NNI filing — read by section

Item 2. Management’s Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and nine months ended September 30, 2023 and 2022. All dollars are in thousands, except per share amounts, unless otherwise noted.) 
 The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company’s consolidated financial statements included in the 2022 Annual Report. 
 Forward-looking and cautionary statements 
 This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives 
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 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. 
 The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2022 Annual Report and include such risks and uncertainties as: 
 • risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and future servicing contracts with the U.S. Department of Education (the "Department") and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or FFELP), private education, and consumer loans; 
 • loan portfolio risks such as credit risk, interest rate basis and repricing risk, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, consumer, and other loans, or investment interests therein, and initiatives to purchase additional FFELP, private education, consumer, and other loans, and risks from changes in levels of loan prepayment or default rates; 
 • financing and liquidity risks, including risks of changes in the interest rate environment; 
 • risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets; 
 • risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors; 
 • uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; 
 • risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; 
 • risks related to the expected benefits to the Company from its continuing investment in ALLO Holdings, LLC (referred to collectively with its subsidiary ALLO Communications LLC as "ALLO"), and risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; 
 • risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses; 
 • risks and uncertainties associated with climate change; and 
 • risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses. 
 All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law. 
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 OVERVIEW 
 The Company is a diverse, innovative company with a purpose to serve others and a vision to make dreams possible. The largest operating businesses engage in loan servicing and education technology, services, and payment processing, and the Company also has a significant investment in communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify both within and outside of its historical core education-related businesses including, but not limited to, investments in early-stage and emerging growth companies, real estate, and renewable energy (solar). The Company is also actively expanding its private education, consumer, and other loan portfolios, and in November 2020 launched Nelnet Bank. 
 GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments 
 The Company prepares its financial statements and presents its financial results in accordance with GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the Company's GAAP net income to Non-GAAP net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below. 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 GAAP net income attributable to Nelnet, Inc. $ 45,332 104,798 100,086 376,573 
 Realized and unrealized derivative market value adjustments (3,140) (52,991) 32,266 (239,125) 
 Tax effect (a) 754 12,718 (7,744) 57,390 
 Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 42,946 64,525 124,608 194,838 
 
 Earnings per share: 
 GAAP net income attributable to Nelnet, Inc. $ 1.21 2.80 2.67 9.99 
 Realized and unrealized derivative market value adjustments (0.08) (1.42) 0.86 (6.34) 
 Tax effect (a) 0.02 0.35 (0.20) 1.52 
 Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 1.15 1.73 3.33 5.17 

 (a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate. 
 (b) "Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. 
 The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting in the consolidated financial statements. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period. 
 The Comp any believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. 
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 Operating Segments 
 The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in the 2022 Annual Report. They include: 
 • Loan Servicing and Systems (LSS) - referred to as Nelnet Diversified Services (NDS) 
 • Education Technology, Services, and Payment Processing (ETS&PP) - referred to as Nelnet Business Services (NBS) 
 • Asset Generation and Management (AGM) 
 • Nelnet Bank 
 The Company earns fee-based revenue through its NDS and NBS reportable operating segments. The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its AGM reportable operating segment. This segment is expected to generate significant amounts of cash as the FFELP portfolio amortizes. The Company actively works to maximize the amount and timing of cash flows generated from its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. Nelnet Bank operates as an internet industrial bank franchise focused on the private education and unsecured consumer loan markets, with a home office in Salt Lake City, Utah. 
 Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate also includes income earned on the majority of the Company’s investments, interest expense incurred on unsecured and other corporate related debt transactions, and certain shared service activities related to internal audit, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These shared services are allocated to each operating segment based on estimated use of such activities and services. In addition, Corporate includes corporate costs and overhead functions not allocated to operating segments, including executive management, investments in innovation, and other holding company organizational costs. 
 The information below presents the operating results (net income (loss) before taxes) for each reportable operating segment and Corporate and Other Activities for the three and nine months ended September 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 September 30, Nine months ended September 30, Certain Items Impacting Comparability
(All dollar amounts below are pre-tax) 
 2023 2022 2023 2022 
 NDS $ 24,469 21,914 66,713 47,494 • An increase in before tax operating margin in 2023 compared with 2022 due to a decrease in operating expenses, primarily salaries and benefits. In 2022, the Company was fully staffed in preparation for the resumption of federal student loan payments once the CARES Act suspension was to expire. The expiration of the CARES Act was extended multiple times throughout 2022. The Company reduced staff in the first and second quarters of 2023 to manage expenses due to the delays in the government's student debt relief and return to repayment programs and lower pricing and reduced servicing volume for the Company's Department servicing contracts. Margin was also positively impacted in 2023 due to $4.8 million of deconversion revenue recognized in the third quarter of 2023 related to a remote hosted servicing customer leaving the Company's platform. 
 
 NBS 22,123 18,655 77,803 66,454 • The recognition of $8.9 million and $20.2 million of interest income for the three and nine months ended September 30, 2023, respectively, compared with $3.7 million and $4.9 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. 
 

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 AGM 40,562 111,872 58,041 424,647 • A net gain of $1.2 million and net loss of $35.3 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting for the three and nine months ended September 30, 2023, respectively, compared with a net gain of $53.0 million and $239.1 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 $24.0 million and $38.7 million in net interest income due to a decrease in core loan spread for the three and nine months ended September 30, 2023, respectively, compared with the same periods in 2022. 
 • A decrease of $4.9 million and $24.2 million in net interest income due to the decrease in the average balance of loans for the three and nine months ended September 30, 2023, respectively, compared with the same periods in 2022. 
 • The recognition of $18.1 million and $47.7 million of investment interest for the three and nine months ended September 30, 2023, respectively, compared with $10.3 million and $28.1 million for the same periods in 2022 due to an increase of interest earned on restricted cash due to higher interest rates. 
 • The recognition of $5.4 million and $32.7 million in gains from the sale of loans for the three and nine months ended September 30, 2023, respectively, compared with $2.6 million and $5.6 million for the same periods in 2022. 
 • The recognition of $8.7 million and $48.7 million in provision for loan losses for the three and nine months ended September 30, 2023, respectively, compared with $9.2 million and $17.2 million for the same periods in 2022. 
 
 Nelnet Bank 2,299 1,055 3,951 2,489 
 Corporate (36,483) (26,442) (92,686) (65,061) • An increase of $4.2 million and $25.1 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 nine months ended September 30, 2023, respectively, compared with the same periods in 2022. 
 • The recognition of net investment income of $0.3 million and losses of $4.5 million for the three and nine months ended September 30, 2023, respectively, compared with net investment income of $10.5 million and $37.2 million for the same periods in 2022. 
 • The recognition of $4.9 million and $16.2 million of losses from the Company's acquisition of GRNE Solar on July 1, 2022 for the three and nine months ended September 30, 2023, respectively, compared with losses of $0.7 million for both the comparable periods in 2022. 
 • The recognition of an impairment charge of $4.7 million in the third quarter of 2023 related to real estate leases as the Company continues to downsize its facility footprint as a result of associates working from home compared with $6.2 million in the second quarter of 2022 related primarily to a venture capital investment. 
 
 Income before income taxes 52,970 127,055 113,823 476,023 
 Income tax expense (10,734) (26,586) (29,475) (107,765) 
 Net loss attributable to noncontrolling interests 3,096 4,329 15,738 8,315 
 Net income $ 45,332 104,798 100,086 376,573 

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 CONSOLIDATED RESULTS OF OPERATIONS 
 An analysis of the Company's consolidated operating results for the three and nine months ended September 30, 2023 compared with the same periods in 2022 is provided below. 
 The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 11 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis. 
 
 Three months ended Nine months ended 
 September 30, September 30, 
 2023 2022 2023 2022 Additional information 
 Loan interest $ 236,423 176,244 704,712 422,327 Increase was due to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans and in gross fixed rate floor income. 
 Investment interest 48,128 26,889 129,835 57,589 Includes income from interest-earning deposits and investments and restricted cash in asset-backed securitizations. Increase was due to an increase in interest earning investments and an increase in interest rates. 
 Total interest income 284,551 203,133 834,547 479,916 
 Interest expense 207,159 126,625 639,756 248,347 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 77,392 76,508 194,791 231,569 
 Less provision for loan losses 10,659 9,665 54,526 18,640 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 loans originated and acquired during the periods presented. 
 
 Net interest income after provision for loan losses 66,733 66,843 140,265 212,929 
 Other income (expense): 
 LSS revenue 127,892 134,197 389,138 395,438 See LSS operating segment - results of operations. 
 ETS&PP revenue 113,796 106,894 357,258 310,211 See ETS&PP operating segment - results of operations. 
 Solar construction revenue 6,301 9,358 19,687 9,358 On July 1, 2022, the Company acquired 80% of the ownership interests of GRNE Solar. GRNE Solar designs and installs residential, commercial, and utility-scale solar systems. The acquisition diversifies the Company's position in the renewable energy space to include solar construction. 
 
 Other, net (211) 2,225 (21,293) 24,750 See table below for the components of "other, net." 
 
 Gain on sale of loans, net 5,362 2,627 32,685 5,616 The Company recognized gains from selling portfolios of loans in 2023 and 2022. For additional information, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 
 Impairment and other expense, net (4,974) 121 (4,974) (6,163) During the third quarter of 2023, the Company recorded an expense of $5.0 million related to real estate leases as the Company continues to downsize its facility footprint as a result of associates working from home. During the second quarter of 2022, the Company recorded an expense of $6.2 million related primarily to a venture capital investment. 
 
 Derivative settlements, net 817 10,271 24,219 12,085 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. The majority of derivative settlements received by the Company was from the Company's derivatives used to hedge loans earning fixed rate floor income. To minimize the Company's exposure to market volatility, the Company terminated this derivative portfolio on March 15, 2023. 
 
 Derivative market value adjustments, net 3,140 52,991 (32,266) 239,125 Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments were related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of such swaps. To minimize the Company's exposure to market volatility, the Company terminated this derivative portfolio on March 15, 2023. As such, the Company expects the derivative market value adjustments in future periods will be less substantial. 
 
 
 
 Total other income (expense), net 252,123 318,684 764,454 990,420 
 Cost of services: 
 Cost to provide education technology, services, and payment processing services 43,694 42,676 131,804 109,073 Represents direct costs to provide payment processing and instructional services in ETS&PP. See ETS&PP operating segment - results of operations. 
 

