What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-08 · 355 added, 276 removed, 638 unchanged (50% of the section changed)

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

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three months ended March 31, 2023 and 2022.

(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.)

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

The words “anticipate,” “assume,” “believe,” “continue,” “could,” “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.

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.

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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 March 31,

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

2023 2022 2023 2022

GAAP net income attributable to Nelnet, Inc.

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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)

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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.

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.

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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.

On November 2, 2020, the Company obtained final approval for federal deposit insurance from the Federal Deposit Insurance Corporation (FDIC) and for a bank charter from the Utah Department of Financial Institutions (UDFI) in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations.

Nelnet Bank operates as an internet industrial bank franchise focused on the private education and unsecured consumer loan markets, with a home office in Salt Lake City, Utah.

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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 provides the operating results (net income (loss) before taxes) for each reportable operating segment and Corporate and Other Activities for the three months ended March 31, 2023 and 2022.

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 March 31, Certain Items Impacting Comparability

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.

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The expiration of the CARES Act was extended multiple times throughout 2022.

The Company reduced staff in January 2023 to manage excess staff due to the delays in the government's student debt relief and return to repayment programs.

NBS 37,637 33,113 • The recognition of $6.0 million of interest income in 2023 compared with $0.3 million in 2022 due to higher interest rates.

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.

AGM (221) 213,429 • A net loss of $37.4 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in 2023 compared with a net gain of $145.7 million in 2022.

• The recognition of $31.9 million in provision for loan losses in 2023 compared with a negative provision of $0.9 million in 2022.

• A decrease of $12.6 million in net interest income due to the decrease in the average balance of loans in 2023 compared with 2022.

• An increase of $4.2 million in net interest income due to an increase in core loan spread in 2023 compared with 2022.

• The recognition of $11.8 million in gains from the sale of loans in 2023 compared with $3.0 million in 2022.

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.

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 (31,275) (19,013) • The recognition of a net loss of $20.2 million in 2023 related to the Company’s investment in ALLO, compared with a net loss of $13.1 million in 2022.

• The recognition of net investment losses of $3.3 million in 2023 compared with net investment income and gains of $8.5 million in 2022.

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

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CONSOLIDATED RESULTS OF OPERATIONS

An analysis of the Company's consolidated operating results for the three months ended March 31, 2023 compared with the same period in 2022 is provided below.

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.

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Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis.

Three months ended

Three months ended Six months ended

June 30, June 30,

2023 2022 2023 2022 Additional information

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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 (negative provision) for loan losses 34,275 (435) Represents the current period provision (negative provision) to reflect the lifetime expected credit losses related to the Company's loan portfolio.

See note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report for the activity in the Company's allowance for loan losses.

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

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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 11,812 2,989 The Company sold $261.9 million (par value) of consumer and other loans during 2023 and recognized a net gain of $11.8 million.

The Company sold $18.1 million (par value) of consumer loans in 2022 and recognized a gain of $3.0 million.

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 in 2023 was from the Company's derivatives used to hedge loans earning fixed rate floor income.

This entire derivative portfolio was terminated on March 15, 2023 to minimize the Company's exposure to market volatility.

As such, there will be no derivative settlements received on this portfolio of derivatives in future periods.

See AGM operating segment - results of operations.

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.

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Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of such swaps.

The entire portfolio of floor income interest rate swaps was terminated on March 15, 2023 to minimize the Company's exposure to market volatility.

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.

Total other income (expense) 265,148 404,445

Total other income (expense), net 247,183 267,291 512,330 671,736

Cost of services:

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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 to manage excess staff due to delays in the government's student debt relief and return to repayment programs.

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.

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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.

The increase was partially offset by a decrease in expenses in LSS 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.

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 8,250 55,697 The effective tax rate was 23.7% and 23.0% for the three months ended March 31, 2023 and 2022, respectively.

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

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The following table summarizes the components of "other, net" in "other income (expense)" on the consolidated statements of income.

Three months ended March 31,

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

2023 2022 2023 2022 Additional information

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Loss from ALLO voting membership interest investment (12,169) (16,941) (32,382) (30,071) See Corporate - results of operations.

Investment activity, net (3,577) 11,856 See Corporate - results of operations and note (a) below for additional information.

