NELNET INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and nine months ended September 30, 2024 and 2023. 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 2023 Annual Report. 36 Forward-looking and cautionary statements This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “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 2023 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 Department, risks related to unfavorable contract modifications or interpretations, 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 prepayment risk, 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; • 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, including disclosure of confidential or personal information and/or damage to reputation resulting from cyber breaches; • risks related to use of artificial intelligence; • uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; • risks related to the ability of Nelnet Bank to achieve its business objectives and effectively deploy loan and deposit strategies 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 and rising construction costs; • risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom) including venture capital and real estate investments, reinsurance, acquisitions, and other activities (including risks associated with errors that occasionally occur in converting loan servicing portfolios to a new servicing platform), including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses; • risks and uncertainties associated with climate change; and • risks and uncertainties associated with litigation matters and maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company’s consolidated financial statements. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law. 37 OVERVIEW The Company is a diversified hybrid holding company with primary businesses being consumer lending, loan servicing, payments, and technology - all with a large customer emphasis in the education space. The largest operating businesses engage in loan servicing and education technology services and payments. 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 a fiber communications company (ALLO), early-stage and emerging growth companies (venture capital investments), real estate, reinsurance, 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. Reclassifications and Immaterial Error Corrections The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the immaterial error corrections made to the previously reported consolidated financial statements for the three and nine months ended September 30, 2023. For additional information, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 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, 2024 2023 2024 2023 GAAP net income attributable to Nelnet, Inc. $ 2,388 44,354 120,886 97,739 Realized and unrealized derivative market value adjustments (a) 13,165 (3,140) 3,668 32,266 Tax effect (b) (3,160) 754 (880) (7,744) Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 12,393 41,968 123,674 122,261 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 0.07 1.18 3.29 2.61 Realized and unrealized derivative market value adjustments (a) 0.36 (0.08) 0.10 0.86 Tax effect (b) (0.09) 0.02 (0.02) (0.20) Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 0.34 1.12 3.37 3.27 (a) "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 respective 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 Company 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. (b) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate. 38 Operating Segments The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in the 2023 Annual Report. They include: • Loan Servicing and Systems (LSS) - referred to as Nelnet Diversified Services (NDS) • Education Technology Services and Payments (ETSP) - referred to as Nelnet Business Services (NBS) • Asset Generation and Management (AGM), part of the Nelnet Financial Services (NFS) division • Nelnet Bank, part of the NFS division 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, through 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 operating segments included in the NFS division include the Company's U.S. Securities and Exchange Commission (SEC)-registered investment advisor subsidiary, property and casualty reinsurance activities, investment activities in real estate, and investment debt securities (primarily student loan and other asset-backed securities) and interest expense incurred on debt used to finance such investments. Other business activities and operating segments that are not reportable and not part of the NFS division are combined and included in Corporate and Other Activities ("Corporate"). Corporate also includes interest income earned on cash balances held at the corporate level and interest expense incurred on unsecured and secured corporate related debt transactions, certain investment activities including its investment in ALLO and early-stage and emerging growth companies (venture capital investments), and certain shared service activities that 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. 39 The information below presents the operating results (net income (loss) before taxes) for each of the Company's reportable and certain other operating segments reconciled to the consolidated financial statements for the three and nine months ended September 30, 2024 and 2023. See "Results of Operations" for additional detail regarding each reportable operating segment, the NFS operating segments, and Corporate and Other Activities under this Item 2. Three months ended September 30, Nine months ended September 30, Certain Items Impacting Comparability (All dollar amounts below are pre-tax) 2024 2023 2024 2023 NDS $ (4,549) 24,469 13,686 66,713 • 2024 results have been negatively impacted by a decrease in revenue and increase in expenses. Revenue has been adversely impacted based on the Company earning less revenue under the new government servicing contract that began on April 1, 2024, in addition to servicing fewer borrowers. Operating expenses have been elevated due to costs incurred for the completion of the transfer of direct loan servicing volume to one platform, making platform enhancements for the new student loan servicing contract, preparation of the conversion of the Discover private education student loan servicing portfolio, which is expected to be completed during the fourth quarter of 2024, and increase in postage and communication costs due to borrowers returning to repayment on September 1, 2023. The Company expects this segment's operating results will improve in future periods as the full impact of its cost-saving measures take effect and new third-party servicing opportunities convert to the Company's platform. NBS 26,813 22,123 100,046 77,803 • An increase in before tax operating margin due to increased revenue while maintaining a consistent cost structure. Nelnet Financial Services division: AGM (16,346) 40,562 41,710 58,041 • The recognition of $29.0 million and $5.9 million in provision for beneficial interest related to certain loan securitization investments in the three months ended September 30, 2024 and June 30, 2024, respectively. Over the life of these securitizations, the Company still anticipates attractive returns on the overall pool of these investments. • The recognition of a non-cash expense of $5.6 million and $25.9 million in the three months ended September 30, 2024 and June 30, 2023, respectively, as the result of writing off the remaining unamortized debt discount in connection with the redemption of certain asset-backed debt securities prior to their maturity. • The recognition of $12.0 million and $2.3 million in provision for loan losses for the three months ended September 30, 2024 and 2023, respectively, and provision of $14.2 million and negative provision of $1.0 million for the nine months ended September 30, 2024 and 2023, respectively. • A decrease of $5.9 million in net loan interest income, including derivative settlements (core loan interest income), for the three months ended September 30, 2024 compared with the same period in 2023 due to a decrease in the average balance of loans partially offset by an increase in core loan spread, and a decrease of $55.4 million for the nine months ended September 30, 2024 compared with the same period in 2023 due to a decrease in the average balance of loans and core loan spread. • A net loss of $9.5 million and net income of $1.2 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting for the three months ended September 30, 2024 and 2023, respectively, and a net loss of $2.9 million and $35.3 million for the nine months ended September 30, 2024 and 2023, respectively. • The recognition of $1.7 million in losses from the sale of loans for the nine months ended September 30, 2024 compared with $16.8 million in the same period of 2023. Nelnet Bank (4,758) 2,299 (7,330) 3,951 • The recognition of provision for loan losses of $6.1 million for the three months ended September 30, 2024 compared with $1.9 million for the same period in 2023, and $18.4 million for the nine months ended September 30, 2024 compared with $5.8 million for the same period in 2023. • A net loss of $3.6 million and net income of $1.9 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting for the three months ended September 30, 2024 and 2023, respectively, and a net loss of $0.8 million and net income of $3.1 million for the nine months ended September 30, 2024 and 2023, respectively. NFS other operating segments 14,038 9,220 44,325 31,321 • An increase in net interest income and net gains related to the Company's investment securities. Corporate: Unallocated corporate costs (10,287) (20,915) (29,389) (47,986) • Decrease due to the Company's focus on reducing its cost structure and continued focus on allocating costs to operating segments based on use of such services. 40 ALLO investment 6,606 (15,559) 1,953 (44,528) • The recognition of no loss in the three months ended September 30, 2024 compared with a loss of $17.3 million for the same period in 2023 and a loss of $10.7 million in the nine months ended September 30, 2024 compared with $49.7 million for the same period in 2023 from the ALLO voting membership interest investment. Absent additional equity contributions with respect to ALLO's voting membership interests, the Company will not recognize additional losses for its voting membership interests in ALLO. • The recognition of income of $4.8 million on the Company's preferred membership interests in ALLO for the three months ended September 30, 2024 compared with $2.3 million for the same period in 2023 and $11.4 million for the nine months ended September 30, 2024 compared with $6.8 million for the same period in 2023. Nelnet Renewable Energy - GRNE (10,125) (4,864) (18,913) (16,169) • Since the acquisition of GRNE Solar in 2022, it has incurred low and, in some cases, negative margins on certain solar construction projects. During the third quarter of 2024, the Company recorded an expense of $8.8 million related to estimated losses on legacy construction projects. The Company has a handful of remaining legacy construction contracts to complete, down from over 30 at the beginning of 2024. Due to the complexity and long-term nature of existing construction contracts, the Company may continue to incur low and/or negative margins to complete these projects. • In April 2024, the Company announced a change in its solar construction operations to focus exclusively on the commercial solar market and will discontinue its residential solar operations. During the second quarter of 2024, the Company recognized non-cash impairment charges of $1.9 million on certain assets related to the residential operations and $1.6 million in severance costs and commissions paid for cancelled contracts. • The Company believes its solar construction business is making progress in repositioning the business for long-term profitable success. Nelnet Renewable Energy - Tax equity investments/ syndication/ administration (8,509) (8,736) (8,775) (24,237) • The recognition of net losses from tax solar investments of $11.3 million in the three months ended September 30, 2024 compared with $6.5 million for the same period in 2023 and $11.1 million in the nine months ended September 30, 2024 compared with $19.5 million for the same period in 2023. These losses include losses attributable to third-party non-controlling interest investors. See note 6 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. These losses are partially offset by revenue earned by the Company related to management, consulting, and performance fees provided on tax equity investments made by third parties. Other corporate activities 4,892 1,520 12,829 2,909 • Includes operating results of the Company's venture capital investments and other corporate activities. Increase in 2024 compared with 2023 was due to venture capital activities. Net (loss) income before taxes (2,223) 50,119 150,141 