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 Cost to provide solar construction services 7,783 5,968 25,204 5,968 As noted above, the Company acquired GRNE Solar on July 1, 2022. These amounts represent direct costs related to GRNE providing solar construction services. 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. 
 Total cost of services 51,477 48,644 157,008 115,041 
 Operating expenses: 
 Salaries and benefits 141,204 147,198 438,620 438,010 Increase for the nine months ended September 30, 2023 compared with the same period in 2022 was primarily due to (i) an increase in headcount in ETS&PP to support the growth of its customer base and the investment in the development of new technologies; and (ii) the acquisition of GRNE Solar on July 1, 2022. 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. The Company expects salaries and benefits beginning to increase at LSS in the fourth quarter of 2023 as it hires additional associates as a result of Department borrowers returning to repayment on September 1, 2023. 
 
 Depreciation and amortization 21,835 18,772 57,114 53,978 Includes depreciation of property and equipment and the amortization of intangibles from prior business acquisitions. Increase was primarily due to an increase in the amortization of intangibles from the GRNE Solar acquisition on July 1, 2022. 
 Other expenses 51,370 43,858 138,154 120,297 Includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs. Increase was due to an increase in expenses in ETS&PP due to higher costs for consulting, professional fees, and technology services resulting from investments in new technologies, and an increase in costs for travel and in-person hosted conferences that had previously subsided due to the COVID-19 pandemic. 
 Total operating expenses 214,409 209,828 633,888 612,285 
 Income before income taxes 52,970 127,055 113,823 476,023 
 Income tax expense 10,734 26,586 29,475 107,765 The effective tax rate was 19.1% and 20.2% for the three months ended September 30, 2023 and 2022, respectively, and 22.7% and 22.2% for the nine months ended September 30, 2023 and 2022, respectively. The Company expects its effective tax rate will range between 21% and 23% for the remainder of 2023. 
 
 Net income 42,236 100,469 84,348 368,258 
 Net loss attributable to noncontrolling interests 3,096 4,329 15,738 8,315 Amounts for noncontrolling interests reflect the net income/loss attributable to the holders of noncontrolling membership interests in WRCM, NextGen, multiple solar entities (including GRNE Solar), and multiple entities investing in federal opportunity zone programs. 
 Net income attributable to Nelnet, Inc. $ 45,332 104,798 100,086 376,573 
 
 Additional information: See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value adjustments. 
 Net income attributable to Nelnet, Inc. $ 45,332 104,798 100,086 376,573 
 Derivative market value adjustments, net (3,140) (52,991) 32,266 (239,125) 
 Tax effect 754 12,718 (7,744) 57,390 
 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 42,946 64,525 124,608 194,838 

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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 September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 ALLO preferred return $ 2,299 2,164 6,822 6,420 See Corporate - results of operations. 
 Borrower late fee income 2,220 2,824 6,635 7,693 See AGM operating segment - results of operations. 
 Administration/sponsor fee income 1,712 1,920 5,180 6,055 See AGM operating segment - results of operations. 
 Investment advisory services 1,633 1,612 4,884 4,375 See Corporate - results of operations. 
 Loss from ALLO voting membership interest investment (17,293) (17,562) (49,676) (47,633) See Corporate - results of operations. 
 Loss from solar investments (3,605) (4,216) (13,481) (7,100) See Corporate - results of operations. 
 Investment activity, net (1,016) 10,701 (8,169) 40,626 See Corporate - results of operations and note (a) below for additional information. 
 
 
 Other 13,839 4,782 26,512 14,314 
 Other, net $ (211) 2,225 (21,293) 24,750 

 (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 September 30, 
 2023 2022 
 Corporate $ (535) 286 567 318 9,717 (39) 792 10,470 
 AGM — (1,883) — (1,883) — (315) — (315) 
 Nelnet Bank — (16) 565 549 — 303 243 546 
 $ (535) (1,613) 1,132 (1,016) 9,717 (51) 1,035 10,701 
 
 
 Nine months ended September 30, 
 2023 2022 
 Corporate $ (849) (605) (3,070) (4,524) 17,695 22,158 (2,673) 37,180 
 AGM — (4,532) (476) (5,008) — 1,260 — 1,260 
 Nelnet Bank — (288) 1,651 1,363 — 675 1,511 2,186 
 $ (849) (5,425) (1,895) (8,169) 17,695 24,093 (1,162) 40,626 

 
 
 
 
 
 
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 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS 
 Loan Servicing Volumes 
 
 As of 
 September 30,
2023 June 30,
2023 March 31,
2023 December 31,
2022 September 30,
2022 June 30,
2022 March 31,
2022 December 31,
2021 
 Servicing volume (dollars in millions): 
 Government $ 500,554 519,308 537,291 545,373 545,546 542,398 507,653 478,402 
 FFELP 18,400 19,021 19,815 20,226 22,412 24,224 25,646 26,916 
 Private and consumer 20,394 20,805 21,484 21,866 22,461 22,838 23,433 23,702 
 Total $ 539,348 559,134 578,590 587,465 590,419 589,460 556,732 529,020 
 
 Number of servicing borrowers: 
 Government 14,543,382 14,898,901 15,518,751 15,777,328 15,657,942 15,426,607 14,727,860 14,196,520 
 FFELP 764,660 788,686 819,791 829,939 910,188 977,785 1,034,913 1,092,066 
 Private and consumer 896,613 899,095 925,861 951,866 979,816 998,454 1,030,863 1,065,439 
 Total 16,204,655 16,586,682 17,264,403 17,559,133 17,547,946 17,402,846 16,793,636 16,354,025 
 
 Number of remote hosted borrowers: 103,396 716,908 5,048,324 6,135,760 6,025,377 5,738,381 5,487,943 4,799,368 

 Government Loan Servicing 
 Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes Educational Loan Services, Inc. (Great Lakes), both subsidiaries of the Company, are two of the current five private sector entities that have student loan servicing contracts with the Department to service loans that include Federal Direct Loan Program loans originated directly by the Department and FFEL Program loans purchased by the Department. The Company also earned remote hosted servicing revenue by licensing software to certain third-party servicers for the Department. 
 Contract Modifications and Award 
 Effective April 1, 2023, the Department modified the student loan servicing contracts between the Department and each of Nelnet Servicing and Great Lakes (the “servicing contracts”) to reduce the monthly fee under the servicing contracts by $0.19 per borrower on certain borrower statuses. 
 The Company's current student loan servicing contracts with the Department were scheduled to expire on December 14, 2023. In April 2023, Nelnet Diversified Solutions, LLC (NDS), a subsidiary of the Company, received a contract award from the Department, pursuant to which NDS was selected to provide continued servicing capabilities for the Department's student aid recipients under a new Unified Servicing and Data Solution (USDS) contract (the "New Government Servicing Contract") which will replace the existing legacy Department student loan servicing contracts. On October 11, 2023, the USDS contract awarded to NDS was novated to Nelnet Servicing. 
 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 Nelnet Servicing and four other third-party servicers that were awarded a USDS contract based on service and performance levels. Under the New Government Servicing Contract, Nelnet Servicing immediately began to make required servicing platform enhancements, for which it will be compensated from the Department on certain of these investments. In April 2023, the Department indicated that servicing under the USDS contracts will go live in 2024 and it will extend the current legacy servicing contracts from December 14, 2023 to December 2024. Until servicing under the USDS contracts goes live, which is anticipated to be during the second quarter of 2024, the Company will continue to earn revenue for servicing borrowers under its current legacy servicing contracts with the Department. 
 The new USDS servicing contracts have multiple revenue components with tiered pricing based on borrower volume, while revenue earned under the legacy servicing contracts is primarily based on borrower status. Assuming borrower volume remains consistent under the USDS servicing contract, the Company expects revenue earned on a per borrower blended basis will decrease under the USDS contract versus the current legacy contracts. However, consistent with the current legacy contracts, the Company expects to earn additional revenue from the Department under the USDS servicing contract for change requests, consolidations, and other support services. As discussed below, during the second quarter of 2023, the Company completed the transfer of Great Lakes direct loan servicing volume to the Nelnet servicing platform. The associated cost savings with moving 
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 government borrowers to one servicing platform will be partially offset under the USDS contract as the Company will incur additional costs for cybersecurity and other system specifications as required under the new contract. 
 Loan Volume Transfers - Full Service Borrowers 
 In July 2021, the Pennsylvania Higher Education Assistance Agency (PHEAA) announced its exit from the federal student loan servicing business. All applicable student loans serviced for the Department by PHEAA were transferred to successor servicers. As of December 31, 2021 and 2022, approximately 603,000 and 1,910,000 PHEAA borrowers, respectively, have been transferred from PHEAA to the Company's platform. In addition, over this same time period, PHEAA borrowers were transferred to other servicers to which the Company provided its servicing system (remote hosted servicing customers). 
 In February 2023, the Department notified the Company of its intention to transfer up to one million of the Company’s existing Department servicing borrowers to another third-party servicer. This transfer decision was not based on the Company's performance. These transfers began in the second quarter of 2023 and were completed in July 2023. 
 In addition, the Company completed the transfer of active borrowers of Great Lakes direct loan servicing volume to the Nelnet servicing platform (the GreatNet Federal servicing platform) during the second quarter of 2023. The Company anticipates the decommissioning of the Great Lakes' platform to be completed by the end of 2023. Therefore, potential associated cost savings as a result of transferring direct loan servicing volume to one platform will not be recognized in operating results until 2024. 
 Loan Volume Transfers - Remote Hosted Servicing Borrowers 
 Edfinancial Services, LLC ("Edfinancial"), a current servicer for the Department, utilized Nelnet Servicing's platform to service their loans for the Department (remote hosted servicing customer). In the fourth quarter of 2022, Nelnet Servicing and Edfinancial reached an agreement on a decommission schedule transferring Edfinancial’s direct loan servicing volume to another third-party servicing platform. As of December 31, 2022, Edfinancial was servicing 4.5 million borrowers for the Department on the Company’s platform. The Company began transferring Edfinancial's servicing volume to another servicing platform in the first quarter of 2023 which reduced the number of Edfinancial's borrowers serviced on the Company's platform to 3.5 million borrowers as of March 31, 2023 and 579,000 borrowers as of June 30, 2023. Edfinancial's remaining borrowers were transferred off of the Company's platform in July 2023. 
 In February 2023, the Company’s other remote hosted servicing customer notified the Company the Department intended to move that customer’s servicing borrowers to a different third-party servicing platform. This transfer decision was the result of this customer not being one of the servicers awarded a USDS contract. As of March 31, 2023, this remote hosted servicing customer was servicing 1.4 million borrowers for the Department on the Company's platform. The majority of this volume was transferred to another third-party servicing platform during the second quarter of 2023, and the remaining borrowers were transferred off of the Company's platform in July 2023. 
 As a result of the transfers discussed above, the Company currently has no remaining Department remote hosted servicing borrowers on its platform and software services revenue will be negatively impacted in future periods. However, the Company has executed an agreement with a third-party servicer awarded a USDS contract to license its servicing software to such entity and the Company anticipates earning remote hosted servicing revenue from this new customer when USDS goes live beginning in the second quarter of 2024. The amount of revenue earned by the Company from this new customer will depend on the number of servicing borrowers allocated by the Department to the new customer. The Company does not have volume projections for the new customer at this time. 
 Department of Education Debt Relief 
 In August 2022, the Department announced a broad based student debt relief plan that would provide targeted student debt cancellation to borrowers with loans held by the Department with unconditional loan cancellation in amounts of up to $20,000 for eligible borrowers who received a Pell Grant, or of up to $10,000 for eligible borrowers who did not receive a Pell Grant. Federal courts blocked implementation of the Department's broad based student debt relief plan and on June 30, 2023, the Supreme Court struck down the Department's plan. While the current version of the Department's forgiveness plan has been invalidated, the Department recently announced that it has begun a new rulemaking process to consider other ways to provide debt relief to borrowers. The Company cannot predict the timing, nature, or ultimate outcome of any future potential student loan forgiveness programs as a result of the rulemaking process. Revenue earned under the current Department servicing contracts will decrease in future periods if the Department successfully implements broad based loan forgiveness. 
 The CARES Act 
 Under the CARES Act, beginning in March 2020, federal student loan payments and interest accruals were suspended for all borrowers that had loans owned by the Department. As a result of the CARES Act, the Company received less servicing 
 45 