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) During the three months ended March 31, 2023, the Company recognized net investment losses of $3.6 million, including net losses of $0.3 million from venture capital investments recognized at Nelnet Bank, a gain of $0.8 million related to real estate investments at Corporate, and losses of $4.1 million primarily related to sales of investments in asset-backed securities (bonds) and marketable equity securities (a loss of $4.1 million recognized at Corporate and a loss of $0.5 million recognized at AGM partially offset by a gain of $0.5 million recognized at Nelnet Bank).

During the three months ended March 31, 2022, the Company recognized net investment income and gains of $11.9 million, including $7.2 million from venture capital investments (including $4.9 million recognized at Corporate, $1.9 million recognized at AGM, and $0.4 million recognized at Nelnet Bank), $4.4 million related to real estate investments at Corporate, and $0.3 million related to investments in asset-backed securities (bonds) and marketable equity securities (a loss of $0.8 million recognized at Corporate and income of $1.1 million recognized at Nelnet Bank).

The Company anticipates fluctuations in future periodic earnings resulting from investment sales and valuation adjustments.

(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,

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,

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

LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS

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2022 March 31,

2023 June 30,

Servicing volume (dollars in millions):

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Contract Modifications and Award

On March 22, 2023, each of Nelnet Servicing and Great Lakes received modifications of contract with an effective date of April 1, 2023 (collectively the “modifications”) from the Department.

Such modifications outline the Department's amendment to the student loan servicing contracts between the Department and each of Nelnet Servicing and Great Lakes (the “servicing contracts”) to reduce the current prices earned by Nelnet Servicing and Great Lakes under the servicing contracts.

Under the servicing contracts, Nelnet Servicing and Great Lakes earn a monthly fee from the Department for each unique borrower they service on behalf of the Department.

The modifications reduce the monthly fee by $0.19 per borrower on certain borrower statuses.

The Company's current student loan servicing contracts with the Department are scheduled to expire on December 14, 2023.

In 2017, the Department initiated a contract procurement process referred to as the Next Generation Financial Services Environment for a new framework for the servicing of all student loans owned by the Department.

In the second quarter of 2022, the Department released a solicitation entitled Unified Servicing and Data Solution (USDS) for the new servicing framework.

The Company responded to the USDS solicitation.

On April 24, 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 Office of Federal Student Aid's student aid recipients under a new USDS contract (the "New Government Servicing Contract") which will replace the existing legacy Department student loan servicing contracts that are currently scheduled to expire December 14, 2023.

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 servicers that were awarded a USDS contract.

New Department borrowers will be allocated to the USDS Servicers based on service and performance levels.

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 a press release issued on April 24, 2023 by the Department's Office of Federal Student Aid (FSA), FSA indicated that servicing under the USDS contracts will go live in 2024 and to maintain stability as the new loan servicing environment gets underway, FSA will extend the current legacy servicing contracts with the Department from December 14, 2023 to December 2024.

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 fee structure included in the new Department servicing contracts under USDS are structurally different than the current legacy servicing contracts with the Department.

The 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.

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 2023, the Company will continue to transfer the Great Lakes direct loan servicing volume to the Nelnet servicing platform.

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

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.

At the time of this announcement, PHEAA serviced approximately 8.5 million borrowers under its contract.

As of December 31, 2021 and 2022, approximately 603,000 and 1,910,000 PHEAA borrowers, respectively, have been transitioned to the Company's platform.

In addition, over this same time period, PHEAA borrowers were transferred to other servicers to which the Company provides its servicing system (remote hosted servicing customers).

Edfinancial Services, LLC ("Edfinancial"), a current servicer for the Department, utilizes Nelnet Servicing's platform to service their loans for the Department.

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 servicing platform.

As of March 31, 2023, Edfinancial was servicing 3.5 million borrowers for the Department on the Company’s platform.

In February 2023, the Department notified the Company of its intention to transfer up to one million borrowers of the Company’s existing Department servicing borrowers to another servicer, and one of the Company’s remote hosted servicing customers notified the Company the Department intends to move that customer’s servicing borrowers to a different servicing platform.

As of March 31, 2023, the remote hosted servicing customer was servicing approximately 1.4 million borrowers for the Department on the Company's platform.