107,819 Income tax benefit (expense) 282 (10,512) (37,653) (28,785) Net loss attributable to noncontrolling interests 4,329 4,747 8,398 18,705 • The majority of noncontrolling interests represents losses attributed to noncontrolling membership interests in the Company’s Nelnet Renewable Energy operating segment. Net income $ 2,388 44,354 120,886 97,739 41 CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's consolidated operating results for the three and nine months ended September 30, 2024 compared with the same periods in 2023 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 12 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, 2024 2023 2024 2023 Additional information Loan interest $ 190,211 236,423 609,064 704,712 Decrease was due to decreases in the average balance of loans partially offset by an increase in the gross yield earned on loans. Investment interest 50,272 48,128 143,086 129,835 Includes income from unrestricted interest-earning deposits and investments, and restricted cash in asset-backed securitizations. Increase was due to an increase in the average balances and interest rates and, for the nine months ended September 30, 2024, an increase in interest earned on the Company's partial ownership in loan securitizations that are accounted for as held-to-maturity beneficial interest investments. Total interest income 240,483 284,551 752,150 834,547 Interest expense 168,328 207,159 539,367 639,756 Decrease was due to a decrease in the average balance of debt outstanding partially offset by an increase in cost of funds. In addition, the Company recognized a $5.6 million and $25.9 million non-cash expense during the third quarter of 2024 and the second quarter of 2023, respectively, as the result of writing off the remaining unamortized debt discount related to the redemption of certain asset-backed debt securities prior to their maturity. Net interest income 72,155 77,392 212,783 194,791 Less provision for loan losses 18,111 4,275 32,551 5,065 Represents the current period provision to reflect the lifetime expected credit losses related to the Company's loan portfolio. See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report for the factors impacting provision for loan losses for the periods presented. Net interest income after provision for loan losses 54,044 73,117 180,232 189,726 Other income (expense): LSS revenue 108,175 127,892 344,428 389,138 See LSS operating segment - results of operations. ETSP revenue 118,179 113,796 378,627 357,258 See ETSP operating segment - results of operations. Solar construction revenue 19,321 6,301 42,741 19,687 Represents revenue earned from GRNE Solar providing solar construction services, including design and installations of residential and commercial solar systems. In April 2024, the Company announced a change in its solar EPC operations to focus exclusively on the commercial solar market and will discontinue its residential solar operations. As a result, residential revenue will continue to decline in future periods as existing customer contracts are completed. Other, net 32,325 (3,062) 78,057 (27,297) See table below for the components of "other, net." Loss on sale of loans (107) (1,022) (1,685) (16,776) The Company recognized losses from selling portfolios of loans. See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Impairment expense and provision for beneficial interests (29,052) (4,974) (36,865) (4,974) The Company established a provision of $29.0 million and $5.9 million for beneficial interest in loan securitization investments during the third quarter and second quarter of 2024, respectively. The Company also recognized a non-cash impairment charge of $1.9 million during the second quarter of 2024 related to the discontinuation of residential solar operations. During the third quarter of 2023, the Company recognized an expense of $5.0 million related to operating lease assets and associated leasehold improvements. See note 9 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Derivative settlements, net 1,640 817 5,046 24,219 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. The majority of derivative settlements received in the periods presented was from the Company's derivatives used to hedge loans earning fixed rate floor income. To minimize the Company's exposure to market volatility and increase liquidity, the Company terminated this derivative portfolio ($2.8 billion notional amount) on March 15, 2023. Subsequent to terminating these derivatives, during the second and fourth quarters of 2023, the Company entered into a total of $400 million notional amount of derivatives to hedge loans earning fixed rate floor income and other loans and investments in which the Company receives a fixed rate. See AGM operating segment - results of operations for additional information. 42 Derivative market value adjustments, net (13,165) 3,140 (3,668) (32,266) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments during the 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. To minimize the Company's exposure to market volatility and increase liquidity, the Company terminated this derivative portfolio ($2.8 billion notional amount) 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 237,316 242,888 806,681 708,989 Cost of services: Cost to provide education technology services and payments 45,273 43,694 134,106 131,804 Represents direct costs to provide payment processing and instructional services in ETSP. See ETSP operating segment - results of operations. Cost to provide solar construction services 26,815 7,783 49,115 25,204 Represents direct costs to provide solar construction services. Since the acquisition of GRNE Solar in 2022, it has incurred low and, in some cases, negative margins on certain projects. During the third quarter of 2024, the Company recorded an expense of $8.8 million related to estimated losses on legacy construction projects. The Company has a handful of remaining legacy construction contracts to complete, down from over 30 at the beginning of 2024. Due to the complexity and long-term nature of existing construction contracts, the Company may continue to incur low and/or negative margins to complete these projects. Total cost of services 72,088 51,477 183,221 157,008 Operating expenses: Salaries and benefits 146,192 141,204 429,701 438,620 Increase for the quarterly period was primarily due to the recognition of $4.1 million restructuring charge related to staff reductions announced in June 2024 in LSS. Decrease for the nine month period was primarily due to staff reductions in the first half of 2023 in LSS 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 contract, partially offset by an increase in ETSP due to annual merit pay increases and an increase in headcount to support the growth of the customer base and the investment in the development of new technologies. Depreciation and amortization 13,661 21,835 45,572 57,114 Includes depreciation of property and equipment and the amortization of intangibles from prior business acquisitions. Other expenses 61,642 51,370 178,278 138,154 Includes expenses such as postage and distribution, consulting and professional fees, occupancy, communications, reinsurance loss reserve and acquisitions costs, and certain information technology-related costs. Increase was driven by an increase in NFS due to reinsurance loss reserve and acquisition costs as a result of growth in reinsurance policies and in LSS due to additional postage and communication costs as a result of borrowers returning to repayment on September 1, 2023. Total operating expenses 221,495 214,409 653,551 633,888 (Loss) income before income taxes (2,223) 50,119 150,141 107,819 Income tax (benefit) expense (282) 10,512 37,653 28,785 The year to date effective tax rate was 23.75% for the nine months ended September 30, 2024 compared with 22.75% for the same period in 2023. Net (loss) income (1,941) 39,607 112,488 79,034 Net loss attributable to noncontrolling interests 4,329 4,747 8,398 18,705 Represents the net income/loss attributable to the holders of noncontrolling membership interests. The majority is attributed to noncontrolling membership interests in the Company's Nelnet Renewable Energy operating segment. Net income attributable to Nelnet, Inc. $ 2,388 44,354 120,886 97,739 Additional information: See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP financial information. Net income attributable to Nelnet, Inc. $ 2,388 44,354 120,886 97,739 Derivative market value adjustments, net 13,165 (3,140) 3,668 32,266 Tax effect (3,160) 754 (880) (7,744) Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 12,393 41,968 123,674 122,261 43 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, 2024 2023 2024 2023 Additional information Reinsurance premiums $ 16,619 6,287 44,250 10,638 See NFS division - results of operations - NFS other operating segments. Investment activity, net (a) 8,529 (1,003) 7,447 (8,155) See note (b) below for additional information. ALLO preferred return 4,783 2,299 11,353 6,822 See Corporate - results of operations. Borrower late fee income 1,741 2,220 7,460 6,635 See NFS division - results of operations - AGM operating segment. Administration/sponsor fee income 1,420 1,712 4,448 5,180 See NFS division - results of operations - AGM operating segment. Investment advisory services (WRCM) 1,394 1,633 4,427 4,884 See NFS division - results of operations - NFS other operating segments. Loss from ALLO voting membership interest investment (a) — (17,293) (10,693) (49,676) See Corporate - results of operations. Loss from solar investments, net (a) (11,238) (6,456) (11,068) (19,485) See Corporate - results of operations. Other 9,077 7,539 20,433 15,860 Other, net $ 32,325 (3,062) 78,057 (27,297) (a) The Company anticipates fluctuations in future periodic earnings resulting from investment purchases, sales, and valuation adjustments. (b) Investment activity by operating segment and investment type follows: Real Estate Venture Capital and Funds Equity / Bonds Total Real Estate Venture Capital and Funds Equity / Bonds Total Three months ended September 30, 2024 2023 NFS - AGM $ — 1,778 — 1,778 — (1,883) — (1,883) NFS - Nelnet Bank — 219 589 808 — (16) 565 549 NFS - Other Operating Segments 2,116 — 1,349 3,465 75 — 885 960 Corporate — 2,478 — 2,478 — (629) — (629) $ 2,116 4,475 1,938 8,529 75 (2,528) 1,450 (1,003) Nine months ended September 30, 2024 2023 NFS - AGM $ — (600) — (600) — (4,532) (476) (5,008) NFS - Nelnet Bank — 31 1,874 1,905 — (288) 1,651 1,363 NFS - Other Operating Segments (1,510) — 1,872 362 502 — (2,732) (2,230) Corporate — 5,780 — 5,780 — (2,280) — (2,280) $ (1,510) 5,211 3,746 7,447 502 (7,100) (1,557) (8,155) 44 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Servicing Volumes As of September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Servicing volume (dollars in millions): Government $ 492,142 $ 489,298 495,409 494,691 500,554 519,308 537,291 545,373 FFELP 13,745 14,576 15,783 17,462 18,400 19,021 19,815 20,226 Private and consumer 20,666 19,876 21,015 20,493 20,394 20,805 21,484 21,866 Total $ 526,553 $ 523,750 532,207 532,646 539,348 559,134 578,590 587,465 Number of servicing borrowers: Government 14,114,468 14,096,152 14,328,013 14,503,057 14,543,382 14,898,901 15,518,751 15,777,328 FFELP 574,979 610,745 656,814 725,866 764,660 788,686 819,791 829,939 Private and consumer 851,747 829,072 882,256 894,703 896,613 899,095 925,861 951,866 Total 15,541,194 15,535,969 15,867,083 16,123,626 16,204,655 16,586,682 17,264,403 17,559,133 Number of remote hosted borrowers: 662,075 133,681 65,295 70,580 103,396 716,908 5,048,324 6,135,760 Government Loan Servicing Nelnet Servicing earns loan servicing revenue from a servicing contract with the Department. The Company's legacy student loan servicing contract with the Department was scheduled to expire on December 14, 2023. In April 2023, Nelnet Servicing received a contract award from the Department, pursuant to which it 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 replaced the legacy Department student loan servicing contract. The New Government Servicing Contract became 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 existing borrowers was allocated by the Department to Nelnet Servicing and four other third-party servicers that were awarded a USDS contract. 