 
 
 
 

 revenue per borrower from the Department based on the borrower forbearance status than what was earned on such accounts prior to these provisions. After multiple extensions of the student loans payment pause under the CARES Act, the payment and interest accrual suspension ended August 31, 2023, and borrowers returned to repayment on September 1, 2023. The Company anticipates revenue per borrower from the Department will increase with borrowers transitioned back to repayment under the legacy government contracts from the 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 May 1, 2022, the Department increased the monthly per borrower CARES Act forbearance rate paid to its servicers to compensate them for supplemental outreach to certain borrowers and to support the transition of borrowers back to repayment. Effective April 1, 2023, the Department decreased the monthly per borrower CARES Act forbearance rate by $0.19 per borrower (as discussed above). 
 Reduction in Staff 
 On January 18, 2023, the Company announced a reduction in staff to manage expenses due to delays in the government's student debt relief and return to repayment programs under the CARES Act. Approximately 350 associates who were hired within the prior six months were laid off with a 60 day notice period and approximately 210 associates were immediately terminated for performance. 
 On March 23, 2023, the Company announced a reduction in staff due to the March 2023 government servicing contract price modifications (as discussed above) and the notification by the Department in February 2023 of its intention to transfer up to one million of the Company's existing Department servicing borrowers to another servicer (as discussed above). Approximately 550 associates who work in LSS, including some in related shared services areas that support LSS, were notified their positions were being eliminated. The Company incurred a charge of $4.3 million related to the staff reductions that was primarily recognized in the first and second quarters of 2023. 
 Borrowers Return to Repayment 
 
 
 As discussed above, after multiple extensions of the student loan payment pause that began in March 2020, the payment and interest accrual suspension ended on August 31, 2023, and all borrowers returned to repayment on September 1, 2023. This unprecedented event, along with frequent program changes announced and/or proposed by the Department, has generated extraordinary call volume and web traffic that has adversely impacted the Company’s level of service. In August 2023, the Company began to hire additional associates to support borrowers returning to repayment. 
 
 
 
 
 46 

 
 
 
 

 Summary and Comparison of Operating Results 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Net interest income $ 1,098 831 3,193 1,100 Increase in 2023 compared with 2022 was due to higher interest rates. 
 Loan servicing and systems revenue 127,892 134,197 389,138 395,438 See table below for additional information. 
 Intersegment servicing revenue 6,944 8,281 21,980 25,142 Represents revenue earned by LSS from servicing loans for AGM and Nelnet Bank. Decrease in 2023 compared with 2022 was due to the continued amortization of AGM's FFELP portfolio. FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. 
 
 Other income 687 596 1,900 1,946 Represents revenue earned from providing administrative support and marketing services. 
 
 Impairment expense (296) — (296) — The Company continues to evaluate the use of office space as a large number of associates continue to work from home. As a result, the Company recorded an additional impairment charge related to certain facilities no longer used by the Company. 
 Total other income, net 135,227 143,074 412,722 422,526 
 Salaries and benefits 73,310 82,067 234,012 257,259 Decrease in 2023 compared with 2022 was due to the Company being fully staffed with contact center operations and support associates in 2022 in preparation for the resumption of federal student loan payments and other activities after the CARES Act suspension. During the first and second quarters of 2023, the Company reduced staff to manage expenses due to delays in the government's student debt relief and return to repayment programs and lower pricing and reduced servicing volume for government servicing contracts. See "Reduction in Staff" above for additional details. The Company expects salaries and benefits to increase beginning in the fourth quarter of 2023 as it hires additional associates as a result of Department borrowers returning to repayment on September 1, 2023. 
 
 Depreciation and amortization 5,023 5,784 14,400 16,056 
 Other expenses 15,629 16,654 42,760 46,375 Decrease in 2023 compared with 2022 was due to a decrease in professional fees and facility costs. Over the last year, the Company has reduced its office space as a large number of employees continue to work from home. 
 
 Intersegment expenses 17,894 17,486 58,030 56,442 Represents costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. 
 
 Total operating expenses 111,856 121,991 349,202 376,132 
 Income before income taxes 24,469 21,914 66,713 47,494 
 Income tax expense (5,872) (5,259) (16,011) (11,399) Represents income tax expense at an effective tax rate of 24%. 
 Net income $ 18,597 16,655 50,702 36,095 
 
 
 
 
 
 
 Before tax operating margin 18.1 % 15.3 % 16.2 % 11.2 % Before tax operating margin represents before tax operating profitability as a percentage of revenue, and for LSS is calculated as income before income taxes divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income revenue. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it provides additional information to facilitate an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. 
 Before tax operating margin increased in 2023 compared with 2022 due primarily to a decrease in salaries and benefits expense as described above. The increase in the three months ended September 30, 2023 compared with the same period in 2022 was also due to $4.8 million of revenue recognized by the Company in the third quarter of 2023 associated with deconversion of remote hosted borrowers from a customer leaving the Company's platform. 
 
 
 
 

 47 

 
 
 
 

 Loan servicing and systems revenue 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Government loan servicing $ 100,154 104,428 304,769 312,368 Represents revenue from the Company's Department servicing contracts. Decrease in the three and nine months ended September 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 the second and third quarters of 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 nine months ended September 30, 2023 compared with the same period in 2022 was also due to (i) the recognition of $6.7 million of revenue in the first quarter of 2022 for incremental work related primarily to CARES Act forbearance exit outreach activities to borrowers; and (ii) the recognition of $10.5 million of revenue in the first quarter of 2022 related to the discharge of borrowers under the Total and Permanent Disability (TPD) discharge program (the Company earns revenue per each borrower that satisfies the requirements for their loan to be discharged under the TPD discharge program). The decrease in revenue for the nine months ended September 30, 2023 compared with the same period in 2022 was partially offset by (i) an increase in borrowers serviced due to the PHEAA servicing volume transferred to the Company's platform in 2022; (ii) a per borrower CARES Act forbearance rate increase on May 1, 2022; and (iii) a per borrower rate increase on certain statuses on September 1, 2022 (5.0%) to reflect the increase in the cost of labor (Employment Cost Index) per the provisions of the contracts. 
 
 Private education and consumer loan servicing 12,330 12,198 36,556 37,194 Increase in the three months ended September 30, 2023 compared with the same period in 2022 was due to an increase in backup servicing volume, partially offset by a decrease in servicing volume. Decrease in the nine months ended September 30, 2023 compared with the same period in 2022 was due to a decrease in servicing volume and client requested enhanced delinquency services. 
 
 FFELP loan servicing 3,304 4,127 10,226 12,386 Decrease in 2023 compared with 2022 was due to a decrease in the number of borrowers serviced. Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off. Since late 2021, the Company has experienced accelerated run-off of its FFELP servicing portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of 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 9,416 8,229 25,076 23,536 Represents revenue from providing remote hosted servicing software to Department and other servicers and providing diversified technology services. Increase in the three and nine months ended September 30, 2023 compared with the same periods in 2022 was due to (i) the recognition of $4.8 million of revenue in the third quarter of 2023 associated with deconversion of remote hosted borrowers from a customer leaving the Company's platform; (ii) annual rate increases on Department remote hosted servicing customers; (iii) contract programming associated with loan transfers and change requests, and (iv) growth in LSS's technology outsourcing opportunities. These increases were partially offset by the transfer of remote hosted borrowers to other third-party servicers. As a result of the transfers, the Company currently has no remaining Department remote hosted servicing borrowers on its platform and software services revenue will be negatively impacted in future periods. See “Government Loan Servicing - Loan Volume Transfers - Remote Hosted Servicing Borrowers” above for additional details. 
 
 Outsourced services 2,688 5,215 12,511 9,954 Represents primarily revenue to provide contact center and back office operational outsourcing services. Decrease in the three months ended September 30, 2023 compared with the same period in 2022 was due to the contracts for support provided to Department servicers expiring at the end of July 2023. Increase in the nine months ended September 30, 2023 compared with the same period in 2022 was due to additional outsourced opportunities, including assisting existing Department servicers as operations transitioned from exiting servicers. 
 
 Loan servicing and systems revenue $ 127,892 134,197 389,138 395,438 

 48 

 
 
 
 
 

 EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS 
 As discussed further in the Company's 2022 Annual Report, this segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Based on the timing of revenue recognition and when expenses are incurred, revenue and before tax operating margin are higher in the first quarter compared with the remainder of the year. 
 Summary and Comparison of Operating Results 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Net interest income $ 8,934 3,707 20,237 4,920 Represents interest income on tuition funds held in custody for schools. Increase in 2023 compared with 2022 was due to higher interest rates. 
 