Neither transfer decision was based on the Company’s performance.

The 2023 transfers discussed above began in the first quarter of 2023 and the Company expects the transfers to be completed by the end of the second quarter of 2023.

As a result of the transfers, software services revenue for remote hosted customers and government servicing revenue will decrease in future periods as borrowers are transferred off of the Company’s platform.

In addition, once all remote hosted servicing transfers are complete, there will be no active Department remote hosted servicing customers using the Company’s platform.

In addition, the Company continues to transfer the Great Lakes direct loan servicing volume to the Nelnet servicing platform (the GreatNet Federal servicing platform).

The Company anticipates the transfer of active borrowers to be completed by the end of the second quarter of 2023 and decommissioning of the Great Lakes' platform to be completed by the end of 2023.

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).

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, and that borrowers whose annual income for either 2020 or 2021 was under $125,000 (for single or married, filing separately) or under $250,000 (for married couples, filing jointly or heads of household) will be eligible for otherwise unconditional loan cancellation in amounts of up to $20,000 for eligible borrowers who received a Pell Grant, or of up to $10,000 for eligible borrowers who did not receive a Pell Grant.

Decisions by the U.S.

Courts of Appeals for the Eighth Circuit and Fifth Circuit in October 2022 and November 2022, respectively, in response to legal challenges that were initiated by other parties (not the Company) have blocked implementation of the Department's broad based student debt relief plan.

These cases have been appealed to the U.S.

Supreme Court.

As of the filing of this report, the Supreme Court has not ruled on, and the Company cannot predict the timing, nature, or ultimate outcome of, this case.

The Company cannot estimate how many borrowers meet the eligibility requirements and other terms and conditions for one-time debt relief under the Department's announcement.

If there was a broad $10,000 or $20,000 per borrower forgiveness on all government owned loans, the Company estimates it would decrease the number of borrowers serviced (based on the borrower loan information as of March 31, 2023) by approximately 4.5 million borrowers and 7.7 million borrowers, respectively.

actual impact to the number of borrowers serviced may be less than these amounts due to annual income ceilings for borrowers to qualify for forgiveness and the impact of whether a Pell Grant was received on the amount of forgiveness for a borrower.

Revenue earned under the current Department servicing contracts will decrease in future periods if the Department's student debt relief plan or other broad based loan forgiveness is implemented.

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

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As a result of the CARES Act, the Company receives less servicing revenue per borrower from the Department based on the borrower forbearance status than what was earned on such accounts prior to these provisions.

On April 6, 2022, the Department extended the student loans payment pause under the CARES Act from May 1, 2022 to August 31, 2022, and on August 24, 2022, the Department extended such payment pause from August 31, 2022 to December 31, 2022.

On November 22, 2022, the Department again extended such payment pause until 60 days following the date the Department is permitted to implement the debt relief program or the litigation initiated by other parties is resolved.

If the debt relief program has not been implemented and the litigation has not been resolved by June 30, 2023, borrower forbearances will end 60 days after June 30, 2023, and payments will resume within 60 days after that (on or before October 28, 2023).

Prior to the April 2022 extension (during the fourth quarter of 2021 and first quarter of 2022), the Company earned additional revenue from the Department based on incremental work, including outbound engagement, being performed by the Company to support the anticipated Department borrowers coming out of forbearance.

Effective May 1, 2022, the Department increased the monthly per borrower CARES Act forbearance rate paid to its servicers to compensate them for supplemental outreach to certain borrowers and to support the transition of borrowers back to repayment.

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

borrowers coming out of forbearance.

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 excess staff capacity due to delays in the government's student debt relief and return to repayment programs under the CARES Act (as discussed above).

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 borrowers of the Company's existing Department servicing borrowers to another servicer (as discussed above).

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 will be incurred primarily during the second quarter of 2023.

The remaining expense was incurred primarily during the second quarter of 2023.

Summary and Comparison of Operating Results

Three months ended March 31,

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

2023 2022 2023 2022 Additional information

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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.

See “Government Loan Servicing - The CARES Act” above for additional details.

In addition, the Company reduced staff in January and March 2023.

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 13,313 16,213 Decrease in 2023 compared with 2022 was due to a decrease in professional fees and facility costs.

