnet Bank's loan assets, asset-backed security investments, and deposits by rate characteristics: As of June 30, 2023 As of December 31, 2022 Dollars Percent Dollars Percent Fixed-rate loan assets $ 372,494 $ 341,776 Fixed-rate investments 98,538 123,809 Total fixed-rate assets 471,032 48.5 % 465,585 52.2 % Variable-rate loan assets 71,994 78,019 Variable-rate investments 428,571 347,559 Total variable rate assets 500,565 51.5 425,578 47.8 Total assets $ 971,597 100.0 % $ 891,163 100.0 % Fixed-rate deposits $ 281,583 32.3 % $ 336,040 42.6 % Variable-rate deposits (a) 589,839 67.7 453,604 57.4 Total deposits $ 871,422 100.0 % $ 789,644 100.0 % (a) Nelnet Bank uses derivative instruments to hedge exposure to variability in cash flows of variable rate deposits to minimize the exposure to volatility in cash flows from future changes in interest rates. The derivatives are not reflected in the above table. See note 4 of the notes to the consolidated financial statements included under Part I, Item 1 of this report for a summary of Nelnet Bank's derivatives outstanding as of June 30, 2023. 71 Interest Rate and Market Risk - Investments The following table presents the rates earned on the Company’s available-for-sale debt securities (investments) and debt facilities used to fund a portion of such investments. The table below excludes securities (investments) held by Nelnet Bank. Average balance Interest income/ expense Average yields/ rates Average balance Interest income/ expense Average yields/ rates Three months ended June 30, 2023 2022 Investments: Asset-backed securities available-for-sale (a) (b) $ 1,076,344 22,911 8.54 % $ 1,258,770 5,104 1.63 % Debt funding asset-backed securities available-for-sale: Participation agreement - variable rate (c) $ 76,966 1,094 5.70 % $ 352,804 1,384 1.57 % Repurchase agreements - variable rate (d) 415,514 6,278 6.06 471,033 1,682 1.43 $ 492,480 7,372 6.00 $ 823,837 3,066 1.49 Six months ended June 30, 2023 2022 Investments: Asset-backed securities available-for-sale (a) (b) $ 1,194,475 41,699 7.04 % $ 1,165,545 8,367 1.45 % Debt funding asset-backed securities available-for-sale: Participation agreement - variable rate (c) $ 230,889 6,153 5.37 % $ 304,669 1,944 1.29 % Repurchase agreements - variable rate (d) 463,637 13,046 5.67 437,537 2,713 1.25 $ 694,526 19,199 5.57 $ 742,206 4,657 1.27 (a) The Company has repurchased certain of its own FFELP loan 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. The table above includes these repurchased bonds. (b) The majority of the Company’s asset-backed securities earn floating rates with expected returns of approximately LIBOR + 100 to 350 basis points to maturity. As of June 30, 2023, $258.1 million (par value) of the Company’s asset-backed securities earn a weighted average fixed rate of 3.29%. (c) Interest incurred by the Company on amounts borrowed under the participation agreement is at a variable rate of LIBOR + 62.5 basis points. (d) Interest incurred by the Company on amounts borrowed under the repurchase agreements is at a variable rate of LIBOR + 70 to 90 basis points or SOFR + 75 to 140 basis points. The Company’s portfolio of asset-backed investment securities has limited liquidity, and the Company could incur a significant loss if the investments were sold prior to maturity at an amount less than the original purchase price. As of June 30, 2023, the gross unrealized loss on the Company’s available-for-sale debt securities was $37.1 million, and the aggregate fair value of available-for-sale debt securities with unrealized losses was $783.0 million. The Company currently has the intent and ability to retain these investments, and none of the unrealized losses were due to credit losses. See note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company’s management, with the participation of the Company's principal executive and principal financial officers, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2023. Based on this evaluation, the Company’s principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023. 72 Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes from the information referred to in the Legal Proceedings section of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 under Part I, Item 3 of such Form 10-K. ITEM 1A. RISK FACTORS There have been no material changes from the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 in response to Part I, Item 1A of such Form 10-K. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Stock Repurchases The following table summarizes the repurchases of Class A common stock during the second quarter of 2023 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934. Period Total number of shares purchased (a) Average price paid per share Total number of shares purchased as part of publicly announced plans or programs (b) Maximum number of shares that may yet be purchased under the plans or programs (b) April 1 - April 30, 2023 — $ — — 4,467,021 May 1 - May 31, 2023 260 91.89 — 4,467,021 June 1 - June 30, 2023 4,474 98.71 — 4,467,021 Total 4,734 $ 98.34 — (a) The total number of shares includes shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company's shares on the date of vesting. (b) On May 9, 2022, the Company announced that its 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 ending May 8, 2025. Working capital and dividend restrictions/limitations The Company's $495.0 million unsecured line of credit, which is available through September 22, 2026, imposes restrictions on the payment of dividends through covenants requiring a minimum consolidated net worth and a minimum level of unencumbered cash, cash equivalent investments, and available borrowing capacity under the line of credit. In addition, trust indentures and other financing agreements governing debt issued by the Company's lending subsidiaries generally have limitations on the amounts of funds that can be transferred to the Company by its subsidiaries through cash dividends at certain times. Further, Nelnet Bank is subject to laws and regulations that restrict the ability of Nelnet Bank to pay dividends to the Company, and authorize regulatory authorities to prohibit or limit the payment of dividends by Nelnet Bank to the Company. These provisions do not currently materially limit the Company's ability to pay dividends, and, based on the Company's current financial condition and recent results of operations, the Company does not currently anticipate that these provisions will materially limit the future payment of dividends. 73 ITEM 5. OTHER INFORMATION Rule 10b5-1 Trading Plans The following table describes contracts, instructions, or written plans for the purchase or sale of the Company's securities adopted by the Company's directors or executive officers during the second quarter of 2023, each of which is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), referred to as Rule 10b5-1 trading plans. Name and Title Date of Adoption of Rule 10b5-1 Trading Plan Scheduled Expiration Date of Rule 10b5-1 Trading Plan (a) Aggregate Number of Securities to Be Purchased or Sold Jona M. Van Deun Director 5/16/2023 9/15/2023 Sale of 785 shares of Class A common stock William J. Munn Corporate Secretary / Chief Governance Officer / General Counsel 6/1/2023 6/1/2024 Sale of 2,500 shares of Class A common stock Michael S. Dunlap Executive Chairman 6/7/2023 7/7/2024 Gift transfer of 40,000 shares of Class A common stock Kathleen A. Farrell Director 6/16/2023 6/15/2024 Sale of 1,000 shares of Class A common stock (a) In each case, a trading plan may also expire on such earlier date as all transactions under the trading plan are completed. During the second quarter of 2023, none of our directors or executive officers terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K). ITEM 6. EXHIBITS 10.1# Nelnet, Inc. Directors Stock Compensation Plan, as amended and restated as of May 18, 2023, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on May 22, 2023 and incorporated herein by reference. 10.2# Nelnet, Inc. Executive Officers Incentive Compensation Plan, as amended and restated as of May 18, 2023, filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on May 22, 2023 and incorporated herein by reference. 10.3*+ Amendment No. 1 to Third Amended and Restated Credit Agreement dated as of June 22, 2023, among Nelnet, Inc., the various lender parties thereto, and U.S. Bank National Association, as Administrative Agent. 10.4*+ Guarantor Consent and Reaffirmation dated as of June 22, 2023, by each of the subsidiaries of Nelnet, Inc. signatories thereto, in favor of U.S. Bank National Association, as Administrative Agent. 10.5* Amended and Restated Form of Custodian Agreement for Whitetail Rock SLAB Funds by and among the Fund, Whitetail Rock Fund Management, LLC, and Union Bank and Trust Company. 31.1* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Jeffrey R. Noordhoek. 31.2* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer James D. Kruger. 32** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH* Inline XBRL Taxonomy Extension Schema Document. 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Filed herewith ** Furnished herewith # Indicates a management contract or compensatory plan or arrangement. + Filed herewith for purposes of providing a complete set of all amendment and restated documents to the Third Amended and Restated Credit Agreement among Nelnet, Inc., U.S. Bank National Association, as Administrative Agent, and the various lender parties thereto. 74 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NELNET, INC. Date: August 7, 2023 By: /s/ JEFFREY R. NOORDHOEK Name: Jeffrey R. Noordhoek Title: Chief Executive Officer Principal Executive Officer Date: August 7, 2023 By: /s/ JAMES D. KRUGER Name: James D. Kruger Title: Chief Financial Officer Principal Financial Officer and Principal Accounting Officer 75