 Education technology, services, and payment processing revenue 113,796 106,894 357,258 310,211 See table below for additional information. 
 Intersegment revenue 77 8 198 16 
 
 
 Total other income 113,873 106,902 357,456 310,227 
 Cost of services 43,694 42,676 131,804 109,073 See table below for additional information. 
 Salaries and benefits 39,776 34,950 116,040 98,356 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 3,030 2,532 8,424 7,544 Represents primarily amortization of intangible assets from prior business acquisitions and depreciation of capitalized software development costs. 
 Other expenses 8,309 7,034 26,063 19,549 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 5,875 4,762 17,559 14,171 Represents costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. 
 Total operating expenses 56,990 49,278 168,086 139,620 
 Income before income taxes 22,123 18,655 77,803 66,454 
 Income tax expense (5,307) (4,475) (18,700) (15,947) Represents income tax expense at an effective tax rate of 24%. 
 Net income 16,816 14,180 59,103 50,507 
 Net (income) loss attributable to noncontrolling interests (6) (61) 113 (8) 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 $ 16,810 14,119 59,216 50,499 

 
 
 
 
 49 

 
 
 
 

 Education technology, services, and payment processing revenue 
 The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period. 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Tuition payment plan services $ 30,223 25,779 95,235 84,131 Increase in 2023 compared with 2022 was due to a higher number of payment plans in the K-12 and higher education markets for both new and existing customers. 
 
 Payment processing 50,848 47,957 126,716 113,996 Increase in 2023 compared with 2022 was due to increase in payment volumes for both the K-12 and higher education markets due to new customers and an increase in volume from existing customers. 
 
 Education technology and services 31,793 32,548 132,796 110,755 Decrease in the three months ended September 30, 2023 compared with the same period in 2022 was due to a decrease in FACTS Education Solutions instructional services revenue as a result of the wind down of economic aid provided to private schools in response to the COVID 19 pandemic. Instructional services revenue provided to schools that was funded by the CARES Act and the Emergency Assistance to Non-Public Schools (EANS) I program was the primary cause of the decline. EANS I program funding ended on September 30, 2023 and EANS II program funding ends on September 30, 2024. The decrease was offset by an increase in revenue from the Company’s school information system software, enrollment and communication services, and financial needs assessments. The increase in revenue in the nine months ended September 30, 2023 compared with the same period in 2022 was due to an increase in revenue from the Company’s school information system software, enrollment and communication services, financial needs assessments, the NextGen acquisition completed in April 2022, and instructional services. Instructional services revenue was the largest component of this increase, driven by the EANS programs. As economic aid provided to schools under the EANS programs stopped on September 30, 2023 (EANS I) and winds down (EANS II), future instructional services revenue will decrease from recent historical periods. 
 
 Other 932 610 2,511 1,329 
 Education technology, services, and payment processing revenue 113,796 106,894 357,258 310,211 
 Cost of services 43,694 42,676 131,804 109,073 Represents costs relating to payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also a component of this expense and decrease/increase in relationship to instructional services revenues. 
 
 Net revenue $ 70,102 64,218 225,454 201,138 
 GAAP before tax operating margin 31.6 % 29.1 % 34.5 % 33.0 % Before tax operating margin, excluding net interest income, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the ETS&PP segment is calculated as income before income taxes less interest income divided by net revenue. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. 
 Before tax operating margin, excluding net interest income, decreased in 2023 compared with 2022 due to investments in (i) the development of new services and technologies; and (ii) superior customer experiences to align with the Company’s strategies to grow, retain, and diversify revenues. 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. 
 
 Net interest income (12.7) (5.8) (9.0) (2.4) 
 Non-GAAP before tax operating margin, excluding net interest income 18.9 % 23.3 % 25.5 % 30.6 % 

 
 
 
 
 50 

 
 
 
 
 

 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS 
 Loan Portfolio 
 As of September 30, 2023, the AGM operating segment had a $12.7 billion loan portfolio, consisting primarily of federally insured loans. For a summary of the Company’s loan portfolio as of September 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 September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 Beginning balance $ 13,239,125 15,855,137 14,169,771 17,441,790 
 Loan acquisitions: 
 Federally insured student loans 2,880 896 518,471 54,845 
 Private education loans 77,365 667 77,365 8,177 
 Consumer and other loans 29,413 120,465 340,091 256,998 
 Total loan acquisitions 109,658 122,028 935,927 320,020 
 Repayments, claims, capitalized interest, participations, and other, net (322,013) (385,312) (1,175,320) (1,310,913) 
 Loans lost to external parties (229,342) (768,923) (712,772) (1,609,728) 
 Loans sold (61,807) (28,915) (481,985) (47,154) 
 
 Ending balance $ 12,735,621 14,794,015 12,735,621 14,794,015 

 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 September 30, 2023, the Company’s ownership correlates to approximately $660 million, $540 million, and $350 million of consumer, private education, and federally insured student loans, respectively, included in these securitizations. The loans held in these securitizations are not included in the above table. 
 Since late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of the continued extension of the CARES Act payment pause on Department held loans and the initiatives offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. After multiple extensions of the student loans payment pause under the CARES Act, the payment and interest accrual suspension ended August 31, 2023, and Federal Direct Loan Program borrowers returned to repayment on September 1, 2023. 
 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 September 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 nine months ended September 30, 2023 and 2022, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 
 
 51 

 
 
 
 

 Loan Spread Analysis 
 The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding. 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 Variable loan yield, gross 7.70 % 5.05 % 7.51 % 3.76 % 
 Consolidation rebate fees (0.80) (0.84) (0.80) (0.85) 
 Discount accretion, net of premium and deferred origination costs amortization 0.06 0.02 0.05 0.03 
 Variable loan yield, net 6.96 4.23 6.76 2.94 
 Loan cost of funds - interest expense (a) (6.14) (3.11) (5.86) (1.95) 
 Loan cost of funds - derivative settlements (b) (c) 0.01 (0.03) 0.01 0.00 
 Variable loan spread 0.83 1.09 0.91 0.99 
 Fixed rate floor income, gross 0.01 0.19 0.02 0.45 
 Fixed rate floor income - derivative settlements (b) (d) 0.01 0.30 0.23 0.10 
 Fixed rate floor income, net of settlements on derivatives 0.02 0.49 0.25 0.55 
 Core loan spread 0.85 % 1.58 % 1.16 % 1.54 % 
 
 Average balance of AGM's loans $ 13,157,152 15,466,505 13,588,427 16,371,092 
 Average balance of AGM's debt outstanding 12,527,771 15,060,823 12,964,890 15,905,170 

 (a) In the second quarter of 2023, the Company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of $25.9 million in interest expense from the write-off of the remaining unamortized debt discount associated with these bonds at the time of redemption. This expense was excluded from the table above. 
 (b) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's Non-Nelnet Bank derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2023 and 2022 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table. 
 A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 Core loan spread 0.85 % 1.58 % 1.16 % 1.54 % 
 Derivative settlements (1:3 basis swaps) (0.01) 0.03 (0.01) (0.00 ) 
 Derivative settlements (fixed rate floor income) (0.01) (0.30) (0.23) (0.10) 
 Loan spread 0.83 % 1.31 % 0.92 % 1.44 % 

 (c) Derivative settlements consist of net settlements received (paid) related to the Company’s 1:3 basis swaps. 
 (d) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps. 
 52 

 
 
 
 

 The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread. 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. In an increasing interest rate environment, student loan spread on FFELP loans increases in the short term because of the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest rate resets on the Company's debt that occurs either monthly or quarterly. 
 Variable loan spread decreased during the three and nine months ended September 30, 2023 compared to the same periods in 2022 due to a significant increase in short-term rates during each of the first three quarters of 2022 compared with the increase in rates for the same periods in 2023. 
 The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows: 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 Fixed rate floor income, gross $ 450 7,585 2,016 54,870 
 Derivative settlements (a) 235 11,356 22,760 11,843 
 Fixed rate floor income, net $ 685 18,941 24,776 66,713 
 Fixed rate floor income contribution to spread, net 0.02 % 0.49 % 0.25 % 0.55 % 

 
 
 (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 nine months ended September 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 September 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 nine months ended September 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. 
 
 
 
 
 
 
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 Summary and Comparison of Operating Results 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Net interest income after provision for loan losses $ 42,753 53,708 69,765 189,028 See table below for additional analysis. 
 Other income, net 2,776 4,627 6,939 16,270 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 $1.9 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively, and losses of $4.5 million and income of $1.3 million for the nine months ended September 30, 2023 and 2022, respectively. 
 
 Gain on sale of loans, net 5,362 2,627 32,685 5,616 The Company recognized gains from selling portfolios of loans in 2023 and 2022. For additional information, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 
 
 Derivative settlements, net 621 10,271 23,940 12,085 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 the periods presented 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 1,192 52,991 (35,323) 239,125 Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments for the periods presented related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of such swaps. On March 15, 2023, AGM terminated its portfolio of floor income interest rate swaps to minimize the Company's exposure to market volatility. As such, the Company expects the derivative market value adjustments in future periods will be less substantial. 
 