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.

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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 to a decrease in operating expenses as described above.

Before tax operating margin increased in 2023 compared with 2022 due primarily to a decrease in salaries and benefits expense as described above.

Loan servicing and systems revenue

Three months ended March 31,

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 2023 compared with 2022 was 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;

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).

These decreases were partially offset by (i) an increase in the number of PHEAA borrowers serviced on the Company's servicing platform;

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 September 1, 2022 (5.0%) to reflect the increase in the cost of labor (Employment Cost Index) per the provisions of the contracts.

Effective April 1, 2023, the monthly fee earned per borrower on certain borrower statuses will be reduced by $0.19.

See “Government Loan Servicing - Contract Modifications and Award" above for additional details.

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.

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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 9,697 7,400 Increase in 2023 compared with 2022 was due to an increase in remote hosted borrowers and an increase in rates.

Software services revenue from Department remote hosted servicing customers will be adversely impacted in future periods.

See “Government Loan Servicing - Loan Volume Transfers” above for additional details.

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

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Summary and Comparison of Operating Results

Three months ended March 31,

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

2023 2022 2023 2022 Additional information

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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 2,578 2,315 Represents primarily amortization of intangible assets from prior business acquisitions.

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.

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Net income 13,715 11,162 42,288 36,328

Net loss attributable to noncontrolling interests 138 — Amounts for noncontrolling interests reflect the net 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) 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

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

Three months ended March 31,

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

2023 2022 2023 2022 Additional information

Tuition payment plan services $ 34,187 30,716 Increase in 2023 compared with 2022 was due to a higher number of payment plans in the K-12 and higher education market.

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.

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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

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and (ii) superior customer experiences to align with the Company’s strategies to grow, retain, and diversify revenues.

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 these areas.

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)

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Loan Portfolio

As of March 31, 2023, the AGM operating segment had a $13.5 billion loan portfolio, consisting primarily of federally insured loans.

For a summary of the Company’s loan portfolio as of March 31, 2023 and December 31, 2022, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

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 March 31,

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

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Ending balance $ 13,239,125 15,855,137 13,239,125 15,855,137

The Company has also purchased 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 March 31, 2023, the Company’s ownership correlates to approximately $585 million, $590 million, and $370 million of consumer, private education, and federally insured student loans, respectively, included in these securitizations.

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.

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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 March 31, 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 months ended March 31, 2023 and 2022, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

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.

Loan Spread Analysis

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The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding.

Three months ended March 31,

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 %

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Variable loan yield, net 6.99 2.77 6.66 2.34

Loan cost of funds - interest expense (5.53) (1.09)

Loan cost of funds - derivative settlements (a) (b) 0.03 0.01

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 (a) (c) 0.68 (0.08)

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

2 unchanged sentences

Average balance of AGM's debt outstanding 13,011,224 15,923,648 13,187,073 16,335,310

(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms.

(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.

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There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 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 March 31,

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 %

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Loan spread 1.06 % 1.50 % 0.96 % 1.50 %

(b) Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps.

(c) Derivative settlements consist of net settlements received (paid) related to the Company’s floor income interest rate swaps.

A trend analysis of AGM's core and variable loan spreads is summarized below.

(d) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps.

The interest earned on a large portion of AGM's FFELP student loan assets is indexed to the one-month LIBOR rate.

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The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread.

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

Variable loan spread increased during the three months ended March 31, 2023 compared with the same period in 2022 due to a narrowing of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

In an increasing interest rate environment, student loan spread on FFELP loans increases due to the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest resets on the Company's debt that occurs either monthly or quarterly.

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.

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

Three months ended March 31,

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

2023 2022 2023 2022

Fixed rate floor income, gross $ 456 18,292 1,567 47,285

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Fixed rate floor income contribution to spread, net 0.01 % 0.55 % 0.37 % 0.58 %

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

The decrease in gross fixed rate floor income for the three months ended March 31, 2023 compared with the same period in 2022 was due to higher interest rates in 2023 compared with 2022.

The Company had a 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.

The increase in net derivative settlements received by the Company during the three months ended March 31, 2023, compared with net derivative settlements paid during the same period in 2022, was due to an increase in interest rates, partially offset by a decrease in the notional amount of derivatives outstanding.