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. Servicing under the New Government Servicing Contract went live on April 1, 2024 and the Company recognized revenue in accordance with this new contract beginning in the second quarter of 2024. The Company earned revenue for servicing borrowers under the legacy servicing contract with the Department through March 31, 2024. The New Government Servicing Contract has multiple revenue components with tiered pricing based on borrower volume, while revenue earned under the legacy servicing contract was primarily based on borrower status. Assuming borrower volume remains consistent under the New Government Servicing Contract, the Company expects revenue earned on a per borrower blended basis will decrease under the New Government Servicing Contract versus the legacy contract. However, consistent with the legacy contract, the Company expects to earn additional revenue from the Department under the New Government Servicing Contract for change requests and other support services. In addition, the Company has executed an agreement with a third-party servicer awarded a USDS contract to license its servicing software to such entity. The Company began earning remote hosted servicing revenue from this new customer during 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 this servicer. Department of Education Debt Relief In August 2022, the Department announced a broad-based student debt relief plan that would have provided up to $20,000 in one-time debt relief to income-qualified recipients with Department held student loans. On June 30, 2023, the Supreme Court ruled that the Department was prohibited from implementing this plan. After the invalidation of this broad-based relief plan, the Department announced plans to enter into a negotiated rulemaking process to achieve debt relief for federal student loan borrowers using provisions of the Higher Education Act (HEA). The Company cannot predict the timing, nature, or ultimate outcome of any student debt relief program as a result of the negotiated rulemaking process. Revenue earned under the New 45 Government Servicing Contract will decrease in future periods if the Department successfully implements its debt relief plan and/or if the Department initiates additional loan forgiveness or cancellation programs in the future. Private Education Loan Servicing On July 17, 2024, Discover Financial Services (Discover) announced the sale of its approximately $10 billion private education student loan portfolio, representing approximately 400,000 borrowers, to partnerships managed by two global investment firms, with Firstmark Services, a division of the Company, assuming responsibility for servicing the portfolio upon the sale. The conversion of these loans to the Company’s platform began in September 2024 with the majority of loan conversions anticipated to be completed in the fourth quarter of 2024. Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Additional information Interest income $ 894 1,098 4,046 3,193 Decrease in the three months ended September 30, 2024 compared with the same period in 2023 was due to decrease in average balance of loan repayment funds held in custody for lenders. Increase in the nine months ended September 30, 2024 compared with the same period in 2023 was due to higher interest rates partially offset by a decrease in average balance of loan repayment funds held in custody for lenders. Loan servicing and systems revenue 108,175 127,892 344,428 389,138 See table below for additional information. Intersegment servicing revenue 5,428 6,944 18,419 21,980 Represents revenue earned by LSS from servicing loans for AGM and Nelnet Bank. Decrease 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 690 687 2,085 1,900 Represents revenue earned from providing administrative support services. Impairment expense — (296) — (296) The Company recorded an impairment charge in the third quarter of 2023 related to certain facilities, as a result of the Company's on-going evaluation of the use of office space when a large number of associates continued to work remotely. Total other income 114,293 135,227 364,932 412,722 Salaries and benefits 76,820 73,310 224,172 234,012 Decrease in the nine months ended September 30, 2024 compared with the same period in 2023 was due to the Company being fully staffed at the beginning of 2023 with contact center operations and support associates as the Company prepared for expiration of the federal student loan payment pause under the CARES Act. In the first half 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 LSS's Department servicing contract. In June 2024, the Company announced an additional reduction in headcount after the completion of the transfer of direct loan servicing volume to one platform and the required servicing platform enhancements for the New Government Servicing Contract. Approximately 220 associates were notified their positions were being eliminated. The Company estimates incurring a charge of $7.1 million related to these staff reductions, of which $2.1 million and $4.1 million was recognized during the second and third quarters of 2024, respectively. The remaining expense will be recognized during the fourth quarter of 2024. Increase in the three months ended September 30, 2024 compared with the same period in 2023 was due to the recognition of the $4.1 million restructure charge related to staff reductions announced in June 2024. Depreciation and amortization 4,854 5,023 15,304 14,400 Other expenses 19,663 15,629 59,861 42,760 Increase was due to additional postage and communication costs due to borrowers returning to repayment on September 1, 2023, and an increase in computer services and subscription costs. Intersegment expenses 18,399 17,894 55,955 58,030 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 119,736 111,856 355,292 349,202 (Loss) income before income taxes (4,549) 24,469 13,686 66,713 Income tax benefit (expense) 1,092 (5,872) (3,284) (16,011) Represents income tax expense/benefit at an effective tax rate of 24%. Net (loss) income $ (3,457) 18,597 10,402 50,702 46 Before tax operating margin (4.0) % 18.1 % 3.8 % 16.2 % 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. 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 decreased in 2024 compared with 2023 due primarily to a decrease in loan servicing and systems revenue as described in the table below, while operating expenses increased period over period. Operating expenses have been elevated due to costs incurred for the completion of the transfer of direct loan servicing volume to one platform, making platform enhancements for the new student loan servicing contract with the Department, preparation of the conversion of the Discover portfolio, and an increase in postage and communication costs due to borrowers returning to repayment on September 1, 2023. The Company expects before tax operating margin to continue to be lower than historical prior year results for the remainder of 2024 until the full impact of its cost-saving measures take effect and revenue is generated from servicing the entire Discover portfolio after its full conversion to the Company's platform during the fourth quarter of 2024. Loan servicing and systems revenue The following table presents disaggregated revenue by service offering for each reporting period. Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Additional information Government loan servicing $ 85,215 100,154 277,705 304,769 Represents revenue from the Company's servicing contracts with the Department. The Company recognized revenue under the New Government Servicing Contract beginning April 1, 2024. Decrease in the three months ended September 30, 2024 compared with the same period in 2023 was due to lower revenue earned on a per borrower blended basis under the new contract and a decrease in the number of borrowers serviced. Decrease in the nine months ended September 30, 2024 compared with the same period in 2023 was also due to the legacy servicing contract reduction of the monthly fee earned per borrower on certain borrower statuses by $0.19 effective April 1, 2023 and a decrease of borrowers serviced due to the Department transferring one million of the Company's existing borrowers to another third-party servicer during the second and third quarters of 2023. These decreases were partially offset by an increase in the average revenue earned on a per borrower blended basis as a result of borrowers moving to a repayment status on September 1, 2023. Private education and consumer loan servicing 13,057 12,330 38,634 36,556 Increase in the three months ended September 30, 2024 compared with the same period in 2023 was due to an increase in backup servicing volume and conversion revenue recognized from the Discover portfolio. Increase in the nine months ended September 30, 2024 compared with the same period in 2023 was also due to rate increases based on contractual consumer price index changes. FFELP loan servicing 2,945 3,304 9,570 10,226 Represents revenue from servicing third-party customers' FFELP portfolios. Over time, FFELP servicing revenue will decrease as third-party customers' FFELP portfolios pay off. Software services 5,197 9,416 14,617 25,076 Represents revenue from providing remote hosted servicing software to certain Department and other servicers and providing diversified technology services. Decrease was primarily due to (i) the transfer of all Department remote hosted borrowers to other third-party servicers throughout 2023 under the Department's legacy servicing contracts and (ii) 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. This decrease was partially offset by the Company beginning to recognize revenue in the second quarter of 2024 from a new remote hosted servicing customer awarded a USDS contract. Outsourced services 1,761 2,688 3,902 12,511 Represents revenue from providing contact center and back office operational outsourcing services. Decrease was due to the contracts for support provided to certain Department servicers expiring in July 2023. Loan servicing and systems revenue $ 108,175 127,892 344,428 389,138 47 EDUCATION TECHNOLOGY SERVICES AND PAYMENTS OPERATING SEGMENT – RESULTS OF OPERATIONS As discussed further in the Company's 2023 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, 2024 2023 2024 2023 Additional information Interest income $ 9,734 8,934 23,315 20,237 Represents interest income on tuition funds held in custody for schools. Increase was due to higher balances and interest rates. Education technology services and payments revenue 118,179 113,796 378,627 357,258 See table below for additional information. Intersegment revenue 60 77 166 198 Total other income 118,239 113,873 378,793 357,456 Cost of services 45,273 43,694 134,106 131,804 See table below for additional information. Salaries and benefits 41,053 39,776 121,956 116,040 Increase in the three months ended September 30, 2024 compared with the same period in 2023 was due to annual merit pay increases. Increase in the nine months ended September 30, 2024 compared with the same period in 2023 was also due to an increase in headcount to support the growth of the customer base and the investment in the development of new technologies. Depreciation and amortization 2,616 3,030 8,012 8,424 Other expenses 7,614 8,309 23,772 26,063 Decrease was due to a decrease in consulting and professional services resulting from reduced outsourced work and an improvement in allowance for doubtful accounts period over period. Decrease was partially offset by an increase in technology services. Intersegment expenses, net 4,604 5,875 14,216 17,559 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 55,887 56,990 167,956 168,086 Income before income taxes 26,813 22,123 100,046 77,803 Income tax expense (6,450) (5,307) (24,035) (18,700) Represents income tax expense at an effective tax rate of 24%. Net income 20,363 16,816 76,011 59,103 Net loss (income) attributable to noncontrolling interests 54 (6) 101 113 Net income $ 20,417 16,810 76,112 59,216 48 Education technology services and payments revenue The following table presents disaggregated revenue by service offering and before tax operating margin for each reporting period. Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Additional information Tuition payment plan services $ 31,659 30,223 104,702 95,235 Increase 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 55,813 50,848 137,926 126,716 Increase 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 services 30,080 31,793 133,306 132,796 Decrease in the three months ended September 30, 2024 compared with the same period in 2023 was due to a decrease in FACTS learning management services revenue as a result of the wind down of economic aid provided to private schools in response to the COVID 19 pandemic. Learning management instructional services revenue provided to private schools has been funded by the CARES Act and the Emergency Assistance to Non-Public Schools (EANS) programs. The EANS I program funding ended on September 30, 2023 and EANS II program funding ended on September 30, 2024. Future instructional services revenue will be adversely impacted compared to recent historical results as a result of the EANS programs ending. Revenue earned under the EANS programs was $2.4 million and $21.4 million for the three and nine month ended September 30, 2024 compared with $8.1 million and $40.3 million for the same periods in 2023, respectively. The decrease in FACTS learning management services revenue as a result of the decrease in EANS revenue was partially offset by an increase in non-EANS professional development and instructional services provided to both new and existing customers. Increase in the nine months ended September 30, 2024 compared with the same period in 2023 was due to an increase in revenue from the Company’s school information system software and application and enrollment services. This increase was partially offset by a decrease in FACTS learning management services revenue as described above. Other 627 932 2,693 2,511 Education technology services and payments revenue 118,179 113,796 378,627 357,258 Cost of services 45,273 43,694 134,106 131,804 Represents direct costs to provide 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 $ 72,906 70,102 244,521 225,454 GAAP before tax operating margin 36.8 % 31.6 % 40.9 % 34.5 % 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 ETSP segment is calculated as income before income taxes less net 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, increased due to increased net revenue while maintaining a consistent cost structure. Net interest income (13.4) (12.7) (9.5) (9.0) Non-GAAP before tax operating margin, excluding net interest income 23.4 % 18.9 % 31.4 % 25.5 % 49 NELNET FINANCIAL SERVICES DIVISION - RESULTS OF OPERATIONS Asset Generation and Management Operating Segment Loan Portfolio As of September 30, 2024, the AGM operating segment had a $9.5 billion loan portfolio, consisting primarily of federally insured loans. For a summary of the Company’s loan portfolio as of September 30, 2024 and December 31, 2023, see note 3 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, 2024 2023 2024 2023 Beginning balance $ 9,910,617 13,239,125 12,049,462 14,169,771 Loan acquisitions: Federally insured student loans 104,914 2,880 104,914 518,471 Private education loans — 77,365 — 77,365 Consumer and other loans 129,202 29,413 405,211 340,091 Total loan acquisitions 234,116 109,658 510,125 935,927 Repayments, claims, capitalized interest, participations, and other, net (386,204) (322,013) (1,112,682) (1,175,320) Loans lost to external parties (207,794) (229,342) (1,562,283) (712,772) Loans sold (1,146) (61,807) (335,033) (481,985) Ending balance $ 9,549,589 12,735,621 9,549,589 12,735,621 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, 2024, the Company’s ownership correlates to approximately $1.99 billion of loans included in these securitizations. The loans held in these securitizations are not included in the above table. Investment interest income earned by the Company from the beneficial interest in loan securitizations is included in "investment interest" on the Company's consolidated statements of income and is not a component of the Company's loan interest income. 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 multiple extensions 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. In August 2022, the Department announced a broad-based student debt relief plan that would have provided up to $20,000 in one-time debt relief to income-qualified recipients with Department held student loans. On June 30, 2023, the Supreme Court ruled that the Department was prohibited from implementing this plan. After the invalidation of this broad-based relief plan, the Department announced plans to enter into a negotiated rulemaking process to achieve debt relief for federal student loan borrowers using provisions of the Higher Education Act (HEA). The Department released proposed regulatory text prior to holding its statutorily-required negotiated rulemaking sessions. Notably, the Department proposed forgiveness for certain groups of borrowers with privately-held FFELP loans without consolidation into the Federal Direct Loan Program as a prerequisite requirement for such forgiveness. Publicly available negotiated rulemaking sessions occurred in the fourth quarter of 2023 and the first quarter of 2024, including a session to discuss broad forgiveness for borrowers “experiencing financial hardship” (financial hardship). The Department published draft regulations for public comment in April 2024, including regulations that would grant automatic discharge for all federal student loans, including privately-held FFELP loans, older than 20 or 25 years. Final publication and effective date for all pending forgiveness regulations pursuant to the HEA are expected in late 2024. The April 2024 draft publication did not include financial hardship regulations to provide forgiveness for borrowers (including borrowers with privately-held FFELP loans); however, the Biden-Harris Administration released the text of the financial hardship Notice of Proposed Rulemaking on October 25, 2024. The proposed rule is expected to be included in the Code of Federal Regulations in the coming weeks with a 30-day comment period. Publication of the final rule will likely 50 depend on the outcome of the November 2024 election. As of the date of this filing, the Biden-Harris Administration is preemptively prohibited from implementing any final rules born of the April 2024 draft publication due to an injunction ordered by the 8 th Circuit Court of Appeals. In addition, during 2023, the Department issued final regulations on the Saving on a Valuable Education (SAVE) income-driven repayment (IDR) plan. The SAVE plan makes significant changes to IDR to lower monthly payment amounts, subsidize interest, and accelerate time to forgiveness for some borrowers. FFELP borrowers can access the new income-driven repayment changes by consolidating their loans into the Federal Direct Loan Program. The benefits of the SAVE plan are not conferred exclusively on a go-forward basis, as has been the case with previous IDR rulemaking, meaning borrowers who consolidate into the Federal Direct Loan Program receive credit toward forgiveness for months in repayment prior to consolidation. The new income-driven repayment regulations were effective July 1, 2024; however, the Biden-Harris Administration announced implementation for some features starting July 30, 2023 and SAVE forgiveness starting February 2024. Two groups of states sued to block implementation of the SAVE program. As of the date of this filing, SAVE is not operational due to an injunction ordered by the 8th Circuit Court of Appeals. In response to the injunction, the Biden-Harris Administration placed approximately 8 million borrowers enrolled in the SAVE program into administrative forbearance. During the forbearance period, borrowers will not have to make student loan payments, and no interest will accrue, however, the months in forbearance will not count toward any forgiveness. The Biden-Harris Administration announced a six-month extension of the SAVE forbearance in late October 2024. The proposed forgiveness regulations and implementation of the SAVE IDR plan regulations have increased, and may continue to increase, consolidation and prepayment activity as FFELP borrowers (i) consolidate their loans into the Federal Direct Loan Program in order to be eligible for potential debt relief for Department borrowers and the SAVE plan and (ii) begin receiving automatic forgiveness for loans older than 20 or 25 years. Prepayments could significantly increase if the federal government and/or the Department initiate servicing contract modifications that impede the standing of States to challenge administrative actions, additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs. Allowance for Loan Losses, Loan Delinquencies, and Loan Charge-offs For a summary of the allowance as a percentage of the ending balance and loan status and delinquency amounts for each of AGM's loan portfolios as of September 30, 2024 and December 31, 2023; 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, 2024 and 2023, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 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 loan interest income, including settlements on derivatives" below, divided by the average balance of loans or debt outstanding. Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Variable loan yield, gross 8.16 % 7.70 % 8.10 % 7.51 % Consolidation rebate fees (0.80) (0.80) (0.80) (0.80) Premium and deferred origination costs amortization, net of discount accretion (0.02) 0.06 0.04 0.05 Variable loan yield, net 7.34 6.96 7.34 6.76 Loan cost of funds - interest expense (a) (6.44) (6.14) (6.48) (5.86) Loan cost of funds - derivative settlements (b) (c) 0.01 0.01 0.01 0.01 Variable loan spread 0.91 0.83 0.87 0.91 Fixed rate floor income, gross 0.01 0.01 0.01 0.02 Fixed rate floor income - derivative settlements (b) (d) 0.05 0.01 0.04 0.23 Fixed rate floor income, net of settlements on derivatives 0.06 0.02 0.05 0.25 Core loan spread 0.97 % 0.85 % 0.92 % 1.16 % Average balance of AGM's loans $ 9,792,095 13,157,152 10,612,686 13,588,427 Average balance of AGM's debt outstanding 9,296,236 12,527,771 10,280,527 12,964,890 51 (a) The Company recognized $5.6 million and $25.9 million in non-cash interest expense during the third quarter of 2024 and the second quarter of 2023, respectively, as a result of writing off the remaining unamortized debt discount related to the redemption of certain asset-backed debt securities prior to their maturity. This non-cash expense was excluded from the respective periods in the table above. (b) Derivative settlements represent the cash paid or received during the respective 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 5 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 2024 and 2023 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 5 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, 2024 2023 2024 2023 Core loan spread 0.97 % 0.85 % 0.92 % 1.16 % Derivative settlements (1:3 basis swaps) (0.01) (0.01) (0.01) (0.01) Derivative settlements (fixed rate floor income) (0.05) (0.01) (0.04) (0.23) Loan spread 0.91 % 0.83 % 0.87 % 0.92 % (c) Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps. (d) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps. 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 occurring either monthly or quarterly. This also results in student loan spread decreasing in the short term in a decreasing interest rate environment. 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, 2024 2023 2024 2023 Fixed rate floor income, gross $ 225 450 563 2,016 Derivative settlements (a) 1,200 235 3,583 22,760 Fixed rate floor income, net $ 1,425 685 4,146 24,776 Fixed rate floor income contribution to spread, net 0.06 % 0.02 % 0.05 % 0.25 % (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, 2024 compared with the same periods in 2023 was due to higher interest rates in 2024 compared with 2023. 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 and increase liquidity, 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 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 2023 settlements. Subsequent to terminating these derivatives, during the second and fourth quarters of 2023, the Company entered into a total of 52 $400.0 million notional amount of derivatives to hedge loans earning fixed rate floor income and other loans and investments in which the Company receives a fixed rate. The increase in net derivative settlements received by the Company in the three months ended September 30, 2024, compared with the same period in 2023, was due to an increase in the notional amount of derivatives outstanding. The decrease in net derivative settlements received by the Company during the nine months ended September 30, 2024, compared with the same period in 2023, was due to a decrease in the notional amount of derivatives outstanding and less favorable terms on the $400.0 million of notional derivatives entered into in 2023 compared with the $2.8 billion notional derivatives that were terminated due to an increase in interest rates from when the terminated derivatives were initially executed. Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Additional information Interest income: Loan interest $ 180,571 230,816 583,907 689,633 See table below for additional analysis. Investment interest 18,970 18,062 54,513 47,726 Increase in the three and nine months ended September 30, 2024 compared with the same periods in 2023 was due to an increase of interest earned on restricted cash due to higher balances and interest rates. Increase in the nine months ended September 30, 2024 compared with the same period in 2023 was also due to an increase of interest earned on the Company's beneficial interest investments. Total interest income 199,541 248,878 638,420 737,359 Loan interest expense 156,050 194,098 504,509 594,764 See table below for additional analysis. Intercompany interest expense 5,092 3,295 19,169 24,141 Represents interest paid by AGM to Nelnet, Inc. (parent company) related to (i) internal borrowings to fund equity advances on certain AGM debt facilities; and (ii) AGM issued bonds held by Nelnet, Inc. Increase in the three months ended September 30, 2024 compared with the same period in 2023 was due to an increase in interest rates and an increase in the weighted average balance of outstanding AGM issued bonds held by Nelnet, Inc. Decrease for the nine months ended September 30, 2024 compared with the same period in 2023 was due to a decrease in the weighted average balance of outstanding AGM issued bonds held by Nelnet, Inc., partially offset by an increase in interest rates. Intercompany interest is eliminated for consolidated financial reporting purposes. Net interest income 38,399 51,485 114,742 118,454 Less provision (negative provision) for loan losses 11,968 2,348 14,199 (772) See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report for factors impacting provision (negative provision) for loan losses for the periods presented. Net interest income after provision for loan losses 26,431 49,137 100,543 119,226 Other income, net 4,918 2,776 11,239 6,939 Represents primarily borrower late fees, income from providing administration activities for third parties, sponsor fee income, and income/losses from AGM's investment in joint ventures. See "Overview - Consolidated Results of Operations" for further detail included in other income. Loss on sale of loans (107) (1,022) (1,685) (16,776) The Company recognized losses from selling portfolios of loans. See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Provision for beneficial interests (28,952) — (34,863) — During the second and third quarters of 2024, the Company recorded an allowance for credit losses (and related provision expense) related to the Company's beneficial interest in certain loan securitizations. See note 6 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Derivative settlements, net 1,359 621 4,356 23,940 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. The decrease in net derivative settlements received by the Company for the nine months ended September 30, 2024 compared with the same period in 2023 was due to the termination of the floor income interest rate swaps ($2.8 billion notional amount) in March 2023. See above under "Loan Spread Analysis" for further information. 53 Derivative market value adjustments, net (9,518) 1,192 (2,875) (35,323) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments during the 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. To minimize the Company's exposure to market volatility and increase liquidity, AGM terminated its portfolio of floor income interest rate swaps ($2.8 billion notional amount) in March 2023. As such, the Company expects the derivative market value adjustments in future periods will be less substantial. See above under "Loan Spread Analysis" for further information. Total other income, net (32,300) 3,567 (23,828) (21,220) Salaries and benefits 1,220 1,242 3,529 3,093 Increase in the nine months ended September 30, 2024 compared with the same period in 2023 was due to additional headcount as the Company actively expands into new asset loan classes. Other expenses 2,775 2,952 9,985 12,083 Represents primarily servicing fees paid to third parties. Decrease in servicing fees was due to the amortization of the FFELP student loan portfolio. Intersegment expenses 6,482 7,948 21,491 24,789 Represents fees paid to LSS for the servicing of the majority of AGM’s loans. 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. Decrease was due to a decrease in servicing fees due to the amortization of the FFELP student loan portfolio serviced by LSS. Total operating expenses 10,477 12,142 35,005 39,965 (Loss) income before income taxes (16,346) 40,562 41,710 58,041 Income tax benefit (expense) 3,923 (9,735) (10,010) (13,930) Represents income tax expense at an effective tax rate of 24%. Net (loss) income $ (12,423) 30,827 31,700 44,111 Additional information: GAAP net (loss) income $ (12,423) 30,827 31,700 44,111 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP financial information. Derivative market value adjustments, net 9,518 (1,192) 2,875 35,323 Tax effect (2,284) 286 (690) (8,478) Non-GAAP net (loss) income, excluding derivative market value adjustments $ (5,189) 29,921 33,885 70,956 54 Net loan interest income, including settlements on derivatives The following table summarizes the components of "loan interest," "loan interest expense" and "derivative settlements, net." Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Additional information Variable interest income, gross $ 200,528 254,569 643,714 763,933 Decrease was due to a decrease in the average balance of loans partially offset by an increase in the gross yield earned on loans. Consolidation rebate fees (19,687) (26,143) (63,870) (81,753) Decrease was due to a decrease in the average consolidation loan balance. Premium and deferred origination costs amortization, net of discount accretion (495) 1,940 3,500 5,437 Net premium amortization in the three months ended September 30, 2024 was due to consumer loans purchased at a premium during the third quarter of 2024. Net discount accretion for the other periods presented was due to the Company's purchases of loans at a net discount over the last several years. Variable interest income, net 180,346 230,366 583,344 687,617 Interest on bonds and notes payable (156,050) (194,098) (504,509) (594,764) Decrease was due to a decrease in the average balance of debt outstanding, partially offset by an increase in cost of funds. In addition, the Company recognized a $5.6 million and $25.9 million non-cash expense during the third quarter of 2024 and second quarter of 2023, respectively, as the result of writing off the remaining unamortized debt discount related to the redemption of certain asset-backed debt securities prior to their maturity. Derivative settlements, net (a) 159 386 773 1,180 Represents net derivative settlements received related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives 24,455 36,654 79,608 94,033 Fixed rate floor income, gross 225 450 563 2,016 Decrease was due to higher interest rates. Derivative settlements, net (a) 1,200 235 3,583 22,760 Represents net derivative settlements received related to the Company's floor income interest rate swaps. Fixed rate floor income, net of settlements on derivatives 1,425 685 4,146 24,776 Net loan interest income, including derivative settlements (core loan interest income) (a) $ 25,880 37,339 83,754 118,809 (a) Net loan interest income, including derivative settlements (core loan interest income) is a non-GAAP financial measure. 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 5 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 2024 and 2023 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 5 and in this table. 55 Nelnet Bank Operating Segment Loan Portfolio As of September 30, 2024, Nelnet Bank had a $559.9 million loan portfolio, consisting of $352.7 million of private education loans and $207.2 million of consumer and other loans. For a summary of the Company’s loan portfolio as of September 30, 2024 and December 31, 2023, see note 3 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 Nelnet Bank operating segment: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Beginning balance $ 542,351 444,488 432,872 419,795 Loan acquisitions and originations: Private education loans 10,843 19,756 28,948 41,341 Consumer and other loans 36,409 22,966 176,257 55,766 Total loan acquisitions and originations 47,252 42,722 205,205 97,107 Repayments (29,731) (18,382) (78,205) (47,957) Loans sold to AGM — (15) — (132) Ending balance $ 559,872 468,813 559,872 468,813 Subsequent to the end of the third quarter, on October 4, 2024, Nelnet Bank purchased a residual trust that included $133 million of private education loans, $7 million in cash and other assets, and $54 million of debt that finances the assets. Nelnet Bank used deposits to fund the approximately $74 million acquisition price. The trust will be consolidated as part of the bank's financial statements. 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 for each of Nelnet Bank's loan portfolios as of September 30, 2024 and December 31, 2023; 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, 2024 and 2023, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Deposits As of September 30, 2024, Nelnet Bank had $1.15 billion of deposits. All of Nelnet Bank’s deposits are interest-bearing and primarily consist of brokered certificates of deposit (CDs), retail and other savings deposits and CDs, and intercompany deposits. Retail and other savings deposits and CDs include deposits from Educational 529 College Savings and Health Savings plans, Short Term Federal Investment Trust (STFIT), commercial and consumer savings, and commercial, institutional, and consumer 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, 2024, Nelnet Bank’s deposits included $77.7 million from Nelnet, Inc. (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 deposits, and NBS custodial deposits consisting of tuition payments collected 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, (a) Nine months ended September 30, (a) 2024 2023 2024 2023 Balance Rate Balance Rate Balance Rate Balance Rate Average assets Federally insured student loans $ — — % $ 60,505 6.58 % $ — — % $ 62,531 6.29 % Private education loans 351,468 4.37 353,749 3.85 359,242 4.33 354,513 3.74 Consumer and other loans 198,337 11.58 36,031 12.91 149,414 12.07 23,064 12.92 Cash and investments 650,951 7.65 585,877 6.48 618,130 7.20 556,754 6.25 Total interest-earning assets 1,200,756 7.34 % 1,036,162 5.81 % 1,126,786 6.93 % 996,862 5.51 % Non-interest-earning assets 16,379 10,511 15,667 8,695 Total assets $ 1,217,135 $ 1,046,673 $ 1,142,453 $ 1,005,557 Average liabilities and equity Brokered deposits $ 247,726 1.95 % $ 204,050 1.38 % $ 229,698 1.74 % $ 204,535 1.38 % Intercompany deposits 168,639 4.71 184,829 4.92 158,628 4.80 173,929 4.78 Retail and other deposits 644,051 5.01 521,357 4.76 603,292 4.98 493,952 4.39 Total interest-bearing liabilities 1,060,416 4.25 % 910,236 4.04 % 991,618 4.20 % 872,416 3.76 % Non-interest-bearing liabilities 8,507 5,363 7,786 5,277 Equity 148,212 131,074 143,049 127,864 Total liabilities and equity $ 1,217,135 $ 1,046,673 $ 1,142,453 $ 1,005,557 (a) Calculated using average daily balances. 57 Summary and Comparison of Operating Results Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Additional information Interest income: Loan interest $ 9,639 5,608 25,157 15,079 Represents interest earned on loans. Increase was due to an increase in the balance of loans and interest rates. Investment interest 12,522 9,563 33,301 26,013 Represents interest earned on cash and investments. Increase was due to an increase of these balances and interest rates. Total interest income 22,161 15,171 58,458 41,092 Interest expense 11,606 9,456 31,872 24,841 Represents interest expense on deposits. Increase was due to an increase of deposits and interest rates. Net interest income 10,555 5,715 26,586 16,251 Provision for loan losses 6,143 1,927 18,352 5,837 Increase in provision for loan losses was due to the mix of loans and an increase in the notional amount of loans acquired and originated in 2024 compared with 2023. See note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Net interest income after provision for loan losses 4,412 3,788 8,234 10,414 Other income, net 841 565 1,991 1,395 Represents primarily net gains and income from investments. Derivative settlements, net 281 196 690 279 Nelnet Bank's use of derivatives is 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 settlements" represent the cash paid or received during the respective period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. For additional information on Nelnet Bank's derivative portfolio, see note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Derivative market value adjustments, net (3,647) 1,948 (793) 3,057 Total other income, net (2,525) 2,709 1,888 4,731 Salaries and benefits 2,973 2,520 8,491 6,881 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Increase was due to the overall growth of Nelnet Bank activities. Depreciation 343 259 944 315 Other expenses 2,570 1,290 5,765 3,696 Represents various expenses such as consulting and professional fees, Nelnet Bank director fees, occupancy, certain technology-related costs, insurance, and marketing. Increase was due to the overall growth of Nelnet Bank activities. Intersegment expenses 759 129 2,252 302 Represents fees paid to LSS for servicing certain of Nelnet Bank's loans. Intersegment expenses also include costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. The majority of shared service costs incurred by the Company to support Nelnet Bank were not allocated to Nelnet Bank through the bank’s de novo period which ended at the end of 2023. The shared service and support costs incurred by the Company related to Nelnet Bank and not allocated to Nelnet Bank were $1.6 million and $5.1 million for the three and nine months ended September 30, 2023, respectively. Total operating expenses 6,645 4,198 17,452 11,194 (Loss) income before income taxes (4,758) 2,299 (7,330) 3,951 Income tax benefit (expense) 1,143 (552) 1,800 (913) Represents income tax expense at an effective tax rate of 24.0% for the three months ended September 30, 2024 and 2023, respectively, and 24.6% and 23.1% for the nine months ended September 30, 2024 and 2023, respectively. Net (loss) income $ (3,615) 1,747 (5,530) 3,038 Additional information: Net (loss) income $ (3,615) 1,747 (5,530) 3,038 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional details about non-GAAP financial information. Derivative market value adjustments, net 3,647 (1,948) 793 (3,057) Tax effect (875) 468 (190) 734 Net (loss) income, excluding derivative market value adjustments $ (843) 267 (4,927) 715 58 NFS Other Operating Segments The following table summarizes the operating results of other operating segments included in NFS that are not reportable. Income taxes are allocated based on 24% of income (loss) before taxes for each activity. Summary and Comparison of Operating Results WRCM (a) Nelnet Insurance Services (b) Real estate investments (c) Investment securities (d) Total Three months ended September 30, 2024 Investment interest $ 4 1,354 95 10,962 12,415 Interest expense — (463) — (1,782) (2,245) Net interest income 4 891 95 9,180 10,170 Other income, net 1,399 18,046 2,116 809 22,370 Salaries and benefits (54) (138) (206) — (398) Other expenses (69) (17,803) (31) (1) (17,904) Intersegment expenses, net (4) (52) (109) (35) (200) Income (loss) before income taxes 1,276 944 1,865 9,953 14,038 Income tax (expense) benefit (276) (227) (450) (2,388) (3,341) Net loss (income) attributable to noncontrolling interests (128) — 11 — (117) Net income (loss) $ 872 717 1,426 7,565 10,580 Three months ended September 30, 2023 Investment interest $ 3 411 141 12,466 13,021 Interest expense — — — (5,661) (5,661) Net interest income 3 411 141 6,805 7,360 Other income, net 1,639 7,277 75 870 9,861 Salaries and benefits (54) (89) (145) — (288) Other expenses (83) (7,441) 4 (2) (7,522) Intersegment expenses, net (3) (82) (106) — (191) Income (loss) before income taxes 1,502 76 (31) 7,673 9,220 Income tax (expense) benefit (325) (18) 7 (1,841) (2,177) Net loss (income) attributable to noncontrolling interests (150) — 1 — (149) Net income (loss) $ 1,027 58 (23) 5,832 6,894 Nine months ended September 30, 2024 Investment interest $ 11 3,693 380 39,826 43,910 Interest expense — (1,052) — (6,216) (7,268) Net interest income 11 2,641 380 33,610 36,642 Other income, net 4,408 47,023 (1,510) 1,092 51,013 Salaries and benefits (161) (375) (593) — (1,129) Other expenses (214) (41,166) (152) (4) (41,536) Intersegment expenses, net (11) (198) (348) (108) (665) Income (loss) before income taxes 4,033 7,925 (2,223) 34,590 44,325 Income tax (expense) benefit (871) (1,902) 525 (8,302) (10,550) Net loss (income) attributable to noncontrolling interests (403) — 37 — (366) Net income (loss) $ 2,759 6,023 (1,661) 26,288 33,409 Nine months ended September 30, 2023 Investment interest $ 8 1,101 423 52,949 54,481 Interest expense — — — (24,860) (24,860) Net interest income 8 1,101 423 28,089 29,621 Other income, net 4,880 12,589 502 (2,884) 15,087 Salaries and benefits (162) (274) (281) — (717) Other expenses (246) (11,929) (43) (5) (12,223) Intersegment expenses, net (9) (144) (294) — (447) Income (loss) before income taxes 4,471 1,343 307 25,200 31,321 Income tax (expense) benefit (966) (323) (81) (6,047) (7,417) Net loss (income) attributable to noncontrolling interests (447) — 29 — (418) Net income (loss) $ 3,058 1,020 255 19,153 23,486 59 (a) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC (WRCM), the Company's SEC-registered investment advisor subsidiary, under various arrangements. WRCM earned management and performance fees of $1.4 million and $1.6 million for the three months ended September 30, 2024 and 2023, respectively, and $4.4 million and $4.9 million for the nine months ended September 30, 2024 and 2023, respectively. Fees earned by WRCM are included in "other income, net" in the table above. (b) Represents the operating results of the Company’s reinsurance treaties on property and casualty policies and the Company’s Nebraska chartered life and health company, which is in run-off mode and reinsures a decreasing term life insurance product distributed to FACTS. The following table presents net premiums, which are included in "other income, net" in the table above, and net loss reserve, commissions, and broker fees, which are included in "other expenses" in the table above: Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 Reinsurance assumed $ 33,585 12,965 88,978 21,994 Reinsurance ceded (16,966) (6,678) (44,728) (11,356) Net premiums $ 16,619 6,287 44,250 10,638 Reinsurance assumed $ 33,195 12,349 77,712 19,876 Reinsurance ceded (16,433) (6,335) (38,646) (10,179) Net loss reserve, commissions, and broker fees $ 16,762 6,014 39,066 9,697 (c) Represents the operating results of the Company’s real estate investments and the administrative costs to manage this portfolio. The Company recognized net gains from its real estate investments of $2.1 million and $0.1 million for the three months ended September 30, 2024 and 2023, respectively, and net losses of $1.5 million for the nine months ended September 30, 2024 compared with a gain of $0.5 million for the same period in 2023, which are included in "other income, net" in the table above. The net results recognized relates primarily to the Company's proportionate share of certain real estate investments accounted for under the equity method. The net gain for the third quarter of 2024 also includes a $2.8 million gain from the sale of a real estate investment. (d) Represents interest income earned on investment debt securities (primarily student loan and other asset-backed securities, including Nelnet-owned asset-backed securities which it has repurchased and are eliminated in consolidation), 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. Also includes interest expense incurred on debt used to finance such investments. The decrease in interest income and interest expense in 2024 compared with 2023 was due to a decrease in the average balance of investments and debt outstanding, respectively. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate and Market Risk - Investments," which provides additional detail on the Company's investment portfolio and debt used to finance such investments. 60 CORPORATE AND OTHER ACTIVITIES – RESULTS OF OPERATIONS Other business activities and operating segments that are not reportable and not part of the NFS division 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 (b) Shared services (a) Tax equity investments / syndication / administration GRNE Solar ALLO investment (c) Venture capital investments (d) Other Total Three months ended September 30, 2024 Investment interest $ — 1 1 — — 3,103 3,105 Interest expense — — (103) — — (601) (704) Net interest income (expense) — 1 (102) — — 2,502 2,401 Solar construction revenue — — 19,321 — — — 19,321 Other income, net 714 (7,640) 43 4,503 2,478 3,408 3,506 Impairment expense — — — — (100) — (100) Cost to provide solar construction services — — (26,815) — — — (26,815) Salaries and benefits (19,411) (621) (1,375) — (187) (2,258) (23,852) Depreciation and amortization (5,463) — (284) — (8) (93) (5,848) Other expenses (11,761) (205) (535) 2,104 (26) (693) (11,116) Intersegment expenses, net 25,634 (44) (378) (1) (21) (110) 25,080 (Loss) income before income taxes (10,287) (8,509) (10,125) 6,606 2,136 2,756 (17,423) Income tax benefit (expense) 2,469 988 2,430 (1,585) (513) 126 3,915 Net loss attributable to noncontrolling interests — 4,392 — — — — 4,392 Net (loss) income $ (7,818) (3,129) (7,695) 5,021 1,623 2,882 (9,116) Three months ended September 30, 2023 Investment interest $ — — 36 — — 3,196 3,232 Interest expense — — (108) — — (324) (432) Net interest income (expense) — — (72) — — 2,872 2,800 Solar construction revenue — — 6,301 — — — 6,301 Other income, net 728 (5,153) 48 (14,908) (629) 2,964 (16,950) Impairment expense (4,678) — — — — — (4,678) Cost to provide solar construction services — — (7,783) — — — (7,783) Salaries and benefits (21,537) (686) (971) — (237) (1,300) (24,731) Depreciation and amortization (9,917) — (3,501) — — (104) (13,522) Other expenses (12,110) (276) (892) (651) (16) (1,725) (15,670) Intersegment expenses, net 26,599 (2,621) 2,006 — (18) (287) 25,679 (Loss) income before income taxes (20,915) (8,736) (4,864) (15,559) (900) 2,420 (48,554) Income tax benefit (expense) 5,020 1,134 954 3,734 216 2,073 13,131 Net loss attributable to noncontrolling interests — 4,011 891 — — — 4,902 Net (loss) income $ (15,895) (3,591) (3,019) (11,825) (684) 4,493 (30,521) 61 Nelnet Renewable Energy (b) Shared services (a) Tax equity investments / syndication / administration GRNE Solar ALLO investment (c) Venture capital investments (d) Other Total Nine months ended September 30, 2024 Investment interest $ — 2 32 — — 9,532 9,566 Interest expense — — (811) — — (1,303) (2,114) Net interest income (expense) — 2 (779) — — 8,229 7,452 Solar construction revenue — — 42,741 — — — 42,741 Other income, net 2,170 (6,398) 136 459 5,780 9,583 11,730 Impairment expense — — (1,865) — (137) — (2,002) Cost to provide solar construction services — — (49,115) — — — (49,115) Salaries and benefits (58,654) (1,905) (6,006) — (663) (4,931) (72,159) Depreciation and amortization (20,191) — (823) — (21) (277) (21,312) Other expenses (32,093) (573) (1,763) 1,498 (52) (4,376) (37,359) Intersegment expenses, net 79,379 99 (1,439) (4) (59) (247) 77,729 (Loss) income before income taxes (29,389) (8,775) (18,913) 1,953 4,848 7,981 (42,295) Income tax benefit (expense) 7,053 424 4,142 (469) (1,164) (1,560) 8,426 Net loss attributable to noncontrolling interests — 7,009 1,654 — — — 8,663 Net (loss) income $ (22,336) (1,342) (13,117) 1,484 3,684 6,421 (25,206) Nine months ended September 30, 2023 Investment interest $ — — 136 — — 8,690 8,826 Interest expense — — (805) — — (988) (1,793) Net interest income (expense) — — (669) — — 7,702 7,033 Solar construction revenue — — 19,687 — — — 19,687 Other income, net 2,130 (18,183) 112 (42,483) (2,280) 8,087 (52,617) Impairment expense (4,678) — — — — — (4,678) Cost to provide solar construction services — — (25,204) — — — (25,204) Salaries and benefits (67,923) (2,356) (3,638) (30) (643) (4,096) (78,686) Depreciation and amortization (27,965) — (5,696) — — (315) (33,976) Other expenses (31,958) (1,116) (1,679) (2,014) (201) (4,359) (41,327) Intersegment expenses, net 82,408 (2,582) 918 (1) (39) (947) 79,757 (Loss) income before income taxes (47,986) (24,237) (16,169) (44,528) (3,163) 6,072 (130,011) Income tax benefit (expense) 11,517 1,985 3,150 10,687 759 90 28,188 Net loss attributable to noncontrolling interests — 15,967 3,043 — — — 19,010 Net (loss) income $ (36,469) (6,285) (9,976) (33,841) (2,404) 6,162 (82,813) (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. 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) 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 construction and development. As of September 30, 2024, the Company has invested a total of $543.7 million (which includes $241.4 million syndicated to third-party investors) in solar tax equity investments that remain outstanding. Due to the management and control of each of these investment partnerships, such partnerships that invest in tax equity investments are consolidated on the Company’s consolidated financial statements, with the co-investor’s portion being presented as noncontrolling interests. Included in tax equity investments in the table above is the Company's share of income or loss from solar investments accounted for 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 net losses on its tax equity investments of $11.2 million and $6.5 million for the three months ended September 30, 2024 and 2023, respectively, and $11.1 million and $19.5 million for the nine months ended September 30, 2024 and 2023, respectively. These income statement amounts, which include amounts attributable to third-party noncontrolling interest investors, are included in “other income, net” in the table above. The amount of net losses attributable to third-party noncontrolling interest investors for the three months ended September 30, 2024 and 2023 was $3.9 million and $3.3 million, respectively, and $5.6 million and $14.7 million for the nine months 62 ended September 30, 2024 and 2023, respectively. Amounts applicable to noncontrolling interest investors are reflected in “net 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 $0.9 million and $0.6 million for the three months ended September 30, 2024 and 2023, respectively, and $2.5 million and $1.3 million for the nine months ended September 30, 2024 and 2023, respectively, which is included in "other income, net" in the table above. During the third quarter of 2024, Nelnet Renewable Energy also recognized solar consulting revenue of $4.2 million. In addition to solar tax equity investments, the Company has a solar construction company (GRNE Solar) that provides full-service engineering, procurement, and construction (EPC) services to residential homes and commercial entities. Since the acquisition of 80% of GRNE Solar's ownership interests in 2022, it has incurred low and, in some cases, negative margins on certain projects. During the third quarter of 2024, the Company recorded an expense of $8.8 million related to estimated losses on legacy construction projects. The Company has a handful of remaining legacy construction contracts to complete, down from over 30 at the beginning of 2024. Due to the complexity and long-term nature of existing construction contracts, the Company may continue to incur low and/or negative margins to complete these projects. In April 2024, the Company announced a change in its solar EPC operations to focus exclusively on the commercial solar market and will discontinue its residential solar operations. As a result, residential revenue will continue to decline from recent historical amounts as existing customer contracts are completed. Residential solar construction revenue was $0.6 million and $2.1 million for the three months ended September 30, 2024 and 2023, respectively, and $3.3 million and $7.3 million for the nine months ended September 30, 2024 and 2023, respectively. In addition, during the second quarter of 2024, the Company recognized non-cash impairment charges of $1.9 million on certain solar facilities and inventory related to the residential solar operations, which is reflected in "impairment expense" in the table above, and $1.6 million in severance costs and commissions paid for cancelled projects, which is included in "salaries and benefits" in the table above. For additional information, see note 9 of the notes to consolidated financial statements included under Part I, Item 1 of this report. On June 30, 2024, the Company acquired the remaining 20% of GRNE Solar for $0.3 million. (c) 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 under the HLBV method of accounting. Under the HLBV method of accounting on its ALLO voting membership interests investment, the Company recognized no losses in the third quarter of 2024 compared with losses of $17.3 million for the same period in 2023 and losses of $10.7 million for the nine months ended September 30, 2024 compared with $49.7 million for the same period in 2023. These amounts are reflected in “other income, net” in the table above. Absent additional equity contributions with respect to ALLO's voting membership interests, the Company will not recognize additional losses for its voting membership interests in ALLO. As of September 30, 2024, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $184.0 million and $11.4 million, respectively. The Company historically earned a preferred annual return of 6.25% that increased to 10.00% on April 1, 2024 for $155.0 million of preferred membership interests of ALLO held by the Company. During the second and third quarter of 2024, the Company purchased an additional $29.0 million of preferred membership interests of ALLO, which earn a preferred annual return of 20.0%. The Company recognized income on its ALLO preferred membership interests of $4.8 million and $2.3 million for the three months ended September 30, 2024 and 2023, respectively, and $11.4 million and $6.8 million for the nine months ended September 30, 2024 and 2023, respectively. These amounts are reflected in “other income, net” in the table above. As part of the ALLO recapitalization transaction completed in 2020, the Company and SDC (a third-party global digital infrastructure investor and member of ALLO) entered into an agreement, in which the Company has a contingent payment obligation to pay SDC a contingent payment amount of up 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 adjusts the balance of this contingent liability each reporting period. For the three and nine months ended September 30, 2024, the Company reduced the obligation resulting in an expense reduction of $2.1 million and $1.5 million, respectively, and for the three and nine months ended September 30, 2023, recognized expense of $0.7 million and $2.0 million, respectively, which is included in “other expenses” in the table above. (d) Represents the operating results of the Company’s venture capital investments, including Hudl, which the Company accounts for using the measurement alternative method, and the administrative costs to manage this portfolio. 63 LIQUIDITY AND CAPITAL RESOURCES The Company’s Loan Servicing and Systems, and Education Technology Services and Payments 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 was funded by the Company with an initial capital contribution of $100.0 million in November 2020 and the Company has contributed an additional $65.0 million to Nelnet Bank since its inception, including $30.0 million year to date through November 7, 2024. 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, 2024, the Company's sources of liquidity included: Cash and cash equivalents $ 219,684 Less: Cash and cash equivalents held at Nelnet Bank (a) (81,714) Net cash and cash equivalents 137,970 Available-for-sale (AFS) debt securities (investments) - at fair value 975,795 Less: AFS debt securities held at Nelnet Bank - at fair value (a) (448,525) AFS private education loan debt securities - held as risk retention - at fair value (b) (227,289) Restricted investments (49,755) Unencumbered AFS debt securities (investments) - at fair value 250,226 Unencumbered private, consumer, and other loans (Non-Nelnet Bank) - at par 249,154 Unencumbered repurchased Nelnet issued asset-backed debt securities - at par (not included on consolidated financial statements) (c) 309,469 Unused capacity on unsecured line of credit (d) 495,000 Sources of liquidity as of September 30, 2024 $ 1,441,819 (a) Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. (b) The Company is sponsor for certain securitizations and as sponsor, is required to provide a certain level of risk retention. To satisfy this requirement, the Company has purchased bonds issued in the securitizations. The Company is required to retain these bonds as described under the caption “Repurchase Agreement” below. (c) 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, redeem the notes at par as cash is generated by the trust estate, or pledge the securities as collateral on repurchase agreements. 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. (d) The Company has a $495.0 million unsecured line of credit that matures on September 22, 2026. As of September 30, 2024, there was no amount outstanding on the unsecured line of credit and $495.0 million was available for future use. The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, consumer, and other loan acquisitions (or investment interests therein); 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. 64 Cash Flows The Company has historically generated positive cash flow from operations. During the nine months ended September 30, 2024 and 2023, the Company generated $482.4 million and $352.6 million, respectively, in cash from operating activities. The increase in 2024 compared with 2023 was due to: • An increase in net income; • Payments of $4.4 million to the Company's clearinghouse for margin payments on derivatives during the nine months ended September 30, 2024 compared with payments of $210.2 million for the same period in 2023; • Adjustments to net income for the impact of provision for beneficial interests and provision for loan losses; and • The impact of changes to accrued interest receivable and other assets during the nine months ended September 30, 2024 compared with the same period in 2023. These factors were partially offset by: • Adjustments to net income for the non-cash change in loss on investments, derivative market value adjustments, loan discount and deferred lender fees accretion, and depreciation and amortization; • No proceeds from the termination of derivative instruments during the nine months ended September 30, 2024 compared with $164.1 million for the same period in 2023; and • The impact of changes to other liabilities, accrued interest payable, and accounts receivable during the nine months ended September 30, 2024 compared with the same period in 2023. The primary items included in the statement of cash flows for investing activities are the purchase, origination, repayment, and sale of loans, the purchase and sale of available-for-sale securities, and the purchase of other investments (primarily solar investments). The primary items included in financing activities are proceeds from the issuance of and payments on bonds and notes payable, the change in deposits at Nelnet Bank used to fund loans and investment activity, and repurchases of common stock. Cash provided by investing activities and used in financing activities for the nine months ended September 30, 2024 was $2.1 billion and $2.7 billion, respectively. 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. 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, 2024 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 7,893,607 8/26/30 - 9/25/69 FFELP and consumer loan warehouse facilities 979,369 11/14/25 - 8/1/26 $ 8,872,976 Bonds and Notes Issued in Asset-backed Securitizations The majority of AGM’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. Cash generated from student loans funded in asset-backed securitizations provide the sources of liquidity to satisfy all obligations related to the outstanding bonds and notes issued in such securitizations. In addition, due to (i) the difference between the yield AGM receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees AGM earns from these transactions, AGM has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. As of September 30, 2024, 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 $1.18 billion as detailed below. The actual timing of cash flows released from the securitizations could be impacted based on when and if the Company terminates a securitization by exercising clean-up calls on the underlying securities when the assets in such securitization reach a certain threshold. The forecasted cash flow presented below includes loans funded in asset-backed securitizations as of September 30, 2024, the majority of which are federally insured student loans. As of September 30, 2024, AGM had $8.4 billion of loans included in 65 asset-backed securitizations, which represented 87.6% of its total loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities, unencumbered private education, consumer, and other loans funded with operating cash, its 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), loans acquired subsequent to September 30, 2024, and loans owned by Nelnet Bank. Asset-backed Securitization Cash Flow Forecast $1.18 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $1.18 billion include approximately $0.74 billion (as of September 30, 2024) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are included in the consolidated balance sheets 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 $0.44 billion, or approximately $0.33 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 September 30, 2024 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, 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 6% for both federally insured consolidation and Stafford loans. Prepayment rates for private education loans range from 11% to 20%. Since late 2021, the Company has experienced accelerated run-off (prepayments) of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans to qualify for loan forgiveness under various initiatives and programs offered by the federal government and the Department. See "Nelnet Financial Services Division - 66 Results of Operations - Asset Generation and Management Operating Segment - Loan Activity" included in this report's Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to the federal government and the Department's initiatives for debt relief that has increased, and may continue to increase, prepayment activity. Prepayments could significantly increase if the federal government and the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs. In addition, see Part I, Item 1A, "Risk Factors - Loan Portfolio - Prepayments risk" in the Company's 2023 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 $0.09 billion $1.09 billion 4x $0.26 billion $0.92 billion 10x $0.43 billion $0.75 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 $0.74 billion (as of September 30, 2024); however, the Company would not receive the $0.44 billion ($0.33 billion after tax) of estimated future earnings from the portfolio. Interest rates : 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 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 $15 million. 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. Warehouse Facilities Warehousing allows the Company to buy and manage loans prior to transferring them into more permanent financing arrangements. For a summary of the Company's warehouse facilities outstanding as of September 30, 2024, see note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The Company has been reducing its warehouse capacity based on its estimated future loan purchases and to save on unused facility costs. 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. Asset-backed Securities Transactions The Company, through its subsidiaries, has historically funded 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 loans included in its warehouse facilities and existing asset-backed securitizations and/or finance loans purchased from third parties and loans that are currently unencumbered. There were no asset-backed securitization transactions completed during the nine months ended September 30, 2024. 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). 67 The Company plans to fund additional loan acquisitions and related investments using current cash; cash provided by operating activities; 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 its third-party repurchase agreement (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 Agreement 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. 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, 2024, the fair value of these bonds was $227.3 million. The Company must retain these investment securities until the latest of (i) the date the aggregate outstanding principal balance of the loans in the securitization is 33% or less of the initial loan balance and (ii) 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 a repurchase agreement with a third party in which a portion of the risk retention investments serve as collateral on the repurchase obligations. As of September 30, 2024, $108.2 million was outstanding on the Company's repurchase agreement and the maturity dates on this facility vary from November 27, 2024 through December 20, 2024. 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 maturity of the repurchase agreement, there can be no assurance that the Company will be able to maintain this or a similar agreement, or find alternative funding if necessary. If necessary, the Company would expect to use operating cash, consider the sale of unencumbered investments, or borrow on its unsecured line of credit to satisfy any remaining obligations. Union Bank Participation Agreements 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, 2024, $326.2 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. The Company also has an agreement with Union Bank under which Union Bank has agreed to purchase from the Company participation interests in FFELP loan asset-backed securities (bond investments). The agreement automatically renews annually and is terminable by either party upon five business days' notice. The Company can participate FFELP loan asset-backed securities to Union Bank to the extent of availability under the grantor trusts, up to $400.0 million or an amount in excess of $400.0 million if mutually agreed to by both parties. The Company maintains legal ownership of the FFELP loan asset-backed securities and, in its discretion, approves and accomplishes any sale, assignment, transfer, encumbrance, or other disposition of the securities. As such, the FFELP loan asset-backed securities subject to this agreement are included on the Company's consolidated balance sheets as "investments and notes receivable" and the participation interests outstanding have been accounted for by the Company as a secured borrowing. As of September 30, 2024, $0.1 million (par value) of FFELP loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. 68 Liquidity Impact Related to Beneficial Interest in Loan Securitizations The Company has partial ownership in consumer, private education, and federally insured student 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 from 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, 2024, the Company's ownership correlates to approximately $1.99 billion of loans included in these securitizations. Investment interest income earned by the Company from the beneficial interest in loan securitizations is included in "investment income" on the Company's consolidated statements of income and is not a component of the Company's loan interest income. As of September 30, 2024, the investment balance on the Company's consolidated balance sheet of its beneficial interest in loan securitizations was $218.7 million. For a summary of this investment balance, see note 6 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, 2024, 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 $328.2 million. The vast majority of these cash flows are expected to be received over the next 5 years. The difference between the total estimated future undiscounted cash flows from these residual interests ($328.2 million) and the investment carrying value ($218.7 million) of $109.5 million, or $83.2 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 September 30, 2024 balance. The undiscounted future cash flows from the consumer and private education 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. For example, the Company established an allowance of $5.9 million and $29.0 million during the second and third quarter of 2024, respectively, related to certain of the Company's beneficial interest securitization investments. The Company's change in estimate of future cash flows from the beneficial interest in certain loan securitizations was lower than previously anticipated due to actual and estimated loan defaults within such securitizations. 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. In addition, the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC discussed below. Prior to Nelnet Bank’s launch of operations, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12%; (ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10% of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank. Under the regulatory framework for prompt corrective action, Nelnet Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI and must meet specific capital standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on Nelnet Bank’s business, results of operations, or financial condition. On January 1, 2020, the Community Bank Leverage Ratio (CBLR) framework, as issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC, became effective. Any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio. 69 Nelnet Bank has opted into the CBLR framework for the quarter ended September 30, 2024 with a leverage ratio of 12.4%. Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework and the minimum level required by the FDIC. Since inception, the Company has made additional contributions of $65.0 million to Nelnet Bank, including $30.0 million year to date through November 7, 2024. 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 in renewable energy solar partnerships. Through September 30, 2024, the Company has invested a total of $543.7 million (which includes $241.4 million syndicated to third-party investors) in tax equity investments that remain outstanding. These investments provide a federal income tax credit under the Internal Revenue Code, equaling 30% to 40% of the eligible project cost, 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 funded 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, 2024, the Company is committed to fund an additional $107.9 million on tax equity investments, of which $89.5 million is expected to be provided by syndication partners. In addition to solar tax equity investments, the Company has a strategy to own solar energy project assets. The Company plans to fund a 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. The Company historically earned a preferred annual return of 6.25% that increased to 10.00% on April 1, 2024 for $155.0 million of preferred membership interests of ALLO. On January 1, 2025, the preferred annual return on the $155.0 million of preferred membership interests of ALLO 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%. During the second and third quarter of 2024, the Company purchased an additional $29.0 million of preferred membership interests in ALLO, which earn a preferred annual return of 20.0%. Accrued and unpaid preferred returns are converted to additional preferred membership interests each December 31. As of September 30, 2024, the accrued and unpaid preferred return was $11.4 million. 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 and/or may purchase additional preferred membership interests that include a preferred return. 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. In addition to equity contributions, ALLO has issued debt to fund its growth. As of September 30, 2024, ALLO has $1.1 billion (par value) of debt outstanding. 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 up 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, 2024, the estimated fair value of the contingent payment is $8.3 million. 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 70 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. Based on the derivative portfolio outstanding as of September 30, 2024, 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 and/or payments to its counterparties for its non-centrally cleared derivatives used by Nelnet Bank. Unsecured Line of Credit 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, 2024, 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. 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. As of September 30, 2024, 3,341,735 shares remained authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time on the open market, in private transactions (including with related parties), or otherwise, depending on various factors, including share prices and other potential uses of liquidity. Shares repurchased by the Company during the first three quarters of 2024 are shown below, and include shares repurchased under the Company's stock repurchase program and shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Certain of these repurchases were made pursuant to trading plans adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. For additional information on stock repurchases during the third quarter of 2024, see "Stock Repurchases" under Part II, Item 2 of this report. Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) (a) Quarter ended March 31, 2024 396,724 $ 35,469 89.41 Quarter ended June 30, 2024 487,980 46,842 95.99 Quarter ended September 30, 2024 5,259 576 109.62 Total 889,963 $ 82,887 93.14 (a) The average price of shares repurchased includes excise taxes. Dividends On September 13, 2024, the Company paid a third quarter 2024 cash dividend on the Company's Class A and Class B common stock of $0.28 per share. In addition, the Company's Board of Directors has declared a fourth quarter 2024 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 16, 2024 to shareholders of record at the close of business on December 2, 2024. 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 2 of the notes to consolidated financial statements included in the Company’s 2023 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 71 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 2023 Annual Report. For additional information regarding changes in the Company’s allowance for loan losses for the three and nine months ended September 30, 2024 and 2023, see the caption “Activity in the Allowance for Loan Losses” in note 3 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, 2023. RECENT ACCOUNTING PRONOUNCEMENTS In November 2023, the FASB issued accounting guidance which improves reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit (referred to as the “significant expense principle”). This guidance will be effective for the Company for the year ending December 31, 2024 annual financial statements, with early adoption permitted. The guidance will be applied retrospectively for all prior periods presented in the financial statements. The Company intends to adopt the standard when it becomes effective for the year ending December 31, 2024 annual financial statements. While the Company is continuing to evaluate the impact this pronouncement will have on its ongoing financial reporting, it currently believes there will be limited impacts to the disclosures included in the notes to consolidated financial statements due to the segment expense detail already disclosed for each reportable segment. In December 2023, the FASB issued accounting guidance to address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This guidance will be effective for the Company for the year ending December 31, 2025 annual financial statements, with early adoption permitted. The guidance will be applied on a prospective basis. The Company intends to adopt the standard when it becomes effective for the year ending December 31, 2025. Management is currently evaluating the impact this guidance will have on the disclosures included in the notes to consolidated financial statements.