 Total other income, net 9,951 70,516 28,241 273,096 
 Salaries and benefits 1,242 653 3,093 1,858 Increase in 2023 compared with 2022 was due to additional headcount as the Company actively expands into new asset loan classes. 
 Other expenses 2,952 3,349 12,083 9,925 Represents primarily servicing fees paid to third parties. Also includes certain professional and legal fees. Increase in the nine months ended September 30, 2023 compared with the same period in 2022 was due to incurring additional professional fees as the Company actively expands into new asset loan classes. 
 Intersegment expenses 7,948 8,350 24,789 25,694 Represents fees paid to LSS for the servicing of AGM’s loan portfolio. These amounts exceed the actual cost of servicing the loans. Intersegment expenses also includes costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. 
 Total operating expenses 12,142 12,352 39,965 37,477 Total operating expenses were 37 basis points and 32 basis points of the average balance of loans for the three months ended September 30, 2023 and 2022, respectively, and 39 basis points and 31 basis points for the nine months ended September 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 40,562 111,872 58,041 424,647 
 Income tax expense (9,735) (26,849) (13,930) (101,915) Represents income tax expense at an effective tax rate of 24%. 
 Net income $ 30,827 85,023 44,111 322,732 
 Additional information: 
 Net income $ 30,827 85,023 44,111 322,732 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 (1,192) (52,991) 35,323 (239,125) 
 Tax effect 286 12,718 (8,478) 57,390 
 Net income, excluding derivative market value adjustments $ 29,921 44,750 70,956 140,997 

 
 
 54 

 
 
 
 

 Net interest income after provision for loan losses, net of settlements on derivatives The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net." 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Variable interest income, gross $ 254,569 196,910 763,933 459,575 Increase in 2023 compared with 2022 was due to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans. 
 Consolidation rebate fees (26,143) (32,612) (81,753) (104,335) Decrease in 2023 compared with 2022 was due to a decrease in the average consolidation loan balance. 
 Discount accretion, net of premium and deferred origination costs amortization 1,940 737 5,437 3,669 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years. 
 Variable interest income, net 230,366 165,035 687,617 358,909 
 Interest on bonds and notes payable (194,098) (118,135) (594,764) (231,960) Increase in 2023 compared with 2022 was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. In addition, during the second quarter of 2023, the Company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of a $25.9 million non-cash expense from the write-off of the remaining debt discount associated with these bonds at the time of redemption. 
 Derivative settlements, net (a) 386 (1,085) 1,180 242 Represents net derivative settlements received (paid) related to the Company’s 1:3 basis swaps. 
 Variable loan interest margin, net of settlements on derivatives 36,654 45,815 94,033 127,191 
 Fixed rate floor income, gross 450 7,585 2,016 54,870 Decrease in 2023 compared with 2022 was due to higher interest rates. 
 Derivative settlements, net (a) 235 11,356 22,760 11,843 Represents net derivative settlements received related to the Company's floor income interest rate swaps. On March 15, 2023, to minimize the Company's exposure to market volatility, the Company terminated its entire derivative portfolio hedging loans earning fixed rate floor income. The decrease in net derivative settlements received by the Company during the three months ended September 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 nine months ended September 30, 2023, compared with the same period in 2022, was due to an increase in settlements on the Company's derivatives outstanding during this period as a result of an increase in interest rates. 
 
 Fixed rate floor income, net of settlements on derivatives 685 18,941 24,776 66,713 
 Core loan interest income (a) 37,339 64,756 118,809 193,904 
 Investment interest 18,062 10,312 47,726 28,147 Increase in 2023 compared with 2022 was due to an increase of interest earned on restricted cash due to higher interest rates. 
 Intercompany interest (3,295) (1,874) (24,141) (3,760) Increase in 2023 compared with 2022 was due to an increase in the balance of borrowings and higher rates. 
 Provision for loan losses - federally insured loans (1,641) (888) (4,052) (505) The primary item impacting provision for loan losses was the establishment of an initial allowance for loans acquired during the periods presented. 
 
 
 For additional information, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 
 Provision for loan losses - private education loans (3,009) (1,154) (3,249) (1,971) 
 Provision for loan losses - consumer and other loans (4,082) (7,173) (41,388) (14,702) 
 Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 43,374 63,979 93,705 201,113 

 (a) Core loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures. For an explanation of GAAP accounting for derivative settlements and the reasons why the Company reports these non-GAAP measures (and the limitations thereof), see footnote (b) to the table immediately under the caption “Loan Spread Analysis” above. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2023 and 2022 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table. 
 
 
 55 

 
 
 
 
 

 NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS 
 Loan Portfolio 
 As of September 30, 2023, Nelnet Bank had a $468.8 million loan portfolio, consisting of $359.9 million of private education loans, $59.3 million of FFELP loans, and $49.6 million of consumer and other loans. For a summary of the Company’s loan portfolio as of September 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 in Nelnet Bank's loan portfolio: 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 Beginning balance $ 444,488 423,553 419,795 257,901 
 Loan acquisitions and originations: 
 
 
 Private education loans 19,756 21,167 41,341 226,713 
 Consumer and other loans 22,966 — 55,766 — 
 Total loan acquisitions and originations 42,722 21,167 97,107 226,713 
 Repayments (18,382) (15,244) (47,957) (51,011) 
 
 Loans sold to AGM (15) — (132) (4,127) 
 
 Ending balance $ 468,813 429,476 468,813 429,476 

 
 
 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, delinquency amounts, and other key credit quality indicators of each of Nelnet Bank's loan portfolios as of September 30, 2023 and December 31, 2022; and the activity in Nelnet Bank's allowance for loan losses and net charge-offs as a percentage of average loans for the three and nine months ended September 30, 2023 and 2022, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 Deposits 
 As of September 30, 2023, Nelnet Bank had $947.4 million of deposits. All of Nelnet Bank’s deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs) and retail and other savings deposits and CDs. Retail and other saving deposits include deposits from Educational 529 College Savings and Health Savings plans, Short Term Federal Investment Trust (STFIT), and commercial and institutional CDs. Union Bank, a related party, is the program manager for the Educational 529 College Savings plans and trustee for the STFIT. 
 As of September 30, 2023, Nelnet Bank’s deposits included $229.3 million from Nelnet, Inc. (the parent company) and its subsidiaries (intercompany), and thus have been eliminated for consolidated financial reporting purposes. The intercompany deposits include a pledged deposit of $40.0 million from Nelnet, Inc. as required under the Capital and Liquidity Maintenance Agreement with the FDIC, deposits required for intercompany transactions, operating and savings deposits, and NBS custodial deposits consisting of collected tuition payments which are subsequently remitted to the appropriate school. 
 
 
 56 

 
 
 
 

 Average Balance Sheet 
 The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 
 Balance Rate Balance Rate Balance Rate Balance Rate 
 Average assets (a) 
 Federally insured student loans $ 60,504 6.58 % $ 75,124 3.69 % $ 62,531 6.29 % $ 80,234 2.39 % 
 Private education loans 353,740 3.85 350,668 3.31 354,513 3.74 304,174 3.13 
 Consumer and other loans 36,041 12.90 — — 23,065 12.92 — — 
 Cash and investments 586,067 6.47 424,899 3.67 556,401 6.25 348,697 2.78 
 Total interest-earning assets 1,036,352 5.81 % 850,691 3.52 % 996,510 5.51 % 733,105 2.88 % 
 Non-interest-earning assets 10,322 8,914 9,047 13,754 
 Total assets $ 1,046,674 $ 859,605 $ 1,005,557 $ 746,859 
 Average liabilities and equity (a) 
 Brokered deposits $ 204,050 1.38 % $ 296,257 1.42 % $ 204,534 1.38 % $ 230,968 1.33 % 
 Intercompany deposits 184,829 6.86 155,350 2.24 173,929 6.10 121,557 1.32 
 Retail and other deposits 521,344 4.22 293,209 1.84 493,939 4.01 283,386 1.08 
 Total interest-bearing liabilities 910,223 4.04 % 744,816 1.76 % 872,402 3.76 % 635,911 1.22 % 
 Non-interest-bearing liabilities 5,377 4,106 5,291 5,037 
 Equity 131,074 110,683 127,864 105,911 
 Total liabilities and equity $ 1,046,674 $ 859,605 $ 1,005,557 $ 746,859 
 

 
 (a) Calculated using average daily balances. 
 
 
 57 

 
 
 
 

 Summary and Comparison of Operating Results 
 
 Three months ended September 30, Nine months ended September 30, 
 2023 2022 2023 2022 Additional information 
 Total interest income $ 15,171 7,551 41,092 15,792 Represents interest earned on loans, cash, and investments. Increase in 2023 compared with 2022 was due to an increase of these balances and interest rates. 
 Interest expense 9,456 3,298 24,841 5,792 Represents interest expense on deposits. Increase in 2023 compared with 2022 was due to an increase of deposits and interest rates. 
 Net interest income 5,715 4,253 16,251 10,000 
 Provision for loan losses 1,927 450 5,837 1,462 Increase in provision for loan losses was due to the mix of loans, including the mix of loans acquired and 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 3,788 3,803 10,414 8,538 
 Other income 565 566 1,395 2,224 Represents primarily net gains and income from investments. 
 
 
 Derivative settlements, net 196 — 279 — During the second and third 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 1,948 — 3,057 — 
 Total other income, net 2,709 566 4,731 2,224 
 Salaries and benefits 2,520 1,814 6,881 5,082 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Increase in 2023 compared with 2022 was due to the overall growth of Nelnet Bank activities. 
 Depreciation 259 4 315 11 
 Other expenses 1,290 1,427 3,696 3,009 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 the nine months ended September 30, 2023 compared with the same period in 2022 was due to the overall growth of Nelnet Bank activities. 
 Intersegment expenses 129 69 302 171 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 $1.6 million for both the three months ended September 30, 2023 and 2022, and $5.1 million and $4.4 million for the nine months ended September 30, 2023 and 2022, respectively. 
 
 Total operating expenses 4,198 3,314 11,194 8,273 
 Income before income taxes 2,299 1,055 3,951 2,489 
 Income tax expense (552) (246) (913) (574) Represents income tax expense at an effective tax rate of 24.0% and 23.3% for the three months ended September 30, 2023 and 2022, respectively, and 23.1% for both the nine months ended September 30, 2023 and 2022. 
 
 Net income $ 1,747 809 3,038 1,915 
 Additional information: 
 Net income $ 1,747 809 3,038 1,915 
 
 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 (1,948) — (3,057) — 
 Tax effect 468 — 734 — 
 Net income, excluding derivative market value adjustments $ 267 809 715 1,915 

 58 

 
 
 
 
 

 CORPORATE AND OTHER ACTIVITIES – RESULTS OF OPERATIONS 
 Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities (“Corporate”). The following table summarizes the operating results of these activities. 
 Income taxes are allocated based on 24% of income (loss) before taxes for each activity. The difference between the Corporate income tax expense and the sum of taxes calculated for each activity is included in income taxes in “other” in the table below. 
 Summary and Comparison of Operating Results 
 
 Nelnet Renewable Energy (c) 
 Shared services (a) WRCM (b) Tax equity investments / syndication / administration GRNE Solar ALLO investment (d) Real estate investments (e) Venture capital investments (f) Interest income/expense, net (g) Other Total 
 Three months ended September 30, 2023 
 Interest income $ — 3 — 36 — 141 1,631 14,069 373 16,253 
 Interest expense — — — (108) — — — (5,816) (169) (6,093) 
 Net interest income — 3 — (72) — 141 1,631 8,253 204 10,160 
 Solar construction revenue — — — 6,301 — — — — — 6,301 
 Other, net 728 1,632 (2,303) 48 (14,908) (492) 276 558 10,223 (4,238) 
 Impairment and other expense (4,678) — — — — — — — — (4,678) 
 Cost to provide solar construction services — — — (7,783) — — — — — (7,783) 
 Salaries and benefits (21,537) (53) (686) (971) — (145) (237) — (1,390) (25,019) 
 Depreciation and amortization (9,917) — — (3,501) — (8) — — (96) (13,522) 
 Other expenses (12,110) (83) (262) (892) (651) (11) (15) (470) (8,698) (23,192) 
 Intersegment expenses, net 26,599 (3) (2,621) 2,006 — (106) (18) (97) (272) 25,488 
 Income (loss) before income taxes (20,915) 1,496 (5,872) (4,864) (15,559) (621) 1,637 8,244 (29) (36,483) 
 Income tax (expense) benefit 5,020 (323) 843 954 3,734 149 (393) (1,978) 2,726 10,732 
 Net (income) loss attributable to noncontrolling interests — (150) 2,360 891 — 1 — — — 3,102 
 Net income (loss) $ (15,895) 1,023 (2,669) (3,019) (11,825) (471) 1,244 6,266 2,697 (22,649) 
 
 Three months ended September 30, 2022 
 Interest income $ — 1 — 3 — 235 536 9,895 190 10,860 
 Interest expense — — — (9) — — — (5,833) (225) (6,067) 
 Net interest income — 1 — (6) — 235 536 4,062 (35) 4,793 
 Solar construction revenue — — — 9,358 — — — — — 9,358 
 Other, net 631 1,612 (4,216) — (15,398) 9,867 (39) 762 3,217 (3,564) 
 Impairment and other expense (29) — — — — — 150 — — 121 
 Cost to provide solar construction services — — — (5,968) — — — — — (5,968) 
 Salaries and benefits (23,152) (56) (340) (2,390) (77) 197 (172) — (1,723) (27,713) 
 Depreciation and amortization (9,649) — — (732) — — — — (71) (10,452) 
 Other expenses (9,696) (83) (127) (958) (150) (47) (18) (1,422) (2,894) (15,395) 
 Intersegment expenses, net 23,056 (3) (65) (24) — (134) — (55) (397) 22,378 
 Income (loss) before income taxes (18,839) 1,471 (4,748) (720) (15,625) 10,118 457 3,347 (1,903) (26,442) 
 Income tax (expense) benefit 4,521 (318) 77 149 3,750 (2,431) (110) (803) 5,409 10,244 
 Net (income) loss attributable to noncontrolling interests — (148) 4,426 101 — 11 — — — 4,390 
 Net income (loss) $ (14,318) 1,005 (245) (470) (11,875) 7,698 347 2,544 3,506 (11,808) 

 59 

 
 
 
 

 
 Nelnet Renewable Energy (c) 
 Shared services (a) WRCM (b) Tax equity investments / syndication / administration GRNE Solar ALLO investment (d) Real estate investments (e) Venture capital investments (f) Interest income/expense, net (g) Other Total 
 Nine months ended September 30, 2023 
 Interest income $ — 8 — 136 — 423 3,515 58,765 460 63,307 
 Interest expense — — — (805) — — — (25,320) (528) (26,653) 
 Net interest income — 8 — (669) — 423 3,515 33,445 (68) 36,654 
 Solar construction revenue — — — 19,687 — — — — — 19,687 
 Other, net 2,130 4,883 (12,179) 112 (42,483) (806) (614) (2,989) 20,420 (31,526) 
 Impairment and other expense (4,678) — — — — — — — — (4,678) 
 Cost to provide solar construction services — — — (25,204) — — — — — (25,204) 
 Salaries and benefits (67,923) (162) (2,356) (3,638) (30) (283) (640) — (4,371) (79,403) 
 Depreciation and amortization (27,965) — — (5,696) — (21) — — (294) (33,976) 
 Other expenses (31,958) (246) (1,102) (1,679) (2,014) (58) (200) (3,114) (13,179) (53,550) 
 Intersegment expenses, net 82,408 (9) (2,582) 918 (1) (294) (39) (290) (801) 79,310 
 Income (loss) before income taxes (47,986) 4,474 (18,219) (16,169) (44,528) (1,039) 2,022 27,052 1,707 (92,686) 
 Income tax (expense) benefit 11,517 (966) 1,253 3,150 10,687 242 (485) (6,492) 1,174 20,080 
 Net (income) loss attributable to noncontrolling interests — (447) 13,000 3,043 — 29 — — — 15,625 
 Net income (loss) $ (36,469) 3,061 (3,966) (9,976) (33,841) (768) 1,537 20,560 2,881 (56,981) 
 Nine months ended September 30, 2022 
 Interest income $ — 1 — 3 — 841 642 19,181 419 21,087 
 Interest expense — — — (9) — — — (10,798) (938) (11,745) 
 Net interest income — 1 — (6) — 841 642 8,383 (519) 9,342 
 Solar construction revenue — — — 9,358 — — — — — 9,358 
 Other, net 1,781 4,375 (6,938) — (41,213) 18,076 22,156 (2,671) 8,743 4,309 
 Impairment and other expense (904) — — — — — (5,259) — — (6,163) 
 Cost to provide solar construction services — — — (5,968) — — — — — (5,968) 
 Salaries and benefits (66,562) (167) (1,180) (2,390) (232) (310) (564) — (4,050) (75,455) 
 Depreciation and amortization (29,423) — — (732) — — — — (211) (30,366) 
 Other expenses (30,782) (264) (514) (958) (174) (37) (64) (2,518) (6,127) (41,438) 
 Intersegment expenses, net 72,527 (9) (183) (24) (2) (324) — (166) (499) 71,320 
 Income (loss) before income taxes (53,363) 3,936 (8,815) (720) (41,621) 18,246 16,911 3,028 (2,663) (65,061) 
 Income tax (expense) benefit 12,807 (850) 52 149 9,989 (4,383) (4,059) (726) 9,091 22,070 
 Net (income) loss attributable to noncontrolling interests — (394) 8,600 101 — 16 — — — 8,323 
 Net income (loss) $ (40,556) 2,692 (163) (470) (31,632) 13,879 12,852 2,302 6,428 (34,668) 

 (a) Includes corporate activities related to internal audit, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services. Certain shared service costs incurred to support Nelnet Bank will not be allocated to Nelnet Bank until the end of the Bank’s de novo period (November 2023). The amount allocated to operating segments is reflected as “intersegment expenses, net” in the table above. Also includes corporate costs and overhead functions not allocated to operating segments, including executive management, investments in innovation, and other holding company organizational costs. 
 (b) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC (WRCM), the Company's SEC-registered investment advisor subsidiary, under various arrangements. WRCM earned management fees of $1.5 million and $1.6 million during the three months ended September 30, 2023 and 2022, respectively, and $4.7 million and $4.3 million during 
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 the nine months ended September 30, 2023 and 2022, respectively. Fees earned by WRCM are included in "other, net" in the table above. 
 (c) Nelnet Renewable Energy 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 September 30, 2023, the Company has invested a total of $332.0 million (which includes $126.5 million syndicated to third-party investors) in solar tax equity investments. Due to the management and control of each of these investment partnerships, the tax equity investments are consolidated on the Company’s consolidated financial statements, with the co-investor’s portion being presented as non-controlling interests. 
 Included in tax equity investments is the Company's share of income or loss from solar investments under the Hypothetical Liquidation at Book Value (HLBV) method of accounting. For the majority of the Company's solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment. Nelnet Renewable Energy recognized losses on its tax equity investments of $3.6 million and $4.2 million during the three months ended September 30, 2023 and 2022, respectively, and $13.5 million and $7.1 million during the nine months ended September 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 $1.8 million and $4.1 million for the three months ended September 30, 2023 and 2022, respectively, and $12.0 million and $8.0 million for the nine months ended September 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 $0.6 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively, and $1.3 million and $0.7 million for the nine months ended September 30, 2023 and 2022, respectively, which is included in "other, net" in the table above. 
 In addition to solar tax equity investments, the Company has a strategy to own solar energy project assets. Accordingly, the Company has begun to execute a multi-faceted approach to originate, acquire, finance, own, and manage these assets. As part of this strategy, on July 1, 2022, the Company acquired 80% of the ownership interest in two subsidiaries of GRNE Solutions, LLC named GRNE-Nelnet, LLC (GRNE) and ENRG-Nelnet, LLC (ENRG) (collectively referred to as “GRNE Solar”). 
 GRNE is a solar contracting company that provides full-service engineering, procurement, and construction (EPC) services to residential homes and commercial entities. Since the acquisition of GRNE, it has incurred low and, in some cases, negative margins on certain projects. As existing contracts are completed and revenue from new projects grows as a percent of overall revenue, the Company expects margin to improve in future periods. 
 (d) Represents primarily the Company's share of loss on its voting membership interests and income on its preferred membership interest in ALLO. 
 The Company accounts for its approximately 45% voting membership interests in ALLO Holdings LLC, a holding company for ALLO Communications LLC (collectively referred to as "ALLO") under the HLBV method of accounting. The Company recognized losses under the HLBV method of accounting on its ALLO voting membership interests investment of $17.3 million and $17.6 million during the three months ended September 30, 2023 and 2022, respectively, and $49.7 million and $47.6 million during the nine months ended September 30, 2023 and 2022, respectively. These amounts are reflected in “other, net” in the table above. 
 As of September 30, 2023, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $145.9 million and $6.8 million, respectively. The preferred membership interests of ALLO held by the Company earn a preferred annual return of 6.25%. The Company recognized income on its ALLO preferred membership interests of $2.3 million and $2.2 million during the three months ended September 30, 2023 and 2022, respectively, and $6.8 million and $6.4 million during the nine months ended September 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 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. The Company recognized an expense of $0.7 million and $2.0 million associated with this obligation for the three and nine months ended September 30, 2023, respectively, which is included in “other expenses” in the table above. 
 (e) Represents the operating results of the Company’s real estate investments and the administrative costs to manage this portfolio. 
 (f) Represents the operating results of the Company’s venture capital investments and the administrative costs to manage this portfolio. In April 2022, the Company recognized a $15.2 million gain as a result of the revaluation of its previously held 50% ownership interests in NextGen (previously accounted for under the equity method) as a result of the Company purchasing an additional 30% ownership interests in NextGen. 
 (g) Represents interest income earned on cash and investment debt securities (primarily student loan and other asset-backed securities), interest expense incurred on unsecured and certain other corporate related debt transactions, unrealized gains/losses on marketable equity securities, realized gains/losses on marketable equity securities and investment debt securities, and other costs to manage these investments and facilities. 
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 LIQUIDITY AND CAPITAL RESOURCES 
 The Company’s Loan Servicing and Systems, and Education Technology, Services, and Payment Processing operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. 
 Nelnet Bank launched operations in November 2020. Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million and the Company contributed an additional $30.0 million and $5.0 million to Nelnet Bank during 2022 and the third quarter of 2023, respectively. Based on Nelnet Bank's business plan for growth and current financial condition, the Company believes it will make additional capital contributions to the bank in future periods. Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. See “Liquidity Impact Related to Nelnet Bank” included below for additional information. 
 Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and the Company's other initiatives to pursue additional strategic investments. 
 Sources of Liquidity 
 As of September 30, 2023, the Company's sources of liquidity included: 
 
 Cash and cash equivalents $ 187,690 
 Less: Cash and cash equivalents held at Nelnet Bank (1) (8,187) 
 Net cash and cash equivalents 179,503 
 
 Available-for-sale (AFS) debt securities (investments) - at fair value 1,059,297 
 Less: AFS debt securities held at Nelnet Bank - at fair value (1) (435,015) 
 AFS debt securities serving as collateral on participation agreement - at fair value (2) (57) 
 AFS debt securities serving as collateral on repurchase agreement - at fair value (3) (260,108) 
 AFS restricted debt securities - at fair value (15,918) 
 Unencumbered AFS debt securities (investments) - at fair value 348,199 
 
 Unencumbered private, consumer, and other loans (Non-Nelnet Bank) - at par 231,317 
 
 Repurchased Nelnet issued asset-backed debt securities - at par (not included on consolidated financial statements) (4) 257,278 
 Less: Repurchased Nelnet issued asset-backed debt securities serving as collateral on repurchase agreement - at par (118,925) 
 Unencumbered repurchased Nelnet issued asset-backed debt securities - at par 138,353 
 
 Unused capacity on unsecured line of credit (5) 495,000 
 
 Sources of liquidity as of September 30, 2023 
 $ 1,392,372 

 (1) Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. 
 (2) See the caption "Other Debt Facilities" below. 
 (3) See the caption "Repurchase Agreements" below. 
 (4) The Company has repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. Certain of these securities serve as collateral on amounts outstanding under the Company's repurchase agreements as reflected in the table above. 
 (5) The Company has a $495.0 million unsecured line of credit that matures on September 22, 2026. As of September 30, 2023, there was no amount outstanding on the unsecured line of credit and $495.0 million was available for future use. 
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 The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, consumer, and other loan acquisitions (or investment interests therein); strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances. 
 Cash Flows 
 The Company has historically generated positive cash flow from operations. During the nine months ended September 30, 2023 and 2022, the Company generated $353.2 million and $656.9 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 nine months ended September 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 with 2022; and 
 • The impact of changes to accrued interest payable during the nine months ended September 30, 2023 compared with the same period in 2022. 
 These factors were partially offset by: 
 • An increase in proceeds from termination of derivative instruments in 2023 compared with 2022; 
 • Adjustments to net income for derivative market value adjustments, the impact of provision for loan losses, and loss on investments; 
 • An increase of non-cash depreciation and amortization during the nine months ended September 30, 2023 compared with the same period in 2022; and 
 • The impact of changes to accrued interest and accounts receivable and other assets and liabilities during the nine months ended September 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, repayment, and sale of loans and the purchase and sale of available-for-sale securities. The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable and Nelnet Bank deposits used to fund loans and investment activity. Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2023 was $1.3 billion and $2.2 billion, respectively. Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2022 was $1.7 billion and $2.5 billion, respectively. Investing and financing activities are further addressed in the discussion that follows. 
 Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral 
 The following table shows AGM's debt obligations outstanding that are secured by loan assets and related collateral. 
 
 As of September 30, 2023 
 Carrying amount 
 Final maturity 
 Bonds and notes issued in asset-backed securitizations $ 10,647,788 8/26/30 - 9/25/69 
 FFELP, private education, and consumer loan warehouse facilities 1,554,298 12/31/23 - 11/14/25 
 $ 12,202,086 

 Bonds and Notes Issued in Asset-backed Securitizations 
 The majority of AGM’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. Cash generated from student loans funded in asset-backed securitizations provide the sources of liquidity to satisfy all obligations related to the outstanding bonds and notes issued in such securitizations. In addition, due to (i) the difference between the yield AGM receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees AGM earns from these transactions, AGM has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. 
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 As of September 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 $1.40 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 September 30, 2023. As of September 30, 2023, AGM had $10.9 billion of loans included in asset-backed securitizations, which represented 85.3% 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 September 30, 2023, loans owned by Nelnet Bank, and cash flows relating to the Company's ownership of beneficial interest in loan securitizations (such beneficial interest investments are classified as "investments and notes receivable" on the Company's consolidated balance sheets). 
 Asset-backed Securitization Cash Flow Forecast 
 $1.40 billion 
 (dollars in millions) 
 
 The forecasted future undiscounted cash flows of approximately $1.40 billion include approximately $0.84 billion (as of September 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, net" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $0.56 billion, or approximately $0.43 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 balance of consolidated shareholders' equity from the current September 30, 2023 balance. 
 The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below. 
 Prepayments : The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the amount of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect estimated prepayment rates, including the level of consolidation activity, 
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 borrower default rates, and utilization of debt management options such as income-based repayment, deferments, and forbearance. Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates of 5% for consolidation loans and 6% for all other loan types. 
 Since late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of the continued extension of the CARES Act payment pause on Department held loans and the initiatives offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. After multiple extensions of the student loans payment pause under the CARES Act, the payment and interest accrual suspension ended August 31, 2023, and Federal Direct Loan Program borrowers returned to repayment on September 1, 2023. If the federal government and the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs, such initiatives could significantly increase prepayments. See note 13 of the notes to the consolidated financial statements included in Part I, Item 1 of this report for additional details regarding the federal government's actions with respect to student loan forgiveness and cancellations. 
 In addition, on July 10, 2023, the Department issued final regulations on income-driven repayment plans for Federal Direct loans. Eligible FFELP borrowers can access the new changes by consolidating their loans into the Federal Direct Loan Program. The new regulations are effective July 1, 2024; however, the Department has elected early implementation for some features starting July 30, 2023. The regulations provide a lower monthly loan payment on a Direct loan by decreasing discretionary income, decreasing the percentage of discretionary income that must be paid toward a Direct loan, and providing the option for married borrowers to exclude their spouse’s income from being factored by filing a separate tax return. Other changes provide for the elimination of accrued interest that is not covered by the monthly payment amount, provide credit towards loan forgiveness that counts certain periods of deferment and forbearance, a shorter loan forgiveness period for borrowers with an original principal balance less than or equal to $12,000, and credit toward loan forgiveness for eligible payments on a Direct or FFELP loan that is repaid by a Direct Consolidation loan. This new income-driven repayment plan may increase consolidation activity in the future as FFELP borrowers consolidate their loans into the Federal Direct Loan Program in order to be eligible for the new income-driven repayment plan. 
 See Part I, Item 1A, "Risk Factors - Loan Portfolio - Prepayments risk" in the Company's 2022 Annual Report for additional information related to risks associated with loan prepayments. 
 The following table summarizes the estimated impact to the above forecasted cash flows if prepayments were greater than the prepayment rate assumptions used to calculate the forecasted cash flows. 
 
 Increase in prepayment rate 
 Reduction in forecasted cash flow from table above 
 Forecasted cash flow using increased prepayment rate 
 2x $0.10 billion 
 $1.30 billion 
 
 4x $0.28 billion 
 $1.12 billion 
 
 10x $0.51 billion 
 $0.89 billion 
 

 If the entire AGM student loan portfolio prepaid, the Company would receive the full amount of overcollateralization included in the asset-backed securitizations of approximately $0.84 billion (as of September 30, 2023); however, the Company would not receive the $0.56 billion ($0.43 billion after tax) of estimated future earnings from the portfolio. 
 Interest rates : On June 30, 2023, LIBOR was discontinued as a benchmark rate. Subsequent to the discontinuation of LIBOR on June 30, 2023, the Company funds a portion of its student loans with floating rate securities that are indexed to 90-day SOFR. Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to the bond equivalent of the 30-day average SOFR in effect for each day in a calendar quarter. The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk. The Company’s cash flow forecast assumes, for the life of the portfolio, a relationship between the various SOFR indices that is implied by the current forward SOFR curves. If the forecast is computed assuming a spread of an additional 12 basis points between Term SOFR and 30-day average SOFR for the life of the portfolio, the cash flow forecast would be reduced by approximately $10 million to $30 million. The Company attempts to mitigate the impact of this basis risk by entering into certain derivative instruments. 
 The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment" for additional information about various interest rate risks which may impact future cash flows from AGM's loan assets. 
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 Warehouse Facilities 
 Warehousing allows the Company to buy and manage FFELP, private education, and consumer loans prior to transferring them into more permanent financing arrangements. For a summary of the Company's warehouse facilities see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. 
 Other Uses of Liquidity 
 The Company no longer originates FFELP loans, but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist, including opportunities to purchase private education, consumer, and other loans (or investment interests therein). 
 The Company plans to fund additional loan acquisitions and related investments using current cash; proceeds from the sale of certain investments; its unsecured line of credit, its Union Bank student loan participation agreement, its Union Bank student loan asset-backed securities participation agreement, and third-party repurchase agreements (each as described below), and/or establishing similar secured and unsecured borrowing facilities; using its existing warehouse facilities (as described above); increasing the capacity under existing and/or establishing new warehouse facilities; and continuing to access the asset-backed securities market. 
 Repurchase Agreements 
 In December 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education loans representing approximately 445,000 borrowers. The Company entered into a joint venture with other investors to acquire the loans, and under the joint venture, the Company had an approximately 8% interest in the loans and has a corresponding 8% interest in residual interests in the 2021 securitizations of the loans discussed below. The joint venture established a limited partnership that purchased the private education loans and funded such loans with a temporary warehouse facility. 
 During 2021, the Company sponsored four asset-backed securitization transactions to permanently finance a total of $8.7 billion of private education loans sold by Wells Fargo (which represented the total remaining loans originally purchased from Wells Fargo, factoring in borrower payments from the date of purchase). As sponsor, the Company is required to provide a certain level of risk retention, and has purchased bonds issued in such securitizations to satisfy this requirement. The bonds purchased to satisfy the risk retention requirement are reflected on the Company's consolidated balance sheets as "investments and notes receivable" and as of September 30, 2023, the fair value of these bonds was $260.1 million. The Company must retain these investment securities until the latest of (i) two years from the closing date of the securitization, (ii) the date the aggregate outstanding principal balance of the loans in the securitization is 33% or less of the initial loan balance, and (iii) the date the aggregate outstanding principal balance of the bonds is 33% or less of the aggregate initial outstanding principal balance of the bonds, at which time the Company can sell its investment securities (bonds) to a third party. The Company entered into repurchase agreements with third parties, of which a portion of the proceeds from such agreements were used to purchase the asset-backed investments, and such investments serve as collateral on the repurchase obligations. 
 In addition, as discussed above, the Company has repurchased certain of its own asset-backed securities in the secondary market that serve as collateral on amounts outstanding under the Company's repurchase agreements. During the third quarter of 2023, the Company paid down the outstanding balance of one of these facilities. 
 As of September 30, 2023, $336.5 million was outstanding on the Company's remaining repurchase agreement, of which $246.1 million was borrowed to fund private education loan securitization bonds subject to the Company’s risk retention requirement and $90.4 million was borrowed to fund repurchased FFELP loan asset-backed securities. As of November 7, 2023, the maturity dates on this facility vary from November 20, 2023 through November 27, 2024, and the facility is subject to early termination upon 180 days' prior written notice provided by the Company or the counterparty prior to the maturity dates. The Company is subject to cash margin deficit payment requirements 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. 
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 Union Bank Participation Agreement 
 The Company maintains an agreement with Union Bank, a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. As of September 30, 2023, $257.0 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $900.0 million or an amount in excess of $900.0 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. 
 Asset-backed Securities Transactions 
 The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations. Depending on market conditions, the Company anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations. 
 There were no asset-backed securitization transactions completed during the nine months ended September 30, 2023. 
 Cash Flow Forecast - Beneficial Interest in Loan Securitizations 
 The Company has partial ownership in federally insured, private education, consumer, and other loan third-party securitizations that are classified as "beneficial interest in loan securitizations" and included in "investments and notes receivable" on the Company's consolidated balance sheets. These residual interests were acquired by the Company or have been received by the Company as consideration as the result of selling portfolios of loans to unrelated third parties who securitized such loans. As of the latest remittance reports filed by the various trusts prior to or as of September 30, 2023, the Company's ownership correlates to approximately $1.55 billion of loans included in these securitizations 
 As of September 30, 2023, the investment balance on the Company's consolidated balance sheet of its beneficial interest in loan securitizations was $191.2 million. For a summary of this investment balance, see note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 
 The Company's partial ownership percentage in each loan securitization grants the Company the right to receive the corresponding percentage of cash flows generated by the securitization. As of September 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, the Company currently expects future undiscounted cash flows from its partial ownership in these securitizations to be approximately $323.3 million. The vast majority of these cash flows are expected to be received over the next 8 years. 
 The difference between the total estimated future undiscounted cash flows from these residual interests and the investment carrying value of $191.2 million of $132.1 million, or $100.4 million after income taxes based on the estimated effective tax rate, represents estimated future investment interest income (earnings) from these investments and is expected to be accretive to the Company's balance of consolidated shareholders' equity from the current September 30, 2023 balance. 
 The undiscounted future cash flows from the private education, consumer, and other loan securitizations are highly subject to credit risk (defaults). If defaults are higher than management's current estimate, the forecasted cash flows and estimated future investment interest income (earnings) from these securitizations would be adversely impacted. 
 Liquidity Impact Related to Nelnet Bank 
 Nelnet Bank launched operations in November 2020. Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million and the Company contributed an additional $30.0 million and $5.0 million to Nelnet Bank during 2022 and the third quarter of 2023, respectively. In addition, the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC discussed below. 
 Prior to Nelnet Bank’s launch of operations, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12%; (ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount 
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 equal to the greater of either 10% of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank. 
 Under the regulatory framework for prompt corrective action, Nelnet Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI and must meet specific capital standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on Nelnet Bank’s business, results of operations, or financial condition. On January 1, 2020, the Community Bank Leverage Ratio (CBLR) framework, as issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC, became effective. Any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio. Nelnet Bank has opted into the CBLR framework for the quarter ended September 30, 2023 with a leverage ratio of 12.7%. Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework and the minimum level required by the FDIC. 
 Nelnet Bank has a portfolio of asset-backed securities investments that were accounted for and classified as available-for-sale. Accordingly, these securities were carried at fair value, with the changes in fair value, net of taxes, carried as a separate component of equity. To reduce Nelnet Bank's market exposure related to decreases in fair value on these investments, on March 31, 2023, securities at Nelnet Bank with a fair value of $149.2 million were transferred from available-for-sale to held to maturity. The securities were reclassified at fair value at the time of the transfer, and such transfer represented a non-cash transaction. Accumulated other comprehensive income as of the date of the transfer (March 31, 2023) included pre-tax unrealized losses of $3.7 million. These unrealized losses will be amortized, consistent with the amortization of any discounts on such securities, over the remaining lives of the respective securities as an adjustment of yield. 
 Based on Nelnet Bank's business plan for growth and current financial condition, the Company believes it will make additional capital contributions to the bank in future periods. 
 Liquidity Impact Related to Nelnet Renewable Energy 
 The Company’s Nelnet Renewable Energy business makes solar tax equity investments. Through September 30, 2023, the Company has invested a total of $332.0 million (which includes $126.5 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 30% of the eligible project costs, with the tax credit available when the project is placed-in-service. The Company is allowed to reduce its tax estimates paid to the U.S. Treasury based on the credits earned. Based on the timing of when the Company funds a project and decreases its tax estimate to the U.S. Treasury due to earning of the tax credit, the amount of capital committed to solar tax equity investments at any point in time is not significant and has a minimal impact on the Company’s liquidity. As of September 30, 2023, the Company is committed to fund an additional $265.9 million on tax equity investments, of which $128.7 million is expected to be provided by syndication partners. 
 In addition to solar tax equity investments, the Company has a strategy to own solar energy project assets. These assets provide long-term, predictable, and recurring cash flows. Accordingly, the Company has begun to execute a multi-faceted approach to originate, acquire, finance, own, and manage these assets. The Company plans to fund a large portion of its current growth plans in owning solar energy projects using third-party debt and third-party tax equity. The collateral on any third-party debt would be limited to the assets of the specific solar projects. Any capital requirements for the origination or purchase of solar projects not funded by third-party debt and third-party tax equity would be provided by the Company using operating cash, borrowings on its unsecured line of credit, and/or the sale of investments. 
 Liquidity Impact Related to ALLO 
 Upon the deconsolidation of ALLO on December 21, 2020, the Company recorded its 45% voting membership interests in ALLO at fair value, and accounts for such investment under the HLBV method of accounting. In addition, the Company recorded its remaining non-voting preferred membership units of ALLO at fair value, and accounts for such investment as a separate equity investment. As of September 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 September 30, 2023 the accrued and unpaid preferred return was $6.8 million. If the non-voting preferred membership interests are not redeemed on or before April 2024, the 
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 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 September 30, 2023, the estimated fair value of the contingent payment is $9.6 million. 
 In June 2023, ALLO closed on an asset-backed securities transaction with an aggregate size of $576.0 million. The proceeds from this transaction were used to refinance the majority of ALLO's prior debt and fund a portion of its current growth plans. If ALLO needs additional capital to support its growth in existing or new markets, the Company has the option to contribute additional capital to maintain its voting equity interest. Although ALLO has obtained debt financing to fund a large portion of its growth plans, the Company contributed $8.4 million of additional equity to ALLO in the first quarter of 2023. As a result of this equity contribution, the Company’s voting membership interests percentage did not materially change. Based on ALLO's business plan for growth and current financial condition, the Company believes it will make additional capital contributions to ALLO in future periods. 
 Liquidity Impact Related to Hedging Activities 
 The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. 
 All Non-Nelnet Bank over-the-counter derivative contracts executed by the Company are cleared post-execution at a regulated clearinghouse. Clearing is a process by which a third party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default. 
 To minimize the Company's exposure to market volatility, on March 15, 2023, the Company terminated its derivative portfolio hedging loans earning fixed rate floor income ($2.8 billion in notional amount of derivatives). Through March 15, 2023, the Company had received cash or had a receivable from the clearinghouse related to variation margin equal to the fair value as of March 15, 2023 of the derivatives used to hedge loans earning fixed rate floor income of $183.2 million, which included $19.1 million related to current period settlements. 
 Based on the derivative portfolio outstanding as of September 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 September 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 September 30, 2023, $0.1 million (par value) of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. This participation agreement has been accounted for by the Company as a secured borrowing. Upon termination or expiration of this agreement, the Company would expect to use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. 
 Stock Repurchases 
 The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 8, 2025. No shares were repurchased under this 
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 program during the first three quarters 2023. As of September 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 three quarters of 2023, the Company repurchased 47,195 shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. These repurchased shares are excluded from the Company's repurchase program. See "Stock Repurchases" under Part II, Item 2 of this report. 
 Dividends 
 On September 15, 2023, the Company paid a third 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 fourth quarter 2023 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.28 per share. The fourth quarter cash dividend will be paid on December 15, 2023 to shareholders of record at the close of business on December 1, 2023. 
 The Company plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. 
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 
 This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 3 of the notes to consolidated financial statements included in the Company’s 2022 Annual Report includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. 
 On an on-going basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are most “critical” - that is, they are most important to the portrayal of the Company’s financial condition and results of operations and they require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy and estimate, as discussed further under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Loan Losses” in the Company’s 2022 Annual Report. For additional information regarding changes in the Company’s allowance for loan losses for the three and nine months ended September 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.
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NELNET INC 10-Q

Item 2. Management’s Discussion and Analysis