The Company's derivatives that hedge fixed rate floor income 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.

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 fixed rate floor derivatives as of March 15, 2023 of $183.2 million, which included $19.1 million related to current period settlements.

To minimize the Company's exposure to market volatility, the Company terminated its entire derivative portfolio hedging loans earning fixed rate floor income.

As a result of the Company terminating these derivatives, there will be no derivative settlements on these derivatives in future periods.

(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.

Summary and Comparison of Operating Results

Three months ended March 31,

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 2,845 6,511 Represents primarily borrower late fees, income from providing administration activities for third parties, and income from AGM's investment in a joint venture.

Decrease in 2023 compared with 2022 was primarily due to the recognition of a $0.1 million loss in the first quarter of 2023 compared with $1.9 million of income for the same period in 2022 related to its investment in the joint venture.

Gain on sale of loans, net 11,812 2,989 The Company sold $261.9 million (par value) and $18.1 million (par value) of loans to unrelated third parties in 2023 and 2022, respectively, and recognized net gains from such sales.

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 derivatives used to hedge loans earning fixed rate floor income.

This entire derivative portfolio was terminated on March 15, 2023 to minimize the Company's exposure to market volatility.

As such, there will be no derivative settlements received on these derivatives in future periods.

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.

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The entire portfolio of floor income interest rate swaps was terminated on March 15, 2023 to minimize the Company's exposure to market volatility.

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 (expense) 583 152,425

Salaries and benefits 755 591

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.

4 unchanged sentences

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 14,467 12,455 Total operating expenses were 41 basis points and 29 basis points of the average balance of loans for the three months ended March 31, 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 certain professional costs as discussed above.

(Loss) income before income taxes (221) 213,429

Income tax benefit (expense) 53 (51,223) Represents income tax expense at an effective tax rate of 24%.

Net (loss) income $ (168) 162,206

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 (loss) income $ (168) 162,206 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.

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)

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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 March 31,

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

2023 2022 2023 2022 Additional information

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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.

Derivative settlements, net (a) 859 396 Derivative settlements include the net settlements received related to the Company’s 1:3 basis swaps.

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) 22,478 (3,205) Derivative settlements include the settlements received (paid) related to the Company's floor income interest rate swaps.

The increase in net derivative settlements received by the Company during 2023, compared with net derivative settlements paid during 2022, was due to an increase in interest rates, partially offset by a decrease in the notional amount of derivatives outstanding.

The entire portfolio of floor income interest rate swaps was terminated on March 15, 2023 to minimize the Company's exposure to market volatility.

As such, there will be no derivative settlements received on these derivatives in future periods.

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.

Fixed rate floor income, net of settlements on derivatives 503 21,984 24,092 47,772

Core loan interest income (a) 62,186 61,416

Investment interest 13,807 9,164 Increase in 2023 compared with 2022 was due to an increase of interest earned on restricted cash due to higher rates.

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 (2,411) 2,748 The Company has recognized provision for loan losses during the three months ended March 31, 2023 due to management's estimate of declining economic conditions, as well as establishing an initial allowance for loans acquired during the period.

(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) negative provision for loan losses - private education loans (240) 400

(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) $ 37,000 70,650 Decrease in 2023 compared with 2022 was due to (i) a decrease in the average balance of loans;

and (ii) an increase in provision for loan losses.

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

and (ii) an increase in investment interest income.

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.

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See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative 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.

Subsequent Event

Subsequent to the end of the first quarter, in April 2023, the Company redeemed $188.6 million of FFELP loan asset-backed securities (bonds and notes payable) prior to their legal maturity.

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.

NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS

Loan Portfolio

As of March 31, 2023, Nelnet Bank had a $439.0 million loan portfolio, consisting of $355.7 million of private education loans, $63.4 million of FFELP loans, and $19.9 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 March 31, 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 months ended March 31, 2023 and 2022, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

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.

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 March 31,

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

2023 2022 2023 2022

Beginning balance $ 439,007 368,257 419,795 257,901

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Repayments (15,046) (17,373) (29,575) (35,767)

Sales to AGM (117) (1,592)

Loans sold to AGM — (2,535) (117) (4,127)

Ending balance $ 444,488 423,553 444,488 423,553

As of March 31, 2023, Nelnet Bank had $869.8 million of 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.

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

Three months ended March 31, (a)

Balance Rate Balance Rate

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

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Summary and Comparison of Operating Results

Three months ended March 31,

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

2023 2022 2023 2022 Additional information

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Net interest income 5,490 3,573 10,535 5,747

Provision for loan losses 2,417 429 Increase in provision for loan losses was due to the mix of loans, including the mix of loans originated in 2023 compared with 2022, and management's estimate of declining economic conditions.

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 210 1,500 Represents primarily income and net gains from investments.

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.

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Depreciation 51 4 56 7

Other expenses 782 682

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 $1.7 million and $1.3 million for the three months ended March 31, 2023 and 2022, respectively.

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

(Loss) income before income taxes (93) 961

Income tax benefit (expense) 35 (223) Represents income tax benefit (expense) at an effective tax rate of 37.4% and 23.2% for the three months ended March 31, 2023 and 2022, respectively.

Net (loss) income $ (58) 738

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

CORPORATE AND OTHER ACTIVITIES – RESULTS OF OPERATIONS

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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 March 31, 2023

Three months ended June 30, 2023

Interest income $ — 3 — 59 — 141 1,214 24,459 (21) 25,855

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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)

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Net income (loss) $ (10,621) 1,028 (1,460) (5,057) (8,425) (847) (1) 12,618 (405) (13,170)

Three months ended March 31, 2022

Three months ended June 30, 2022

Interest income $ — — — — — 318 106 5,683 128 6,235

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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 — — — — — — — — — —

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Net income (loss) $ (13,099) 917 (90) — (11,303) 2,985 8,979 (648) 50 (12,209)

Nelnet Renewable Energy (c)

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.

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(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.

During the three months ended March 31, 2023 and 2022, WRCM earned $1.6 million and $1.3 million in management fees, respectively.

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.

(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 March 31, 2023, the Company has invested a total of $294.4 million (which includes $115.9 million syndicated to third-party investors) in solar tax equity investments.

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.

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For the majority of the Company's solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment.

During the three months ended March 31, 2023 and 2022, Nelnet Renewable Energy recognized losses of $1.9 million and $1.0 million, respectively, on its tax equity investments.

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 $2.7 million and $1.8 million for the three months ended March 31, 2023 and 2022, respectively, and are reflected in “net (income) loss attributable to noncontrolling interests” 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 March 31, 2023 and 2022, respectively, which is included in "other, net" in the table above.

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.

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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.

During the three months ended March 31, 2023 and 2022, the Company recognized losses of $20.2 million and $13.1 million, respectively, under the HLBV method of accounting on its ALLO voting membership interests investment.

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 March 31, 2023, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $145.9 million and $2.2 million, respectively.

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%.

During the three months ended March 31, 2023 and 2022, the Company recognized income on its ALLO preferred membership interests of $2.2 million and $2.1 million, respectively.

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.

During the three months ended March 31, 2023 and 2022, the Company recognized $0.8 million and $4.4 million, respectively, in net income and gains from its real estate investments, which is included in “other, net” in the table above.

(f) Represents the operating results of the Company’s venture capital investments and the administrative costs to manage this portfolio.

During the three months ended March 31, 2022, the Company recognized $4.9 million in net income and gains on venture capital investments, which is included in “other, net” in the table above.

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.

During the three months ended March 31, 2023 and 2022, the Company recognized losses of $4.1 million and $0.8 million, respectively, on its marketable equity and investment debt securities, which are included in “other, net” in the table above.

During the three months ended March 31, 2023, the Company recognized $1.8 million in fees owed on collateral deposits with its derivative third-party clearinghouse as the result of an increase in collateral deposit balances and interest rates, which is included in “other expenses” in the table above.

Fees owed on collateral deposits with its derivative third-party clearinghouse were insignificant for the three months ended March 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

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Sources of Liquidity

As of March 31, 2023, the Company's sources of liquidity included:

As of June 30, 2023, the Company's sources of liquidity included:

Cash and cash equivalents $ 121,769

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Unused capacity on unsecured line of credit (5) 495,000

Sources of liquidity as of March 31, 2023

Sources of liquidity as of June 30, 2023

(1) Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank.

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(5) The Company has a $495.0 million unsecured line of credit that matures on September 22, 2026.

As of March 31, 2023, there was no amount outstanding on the unsecured line of credit and $495.0 million was available for future use.

The line of credit

agreement contains certain financial covenants, including limitations on recourse indebtedness to adjusted EBITDA (over the last four rolling quarters).

Of the $495.0 million availability, approximately $260 million was available for purposes other than reducing existing recourse debt due to the limitations on recourse indebtedness to adjusted EBITDA financial covenant.

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.

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);

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The Company has historically generated positive cash flow from operations.

During the three months ended March 31, 2023 and 2022, the Company generated $122.8 million and $275.3 million, respectively, in cash from operating activities.

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 three months ended March 31, 2023 compared with proceeds received in 2022;

• Adjustments to net income for the impact of the non-cash change in deferred income taxes.

• 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;

• A decrease in net proceeds from the sale of equity securities in 2023 compared to 2022.

These factors were partially offset by:

• Proceeds from termination of derivative instruments in 2023;

• 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;

• The impact of changes to accounts receivable during the three months ended March 31, 2023 compared with the same period in 2022.

• An increase of non-cash depreciation and amortization during the six months ended June 30, 2023 compared with the same period in 2022;

• 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.

Cash provided by investing activities and used in financing activities for the three months ended March 31, 2023 was $723.9 million and $1,306.3 million, respectively.

Cash provided by investing activities and used in financing activities for the three months ended March 31, 2022 was $603.1 million and $895.1 million, respectively.

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.

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

As of March 31, 2023

As of June 30, 2023

Carrying amount

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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 March 31, 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 $1.43 billion as detailed below.

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 March 31, 2023.

As of March 31, 2023, AGM had $12.1 billion of loans included in asset-backed securitizations, which represented 89.5% 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 March 31, 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).

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.

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

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(dollars in millions)

The forecasted future undiscounted cash flows of approximately $1.43 billion include approximately $0.89 billion (as of March 31, 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 $0.54 billion, or approximately $0.41 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 March 31, 2023 balance of consolidated shareholders' equity.

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.

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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.

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$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 $0.89 billion (as of March 31, 2023);

however, the Company would not receive the $0.53 billion ($0.40 billion after tax) of estimated future earnings from the portfolio.

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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.

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

In addition, the Company attempts to mitigate the impact of this basis risk by entering into certain derivative instruments.

The Company attempts to mitigate the impact of this basis risk by entering into certain derivative instruments.

The Company uses the current forward interest rate yield curve to forecast cash flows.

A change in the forward interest rate curve would impact the future cash flows generated from the portfolio.

An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving.

See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment" for additional information about various interest rate risks which may impact future cash flows from AGM's loan assets.

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

See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2022 Annual Report.

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.

Warehouse Facilities

Warehousing allows the Company to buy and manage loans prior to transferring them into more permanent financing arrangements.

The Company has a FFELP warehouse facility that, as of March 31, 2023, had an aggregate maximum financing amount available of $1.25 billion, of which $919.3 million was outstanding and $330.7 million was available for additional funding.

The warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 22, 2023).

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

The loans would then be funded at this new advance rate until the final maturity date of the facility (May 22, 2024).

As of March 31, 2023, the Company had $62.8 million advanced as equity support on this facility.

On April 3, 2023, the Company obtained an additional FFELP warehouse facility that has an aggregate maximum financing amount available of $250.0 million.

This warehouse facility's liquidity provisions expire on April 2, 2024 and has a final maturity date of April 2, 2025.

As of March 31, 2023, the Company's private education warehouse facility had an outstanding balance of $47.9 million, liquidity provisions through June 30, 2023, a final maturity of December 31, 2023, and $19.4 million was advanced as equity support.

No additional amounts can be borrowed under this facility.

The Company also has a consumer loan warehouse facility that, as of March 31, 2023, had an aggregate maximum financing amount available of $250.0 million, an advance rate of 70%, liquidity provisions through November 14, 2024, and a final maturity date of November 14, 2025.

As of March 31, 2023, $82.4 million was outstanding under this facility, $167.6 million was available for future funding, and the Company had $35.2 million advanced as equity support.

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.

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

The bonds purchased to satisfy the risk retention requirement are reflected on the Company's consolidated balance sheet as "investments and notes receivable" and as of March 31, 2023, the fair value of these bonds was $294.6 million.

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.

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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 March 31, 2023, $433.0 million was outstanding on the Company's repurchase agreements, of which $274.0 million was borrowed to fund private education loan securitization bonds subject to the Company’s risk retention requirement and $159.0 million was borrowed to fund repurchased FFELP loan asset-backed securities.

The repurchase agreements have various maturity dates (as of March 31, 2023) from April 6, 2023 through November 27, 2024, but one of the agreements is subject to early termination upon required notice provided by the Company or the applicable counterparty prior to the maturity dates.

Subsequent to March 31, 2023, the maturities on these agreements were extended, and as of May 8, 2023, the maturity dates vary from May 26, 2023 through November 27, 2024.

The Company is required to pay additional cash in the event the fair value of the securities subject to a repurchase agreement becomes less than the original purchase price of such securities.

Upon termination or expiration of the repurchase agreements, the Company would use cash and/or cash proceeds from its unsecured line of credit, consider the sale of assets (subject to any restrictions described above), or transfer collateral to satisfy any outstanding obligations subject to the repurchase agreements.

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.

Union Bank Participation Agreement

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

As of March 31, 2023, $684.4 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

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.

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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 three months ended March 31, 2023.

There were no asset-backed securitization transactions completed during the six months ended June 30, 2023.

Liquidity Impact Related to Nelnet Bank

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

Nelnet Bank has opted into the CBLR framework for the quarter ended March 31, 2023 with a leverage ratio of 12.6%.

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.

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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

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 includes pre-tax unrealized losses of $3.7 million related to the transfer.

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.

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The Company’s Nelnet Renewable Energy business makes solar tax equity investments.

Through March 31, 2023, the Company has invested a total of $294.4 million (which includes $115.9 million syndicated to third-party investors) in tax equity investments in renewable energy solar partnerships.

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.

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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 March 31, 2023, the Company is committed to fund an additional $220.3 million on tax equity investments, of which $141.4 million is expected to be provided by syndication partners.

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.

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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 March 31, 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%.

Agreements among the Company, SDC (a third-party global digital infrastructure investor), and ALLO provide that they will use commercially reasonable efforts (which excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause the redemption, on or before April 2024, the non-voting preferred membership interests in ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests.

However, if the non-voting preferred membership interests are not redeemed on or before April 2024, the preferred annual return is increased from 6.25% to 10.00%.

As part of the ALLO recapitalization transaction, 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 March 31, 2023 the estimated fair value of the contingent payment is $7.6 million.

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 third-party debt financing to fund a large portion of its current growth plans, the Company contributed $8.4 million of additional equity to ALLO in the first quarter of 2023.

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.

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

All over-the-counter derivative contracts executed by the Company are cleared post-execution at a regulated clearinghouse.

All Non-Nelnet Bank over-the-counter derivative contracts executed by the Company are cleared post-execution at a regulated clearinghouse.

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.

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).

Based on the remaining derivative portfolio outstanding as of March 31, 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.

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 March 31, 2023, the unsecured line of credit had no amount outstanding and $495.0 million was available for future use.

The line of credit agreement contains certain financial covenants, including limitations on recourse indebtedness to adjusted EBITDA (over the last four rolling quarters).

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 March 31, 2023, $311.8 million (par value) of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

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.

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The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 8, 2025.

No shares were repurchased under this program during the first quarter of 2023.

As of March 31, 2023, 4,467,021 shares remained authorized for repurchase under the Company's stock repurchase program.

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 quarter of 2023, the Company repurchased 36,513 shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares.

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.

On March 15, 2023, the Company paid a first 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 second quarter 2023 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.26 per share.

The second quarter cash dividend will be paid on June 15, 2023 to shareholders of record at the close of business on June 1, 2023.

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.

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods.

The preparation of these financial statements requires management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods.

The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances.

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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 months ended March 31, 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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis