UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

(Mark One)

		
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the quarterly period ended June 30, 2016
 
or

	
		
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the transition period from   to   .

COMMISSION FILE NUMBER 001-31924

NELNET, INC.
(Exact name of registrant as specified in its charter)

		
NEBRASKA
(State or other jurisdiction of incorporation or organization)	84-0748903
(I.R.S. Employer Identification No.)	
 	 	
121 SOUTH 13TH STREET
SUITE 100
LINCOLN, NEBRASKA
(Address of principal executive offices)	 
68508
(Zip Code)	
  (402) 458-2370
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]                                                  Accelerated filer [ ]
Non-accelerated filer [  ]                                                     Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[  ] No[X]

As of July 31, 2016 , there were 31,021,028 and 11,476,932 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,317,364 shares of Class A Common Stock held by wholly owned subsidiaries).  

NELNET, INC.
FORM 10-Q
INDEX
June 30, 2016

	
				
PART I. FINANCIAL INFORMATION	 	
 	Item 1.	Financial Statements	2	
 	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27	
 	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52	
 	Item 4.	Controls and Procedures	58	
 	 	 	 	
PART II. OTHER INFORMATION	 	
 	Item 1.	Legal Proceedings	58	
 	Item 1A.	Risk Factors	58	
 	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59	
 	Item 6.	Exhibits	60	
 	 	 	 	
Signatures	 	61	

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

	
								
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED BALANCE SHEETS	
(Dollars in thousands, except share data)	
(unaudited)	
 	 	 	 	 	
 	 	As of		As of	
 	 	June 30, 2016		December 31, 2015	
Assets:	 	 	 	 	
Student loans receivable (net of allowance for loan losses of $48,753 and $50,498, respectively)	 	$	26,539,604		 	28,324,552		
Cash and cash equivalents:	 	 		 	 		
Cash and cash equivalents - not held at a related party	 	9,225		 	11,379		
Cash and cash equivalents - held at a related party	 	50,028		 	52,150		
Total cash and cash equivalents	 	59,253		 	63,529		
Investments and notes receivable	 	285,996		 	303,681		
Restricted cash and investments	 	964,799		 	832,624		
Restricted cash - due to customers	 	132,018		 	144,771		
Accrued interest receivable	 	380,140		 	383,825		
Accounts receivable (net of allowance for doubtful accounts of $1,498 and $2,003, respectively)	 	41,964		 	51,345		
Goodwill	 	147,312		 	146,000		
Intangible assets, net	 	54,141		 	51,062		
Property and equipment, net	 	96,079		 	80,482		
Other assets	 	11,084		 	8,583		
Fair value of derivative instruments	 	3,408		 	28,690		
Total assets	 	$	28,715,798		 	30,419,144		
Liabilities:	 	 		 	 		
Bonds and notes payable	 	$	26,399,686		 	28,105,921		
Accrued interest payable	 	39,926		 	31,507		
Other liabilities	 	136,181		 	169,906		
Due to customers	 	132,018		 	144,771		
Fair value of derivative instruments	 	101,771		 	74,881		
Total liabilities	 	26,809,582		 	28,526,986		
Commitments and contingencies	 	 	 	 	
Equity:	 	 	 	 	
  Nelnet, Inc. shareholders' equity:	 	 		 	 		
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding	 	—		 	—		
Common stock:	 	 	 	 	
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 31,024,230 shares and 32,476,528 shares, respectively	 	310		 	325		
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,476,932 shares	 	115		 	115		
Additional paid-in capital	 	4,601		 	—		
Retained earnings	 	1,894,551		 	1,881,708		
Accumulated other comprehensive (loss) earnings	 	(2,277	)	 	2,284		
Total Nelnet, Inc. shareholders' equity	 	1,897,300		 	1,884,432		
Noncontrolling interests	 	8,916		 	7,726		
Total equity	 	1,906,216		 	1,892,158		
Total liabilities and equity	 	$	28,715,798		 	30,419,144		
 	 	 	 	 	
Supplemental information - assets and liabilities of consolidated variable interest entities:	 	 	 	 	
Student loans receivable	 	$	26,735,698		 	28,499,180		
Restricted cash and investments	 	851,389		 	814,294		
Accrued interest receivable and other assets	 	380,230		 	384,230		
Bonds and notes payable	 	(26,660,478	)	 	(28,405,133	)	
Other liabilities	 	(405,832	)	 	(353,607	)	
Fair value of derivative instruments, net	 	(44,602	)	 	(64,080	)	
Net assets of consolidated variable interest entities	 	$	856,405		 	874,884		
See accompanying notes to consolidated financial statements.

2

	
													
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF INCOME	
(Dollars in thousands, except share data)	
(unaudited)	
 	Three months	 	Six months	
 	ended June 30,	 	ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Interest income:	 	 	 	 	 	 	 	
Loan interest	$	184,067		 	175,835		 	374,055		 	347,779		
Investment interest	2,185		 	1,887		 	4,214		 	4,092		
Total interest income	186,252		 	177,722		 	378,269		 	351,871		
Interest expense:	 	 	 		 	 		 	 		
Interest on bonds and notes payable	94,052		 	72,626		 	184,460		 	144,180		
Net interest income	92,200		 	105,096		 	193,809		 	207,691		
Less provision for loan losses	2,000		 	2,150		 	4,500		 	4,150		
Net interest income after provision for loan losses	90,200		 	102,946		 	189,309		 	203,541		
Other income:	 	 	 		 	 		 	 		
Loan and guaranty servicing revenue	54,402		 	63,833		 	106,732		 	121,644		
Tuition payment processing, school information, and campus commerce revenue	30,483		 	27,686		 	69,140		 	62,366		
Communications revenue	4,478		 	—		 	8,824		 	—		
Enrollment services revenue	—		 	12,680		 	4,326		 	26,053		
Other income	9,765		 	11,985		 	23,559		 	23,393		
Gain on sale of loans and debt repurchases	—		 	1,515		 	101		 	4,390		
Derivative market value and foreign currency adjustments and derivative settlements, net	(40,702	)	 	6,502		 	(69,392	)	 	3,424		
Total other income	58,426		 	124,201		 	143,290		 	241,270		
Operating expenses:	 		 	 		 	 		 	 		
Salaries and benefits	60,923		 	58,787		 	124,165		 	119,837		
Depreciation and amortization	8,183		 	6,501		 	15,823		 	12,163		
Loan servicing fees	7,216		 	7,420		 	14,144		 	15,036		
Cost to provide communications services	1,681		 	—		 	3,384		 	—		
Cost to provide enrollment services	—		 	10,395		 	3,623		 	21,194		
Other expenses	29,409		 	32,725		 	57,783		 	62,826		
Total operating expenses	107,412		 	115,828		 	218,922		 	231,056		
Income before income taxes	41,214		 	111,319		 	113,677		 	213,755		
Income tax expense	15,036		 	40,356		 	39,469		 	77,986		
Net income	26,178		 	70,963		 	74,208		 	135,769		
Net income attributable to noncontrolling interests	28		 	54		 	97		 	95		
Net income attributable to Nelnet, Inc.	$	26,150		 	70,909		 	74,111		 	135,674		
Earnings per common share:	 	 	 	 	 	 	 	
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	0.61		 	1.54		 	1.73		 	2.94		
Weighted average common shares outstanding - basic and diluted	42,635,700		 	45,946,415		 	42,861,896		 	46,127,207		

 See accompanying notes to consolidated financial statements.

3

	
													
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	
(Dollars in thousands)	
(unaudited)	
 	Three months	 	Six months	
 	ended June 30,	 	ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Net income	$	26,178		 	70,963		 	74,208		 	135,769		
Other comprehensive loss:	 	 	 	 	 	 	 	
Available-for-sale securities:	 	 	 	 	 	 	 	
Unrealized holding losses arising during period, net	(6,138	)	 	(436	)	 	(7,648	)	 	(649	)	
Reclassification adjustment for losses (gains) recognized in net income, net	277		 	(2,093	)	 	409		 	(2,297	)	
Income tax effect	2,168		 	940		 	2,678		 	1,094		
Total other comprehensive loss	(3,693	)	 	(1,589	)	 	(4,561	)	 	(1,852	)	
Comprehensive income	22,485		 	69,374		 	69,647		 	133,917		
Comprehensive income attributable to noncontrolling interests	28		 	54		 	97		 	95		
Comprehensive income attributable to Nelnet, Inc.	$	22,457		 	69,320		 	69,550		 	133,822		

See accompanying notes to consolidated financial statements.

4

	
																																		
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY	
(Dollars in thousands, except share data)	
(unaudited)	
 	Nelnet, Inc. Shareholders	 	 	 	
 	Preferred stock shares	 	Common stock shares	 	Preferred stock	 	Class A common stock	 	Class B common stock	 	Additional paid-in capital	 	 Retained earnings	 	Accumulated other comprehensive (loss) earnings	 	Noncontrolling interests	 	Total equity	
 		 	Class A	 	Class B	 		 		 		 		 		 		 		 		
Balance as of March 31, 2015	—		 	34,713,065		 	11,486,932		 	$	—		 	347		 	115		 	13,177		 	1,762,711		 	4,872		 	271		 	1,781,493		
Issuance of noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	19		 	19		
Net income	—		 	—		 	—		 	—		 	—		 	—		 	—		 	70,909		 	—		 	54		 	70,963		
Other comprehensive loss	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(1,589	)	 	—		 	(1,589	)	
Distribution to noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(44	)	 	(44	)	
Cash dividend on Class A and Class B common stock - $0.10 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(4,559	)	 	—		 	—		 	(4,559	)	
Issuance of common stock, net of forfeitures	—		 	9,616		 	—		 	—		 	—		 	—		 	945		 	—		 	—		 	—		 	945		
Compensation expense for stock based awards	—		 	—		 	—		 	—		 	—		 	—		 	1,353		 	—		 	—		 	—		 	1,353		
Repurchase of common stock	—		 	(998,210	)	 	—		 	—		 	(10	)	 	—		 	(15,475	)	 	(27,604	)	 	—		 	—		 	(43,089	)	
Balance as of June 30, 2015	—		 	33,724,471		 	11,486,932		 	$	—		 	337		 	115		 	—		 	1,801,457		 	3,283		 	300		 	1,805,492		
Balance as of March 31, 2016	—		 	31,008,226		 	11,476,932		 	$	—		 	310		 	115		 	2,913		 	1,873,500		 	1,416		 	8,672		 	1,886,926		
Issuance of noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	338		 	338		
Net income	—		 	—		 	—		 	—		 	—		 	—		 	—		 	26,150		 	—		 	28		 	26,178		
Other comprehensive loss	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(3,693	)	 	—		 	(3,693	)	
Distribution to noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(122	)	 	(122	)	
Cash dividend on Class A and Class B common stock - $0.12 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(5,099	)	 	—		 	—		 	(5,099	)	
Issuance of common stock, net of forfeitures	—		 	27,946		 	—		 	—		 	—		 	—		 	954		 	—		 	—		 	—		 	954		
Compensation expense for stock based awards	—		 	—		 	—		 	—		 	—		 	—		 	1,133		 	—		 	—		 	—		 	1,133		
Repurchase of common stock	—		 	(11,942	)	 	—		 	—		 	—		 	—		 	(399	)	 			 	—		 	—		 	(399	)	
Balance as of June 30, 2016	—		 	31,024,230		 	11,476,932		 	$	—		 	310		 	115		 	4,601		 	1,894,551		 	(2,277	)	 	8,916		 	1,906,216		
Balance as of December 31, 2014	—		 	34,756,384		 	11,486,932		 	$	—		 	348		 	115		 	17,290		 	1,702,560		 	5,135		 	230		 	1,725,678		
Issuance of noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	19		 	19		
Net income	—		 	—		 	—		 	—		 	—		 	—		 	—		 	135,674		 	—		 	95		 	135,769		
Other comprehensive loss	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(1,852	)	 	—		 	(1,852	)	
Distribution to noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(44	)	 	(44	)	
Cash dividends on Class A and Class B common stock - $0.20 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(9,173	)	 	—		 	—		 	(9,173	)	
Issuance of common stock, net of forfeitures	—		 	142,095		 	—		 	—		 	1		 	—		 	3,411		 	—		 	—		 	—		 	3,412		
Compensation expense for stock based awards	—		 	—		 	—		 	—		 	—		 	—		 	2,711		 	—		 	—		 	—		 	2,711		
Repurchase of common stock	—		 	(1,174,008	)	 	—		 	—		 	(12	)	 	—		 	(23,412	)	 	(27,604	)	 	—		 	—		 	(51,028	)	
Balance as of June 30, 2015	—		 	33,724,471		 	11,486,932		 	$	—		 	337		 	115		 	—		 	1,801,457		 	3,283		 	300		 	1,805,492		
Balance as of December 31, 2015	—		 	32,476,528		 	11,476,932		 	$	—		 	325		 	115		 	—		 	1,881,708		 	2,284		 	7,726		 	1,892,158		
Issuance of noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	1,312		 	1,312		
Net income	—		 	—		 	—		 	—		 	—		 	—		 	—		 	74,111		 	—		 	97		 	74,208		
Other comprehensive loss	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(4,561	)	 	—		 	(4,561	)	
Distribution to noncontrolling interests	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(219	)	 	(219	)	
Cash dividends on Class A and Class B common stock - $0.24 per share	—		 	—		 	—		 	—		 	—		 	—		 	—		 	(10,192	)	 	—		 	—		 	(10,192	)	
Issuance of common stock, net of forfeitures	—		 	158,743		 	—		 	—		 	1		 	—		 	3,661		 	—		 	—		 	—		 	3,662		
Compensation expense for stock based awards	—		 	—		 	—		 	—		 	—		 	—		 	2,316		 	—		 	—		 	—		 	2,316		
Repurchase of common stock	—		 	(1,611,041	)	 	—		 	—		 	(16	)	 	—		 	(1,376	)	 	(51,076	)	 	—		 	—		 	(52,468	)	
Balance as of June 30, 2016	—		 	31,024,230		 	11,476,932		 	$	—		 	310		 	115		 	4,601		 	1,894,551		 	(2,277	)	 	8,916		 	1,906,216		

 See accompanying notes to consolidated financial statements.

5

	
							
NELNET, INC. AND SUBSIDIARIES	
CONSOLIDATED STATEMENTS OF CASH FLOWS	
(Dollars in thousands)	
(unaudited)	
 	Six months	
 	ended June 30,	
 	2016	 	2015	
Net income attributable to Nelnet, Inc.	$	74,111		 	135,674		
Net income attributable to noncontrolling interests	97		 	95		
Net income	74,208		 	135,769		
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:	 		 	 		
Depreciation and amortization, including debt discounts and student loan premiums and deferred origination costs	62,298		 	60,191		
Student loan discount accretion	(21,524	)	 	(21,506	)	
Provision for loan losses	4,500		 	4,150		
Derivative market value adjustment	48,649		 	19,457		
Foreign currency transaction adjustment	8,712		 	(33,538	)	
Proceeds from termination of derivative instruments	3,523		 	51,947		
Payment to enter into interest rate caps	—		 	(585	)	
Gain on sale of loans	—		 	(351	)	
Gain from debt repurchases	(101	)	 	(4,039	)	
 Loss (gain) from sales of available-for-sale securities, net	409		 	(2,297	)	
Payments for purchases of trading securities, net	(235	)	 	(11,697	)	
Deferred income tax (benefit) expense	(20,260	)	 	3,119		
Other	6,069		 	6,376		
Decrease (increase) in accrued interest receivable	3,685		 	(743	)	
Decrease (increase) in accounts receivable	9,462		 	(10,341	)	
Increase in other assets	(2,579	)	 	(1,967	)	
Increase in accrued interest payable	8,419		 	2,566		
Decrease in other liabilities	(10,006	)	 	(4,526	)	
Net cash provided by operating activities	175,229		 	191,985		
Cash flows from investing activities, net of acquisitions:	 		 	 		
Purchases of student loans and student loan residual interests	(183,375	)	 	(1,637,650	)	
Net proceeds from student loan repayments, claims, capitalized interest, and other	1,927,319		 	1,953,437		
Proceeds from sale of student loans	44,738		 	3,996		
Purchases of available-for-sale securities	(51,735	)	 	(5,550	)	
Proceeds from sales of available-for-sale securities	58,232		 	47,951		
Purchases of investments and issuance of notes receivable	(10,222	)	 	(53,770	)	
Proceeds from investments and notes receivable	5,360		 	8,824		
Purchases of property and equipment, net	(29,577	)	 	(9,519	)	
(Increase) decrease in restricted cash and investments, net	(131,325	)	 	16,532		
Net cash provided by investing activities	1,629,415		 	324,251		
Cash flows from financing activities:	 		 	 		
Payments on bonds and notes payable	(1,972,880	)	 	(2,629,565	)	
Proceeds from issuance of bonds and notes payable	226,194		 	2,233,630		
Payments of debt issuance costs	(1,084	)	 	(8,707	)	
Dividends paid	(10,192	)	 	(9,173	)	
Repurchases of common stock	(52,468	)	 	(51,028	)	
Proceeds from issuance of common stock	417		 	431		
Issuance of noncontrolling interests	1,312		 	19		
Distribution to noncontrolling interests	(219	)	 	(44	)	
Net cash used in financing activities	(1,808,920	)	 	(464,437	)	
Net (decrease) increase in cash and cash equivalents	(4,276	)	 	51,799		
Cash and cash equivalents, beginning of period	63,529		 	130,481		
Cash and cash equivalents, end of period	$	59,253		 	182,280		
 	 	 	 	
Cash disbursements made for:	 		 	 		
Interest	$	142,446		 	108,436		
Income taxes, net of refunds	$	55,988		 	67,211		
Noncash activity:	 	 	 	
Investing activity - student loans and other assets acquired	$	—		 	517,845		
Financing activity - borrowings and other liabilities assumed in acquisition of student loans	$	—		 	451,845		

See accompanying notes to consolidated financial statements.

6

NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless otherwise noted)
(unaudited)

1.    Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2015 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 . The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the " 2015 Annual Report").

Reclassifications

Certain amounts previously reported within the Company's consolidated balance sheet and statements of income have been reclassified to conform to the current period presentation. These reclassifications are summarized below.

•	In April 2015, the Financial Accounting Standards Board ("FASB") issued accounting guidance regarding the presentation of debt issuance costs. The new guidance requires that entities present debt issuance costs related to a debt liability as a direct deduction from that liability on the balance sheet. This guidance became effective for the Company beginning January 1, 2016. As a result of this standard, the Company reclassified its debt issuance costs, which were previously included in "other assets" on the consolidated balance sheet, to "bonds and notes payable."	

•	On February 1, 2016, the Company sold 100 percent of the membership interests in Sparkroom LLC, which includes the majority of the Company's inquiry management products and services within Nelnet Enrollment Solutions. The Company retained the digital marketing and content solution products and services under the brand name Peterson's within the Nelnet Enrollment Solutions business, which include test preparation study guides, school directories and databases, career exploration guides, on-line courses, scholarship search and selection data, career planning information and guides, and on-line information about colleges and universities. The Company reclassified the revenue and cost of goods sold attributable to the Peterson's products and services from "enrollment services revenue" and "cost to provide enrollment services" to "other income" and "other expenses," respectively, on the consolidated statements of income. After this reclassification, "enrollment services revenue" and "cost to provide enrollment services" include the operating results of the products and services sold as part of the Sparkroom disposition for all periods presented. These reclassifications had no effect on consolidated net income.	

7

2.    Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:

							
 	As of	 	As of	
 	June 30, 2016	 	December 31, 2015	
Federally insured loans:	 	 	 	
Stafford and other	$	5,629,034		 	6,202,064		
Consolidation	20,837,356		 	22,086,043		
Total	26,466,390		 	28,288,107		
Private education loans	288,170		 	267,642		
 	26,754,560		 	28,555,749		
Loan discount, net of unamortized loan premiums and deferred origination costs (a)	(166,203	)	 	(180,699	)	
Allowance for loan losses – federally insured loans	(33,224	)	 	(35,490	)	
Allowance for loan losses – private education loans	(15,529	)	 	(15,008	)	
 	$	26,539,604		 	28,324,552		

(a)	As of June 30, 2016 and December 31, 2015 , "loan discount, net of unamortized loan premiums and deferred origination costs" included $26.2 million and $33.0 million , respectively, of non-accretable discount associated with purchased loans of $10.1 billion and $10.8 billion , respectively.	

Private Education Loans

In February 2015, the Company entered into an agreement with CommonBond, Inc. ("CommonBond"), a student lending company that provides private education loans to graduate students, under which the Company committed to purchase private education loans for a period of 18 months , with the maximum purchase obligation limited to $200.0 million . As of June 30, 2016 , the Company had purchased $190.1 million in private education loans from CommonBond and has satisfied its commitment under this agreement.

8

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.

													
 	Three months ended June 30,	 	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Balance at beginning of period	$	50,084		 	51,161		 	50,498		 	48,900		
Provision for loan losses:	 	 	 	 	 		 	 		
Federally insured loans	2,000		 	2,000		 	4,000		 	4,000		
Private education loans	—		 	150		 	500		 	150		
Total provision for loan losses	2,000		 	2,150		 	4,500		 	4,150		
Charge-offs:	 		 	 		 	 		 	 		
Federally insured loans	(3,217	)	 	(3,259	)	 	(6,266	)	 	(6,408	)	
Private education loans	(514	)	 	(446	)	 	(915	)	 	(1,122	)	
Total charge-offs	(3,731	)	 	(3,705	)	 	(7,181	)	 	(7,530	)	
Recoveries - private education loans	250		 	238		 	526		 	492		
Purchase (sale) of federally insured and private education loans, net	100		 	—		 	260		 	(230	)	
Transfer from repurchase obligation related to private education loans repurchased, net	50		 	180		 	150		 	4,242		
Balance at end of period	$	48,753		 	50,024		 	48,753		 	50,024		
 	 	 	 	 	 	 	 	
Allocation of the allowance for loan losses:	 	 	 		 	 		 	 		
Federally insured loans	$	33,224		 	36,762		 	33,224		 	36,762		
Private education loans	15,529		 	13,262		 	15,529		 	13,262		
Total allowance for loan losses	$	48,753		 	50,024		 	48,753		 	50,024		

9

Student Loan Status and Delinquencies

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.  The table below shows the Company’s loan delinquency amounts.

	
																					
 	As of June 30, 2016	 	As of December 31, 2015	 	As of June 30, 2015	
Federally insured loans:	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment	$	1,936,064		 	 	 	$	2,292,941		 	 	 	$	2,634,088		 	 	
Loans in forbearance	2,672,241		 	 	 	2,979,357		 	 	 	3,118,774		 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	
Loans current	18,957,457		 	86.7	%	 	19,447,541		 	84.4	%	 	19,055,994		 	85.2	%	
Loans delinquent 31-60 days	828,885		 	3.8		 	1,028,396		 	4.5		 	950,055		 	4.2		
Loans delinquent 61-90 days	482,379		 	2.2		 	566,953		 	2.5		 	612,657		 	2.7		
Loans delinquent 91-120 days	320,213		 	1.5		 	415,747		 	1.8		 	355,636		 	1.6		
Loans delinquent 121-270 days	918,788		 	4.2		 	1,166,940		 	5.1		 	1,051,843		 	4.7		
Loans delinquent 271 days or greater	350,363		 	1.6		 	390,232		 	1.7		 	359,601		 	1.6		
Total loans in repayment	21,858,085		 	100.0	%	 	23,015,809		 	100.0	%	 	22,385,786		 	100.0	%	
Total federally insured loans	$	26,466,390		 	 		 	$	28,288,107		 	 		 	$	28,138,648		 	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Private education loans:	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment	$	54,597		 	 	 	$	30,795		 	 	 	$	5,268		 	 	
Loans in forbearance	1,610		 	 	 	350		 	 	 	142		 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	
Loans current	225,585		 	97.2	%	 	228,464		 	96.7	%	 	161,355		 	95.0	%	
Loans delinquent 31-60 days	1,361		 	0.6		 	1,771		 	0.7		 	1,407		 	0.8		
Loans delinquent 61-90 days	929		 	0.4		 	1,283		 	0.5		 	1,647		 	1.0		
Loans delinquent 91 days or greater	4,088		 	1.8		 	4,979		 	2.1		 	5,383		 	3.2		
Total loans in repayment	231,963		 	100.0	%	 	236,497		 	100.0	%	 	169,792		 	100.0	%	
Total private education loans	$	288,170		 	 		 	$	267,642		 	 		 	$	175,202		 	 	

10

3.    Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:

								
 	As of June 30, 2016	
 	Carrying
amount	 	Interest rate
range	 	Final maturity	
Variable-rate bonds and notes issued in asset-backed securitizations:	 	 	 	 	 	
Bonds and notes based on indices	$	23,418,478		 	0.30% - 6.90%	 	8/26/19 - 8/26/52	
Bonds and notes based on auction	1,158,415		 	1.26% - 2.21%	 	3/22/32 - 11/26/46	
Total variable-rate bonds and notes	24,576,893		 	 	 	 	
FFELP warehouse facilities	1,811,708		 	0.46% - 0.80%	 	7/9/18 - 4/26/19	
Private education loan warehouse facility	221,114		 	0.81%	 	4/28/17	
Unsecured line of credit	105,000		 	1.94% - 1.95%	 	10/30/20	
Unsecured debt - Junior Subordinated Hybrid Securities	57,184		 	4.01%	 	9/15/61	
Other borrowings	93,355		 	1.97% - 3.38%	 	10/31/16 - 12/15/45	
 	26,865,254		 	 	 	 	
Discount on bonds and notes payable and debt issuance costs, net	(465,568	)	 	 	 	 	
Total	$	26,399,686		 	 	 	 	

								
 	As of December 31, 2015	
 	Carrying
amount	 	Interest rate
range	 	Final maturity	
Variable-rate bonds and notes issued in asset-backed securitizations:	 	 	 	 	 	
Bonds and notes based on indices	$	25,155,336		 	0.05% - 6.90%	 	8/26/19 - 8/26/52	
Bonds and notes based on auction	1,160,365		 	0.88% - 2.17%	 	3/22/32 - 11/26/46	
Total variable-rate bonds and notes	26,315,701		 	 	 	 	
FFELP warehouse facilities	1,855,907		 	0.27% - 0.56%	 	4/29/18 - 12/14/18	
Private education loan warehouse facility	181,184		 	0.57%	 	12/26/16	
Unsecured line of credit	100,000		 	1.79% - 1.92%	 	10/30/20	
Unsecured debt - Junior Subordinated Hybrid Securities	57,184		 	3.99%	 	9/15/61	
Other borrowings	93,355		 	1.93% - 3.38%	 	10/31/16 - 12/15/45	
 	28,603,331		 	 	 	 	
Discount on bonds and notes payable and debt issuance costs, net	(497,410	)	 	 	 	 	
Total	$	28,105,921		 	 	 	 	

11

FFELP Warehouse Facilities

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.

As of June 30, 2016 , the Company had three FFELP warehouse facilities as summarized below.

															
 	 	NFSLW-I (a)	 	NHELP-II	 	NHELP-III	 	 	Total	
Maximum financing amount	 	$	875,000		 	500,000		 	750,000		 	 	2,125,000		
Amount outstanding	 	844,087		 	455,049		 	512,572		 	 	1,811,708		
Amount available	 	$	30,913		 	44,951		 	237,428		 	 	313,292		
Expiration of liquidity provisions	 	July 8, 2016		 	December 16, 2016		 	April 28, 2017		 	 	 	
Final maturity date	 	July 9, 2018		 	December 14, 2018		 	April 26, 2019		 	 	 	
Maximum advance rates	 	92.0 - 98.0%		 	85.0 - 95.0%		 	92.2 - 95.0%		 	 	 	
Minimum advance rates	 	84.0 - 90.0%		 	85.0 - 95.0%		 	92.2 - 95.0%		 	 	 	
Advanced as equity support	 	$	36,663		 	38,051		 	30,694		 	 	105,408		

(a)	On July 10, 2015, the Company amended the agreement for this warehouse facility to temporarily increase the maximum financing amount to $875.0 million. The maximum financing amount was scheduled to decrease by $125.0 million on March 31, 2016. On January 26, 2016, the Company amended the agreement for this warehouse facility to extend the scheduled decrease of the maximum financing amount by $125.0 million to July 8, 2016. On July 7, 2016, the Company amended the agreement for this warehouse facility to permanently set the maximum financing amount at $875.0 million , and changed the expiration of liquidity provisions to July 10, 2018 and the final maturity date to September 7, 2018 .	

Private Education Loan Warehouse Facility

On June 26, 2015, the Company entered into a $275.0 million private education loan warehouse facility. As of June 30, 2016 , there was $221.1 million outstanding on the facility and $53.9 million was available for future use. The facility has a static advance rate that requires initial equity for loan funding, but does not require increased equity based on market movements. The maximum advance rate on the entire facility is 88 percent and minimum advance rates, depending on loan characteristics and program type, ranged from 64 percent to 99 percent . As of June 30, 2016 , $32.0 million was advanced on the facility as equity support. The facility is supported by liquidity provisions, which had an original expiration date of June 24, 2016 .
On April 1, 2016, the Company amended the agreement for this facility to change the expiration date for the liquidity provisions to October 28, 2016 , and to change the final maturity date to April 28, 2017 . In addition, the minimum advance rates, depending on loan characteristics and program type, were changed to a range from 61.75 percent to 95.00 percent , and the maximum advance rate on the entire facility remained at 88 percent . In the event the Company is unable to renew the liquidity provisions by the amended expiration date of October 28, 2016, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's amended final maturity date of April 28, 2017.
Unsecured Line of Credit

The Company has a $350.0 million unsecured line of credit that has a maturity date of October 30, 2020 .  As of June 30, 2016 , the unsecured line of credit had an outstanding balance of $105.0 million and $245.0 million was available for future use.

12

4.   Derivative Financial Instruments

The Company uses derivative financial instruments primarily to manage interest rate risk and foreign currency exchange risk. Derivative instruments used as part of the Company's risk management strategy are further described in note 5 of the notes to consolidated financial statements included in the 2015 Annual Report. A tabular presentation of such derivatives outstanding as of June 30, 2016 and December 31, 2015 is presented below.

Basis Swaps

The following table summarizes the Company’s basis swaps outstanding as of June 30, 2016 and December 31, 2015 in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

	
									
 	 	As of June 30,	 	As of December 31,	
 	 	2016	 	2015	
Maturity	 	Notional amount	 	Notional amount	
2016	 	$	2,000,000		 	$	7,500,000		
2028	 	125,000		 	—		
The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2016 and December 31, 2015 was one-month LIBOR plus 9.3 basis points and 10.0 basis points, respectively.
Interest Rate Swaps – Floor Income Hedges

The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income.

															
 	 	As of June 30, 2016	 	As of December 31, 2015	
Maturity	 	Notional amount	 	Weighted average fixed rate paid by the Company (a)	 	Notional amount	 	Weighted average fixed rate paid by the Company (a)	
	 		 		 		 		
2016	 	$	750,000		 	0.72	%	 	$	1,000,000		 	0.76	%	
2017	 	1,000,000		 	0.97		 	2,100,000		 	0.84		
2018	 	1,600,000		 	1.08		 	1,600,000		 	1.08		
2019	 	3,250,000		 	0.97		 	500,000		 	1.12		
2020	 	1,500,000		 	1.01		 	—		 	—		
2025	 	100,000		 	2.32		 	100,000		 	2.32		
2026	 	50,000		 	1.52		 	—		 	—		
 	 	$	8,250,000		 	0.99	%	 	$	5,300,000		 	0.95	%	

(a)	For all interest rate derivatives, the Company receives discrete three-month LIBOR.	

On August 20, 2014, the Company paid $9.1 million for an interest rate swap option to economically hedge loans earning fixed rate floor income. The interest rate swap option gives the Company the right, but not the obligation, to enter into a $250 million notional interest rate swap in which the Company would pay a fixed amount of 3.30% and receive discrete one-month LIBOR. If the interest rate swap option is exercised, the swap would become effective in 2019 and mature in 2024.

13

Interest Rate Swaps – Unsecured Debt Hedges

The Company had the following derivatives outstanding as of June 30, 2016 and December 31, 2015 that are used to effectively convert the variable interest rate on a portion of the Junior Subordinated Hybrid Securities to a fixed rate of 7.66% .

	
								
Maturity	 	Notional amount	 	Weighted average fixed rate paid by the Company (a)	
2036	 	$	25,000		 	4.28	%	

(a)	For all interest rate derivatives, the Company receives discrete three-month LIBOR.	

Interest Rate Caps

In June 2015, in conjunction with the entry into the $275.0 million private education loan warehouse facility, the Company paid $2.9 million for two interest rate cap contracts with a total notional amount of $275.0 million . The first interest rate cap has a notional amount of $125.0 million and a one-month LIBOR strike rate of 2.50% , and the second interest rate cap has a notional amount of $150.0 million and a one-month LIBOR strike rate of 4.99% . In the event that the one-month LIBOR rate rises above the applicable strike rate, the Company would receive monthly payments related to the spread difference. Both interest rate cap contracts have a maturity date of July 15, 2020.

Foreign Currency Exchange Risk

In 2006, the Company issued €352.7 million of student loan asset-backed Euro Notes (the "Euro Notes") with an interest rate based on a spread to the EURIBOR index. As a result of the Euro Notes, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes are re-measured at each reporting period and recorded in the Company’s consolidated balance sheet in U.S. dollars based on the foreign currency exchange rate on that date.

The Company entered into a cross-currency interest rate swap in connection with the issuance of the Euro Notes. Under the terms of the cross-currency interest rate swap, the Company receives from the counterparty a spread to the EURIBOR index based on a notional amount of €352.7 million and pays a spread to the LIBOR index based on a notional amount of $450.0 million . In addition, under the terms of this agreement, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect between the U.S. dollar and Euro as of the issuance of the notes.

The following table shows the income statement impact as a result of the re-measurement of the Euro Notes and the change in the fair value of the related derivative instrument.

													
 	Three months ended June 30,	 	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Re-measurement of Euro Notes	$	9,768		 	(14,671	)	 	(8,712	)	 	33,538		
Change in fair value of cross-currency interest rate swap	(12,008	)	 	13,933		 	20,693		 	(35,873	)	
Total impact to consolidated statements of income - income (expense) (a)	$	(2,240	)	 	(738	)	 	11,981		 	(2,335	)	

(a)	The financial statement impact of the above items is included in "Derivative market value and foreign currency adjustments and derivative settlements, net" in the Company's consolidated statements of income.	
Management has structured the cross-currency interest rate swap to economically hedge the Euro Notes to effectively convert the Euro Notes to U.S. dollars and pay a spread on these notes based on the LIBOR index. However, the cross-currency interest rate swap does not qualify for hedge accounting. The re-measurement of the Euro-denominated bonds generally correlates with the change in the fair value of the corresponding cross-currency interest rate swap. However, the Company will experience unrealized gains and losses between these financial instruments due to the principal and accrued interest on the Euro Notes being re-measured to U.S. dollars at each reporting date based on the foreign currency exchange rate on that date, while the cross-currency interest rate swap is measured at fair value at each reporting date with the change in fair value recognized in the current period earnings.

14

Consolidated Financial Statement Impact Related to Derivatives  

The following table summarizes the fair value of the Company’s derivatives as reflected in the consolidated balance sheets:

													
 	Fair value of asset derivatives	 	Fair value of liability derivatives	
 	As of	 	As of	 	As of	 	As of	
 	June 30,
2016	 	December 31,
2015	 	June 30,
2016	 	December 31,
2015	
1:3 basis swaps	$	623		 	724		 	127		 	410		
Interest rate swaps - floor income hedges	27		 	21,408		 	42,791		 	1,175		
Interest rate swap option - floor income hedge	986		 	3,257		 	—		 	—		
Interest rate swaps - hybrid debt hedges	—		 	—		 	11,660		 	7,646		
Interest rate caps	355		 	1,570		 	—		 	—		
Cross-currency interest rate swap	—			—		 	44,957		 	65,650		
Other	1,417		 	1,731		 	2,236		 	—		
Total	$	3,408		 	28,690		 	101,771		 	74,881		

During the six months ended June 30, 2016 , the Company terminated a total notional amount of $3.1 billion of fixed rate floor income hedges for gross proceeds of $3.0 million , and a total notional amount of $300.0 million of other basis swaps for gross proceeds of $0.5 million . During the six months ended June 30, 2015 , the Company terminated a total notional amount of $5.5 billion of 1:3 Basis Swaps for gross proceeds of $51.9 million .

Offsetting of Derivative Assets/Liabilities

The Company records derivative instruments in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain of the Company's derivative instruments are subject to right of offset provisions with counterparties. The following tables include the gross amounts related to the Company's derivative portfolio recognized in the consolidated balance sheets, reconciled to the net amount when excluding derivatives subject to enforceable master netting arrangements and cash collateral received/pledged:

	
														
 	 	 	 	Gross amounts not offset in the consolidated balance sheets	 	 	
Derivative assets	 	Gross amounts of recognized assets presented in the consolidated balance sheets	 	Derivatives subject to enforceable master netting arrangement	 	Cash collateral pledged	 	Net asset (liability)	
Balance as of
June 30, 2016	 	$	3,408		 	(3,053	)	 	—		 	355		
Balance as of
December 31, 2015	 	28,690		 	(851	)	 	1,632		 	29,471		

	
														
 	 	 	 	Gross amounts not offset in the consolidated balance sheets	 	 	
Derivative liabilities	 	Gross amounts of recognized liabilities presented in the consolidated balance sheets	 	Derivatives subject to enforceable master netting arrangement	 	Cash collateral pledged/received, net	 	Net asset (liability)	
Balance as of
June 30, 2016	 	$	(101,771	)	 	3,053		 	90,170		 	(8,548	)	
Balance as of
December 31, 2015	 	(74,881	)	 	851		 	13,168		 	(60,862	)	

15

The following table summarizes the effect of derivative instruments in the consolidated statements of income.

													
 	Three months ended June 30,	 	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Settlements:	 		 	 		 	 		 	 		
1:3 basis swaps	$	743		 	123		 	414		 	389		
Interest rate swaps - floor income hedges	(4,841	)	 	(5,019	)	 	(10,084	)	 	(10,034	)	
Interest rate swaps - hybrid debt hedges	(231	)	 	(253	)	 	(463	)	 	(505	)	
Cross-currency interest rate swap	(1,166	)	 	(293	)	 	(1,898	)	 	(507	)	
Total settlements - expense	(5,495	)	 	(5,442	)	 	(12,031	)	 	(10,657	)	
Change in fair value:	 		 	 		 	 		 	 		
1:3 basis swaps	(586	)	 	1,428		 	183		 	12,398		
Interest rate swaps - floor income hedges	(27,276	)	 	7,534		 	(59,985	)	 	2,662		
Interest rate swap option - floor income hedge	(856	)	 	1,381		 	(2,272	)	 	470		
Interest rate swaps - hybrid debt hedges	(1,464	)	 	2,540		 	(4,014	)	 	1,087		
Interest rate caps	(453	)	 	(201	)	 	(1,215	)	 	(201	)	
Cross-currency interest rate swap	(12,008	)	 	13,933		 	20,693		 	(35,873	)	
Other	(2,332	)	 	—		 	(2,039	)	 	—		
Total change in fair value - (expense) income	(44,975	)	 	26,615		 	(48,649	)	 	(19,457	)	
Re-measurement of Euro Notes (foreign currency transaction adjustment) - income (expense)	9,768		 	(14,671	)	 	(8,712	)	 	33,538		
Derivative market value and foreign currency adjustments and derivative settlements, net - income (expense)	$	(40,702	)	 	6,502		 	(69,392	)	 	3,424		

5.    Investments and Notes Receivable

A summary of the Company's investments and notes receivable follows:

																										
 	As of June 30, 2016	 	As of December 31, 2015	
 	Amortized cost	 	Gross unrealized gains	 	Gross unrealized losses (a)	 	Fair value	 	Amortized cost	 	Gross unrealized gains	 	Gross unrealized losses	 	Fair value	
 		 		 		 		 		 		 		 		
Investments (at fair value):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale investments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan asset-backed and other debt securities (b)	$	133,190		 	1,091		 	(6,432	)	 	127,849		 	139,970		 	3,402		 	(1,362	)	 	142,010		
Equity securities	720		 	1,797		 	(69	)	 	2,448		 	846		 	1,686		 	(100	)	 	2,432		
Total available-for-sale investments	$	133,910		 	2,888		 	(6,501	)	 	130,297		 	140,816		 	5,088		 	(1,462	)	 	144,442		
Trading investments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan asset-backed securities	 	 	 	 	 	 	5,867		 	 	 	 	 	 	 	6,045		
Equity securities	 	 	 	 	 	 	5,318		 	 	 	 	 	 	 	4,905		
Total trading investments	 	 	 	 	 	 	11,185		 	 	 	 	 	 	 	10,950		
Total available-for-sale and trading investments	 	 	 	 	 	 	141,482		 	 	 	 	 	 	 	155,392		
Other Investments and Notes Receivable (not measured at fair value):	 	 	 	 	 	 	 	 	 	 	 	 	
Venture capital and funds	 	 	 	 	 	 	65,778		 	 	 	 	 	 	 	63,323		
Real estate	 	 	 	 	 	 	48,586		 	 	 	 	 	 	 	50,463		
Notes receivable	 	 	 	 	 	 	17,206		 	 	 	 	 	 	 	18,473		
Tax liens and affordable housing	 	 	 	 	 	 	12,944		 	 	 	 	 	 	 	16,030		
Total investments and notes receivable	 	 	 	 	 	 	$	285,996		 	 	 	 	 	 	 	303,681		

(a)	As of June 30, 2016 , the Company considered the decline in market value of its available-for-sale investments to be temporary in nature and did not consider any of its investments other-than-temporarily impaired.	

(b)	As of June 30, 2016 , the stated maturities of the majority of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years.	

16

6. Business Combination

Allo Communications LLC ("Allo")

On December 31, 2015, the Company purchased 92.5 percent of the ownership interests of Allo for total cash consideration of $46.25 million .  On January 1, 2016, the Company sold a 1.0 percent ownership interest in Allo to a non-related third-party for $0.5 million . The remaining 7.5 percent of the ownership interests of Allo is owned by members of Allo management, who have the opportunity to earn an additional 11.5 percent (up to 19 percent ) of the total ownership interests based on the financial performance of Allo.  The additional ownership interest that Allo management has the opportunity to earn are based on their continued employment with Allo. Accordingly, the value associated with the ownership interests issued to these employees of $1.0 million will be recognized by Allo as compensation expense over the performance period.

Allo provides pure fiber optic service to homes and businesses for internet, television, and telephone services.  The acquisition of Allo provides additional diversification of the Company's revenues and cash flows outside of education.  In addition, the acquisition leverages the Company's existing infrastructure, customer service capabilities and call centers, and financial strength and liquidity for continued growth. 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The fair values of the assets and liabilities related to Allo are subject to refinement as the Company completes its analysis relative to the fair values at the date of acquisition. During the first six months of 2016, the Company recognized certain adjustments to the provisional amounts recorded at December 31, 2015 that were needed to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The net impact of these adjustments was an increase to goodwill, and the adjustments had no impact on operating results.

					
Cash and cash equivalents	 	$	334		
Restricted cash and investments	 	850		
Accounts receivable	 	1,935		
Property and equipment	 	32,479		
Other assets	 	371		
Intangible assets	 	11,410		
Excess cost over fair value of net assets acquired (goodwill)	 	21,112		
Other liabilities	 	(4,587	)	
Bonds and notes payable	 	(13,904	)	
Net assets acquired	 	50,000		
Minority interest	 	(3,750	)	
Total consideration paid by the Company	 	$	46,250		

The $11.4 million of acquired intangible assets on the date of acquisition had a weighted-average useful life of approximately 12 years. The intangible assets that made up this amount included customer relationships of $6.3 million ( 10 -year useful life) and a trade name of $5.1 million ( 15 -year useful life).

The $21.1 million of goodwill was assigned to the Communications operating segment and is expected to be deductible for tax purposes. The amount allocated to goodwill was primarily attributable to future customers to be generated through the continued expansion of Allo's services in rural markets.

The proforma impacts of the acquisition on the Company's historical results prior to the acquisition were not material.

Allo recognizes revenue when (i) persuasive evidence of an arrangement exists between Allo and the customer, (ii) delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price to the customer is fixed or determinable, and (iv) collectability of the sales price is reasonably assured. Revenues based on a flat fee, derived principally from internet, television, and telephone services are billed in advance and recognized in subsequent periods when the services are provided. Revenues for usage-based services, such as access charges billed to other telephone carriers for originating and terminating long-distance calls on Allo's network, are billed in arrears. Allo recognizes revenue from these services in the period the services are rendered rather than billed. Earned but unbilled usage-based services are recorded in accounts receivable.

17

7. Intangible Assets and Goodwill

Intangible assets consist of the following:

									
 	Weighted average remaining useful life as of June 30, 2016 (months)	 	As of
June 30,
2016	 	As of December 31, 2015	
 		 		 		
Amortizable intangible assets:	 	 	 	
Customer relationships (net of accumulated amortization of $5,949 and $4,028, respectively)	171	 	$	30,935		 	27,576		
Computer software (net of accumulated amortization of $6,820 and $4,397, respectively)	31	 	12,128		 	11,601		
Trade names (net of accumulated amortization of $1,224 and $795, respectively)	195	 	10,348		 	10,687		
Content (net of accumulated amortization of $1,350 and $900, respectively)	6	 	450		 	900		
Covenants not to compete (net of accumulated amortization of $74 and $56, respectively)	95	 	280		 	298		
Total - amortizable intangible assets	143	 	$	54,141		 	51,062		

The Company recorded amortization expense on its intangible assets of $2.7 million and $2.4 million during the three months ended June 30, 2016 and 2015 , respectively, and $5.2 million and $4.8 million during the six months ended June 30, 2016 and 2015 , respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of June 30, 2016 , the Company estimates it will record amortization expense as follows:

	
				
2016 (July 1 - December 31)	$	6,328		
2017	9,386		
2018	8,605		
2019	5,147		
2020	4,231		
2021 and thereafter	20,444		
 	$	54,141		

The change in the carrying amount of goodwill by reportable operating segment was as follows:

																			
 	Student Loan and Guaranty Servicing	 	Tuition Payment Processing and Campus Commerce	 	Communications	 	Asset Generation and Management	 	Corporate and Other Activities	 	Total	
Balance as of December 31, 2015	$	8,596		 	67,168		 	19,800		 	41,883		 	8,553		 	146,000		
Allo purchase price adjustment	—		 	—		 	1,312		 	—		 	—		 	1,312		
Balance as of March 31, 2016	8,596		 	67,168		 	21,112		 	41,883		 	8,553		 	147,312		
Allo purchase price adjustment	—		 	—		 	—		 	—		 	—		 	—		
Balance as of June 30, 2016	$	8,596			67,168			21,112			41,883			8,553			147,312		

18

8. Property and Equipment

Property and equipment consisted of the following:

									
 	 	 	As of	 	As of	
 	Useful life	 	June 30, 2016	 	December 31, 2015	
Non-communications:	 	 	 	 	 	
Computer equipment and software	1-5 years	 	$	95,113		 	89,093		
Office furniture and equipment	3-7 years	 	12,576		 	12,638		
Building and building improvements	5-39 years	 	12,244		 	12,239		
Transportation equipment	4-10 years	 	3,868		 	3,868		
Leasehold improvements	5-20 years	 	3,342		 	3,545		
Land	—	 	827		 	700		
Construction in progress	—	 	9,986		 	1,210		
 	 	 	137,956		 	123,293		
Accumulated depreciation - non-communications	 	 	84,583		 	77,188		
Non-communications, net property and equipment	 	 	53,373		 	46,105		
 	 	 	 	 	 	
Communications:	 	 	 	 	 	
Network plant and fiber	5-15 years	 	26,382		 	25,669		
Central office	5-15 years	 	4,376		 	909		
Customer located property	5-10 years	 	3,823		 	6,912		
Transportation equipment	4-10 years	 	1,296		 	470		
Computer equipment and software	1-5 years	 	752		 	74		
Other	1-20 years	 	625		 	343		
Land	—	 	70		 	—		
Construction in progress	—	 	7,192		 	—		
 	 	 	44,516		 	34,377		
Accumulated depreciation - communications	 	 	1,810		 	—		
Communications, net property and equipment	 	 	42,706		 	34,377		
Total property and equipment, net	 	 	$	96,079		 	80,482		

Depreciation expense for the three months ended June 30, 2016 and 2015 related to property and equipment was $5.4 million and $4.1 million , respectively, and $10.6 million and $7.4 million during the six months ended June 30, 2016 and 2015 , respectively.

19

9.   Earnings per Common Share

Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate earnings per share amounts for common stock and unvested share based awards. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock.

																			
 	Three months ended June 30,	
 	2016	 	2015	
 	Common shareholders	 	Unvested restricted stock shareholders	 	Total	 	Common shareholders	 	Unvested restricted stock shareholders	 	Total	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to Nelnet, Inc.	$	25,879		 	271		 	26,150		 	70,146		 	763		 	70,909		
 	 	 	 	 			 	 	 	 	 	 	
Denominator:			 			 			 	 	 	 	 	 	
Weighted-average common shares outstanding - basic and diluted	42,193,769		 	441,931		 	42,635,700		 	45,451,888		 	494,527		 	45,946,415		
Earnings per share - basic and diluted	$	0.61		 	0.61		 	0.61		 	1.54		 	1.54		 	1.54		
 	 	 	 	 	 	 	 	 	 	 	 	
 	Six months ended June 30,	
 	2016	 	2015	
 	Common shareholders	 	Unvested restricted stock shareholders	 	Total	 	Common shareholders	 	Unvested restricted stock shareholders	 	Total	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to Nelnet, Inc.	$	73,334		 	777		 	74,111		 	134,227		 	1,447		 	135,674		
 	 	 	 	 	 	 	 	 	 	 	 	
Denominator:	 	 	 	 	 	 	 	 	 	 	 	
Weighted-average common shares outstanding - basic and diluted	42,412,287		 	449,609		 	42,861,896		 	45,635,155		 	492,052		 	46,127,207		
Earnings per share - basic and diluted	$	1.73		 	1.73		 	1.73		 	2.94		 	2.94		 	2.94		

Unvested restricted stock awards are the Company's only potential common shares and, accordingly, there were no awards that were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation.

20

10.    Segment Reporting

See note 14 of the notes to consolidated financial statements included in the 2015 Annual Report for a description of the Company's operating segments. The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.

Prior to January 1, 2016, the Company allocated certain corporate overhead expenses that are incurred within the Corporate and Other Activities segment to the other operating segments. These expenses included certain corporate activities related to executive management, internal audit, enterprise risk management, and other costs incurred by the Company due to corporate-wide initiatives. Effective January 1, 2016, internal reporting to executive management (the "chief operating decision maker") changed to eliminate the allocation of these expenses to the other segments. Management believes the change in its allocation methodology results in a better reflection of the operating results of each of the reportable segments as if they each operated as a standalone business entity, which also reflects how management evaluates the performance of the segments. Prior period segment operating results have been restated to conform to the current period presentation.

																						
 	Three months ended June 30, 2016	
 	Student Loan and Guaranty Servicing	 	Tuition Payment Processing and Campus Commerce	 	Communications	 	Asset
Generation and
Management	 	Corporate and Other Activities	 	Eliminations	 	Total	
Total interest income	$	22		 	3		 	—		 	184,966		 	2,064		 	(802	)	 	186,252		
Interest expense	—		 	—		 	205		 	92,769		 	1,881		 	(802	)	 	94,052		
Net interest income	22		 	3		 	(205	)	 	92,197		 	183		 	—		 	92,200		
Less provision for loan losses	—		 	—		 	—		 	2,000		 	—		 	—		 	2,000		
Net interest income (loss) after provision for loan losses	22			3		 	(205	)	 	90,197		 	183		 	—		 	90,200		
Other income:	 		 	 		 	 	 	 		 	 		 	 		 	 		
Loan and guaranty servicing revenue	54,402		 	—		 	—		 	—		 	—		 	—		 	54,402		
Intersegment servicing revenue	11,408		 	—		 	—		 	—		 	—		 	(11,408	)	 	—		
Tuition payment processing, school information, and campus commerce revenue	—		 	30,483		 	—		 	—		 	—		 	—		 	30,483		
Communications revenue	—		 	—		 	4,478		 	—		 	—		 	—		 	4,478		
Enrollment services revenue	—		 	—		 	—		 	—		 	—		 	—		 	—		
Other income	—		 	—		 	—		 	3,834		 	5,931		 	—		 	9,765		
Gain on sale of loans and debt repurchases	—		 	—		 	—		 	—		 	—		 	—		 	—		
Derivative market value and foreign currency adjustments, net	—		 	—		 	—		 	(31,411	)	 	(3,797	)	 	—		 	(35,207	)	
Derivative settlements, net	—		 	—		 	—		 	(5,264	)	 	(231	)	 	—		 	(5,495	)	
Total other income	65,810		 	30,483		 	4,478		 	(32,841	)	 	1,903		 	(11,408	)	 	58,426		
Operating expenses:	 		 	 		 	 	 	 	 	 		 	 	 	 		
Salaries and benefits	31,380		 	15,444		 	1,377		 	499		 	12,222		 	—		 	60,923		
Depreciation and amortization	445		 	2,511		 	1,378		 	—		 	3,848		 	—		 	8,183		
Loan servicing fees	—		 	—		 	—		 	7,216		 	—		 	—		 	7,216		
Cost to provide communication services	—		 	—		 	1,681		 	—		 	—		 	—		 	1,681		
Cost to provide enrollment services	—		 	—		 	—		 	—		 	—		 	—		 	—		
Other expenses	11,380		 	4,815		 	813		 	1,481		 	10,920		 	—		 	29,409		
Intersegment expenses, net	6,102		 	1,562		 	187		 	11,539		 	(7,981	)	 	(11,408	)	 	—		
Total operating expenses	49,307		 	24,332		 	5,436		 	20,735		 	19,009		 	(11,408	)	 	107,412		
Income (loss) before income taxes	16,525		 	6,154		 	(1,163	)	 	36,621		 	(16,923	)	 	—		 	41,214		
Income tax (expense) benefit	(6,280	)	 	(2,338	)	 	442		 	(13,916	)	 	7,057		 	—		 	(15,036	)	
Net income (loss)	10,245		 	3,816		 	(721	)	 	22,705		 	(9,866	)	 	—		 	26,178		
  Net income attributable to noncontrolling interests	—		 	—		 	—		 	—		 	28		 	—		 	28		
Net income (loss) attributable to Nelnet, Inc.	$	10,245		 	3,816		 	(721	)	 	22,705		 	(9,894	)	 	—		 	26,150		

21

	
																			
 	Three months ended June 30, 2015 (a)	
 	Student Loan and Guaranty Servicing	 	Tuition Payment Processing and Campus Commerce	 	Asset
Generation and
Management	 	Corporate and Other
Activities	 	Eliminations	 	Total	
Total interest income	$	13		 	1		 	176,279		 	1,814		 	(385	)	 	177,722		
Interest expense	—		 	—		 	71,441		 	1,570		 	(385	)	 	72,626		
Net interest income	13		 	1		 	104,838		 	244		 	—		 	105,096		
Less provision for loan losses	—		 	—		 	2,150		 	—		 	—		 	2,150		
Net interest income after provision for loan losses	13		 	1		 	102,688		 	244		 	—		 	102,946		
Other income:	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing revenue	63,833		 	—		 	—		 	—		 	—		 	63,833		
Intersegment servicing revenue	12,223		 	—		 	—		 	—		 	(12,223	)	 	—		
Tuition payment processing, school information, and campus commerce revenue	—		 	27,686		 	—		 	—		 	—		 	27,686		
Enrollment services revenue	—		 	—		 	—		 	12,680		 	—		 	12,680		
Other income	—		 	—		 	3,950		 	8,035		 	—		 	11,985		
Gain on sale of loans and debt repurchases	—		 	—		 	1,041		 	474		 	—		 	1,515		
Derivative market value and foreign currency adjustments, net	—		 	—		 	9,404		 	2,540		 	—		 	11,944		
Derivative settlements, net	—		 	—		 	(5,189	)	 	(253	)	 	—		 	(5,442	)	
Total other income	76,056		 	27,686		 	9,206		 	23,476		 	(12,223	)	 	124,201		
Operating expenses:	 		 	 		 	 		 	 		 	.		 	 		
Salaries and benefits	31,585		 	13,583		 	524		 	13,095		 	—		 	58,787		
Depreciation and amortization	527		 	2,195		 	—		 	3,779		 	—		 	6,501		
Loan servicing fees	—		 	—		 	7,420		 	—		 	—		 	7,420		
Cost to provide enrollment services	—		 	—		 	—		 	10,395		 	—		 	10,395		
Other expenses	15,376		 	4,112		 	1,270		 	11,967		 	—		 	32,725		
Intersegment expenses, net	8,045		 	2,164		 	12,362		 	(10,348	)	 	(12,223	)	 	—		
Total operating expenses	55,533		 	22,054		 	21,576		 	28,888		 	(12,223	)	 	115,828		
Income (loss) before income taxes	20,536		 	5,633		 	90,318		 	(5,168	)	 	—		 	111,319		
Income tax (expense) benefit	(7,804	)	 	(2,140	)	 	(34,321	)	 	3,910		 	—		 	(40,356	)	
Net income (loss)	12,732		 	3,493		 	55,997		 	(1,258	)	 	—		 	70,963		
  Net income attributable to noncontrolling interests	—		 	—		 	—		 	54		 	—		 	54		
Net income (loss) attributable to Nelnet, Inc.	$	12,732		 	3,493		 	55,997		 	(1,312	)	 	—		 	70,909		

(a)	Does not include the Communications segment, which was initiated as a result of the acquisition of Allo on December 31, 2015.	

22

	
																						
 	Six months ended June 30, 2016	
 	Student Loan and Guaranty Servicing	 	Tuition Payment Processing and Campus Commerce	 	Communications	 	Asset
Generation and
Management	 	Corporate and Other
Activities	 	Eliminations	 	Total	
Total interest income	$	43		 	5		 	—		 	375,689		 	4,157		 	(1,625	)	 	378,269		
Interest expense	—		 	—		 	352		 	182,647		 	3,087		 	(1,625	)	 	184,460		
Net interest income	43		 	5		 	(352	)	 	193,042		 	1,070		 	—		 	193,809		
Less provision for loan losses	—		 	—		 	—		 	4,500		 	—		 	—		 	4,500		
Net interest income (loss) after provision for loan losses	43		 	5		 	(352	)	 	188,542		 	1,070		 	—		 	189,309		
Other income:	 		 	 		 	 	 	 		 	 		 	 		 	 		
Loan and guaranty servicing revenue	106,732		 	—		 	—		 	—		 	—		 	—		 	106,732		
Intersegment servicing revenue	23,415		 	—		 	—		 	—		 	—		 	(23,415	)	 	—		
Tuition payment processing, school information, and campus commerce revenue	—		 	69,140		 	—		 	—		 	—		 	—		 	69,140		
Communications revenue	—		 	—		 	8,824		 	—		 	—		 	—		 	8,824		
Enrollment services revenue	—		 	—		 	—		 	—		 	4,326		 	—		 	4,326		
Other income	—		 	—		 	—		 	8,097		 	15,462		 	—		 	23,559		
Gain on sale of loans and debt repurchases	—		 	—		 	—		 	101		 	—		 	—		 	101		
Derivative market value and foreign currency adjustments, net	—		 	—		 	—		 	(51,308	)	 	(6,053	)	 	—		 	(57,361	)	
Derivative settlements, net	—		 	—		 	—		 	(11,568	)	 	(463	)	 	—		 	(12,031	)	
Total other income	130,147		 	69,140		 	8,824		 	(54,678	)	 	13,272		 	(23,415	)	 	143,290		
Operating expenses:	 		 	 		 	 	 	 		 	 		 	 		 	 		
Salaries and benefits	64,346		 	29,880		 	2,467		 	1,018		 	26,454		 	—		 	124,165		
Depreciation and amortization	883		 	4,782		 	2,507		 	—		 	7,650		 	—		 	15,823		
Loan servicing fees	—		 	—		 	—		 	14,144		 	—		 	—		 	14,144		
Cost to provide communication services	—		 	—		 	3,384		 	—		 	—		 	—		 	3,384		
Cost to provide enrollment services	—		 	—		 	—		 	—		 	3,623		 	—		 	3,623		
Other expenses	22,850		 	8,973		 	1,566		 	2,997		 	21,397		 	—		 	57,783		
Intersegment expenses, net	12,343		 	3,074		 	331		 	23,646		 	(15,978	)	 	(23,415	)	 	—		
Total operating expenses	100,422		 	46,709		 	10,255		 	41,805		 	43,146		 	(23,415	)	 	218,922		
Income (loss) before income taxes	29,768		 	22,436		 	(1,783	)	 	92,059		 	(28,804	)	 	—		 	113,677		
Income tax (expense) benefit	(11,312	)	 	(8,526	)	 	678		 	(34,983	)	 	14,674		 	—		 	(39,469	)	
Net income (loss)	18,456		 	13,910		 	(1,105	)	 	57,076		 	(14,130	)	 	—		 	74,208		
  Net income attributable to noncontrolling interests	—		 	—		 	—		 	—		 	97		 	—		 	97		
Net income (loss) attributable to Nelnet, Inc.	$	18,456		 	13,910		 	(1,105	)	 	57,076		 	(14,227	)	 	—		 	74,111		

23

	
																			
 	Six months ended June 30, 2015 (a)	
 	Student Loan and Guaranty Servicing	 	Tuition Payment Processing and Campus Commerce	 	Asset
Generation and
Management	 	Corporate and Other
Activities	 	Eliminations	 	Total	
Total interest income	$	20		 	3		 	348,702		 	3,967		 	(821	)	 	351,871		
Interest expense	—		 	—		 	141,981		 	3,020		 	(821	)	 	144,180		
Net interest income	20		 	3		 	206,721		 	947		 	—		 	207,691		
Less provision for loan losses	—		 	—		 	4,150		 	—		 	—		 	4,150		
Net interest income after provision for loan losses	20		 	3		 	202,571		 	947		 	—		 	203,541		
Other income:	 		 	 		 	 		 	 		 	 		 	 		
Loan and guaranty servicing revenue	121,644		 	—		 	—		 	—		 	—		 	121,644		
Intersegment servicing revenue	25,094		 	—		 	—		 	—		 	(25,094	)	 	—		
Tuition payment processing, school information, and campus commerce revenue	—		 	62,366		 	—		 	—		 	—		 	62,366		
Enrollment services revenue	—		 	—		 	—		 	26,053		 	—		 	26,053		
Other income	—		 	—		 	8,526		 	14,867		 	—		 	23,393		
 Gain on sale of loans and debt repurchases	—		 	—		 	1,392		 	2,998		 	—		 	4,390		
Derivative market value and foreign currency adjustments, net	—		 	—		 	12,994		 	1,087		 	—		 	14,081		
Derivative settlements, net	—		 	—		 	(10,152	)	 	(505	)	 	—		 	(10,657	)	
Total other income	146,738		 	62,366		 	12,760		 	44,500		 	(25,094	)	 	241,270		
Operating expenses:	 		 	 		 	 		 	 		 	 		 	 		
Salaries and benefits	65,288		 	26,904		 	1,065		 	26,580		 	—		 	119,837		
Depreciation and amortization	973		 	4,390		 	—		 	6,800		 	—		 	12,163		
Loan servicing fees	—		 	—		 	15,036		 	—		 	—		 	15,036		
Cost to provide enrollment services	—		 	—		 	—		 	21,194		 	—		 	21,194		
Other expenses	29,976		 	7,914		 	2,407		 	22,529		 	—		 	62,826		
Intersegment expenses, net	14,687		 	4,199		 	25,370		 	(19,162	)	 	(25,094	)	 	—		
Total operating expenses	110,924		 	43,407		 	43,878		 	57,941		 	(25,094	)	 	231,056		
Income (loss) before income taxes	35,834		 	18,962		 	171,453		 	(12,494	)	 	—		 	213,755		
Income tax (expense) benefit	(13,617	)	 	(7,206	)	 	(65,152	)	 	7,989		 	—		 	(77,986	)	
Net income (loss)	22,217		 	11,756		 	106,301		 	(4,505	)	 	—		 	135,769		
  Net income attributable to noncontrolling interests	—		 	—		 	—		 	95		 	—		 	95		
Net income (loss) attributable to Nelnet, Inc.	$	22,217		 	11,756		 	106,301		 	(4,600	)	 	—		 	135,674		

(a)	Does not include the Communications segment, which was initiated as a result of the acquisition of Allo on December 31, 2015 .	

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11.    Major Customer
The Company earns loan servicing revenue from a servicing contract with the U.S. Department of Education (the "Department") that currently expires on June 16, 2019. Revenue earned by the Company's Student Loan and Guaranty Servicing operating segment related to this contract was $37.1 million and $33.6 million for the three months ended June 30, 2016 and 2015 , respectively, and $72.3 million and $66.0 million for the six months ended June 30, 2016 and 2015, respectively. In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing solution to support the management of federal student financial aid, including the servicing of all student loans owned by the Department.  The contract solicitation process is divided into two phases. Responses for Phase I were due on May 9, 2016. 

On May 6, 2016, the Company and Great Lakes Educational Loan Services, Inc. ("Great Lakes") submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract in the event that the Department selects it to be awarded with the contract. The joint venture will operate as a new legal entity called GreatNet Solutions, LLC ("GreatNet"). The Company and Great Lakes each own 50 percent of the ownership interests of GreatNet. In addition to the Company, Great Lakes is currently one of four private sector companies (referred to as Title IV Additional Servicers, or "TIVAS") that currently has a student loan servicing contract with the Department to provide servicing for loans owned by the Department.

On June 30, 2016, the Department announced which entities were selected to respond to Phase II of the procurement selection process. GreatNet was one of three entities selected.

12.   Fair Value

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis. There were no transfers into or out of level 1, level 2, or level 3 for the six months ended June 30, 2016.

																			
 	As of June 30, 2016	 	As of December 31, 2015	
 	Level 1	 	Level 2	 	Total	 	Level 1	 	Level 2	 	Total	
Assets:	 	 	 	 	 	 	 	 	 	 	 	
Investments (available-for-sale and trading):	 	 	 	 			 	 	 	 	 	 	
Student loan asset-backed securities	$	—		 	133,592		 	133,592		 	—		 	147,925		 	147,925		
Equity securities	7,766		 	—		 	7,766		 	7,337		 	—		 	7,337		
Debt securities	124		 	—		 	124		 	130		 	—		 	130		
Total investments (available-for-sale and trading)	7,890		 	133,592		 	141,482		 	7,467		 	147,925		 	155,392		
Fair value of derivative instruments	—		 	3,408		 	3,408		 	—		 	28,690		 	28,690		
Total assets	$	7,890		 	137,000		 	144,890		 	7,467		 	176,615		 	184,082		
Liabilities:	 		 	 		 	 		 	 	 	 	 	 	
Fair value of derivative instruments	$	—		 	101,771		 	101,771		 	—		 	74,881		 	74,881		
Total liabilities	$	—		 	101,771		 	101,771		 	—		 	74,881		 	74,881		

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The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets:

																
 	As of June 30, 2016	
 	Fair value	 	Carrying value	 	Level 1	 	Level 2	 	Level 3	
Financial assets:	 	 	 	 	 	 	 	 	 	
Student loans receivable	$	26,875,363		 	26,539,604		 	—		 	—		 	26,875,363		
Cash and cash equivalents	59,253		 	59,253		 	59,253		 	—		 	—		
Investments (available-for-sale and trading)	141,482		 	141,482		 	7,890		 	133,592		 	—		
Notes receivable	17,206		 	17,206		 	—		 	17,206		 	—		
Restricted cash	955,689		 	955,689		 	955,689		 	—		 	—		
Restricted cash – due to customers	132,018		 	132,018		 	132,018		 	—		 	—		
Restricted investments	9,110		 	9,110		 	9,110		 	—		 	—		
Accrued interest receivable	380,140		 	380,140		 	—		 	380,140		 	—		
Derivative instruments	3,408		 	3,408		 	—		 	3,408		 	—		
Financial liabilities:	 		 	 		 	 	 	 	 	 	
Bonds and notes payable	25,510,394		 	26,399,686		 	—		 	25,510,394		 	—		
Accrued interest payable	39,926		 	39,926		 	—		 	39,926		 	—		
Due to customers	132,018		 	132,018		 	132,018		 	—		 	—		
Derivative instruments	101,771		 	101,771		 	—		 	101,771		 	—		

																
 	As of December 31, 2015	
 	Fair value	 	Carrying value	 	Level 1	 	Level 2	 	Level 3	
Financial assets:	 	 	 	 	 	 	 	 	 	
Student loans receivable	$	28,611,350		 	28,324,552		 	—		 	—		 	28,611,350		
Cash and cash equivalents	63,529		 	63,529		 	63,529		 	—		 	—		
Investments (available-for-sale and trading)	155,392		 	155,392		 	7,467		 	147,925		 	—		
Notes receivable	18,067		 	18,473		 	—		 	18,067		 	—		
Restricted cash	823,450		 	823,450		 	823,450		 	—		 	—		
Restricted cash – due to customers	144,771		 	144,771		 	144,771		 	—		 	—		
Restricted investments	9,174		 	9,174		 	9,174		 	—		 	—		
Accrued interest receivable	383,825		 	383,825		 	—		 	383,825		 	—		
Derivative instruments	28,690		 	28,690		 	—		 	28,690		 	—		
Financial liabilities:	 		 	 		 	 	 	 	 	 	
Bonds and notes payable	27,150,775		 	28,105,921		 	—		 	27,150,775		 	—		
Accrued interest payable	31,507		 	31,507		 	—		 	31,507		 	—		
Due to customers	144,771		 	144,771		 	144,771		 	—		 	—		
Derivative instruments	74,881		 	74,881		 	—		 	74,881		 	—		
 
The methodologies for estimating the fair value of financial assets and liabilities are described in note 20 of the notes to consolidated financial statements included in the 2015 Annual Report.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and six months ended June 30, 2016 and 2015 . 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 2015 Annual Report.

Forward-looking and cautionary statements

This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document.  Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” 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 analysis 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 2015 Annual Report and elsewhere in this report, and include such risks and uncertainties as:

•	student loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), 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 student loans and initiatives to purchase additional FFELP and private education loans, and risks from changes in levels of student loan prepayment or default rates;	

•	financing and liquidity risks, including risks of changes in the general interest rate environment and in the securitization and other financing markets for student loans, including adverse changes resulting from slower than expected payments on student loans in FFELP securitization trusts, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;	

•	risks from changes in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, risks related to adverse changes in the Company's volumes allocated under the Company's loan servicing contract with the Department, which accounted for approximately 15 percent of the Company's revenue in 2015, risks related to the Department's initiative to procure a new contract for federal student loan servicing to acquire a single servicing solution to service all loans owned by the Department, including the risk that the Company's joint venture with Great Lakes may not be awarded the contract, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of FFELP, Federal Direct Loan Program, and private education loans;	

•	risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential student loan borrower and other customer information;	

•	uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;	

27

		
•	the uncertain nature of the expected benefits from the acquisition of Allo Communications LLC and the ability to integrate its communications operations and successfully expand its fiber network in existing service areas and additional communities;	

•	risks and uncertainties related to initiatives to pursue additional strategic investments and acquisitions, including investments and acquisitions that are intended to diversify the Company both within and outside of its historical core education-related businesses; and	

•	risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs, resulting from the recent politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.	
All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws.
OVERVIEW

The Company is a diverse company with a focus on delivering education-related products and services and student loan asset management. The largest operating businesses engage in student loan servicing, tuition payment processing and school information systems, and communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate and start-up ventures.

GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments

A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency adjustments, is provided below.

													
 	Three months ended June 30,	 	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
GAAP net income attributable to Nelnet, Inc.	$	26,150		 	70,909		 	74,111		 	135,674		
Derivative market value and foreign currency adjustments	35,207		 	(11,944	)	 	57,361		 	(14,081	)	
Tax effect (a)	(13,379	)	 	4,539		 	(21,797	)	 	5,351		
Net income, excluding derivative market value and foreign currency adjustments (b)	$	47,978		 	63,504		 	109,675		 	126,944		
 	 	 	 	 	 	 	 	
Earnings per share:	 	 	 	 	 	 	 	
GAAP net income attributable to Nelnet, Inc.	$	0.61		 	1.54		 	1.73		 	2.94		
Derivative market value and foreign currency adjustments	0.83		 	(0.26	)	 	1.34		 	(0.31	)	
Tax effect (a)	(0.31	)	 	0.10		 	(0.51	)	 	0.12		
Net income, excluding derivative market value and foreign currency adjustments (b)	$	1.13		 	1.38		 	2.56		 	2.75		

(a)	The tax effects are calculated by multiplying the derivative market value and foreign currency adjustments by the applicable statutory income tax rate.	

(b)	The Company provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. "Derivative market value and foreign currency adjustments" include (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars. The Company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.	

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Operating Results

The Company earns net interest income on its FFELP student loan portfolio in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of June 30, 2016 , the Company had a $26.5 billion student loan portfolio that will amortize over the next approximately 25 years. The Company actively seeks to acquire additional FFELP loan portfolios to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

In addition, the Company earns fee-based revenue through the following reportable operating segments:

•	Student Loan and Guaranty Servicing ("LGS") - referred to as Nelnet Diversified Solutions ("NDS")	
		
•	Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS")	
		
•	Communications - referred to as Allo Communications ("Allo")	

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.

Prior to January 1, 2016, the Company allocated certain corporate overhead expenses that are incurred within the Corporate and Other Activities segment to the other operating segments. These expenses included certain corporate activities related to executive management, internal audit, enterprise risk management, and other costs incurred by the Company due to corporate-wide initiatives. Effective January 1, 2016, internal reporting to executive management (the "chief operating decision maker") changed to eliminate the allocation of these expenses to the other segments. Management believes the change in its allocation methodology results in a better reflection of the operating results of each of the reportable segments as if they each operated as a standalone business entity, which also reflects how management evaluates the performance of the segments. Prior period segment operating results have been restated to conform to the current period presentation.

The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the three and six months ended June 30, 2016 and 2015 (dollars in millions).

(a)	Revenue includes intersegment revenue earned by LGS as a result of servicing loans for AGM.	

(b)	Total revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax.	

(c)	Computed as income before income taxes divided by total revenue.	

A summary of the results and financial highlights for each reportable operating segment and a summary of the Company's liquidity and capital resources follows. See "Results of Operations" for each reportable operating segment and "Liquidity and Capital Resources" under this Item 2 for additional detail.

29

Student Loan and Guaranty Servicing

•	As of June 30, 2016 , the Company was servicing $183.6 billion in FFELP, private, and government owned student loans, as compared with $169.9 billion of loans as of June 30, 2015 .	

•	Revenue decreased in the three and six months ended June 30, 2016 compared to the same periods in 2015 due to a decrease in guaranty servicing and collection revenue. The Company's guaranty servicing and collection revenue was earned from two guaranty clients, and a significant amount of such revenue came from one of those clients. The contract with this client expired on October 31, 2015. FFELP guaranty servicing and collection revenue recognized by the Company from this client for the three and six months ended June 30, 2015 was $12.6 million and $21.3 million respectively. The other guaranty servicing and collection client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. After this customer's exit from the FFELP guaranty business effective June 30, 2016, the Company has no remaining guaranty servicing and collection revenue.	

•	Revenue from the government servicing contract increased to $37.1 million for the three months ended June 30, 2016 compared to $33.6 million for the same period in 2015, and increased to $72.3 million for the six months ended June 30, 2016, compared to $66.0 million for the same period in 2015. This increase was due to the shift in the portfolio of loans serviced to a greater portion of loans in higher paying repayment statuses.	

•	Before tax operating margin was 25.1% and 27.0% for the three months ended June 30, 2016 and 2015, respectively, and 22.9% and 24.4% for the six months ended June 30, 2016 and 2015, respectively. This decrease was due to a decrease in guaranty servicing and collection revenue due to the loss of a significant guaranty client discussed above. The Company anticipates that margins will continue to decrease as a result of the loss of its remaining guaranty servicing and collection customer that exited the FFELP guaranty business at the end of their contract term on June 30, 2016 as discussed above.	

•	In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing solution to support the management of federal student financial aid, including the servicing of all student loans owned by the Department.  The contract solicitation process is divided into two phases. Responses for Phase I were due on May 9, 2016. 	

On May 6, 2016, the Company and Great Lakes submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract in the event that the Department selects it to be awarded with the contract. The joint venture will operate as a new legal entity called GreatNet Solutions, LLC ("GreatNet"). The Company and Great Lakes each own 50 percent of the ownership interests of GreatNet. In addition to the Company, Great Lakes is one of four private sector companies (referred to as Title IV Additional Services, or "TIVAS") that currently has a student loan servicing contract with the Department to provide servicing for loans owned by the Department. On June 30, 2016, the Department announced which entities were selected to respond to Phase II of the procurement selection process. GreatNet was one of three entities selected.

Tuition Payment Processing and Campus Commerce

•	Revenue increased in the three and six months ended June 30, 2016 compared to the same periods in 2015 due to increases in the number of managed tuition payment plans, campus commerce customer transaction and payments volume, and new school customers.	

•	Before tax operating margin was 20.2% and 20.3% for the three months ended June 30, 2016 and 2015 , respectively and 32.5% and 30.4% for the six months ended June 30, 2016 and 2015, respectively.	

•	This segment is subject to seasonal fluctuations. Based on the timing of when revenue is recognized and when expenses are incurred, revenue and operating margin are higher in the first quarter as compared to the remainder of the year.	

30

Communications

•	On December 31, 2015, the Company purchased 92.5 percent of the ownership interests of Allo for total cash consideration of $46.25 million.  On January 1, 2016, the Company sold a 1.0 percent ownership interest in Allo to a non-related third-party for $0.5 million. The remaining 7.5 percent of the ownership interests of Allo is owned by members of Allo management, who have the opportunity to earn an additional 11.5 percent (up to 19 percent) of the total ownership interests based on the financial performance of Allo.  The Allo assets acquired and liabilities assumed were recorded by the Company at their respective estimated fair values at the date of acquisition, and such assets and liabilities were included in the Company's balance sheet as of December 31, 2015.  However, Allo had no impact on the consolidated statement of income for 2015.  On January 1, 2016, the Company began to reflect the operations of Allo in the consolidated statements of income.	

•	For the three and six months ended June 30, 2016 , the operating segment recorded a net loss of $0.7 million and $1.1 million, respectively. The Company anticipates this operating segment will be dilutive to consolidated earnings in 2016 due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.	

•	The Company currently plans to spend a total of approximately $50 million in network capital expenditures during 2016. However, such amount could change based on customer demand for Allo's services. For the six months ended June 30, 2016 , Allo's capital expenditures were $12.0 million, including $9.2 million for the three months ended June 30, 2016.	

Asset Generation and Management

•	Core student loan spread was 1.29% for the three months ended June 30, 2016 , compared to 1.41% for the same period in 2015 and 1.34% for the three month period ended March 31, 2016. The decrease in core student loan spread for the three month period ended June 30, 2016 compared to the three month period ended March 31, 2016 was due to a widening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans.	

•	Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the three months ended June 30, 2016 and 2015 , and six months ended June 30, 2016 and 2015, the Company earned $39.5 million , $45.1 million , $80.1 million, and $91.3 million, respectively, of fixed rate floor income (net of derivative settlements of $4.8 million and $5.0 million for the three months ended June 30, 2016 and 2015, respectively, and $10.1 million and $10.0 million for the six months ended June 30, 2016 and 2015, respectively, used to hedge such loans). The decrease in fixed rate floor income for the three and six months ended June 30, 2016 compared to the same periods in 2015 is due to an increase in interest rates.	

Liquidity and Capital Resources

•	As of June 30, 2016 , the Company had cash and cash equivalents of $59.3 million . In addition, the Company had a portfolio of available-for-sale and trading investments, consisting primarily of student loan asset-backed securities, with a fair value of $141.5 million as of June 30, 2016 .	

•	For the six months ended June 30, 2016 , the Company generated $175.2 million in net cash provided by operating activities.	

•	Forecasted future cash flows from the Company's FFELP student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.37 billion as of June 30, 2016 .	

•	During the six months ended June 30, 2016 , the Company repurchased a total of 1,611,041 shares of Class A common stock for $52.5 million ($32.57 per share). In May 2016, the Company's Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 25, 2019. The five million shares authorized under the new program include the remaining 1,664,223 un-repurchased shares from the prior program, which the new program replaced.	

•	During the six months ended June 30, 2016 , the Company paid cash dividends of $10.2 million ($0.24 per share), including $5.1 million ($0.12 per share) during the second quarter.	

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•	The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP and private education loan acquisitions; strategic acquisitions and investments; expansion of Allo's telecommunications network; 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.	

CONSOLIDATED RESULTS OF OPERATIONS

Analysis of the Company's operating results for the three and six months ended June 30, 2016 compared to the same period in 2015 is summarized below.

The Company’s operating results are primarily driven by the performance of its existing portfolio and the revenues generated by its fee-based businesses and the costs to provide their products and services.  The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt.

The Company operates in distinct operating segments as described previously. For a reconciliation of the segment operating results to the consolidated results of operations, see note 10 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a segment basis.

32

	
															
 	Three months	 	Six months	 	 	
 	ended June 30,	 	ended June 30,	 	 	
 	2016	 	2015	 	2016	 	2015	 	Additional information	
Loan interest	$	184,067		 	175,835		 	374,055		 	347,779		 	Increase due to an increase in the gross yield earned on the student loan portfolio, partially offset by a decrease in the average balance of student loans and fixed rate floor income.	
Investment interest	2,185		 	1,887		 	4,214		 	4,092		 	Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations.	
Total interest income	186,252		 	177,722		 	378,269		 	351,871		 	 	
Interest expense	94,052		 	72,626		 	184,460		 	144,180		 	Increase due primarily to an increase in the Company's cost of funds, partially offset by a decrease in the average balance of debt outstanding.	
Net interest income	92,200		 	105,096		 	193,809		 	207,691		 	See table below for additional analysis.	
Less provision for loan losses	2,000		 	2,150		 	4,500		 	4,150		 	Represents the periodic expense of maintaining an allowance appropriate to absorb losses inherent in the portfolio of student loans. See AGM operating segment - results of operations.	
Net interest income after provision for loan losses	90,200		 	102,946		 	189,309		 	203,541		 	 	
Other income:	 		 	 		 	 		 	 		 	 	
LGS revenue	54,402		 	63,833		 	106,732		 	121,644		 	See LGS operating segment - results of operations.	
TPP&CC revenue	30,483		 	27,686		 	69,140		 	62,366		 	See TPP&CC operating segment - results of operations.	
Communications revenue	4,478		 	—		 	8,824		 	—		 	See Communications operating segment - results of operations.	
Enrollment services revenue	—		 	12,680		 	4,326		 	26,053		 	See table below for additional analysis.	
Other income	9,765		 	11,985		 	23,559		 	23,393		 	See table below for the components of "other income."	
Gain on sale of loans and debt repurchases	—		 	1,515		 	101		 	4,390		 	Gains are primarily from the Company repurchasing its own debt.	
Derivative settlements, net	(5,495	)	 	(5,442	)	 	(12,031	)	 	(10,657	)	 	The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. See table below for additional analysis.	
Derivative market value and foreign currency adjustments, net	(35,207	)	 	11,944		 	(57,361	)	 	14,081		 	Includes (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.	
Total other income	58,426		 	124,201		 	143,290		 	241,270		 	 	
Operating expenses:	 		 	 		 	 		 	 		 	 	
Salaries and benefits	60,923		 	58,787		 	124,165		 	119,837		 	Increase was due to additional personnel to support the increase in TPP&CC revenue and the acquisition of Allo on December 31, 2015.	
Depreciation and amortization	8,183		 	6,501		 	15,823		 	12,163		 	Increase was due to additional depreciation expense as a result of investments in information technology infrastructure and due to the acquisition of Allo on December 31, 2015.	
Loan servicing fees	7,216		 	7,420		 	14,144		 	15,036		 	The Company pays higher third-party servicing fees on delinquent loans. The Company's third-party serviced loan portfolio has fewer delinquent loans in 2016 compared to 2015; therefore, third-party servicing fees have decreased.	
Cost to provide communication services	1,681		 	—		 	3,384		 	—		 	Represents costs of services and products primarily associated with television programming costs.	
Cost to provide enrollment services	—		 	10,395		 	3,623		 	21,194		 	See table below for additional analysis.	
Other	29,409		 	32,725		 	57,783		 	62,826		 	Decrease due to a decrease in collection costs associated with  the decrease in FFELP guaranty collection revenue, partially offset by an increase as a result of the acquisition of Allo on December 31, 2015.	
Total operating expenses	107,412		 	115,828		 	218,922		 	231,056		 	 	
Income before income taxes	41,214		 	111,319		 	113,677		 	213,755		 	 	
Income tax expense	15,036		 	40,356		 	39,469		 	77,986		 	The effective tax rate was 36.51% and 36.27% in the three months ended June 30, 2016 and 2015, respectively, and 34.75% and 36.50% in the six months ended June 30, 2016 and 2015, respectively. The lower effective tax rate for the six months ended June 30, 2016 compared to the same period in 2015 was due to the resolution of certain tax positions during the first quarter of 2016.	
Net income	26,178		 	70,963		 	74,208		 	135,769		 	 	
Net income attributable to noncontrolling interest	28		 	54		 	97		 	95		 	 	
Net income attributable to Nelnet, Inc.	$	26,150		 	70,909		 	74,111		 	135,674		 	 	
Additional information:	 	 	 	 	 	 	 	 	 	
Net income attributable to Nelnet, Inc.	$	26,150		 	70,909		 	74,111		 	135,674		 	See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value and foreign currency adjustments.	
Derivative market value and foreign currency adjustments	35,207		 	(11,944	)	 	57,361		 	(14,081	)	 		
Tax effect	(13,379	)	 	4,539		 	(21,797	)		5,351		 		
Net income attributable to Nelnet, Inc., excluding derivative market value and foreign currency adjustments	$	47,978		 	63,504		 	109,675		 	126,944		 		

33

The following table summarizes the components of "net interest income" and "derivative settlements, net."

															
 	Three months ended June 30,	 	Six months ended June 30,	 	 	
 	2016	 	2015	 	2016	 	2015	 	Additional information	
Variable student loan interest margin, net of settlements on derivatives	$	47,141		 	54,521		 	100,996		 	105,155		 	Represents the yield the Company receives on its student loan portfolio less the cost of funding these loans. Variable student loan spread is also impacted by the amortization/accretion of loan premiums and discounts, the 1.05% per year consolidation loan rebate fee paid to the Department, and yield adjustments from borrower benefit programs. See AGM operating segment - results of operations.	
Fixed rate floor income, net of settlements on derivatives	39,497		 	45,069		 	80,136		 	91,313		 	The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information.	
Investment interest	2,185		 	1,887		 	4,214		 	4,092		 	 	
Non-portfolio related derivative settlements	(231	)	 	(253	)	 	(463	)	 	(506	)	 	 	
Corporate debt interest expense	(1,887	)	 	(1,570	)	 	(3,105	)	 	(3,020	)	 	Includes interest expense on the Junior Subordinated Hybrid Securities and unsecured and secured lines of credit.	
Net interest income (net of settlements on derivatives)	$	86,705		 	99,654		 	181,778		 	197,034		 	 	

The following table summarizes the components of "Enrollment services revenue" and "Cost to provide enrollment services."

										
 	Inquiry management (marketing) (a)	 	Inquiry management (software) (a)	 	Total (a)	
 	Three months ended June 30, 2016	
Enrollment services revenue	$	—		 	—		 	—		
Cost to provide enrollment services	—		 	—		 	—		
Gross profit	$	—		 	—		 	—		
 		 	 	 	 	
 	Three months ended June 30, 2015	
Enrollment services revenue	$	11,751		 	929		 	12,680		
Cost to provide enrollment services	10,395		 	—		 	10,395		
Gross profit	$	1,356		 	929		 	2,285		
Gross profit %	11.5%	 	 	 	 	
 	 	 	 	 	 	
 	Six months ended June 30, 2016	
Enrollment services revenue	$	4,001		 	325		 	4,326		
Cost to provide enrollment services	3,623		 	—		 	3,623		
Gross profit	$	378		 	325		 	703		
Gross profit %	9.4%	 	 	 	 	
 	 	 	 	 	 	
 	Six months ended June 30, 2015	
Enrollment services revenue	$	24,006		 	2,047		 	26,053		
Cost to provide enrollment services	21,194		 	—		 	21,194		
Gross profit	$	2,812		 	2,047		 	4,859		
Gross profit %	11.7%	 	 	 	 	

(a)	On February 1, 2016, the Company sold 100 percent of the membership interests in Sparkroom LLC, which includes the majority of the Company's inquiry management products and services within Nelnet Enrollment Solutions. The Company retained the digital marketing and content solution products and services under the brand name Peterson's within the Nelnet Enrollment Solutions business, which include test preparation study guides, school directories and databases, career exploration guides, on-line courses, scholarship search and selection data, career planning information and guides, and on-line information about colleges and universities. The Company reclassified the revenue and cost of goods sold attributable to the Peterson's products and services from "enrollment services revenue" and "cost to provide enrollment services" to "other income" and "other expenses," respectively, on the consolidated statements of income. After this reclassification, "enrollment services revenue" and "cost to provide enrollment services" include the operating results of the products and services sold as part of the Sparkroom disposition for all periods presented. These reclassifications had no effect on consolidated net income.	

34

The following table summarizes the components of "other income."

													
 	Three months ended June 30,	 	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Borrower late fee income	$	3,106		 	3,621		 	6,752		 	7,752		
Investment advisory fees	1,014		 	833		 	1,832		 	1,491		
Realized and unrealized gains/(losses) on investments classified as available-for-sale and trading, net	(112	)	 	1,826		 	1,028		 	2,349		
Peterson's revenue (a)	3,246		 	4,481		 	6,527		 	8,971		
Other (b)	2,511		 	1,224		 	7,420		 	2,830		
Other income	$	9,765		 	11,985		 	23,559		 	23,393		

(a)	Represents revenue previously included in "Enrollment services revenue" on the consolidated statements of income. The decrease in revenue for the three and six months ended June 30, 2016 compared to the same periods in 2015 was due to the loss of rights to a certain publication.	

(b)	The operating results for the six months ended June 30, 2016 includes a gain of approximately $3.0 million related to the Company's sale of Sparkroom, LLC in February 2016.	

35

STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT – RESULTS OF OPERATIONS

Student Loan Servicing Volumes (dollars in millions)

	
																									
Company owned	 	$21,397	 	$19,742	 	$19,369	 	$18,934	 	$18,593	 	$18,886	 	$18,433	 	$18,079	
% of total	 	15.5%	 	12.2%	 	11.5%	 	11.1%	 	10.6%	 	10.7%	 	10.1%	 	9.8%	
Number of servicing borrowers:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government servicing:	 	5,305,498		 	5,915,449		 	5,882,446		 	5,817,078		 	5,886,266		 	5,842,163		 	5,786,545		 	5,726,828		
FFELP servicing:	 	1,462,122		 	1,397,295		 	1,358,551		 	1,353,785		 	1,339,307		 	1,335,538		 	1,298,407		 	1,296,198		
Private servicing:	 	195,580		 	202,529		 	205,926		 	209,854		 	230,403		 	245,737		 	250,666		 	264,827		
Total:	 	6,963,200		 	7,515,273		 	7,446,923		 	7,380,717		 	7,455,976		 	7,423,438		 	7,335,618		 	7,287,853		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Number of remote hosted borrowers:	 	1,915,203		 	1,611,654		 	1,592,813		 	1,559,573		 	1,710,577		 	1,755,341		 	1,796,783		 	1,842,961		

Department of Education Student Loan Servicing Contract

The Company's current servicing contract with the Department expires on June 16, 2019. In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing solution to support the management of federal student financial aid, including the servicing of all student loans owned by the Department.  The contract solicitation process is divided into two phases. Responses for Phase I were due on May 9, 2016.

On May 6, 2016, the Company and Great Lakes submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract in the event that the Department selects it to be awarded with the contract. The joint venture will operate as a new legal entity called GreatNet. The Company and Great Lakes each own 50 percent of the ownership interests of GreatNet. In addition to the Company, Great Lakes is one of four private sector companies that currently has a student loan servicing contract with the Department to provide servicing for loans owned by the Department. On June 30, 2016, the Department announced which entities were selected to respond to Phase II of the procurement selection process. GreatNet was one of three entities selected. Navient Corporation and FedLoan Servicing (Pennsylvania Higher Education Assistance Agency), both existing TIVAS, were also selected to respond to Phase II.

During 2015, approximately 75 percent of new government student loans were allocated for servicing to the four TIVAS, with allocations based on established performance metrics compared among that group. An additional six not-for-profit ("NFP") servicers were allocated a total of approximately 25 percent of new loans for servicing during 2015. On March 2, 2016, the

36

Department announced that, for the period March 1, 2016 through June 30, 2016, new student loans will be allocated for servicing among the group of ten TIVAS and NFP servicers on the basis of the currently established performance metrics as compared among all ten loan servicers in that group, pursuant to a provision in the federal budgetary Consolidated Appropriations Act of 2016. This change resulted in a decrease in the Company's overall government allocation of new student loans for servicing from 13 percent to 8 percent for the period March 1, 2016 through June 30, 2016, and the other TIVAS were similarly affected. However, the Company did and will continue to benefit from the allocation of additional borrowers to the four NFP servicers to which the Company licenses its remote-hosted servicing software.

On July 15, 2016, the Department provided an update on its Direct Loan servicing contract with performance metrics results for the period January 1, 2016 through May 31, 2016 and new volume allocations for its student loan servicers based on these results. The new performance results had the Company ranked fifth among all TIVAS and NFP servicers, which results in the Company being allocated 12 percent of new student loan servicing volume for the period July 1, 2016 through February 28, 2017. The Company ranked second among the four TIVAS, with Great Lakes ranking first.

Summary and Comparison of Operating Results

															
 	Three months ended June 30,	 	Six months ended June 30,	 	Additional information	
 	2016	 	2015	 	2016	 	2015	 	 	
Net interest income	$	22		 	13		 	43		 	20		 		
Loan and guaranty servicing revenue	54,402		 	63,833		 	106,732		 	121,644		 	See table below for additional analysis.	
Intersegment servicing revenue	11,408		 	12,223		 	23,415		 	25,094		 	Represents revenue earned by the LGS operating segment as a result of servicing loans for the AGM operating segment. Decrease was due to portfolio run-off.	
Total other income	65,810		 	76,056		 	130,147		 	146,738		 		
Salaries and benefits	31,380		 	31,585		 	64,346		 	65,288		 		
Depreciation and amortization	445		 	527		 	883		 	973		 		
Other expenses	11,380		 	15,376		 	22,850		 	29,976		 	Decrease due primarily to a decrease in collection costs associated with FFELP guaranty collection revenue. Collection costs were $1.7 million and $6.0 million for the three months ended June 30, 2016 and 2015, respectively and $3.5 million and $10.8 million for the six months ended June 30, 2016 and 2015, respectively. Excluding collection costs, other expenses were $9.7 million and $9.4 million for the three months ended June 30, 2016 and 2015, respectively, and $19.3 million and $19.2 million for the six months ended June 30, 2016 and 2015, respectively. See additional information below regarding the decrease in FFELP guaranty collection revenue.	
Intersegment expenses, net	6,102		 	8,045		 	12,343		 	14,687		 	Intersegment expenses represent costs for certain corporate activities that are allocated to each operating segment based on estimated use of such activities and services.	
Total operating expenses	49,307		 	55,533		 	100,422		 	110,924		 		
Income before income taxes	16,525		 	20,536		 	29,768		 	35,834		 		
Income tax expense	(6,280	)	 	(7,804	)	 	(11,312	)	 	(13,617	)	 		
Net income	$	10,245		 	12,732		 	18,456		 	22,217		 		
Before tax operating margin	25.1	%	 	27.0	%	 	22.9	%	 	24.4	%	 	Decrease in margin is due to a decrease in guaranty servicing and collection revenue due to the loss of a guaranty client as discussed below. The Company anticipates that margins will continue to decrease as a result of the loss of its remaining guaranty servicing and collection customer that exited the FFELP guaranty business at the end of their contract term on June 30, 2016 as discussed below.	

37

The following table summarizes the components of "Loan and guaranty servicing revenue."

															
 	Three months ended June 30,	 	Six months ended June 30,	 	Additional information	
 	2016	 	2015	 	2016	 	2015	 	 	
Government servicing	$	37,063		 	33,633		 	72,294		 	66,041		 	Increase due to the shift in the portfolio of loans serviced to a greater portion of loans in higher paying repayment statuses.	
FFELP servicing	3,684		 	3,483		 	7,323		 	7,028		 	Increase due to an increase in third-party servicing volume as a result of conversions to the Company's servicing platform. Over time, FFELP servicing revenue will decrease as third-party customers' FFELP portfolios run off.	
Private servicing	3,427		 	2,743		 	6,573		 	5,782		 	Increase due to growth in private loan servicing volume from existing and new clients.	
FFELP guaranty servicing	1,161		 	2,416		 	2,345		 	4,897		 	The Company’s guaranty servicing revenue was earned from two guaranty servicing clients.  A contract with one client expired on October 31, 2015, and was not renewed.   Guaranty servicing revenue from this customer was $1.3 million for the three months ended June 30, 2015 and $2.6 million for the six months ended June 30, 2015.  The remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016.   Guaranty servicing revenue from this customer was $1.2 million for each of the three months ended June 30, 2016 and 2015 and $2.3 million for each of the six months ended June 30, 2016 and 2015, respectively.  After this customer’s exit from the FFELP guaranty business effective June 30, 2016, the Company has no remaining guaranty servicing revenue.	
FFELP guaranty collection	3,424		 	15,840		 	7,211		 	26,745		 	The Company’s guaranty collection revenue was earned from two guaranty collection clients.  A contract with one client expired on October 31, 2015, and was not renewed.   Guaranty collection revenue from this customer was $11.3 million for the three months ended June 30, 2015 and $18.7 million for the six months ended June 30, 2015.  The remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016.   Guaranty collection revenue from this customer was $3.4 million and $4.5 million for the three months ended June 30, 2016 and 2015, respectively, and $7.2 million and $8.0 million for the six months ended June 30, 2016 and 2015, respectively.  After this customer’s exit from the FFELP guaranty business effective June 30, 2016, the Company has no remaining guaranty collection revenue.  The Company incurred collection costs that were directly related to guaranty collection revenue.	
Software services	4,653		 	4,638		 	9,261		 	9,506		 	The majority of software services revenue relates to providing hosted student loan servicing.	
 Other	990		 	1,080		 	1,725		 	1,645		 	 	
Loan and guaranty servicing revenue	$	54,402		 	63,833		 	106,732		 	121,644		 	 	

38

TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT – RESULTS OF OPERATIONS

This segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Higher amounts of revenue are typically recognized during the first quarter due to fees related to grant and aid applications as well as online applications and enrollment services.  The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to generally fixed year-round personnel costs and seasonal marketing costs. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year.

Summary and Comparison of Operating Results

															
 	Three months ended June 30,	 	Six months ended June 30,	 	Additional information	
 	2016	 	2015	 	2016	 	2015	 	 	
Net interest income	$	3		 	1		 	5		 	3		 	 	
Tuition payment processing, school information, and campus commerce revenue	30,483		 	27,686		 	69,140		 	62,366		 	Increase was due to an increase in the number of managed tuition payment plans, campus commerce customer transaction and payments volume, and new school customers.	
Salaries and benefits	15,444		 	13,583		 	29,880		 	26,904		 	Increase due to additional personnel to support the increase in payment plans and continued system maintenance and enhancements.	
Depreciation and amortization	2,511		 	2,195		 	4,782		 	4,390		 		
Other expenses	4,815		 	4,112		 	8,973		 	7,914		 		
Intersegment expenses, net	1,562		 	2,164		 	3,074		 	4,199		 	Intersegment expenses represent costs for certain corporate activities that are allocated to each operating segment based on estimated use of such activities and services.	
Total operating expenses	24,332		 	22,054		 	46,709		 	43,407		 	 	
Income before income taxes	6,154		 	5,633		 	22,436		 	18,962		 	 	
Income tax expense	(2,338	)	 	(2,140	)	 	(8,526	)	 	(7,206	)	 	 	
Net income	$	3,816		 	3,493		 	13,910		 	11,756		 	 	
Before tax operating margin	20.2	%	 	20.3	%	 	32.5	%	 	30.4	%	 	 	

39

COMMUNICATIONS OPERATING SEGMENT – RESULTS OF OPERATIONS

Summary of Operating Results

									
 	Three months ended June 30, 2016	 	Six months ended June 30, 2016	 	Additional information	
Interest expense	$	205		 	352		 	 	
Communications revenue	4,478		 	8,824		 	Communications revenue is derived primarily from the sale of pure fiber optic services to residential and business customers in Nebraska, including internet, television, and telephone services.	
Salaries and benefits	1,377		 	2,467		 	At June 30, 2016, Allo had approximately 170 employees, including part-time employees. Allo also uses temporary employees in the normal course of business. Certain costs qualify for capitalization as Allo builds its network.	
Depreciation and amortization	1,378		 	2,507		 	Depreciation reflects the allocation of the costs of Allo's property and equipment over the period in which such assets are used. Amortization reflects the allocation of costs related to intangible assets recorded at fair value as of the date the Company acquired Allo over their estimated useful lives.	
Cost to provide communications services	1,681		 	3,384		 	Costs of services and products is primarily associated with television programming costs.	
Other expenses	813		 	1,566		 	 	
Intersegment expenses, net	187		 	331		 	Intersegment expenses represent costs for certain corporate activities that are allocated to each operating segment based on estimated use of such activities and services.	
Total operating expenses	5,436		 	10,255		 	 	
Loss before income taxes	(1,163	)	 	(1,783	)	 	 	
Income tax benefit	442		 	678		 	 	
Net loss	$	(721	)	 	(1,105	)	 	 	
 	 	 	 	 	 	
Additional Information:	 	 	 	 	 	
Net loss	$	(721	)	 	(1,105	)	 	 	
Interest expense	205		 	352		 	 	
Income tax benefit	(442	)	 	(678	)	 	 	
Depreciation and amortization	1,378		 	2,507		 	 	
Earnings before interest expense, income taxes, depreciation, and amortization (EBITDA)	$	420		 	1,076		 	For additional information regarding this non-GAAP measure, see the table immediately below.	

40

Certain financial and operating data for Allo is summarized in the tables below.

							
 	Three months ended June 30, 2016	 	Six months ended June 30, 2016	
 				
Residential revenue	$	2,528		 	5,052		
Business revenue	1,584		 	3,212		
Other revenue	366		 	560		
Total revenue	$	4,478		 	8,824		
 	 	 	 	
Net loss	$	(721	)	 	(1,105	)	
EBITDA (a)	420		 	1,076		
 	 	 	 	
Capital expenditures	9,160		 	12,037		
 	 	 	 	
Revenue contribution:		 	 	
Internet	37.0	%	 	37.6	%	
Telephone	26.6		 	27.2		
Television	31.4		 	32.1		
Other	5.0		 	3.1		
 	100.0	%	 	100.0	%	

	
						
 	As of
June 30, 2016	 	As of
December 31, 2015	
Residential customer information:	 	 	 	
Households served	8,314		 	7,600		
Households passed (b)	22,977		 	21,274		
Total households in current markets	137,500		 	137,500		

(a)	Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. Allo's management uses EBITDA to compare Allo's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest expense and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The Company reports EBITDA for Allo because the Company believes that it provides useful additional information for investors regarding a key metric used by management to assess Allo's performance, and it provides supplemental information about Allo's operating performance on a more variable cost basis. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from Allo's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP. A reconciliation of EBITDA from net income (loss) under GAAP is presented in the table immediately above.	

(b)	Represents the estimated number of single residence homes, apartments, and condominiums that Allo already serves and those in which Allo has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected.	

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ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS

Student Loan Portfolio

As of June 30, 2016 , the Company had a $26.5 billion student loan portfolio that will amortize over the next approximately 25 years. For a summary of the Company’s student loan portfolio as of June 30, 2016 and December 31, 2015 , see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
 
Loan Activity

The following table sets forth the activity of loans:

													
 	Three months ended June 30,	 	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Beginning balance	$	27,743,818		 	28,107,088		 	28,555,749		 	28,223,908		
Loan acquisitions	74,969		 	1,228,030		 	185,928		 	2,064,142		
Repayments, claims, capitalized interest, and other	(737,712	)	 	(690,556	)	 	(1,329,732	)	 	(1,318,916	)	
Consolidation loans lost to external parties	(326,515	)	 	(330,712	)	 	(612,647	)	 	(651,288	)	
Loans sold	—		 	—		 	(44,738	)	 	(3,996	)	
Ending balance	$	26,754,560		 	28,313,850		 	26,754,560		 	28,313,850		
 
Allowance for Loan Losses and Loan Delinquencies

The Company maintains an allowance appropriate to absorb losses, net of recoveries, inherent in the portfolio of student loans, which results in periodic expense provisions for loan losses. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.  

For a summary of the activity in the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 , and a summary of the Company's student loan delinquency amounts as of June 30, 2016 , December 31, 2015 , and June 30, 2015 , see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

In general, over the last several years, there has been a period over period decrease in the Company's federally insured loan provision for loan losses and charge-offs. The Company’s primary driver for loan growth has been acquiring student loan portfolios.  The Company records loans acquired net of any credit exposure through a credit discount, separate from the allowance for loan losses. This credit discount is non-accretable to interest income.   The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses.   The recent purchases of large loan portfolios have resulted in an increase in the non-accretable discount balance, but no additional allowance for loan losses associated with these recent loan portfolios has been necessary.   In addition, as the Company’s overall federally insured student loan portfolio continues to season with the length of time that loans are in active repayment, credit performance continues to improve.

The Company's provision for loan losses for private education loans increased during the first six months of 2016 compared to 2015 due to the increase in the private education loan balance.

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Student Loan Spread Analysis

The following table analyzes the student loan spread on the Company’s portfolio of student loans, which represents the spread between the yield earned on student loan assets and the costs of the liabilities and derivative instruments used to fund the assets.

																
 	Three months ended	 	Six months ended	
 	June 30,
2016	 	March 31,
2016	 	June 30,
2015	 	June 30,
2016	 	June 30,
2015	
Variable student loan yield, gross	2.84	 %	 	2.82	 %	 	2.57	 %	 	2.84	 %	 	2.55	 %	
Consolidation rebate fees	(0.83	)	 	(0.83	)	 	(0.83	)	 	(0.83	)	 	(0.84	)	
Discount accretion, net of premium and deferred origination costs amortization	0.06		 	0.06		 	0.04		 	0.06		 	0.05		
Variable student loan yield, net	2.07		 	2.05		 	1.78		 	2.07		 	1.76		
Student loan cost of funds - interest expense	(1.35	)	 	(1.27	)	 	(1.01	)	 	(1.32	)	 	(1.00	)	
Student loan cost of funds - derivative settlements	(0.01	)	 	(0.02	)	 	—		 	(0.01	)	 	—		
Variable student loan spread	0.71		 	0.76		 	0.77		 	0.74		 	0.76		
Fixed rate floor income, net of settlements on derivatives	0.58		 	0.58		 	0.64		 	0.58		 	0.65		
Core student loan spread	1.29	 %		1.34	 %		1.41	 %	 	1.32	 %	 	1.41	 %	
 	 	 	 	 	 	 	 	 	 	
Average balance of student loans	$	27,314,389		 	28,232,489		 	28,297,312		 	27,773,439		 	28,293,366		
Average balance of debt outstanding	27,240,061		 	28,099,821		 	28,331,870		 	27,669,813		 	28,395,893		

A trend analysis of the Company's core and variable student loan spreads is summarized below.

		
(a)	The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.  The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities.  The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread.  This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s FFELP student loan assets and related funding for those assets.	

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Variable student loan spread decreased during the three months ended June 30, 2016 as compared to both the three months ended March 31, 2016 and June 30, 2015 due to a widening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income.  A summary of fixed rate floor income and its contribution to core student loan spread follows:

																
 	Three months ended	 	Six months ended	
 	June 30, 2016	 	March 31, 2016	 	June 30, 2015	 	June 30, 2016	 	June 30, 2015	
Fixed rate floor income, gross	$	44,338		 	45,882		 	50,088		 	90,220		 	101,347		
Derivative settlements (a)	(4,841	)	 	(5,243	)	 	(5,019	)	 	(10,084	)	 	(10,034	)	
Fixed rate floor income, net	$	39,497		 	40,639		 	45,069		 	80,136		 	91,313		
Fixed rate floor income contribution to spread, net	0.58	%	 	0.58	%	 	0.64	%	 	0.58	%	 	0.65	%	

		
(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.	

The high levels of fixed rate floor income earned during 2016 and 2015 are due to historically low interest rates.  If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods. The decrease in fixed rate floor income for the three and six months ended June 30, 2016 compared to the same periods in 2015 is due to an increase in interest rates. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

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Summary and Comparison of Operating Results

															
 	Three months ended June 30,	 	Six months ended June 30,	 	Additional information	
 	2016	 	2015	 	2016	 	2015	 	 	
Net interest income after provision for loan losses	$	90,197		 	102,688		 	188,542		 	202,571		 	See table below for additional analysis.	
Other income	3,834		 	3,950		 	8,097		 	8,526		 	The primary component of other income is borrower late fees, which were $3.1 million and $3.6 million for the three months ended June 30, 2016 and 2015, and $6.8 million and $7.8 million for the six months ended June 30, 2016 and 2015, respectively.	
Gain on sale of loans and debt repurchases	—		 	1,041		 	101		 	1,392		 	Gains were primarily from the Company repurchasing its own asset-backed debt securities.	
Derivative market value and foreign currency adjustments, net	(31,411	)	 	9,404		 	(51,308	)	 	12,994		 	Includes (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.	
Derivative settlements, net	(5,264	)	 	(5,189	)	 	(11,568	)	 	(10,152	)	 	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.	
Total other (expense) income	(32,841	)	 	9,206		 	(54,678	)	 	12,760		 	 	
Salaries and benefits	499		 	524		 	1,018		 	1,065		 	 	
Loan servicing fees	7,216		 	7,420		 	14,144		 	15,036		 	The Company pays higher third-party servicing fees on delinquent loans. The Company's third-party serviced loan portfolio has fewer delinquent loans in 2016 compared to 2015; therefore, third-party servicing fees have decreased.	
Other expenses	1,481		 	1,270		 	2,997		 	2,407		 	 	
Intersegment expenses, net	11,539		 	12,362		 	23,646		 	25,370		 	Amounts include fees paid to the LGS operating segment for the servicing of the Company’s student loan portfolio. Decrease due to run off of the portfolio serviced by LGS.	
Total operating expenses	20,735		 	21,576		 	41,805		 	43,878		 	 	
Income before income taxes	36,621		 	90,318		 	92,059		 	171,453		 	 	
Income tax expense	(13,916	)	 	(34,321	)	 	(34,983	)	 	(65,152	)	 	 	
Net income	$	22,705		 	55,997		 	57,076		 	106,301		 	 	
 	 	 	 	 	 	 	 	 	 	
Additional information:	 	 	 	 	 	 	 	 	 	
Net income	$	22,705		 	55,997		 	57,076		 	106,301		 	See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value and foreign currency adjustments. Net income, excluding derivative market value and foreign currency adjustments, decreased in 2016 as compared to 2015 due to a decrease in variable student loan spread and fixed rate floor income.	
Derivative market value and foreign currency adjustments, net	31,411		 	(9,404	)	 	51,308		 	(12,994	)	 		
Tax effect	(11,936	)	 	3,574		 	(19,497	)	 	4,938		 		
Net income, excluding derivative market value and foreign currency adjustments	$	42,180		 	50,167		 	88,887		 	98,245		 		

45

The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net."

															
 	Three months ended June 30,	 	Six months ended June 30,	 	Additional information	
 	2016	 	2015	 	2016	 	2015	 	 	
Variable interest income, net of settlements on derivatives	$	191,802		 	180,868		 	388,928		 	357,346		 	Increase due to an increase in the gross yield earned on student loans, net of settlements on derivatives, partially offset by a decrease in the average balance of student loans.	
Consolidation rebate fees	(56,786	)	 	(58,427	)	 	(115,222	)	 	(117,298	)	 	Decrease due to a decrease in the average consolidation loan balance.	
Discount accretion, net of premium and deferred origination costs amortization	4,291		 	3,136		 	8,644		 	6,267		 	Increase due to the Company's purchases of loans at a net discount over the last several years.	
Interest on bonds and notes payable	(92,166	)	 	(71,056	)	 	(181,354	)	 	(141,160	)	 	Increase due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding.	
Variable student loan interest margin, net of settlements on derivatives	47,141		 	54,521		 	100,996		 	105,155		 	 	
Fixed rate floor income, net of settlements on derivatives	39,497		 	45,069		 	80,136		 	91,313		 	The high levels of fixed rate floor income earned are due to historically low interest rates. Fixed rate floor income has decreased due to the rising interest rate environment.	
Investment interest	899		 	444		 	1,634		 	922		 	 	
Intercompany interest	(604	)	 	(385	)	 	(1,292	)	 	(821	)	 	 	
Provision for loan losses - federally insured	(2,000	)	 	(2,000	)	 	(4,000	)	 	(4,000	)	 	See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations."	
Provision for loan losses - private education loans	—		 	(150	)	 	(500	)	 	(150	)	 		
Net interest income after provision for loan losses (net of settlements on derivatives)	$	84,933		 	97,499		 	176,974		 	192,419		 	 	

LIQUIDITY AND CAPITAL RESOURCES

The Company’s Student Loan and Guaranty Servicing and Tuition Payment Processing and Campus Commerce operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and capital needs to expand Allo's communications network in the Company's Communications operating segment.

Sources of Liquidity

The Company has historically generated positive cash flow from operations.  For the six months ended June 30, 2016 and the year ended December 31, 2015, the Company's net cash provided by operating activities was $175.2 million and $391.4 million, respectively.

As of June 30, 2016 , the Company had cash and cash equivalents of $ 59.3 million . The Company also had a portfolio of available-for-sale and trading investments, consisting primarily of student loan asset-backed securities, with a fair value of $141.5 million as of June 30, 2016 .

The Company also has a $350.0 million unsecured line of credit that matures on October 30, 2020. As of June 30, 2016 , $105.0 million was outstanding on the unsecured line of credit and $245.0 million was available for future use.

46

In addition, 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 effectively retired and are not included on the Company’s consolidated balance sheet.  However, these securities are legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate.  Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As of June 30, 2016 , the Company holds $50.8 million (par value) of its own asset-backed securities that are not included in the consolidated financial statements.

The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP and private education loan acquisitions; strategic acquisitions and investments; expansion of Allo's telecommunications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. Dependent upon the timing and size of the opportunities, the Company's cash and investment balances may increase from their current levels.
 
Cash Flows

During the six months ended June 30, 2016 , the Company generated $175.2 million from operating activities, compared to $192.0 million for the same period in 2015. The decrease in cash provided by operating activities reflects a decrease in net income, change in deferred taxes, and a decrease in proceeds from terminating certain derivative instrument contracts during the six months ended June 30, 2016 as compared to the same period in 2015. These factors were partially offset by changes in the adjustments to net income for non-cash fair value adjustments for derivatives and foreign currency transaction adjustments and a decrease in accounts receivable. Accrued interest on loans purchased is included in cash flows from operating activities in the respective period of the purchase.  Net purchased accrued interest was $60.7 million for the six months ended June 30, 2015. Net purchased accrued interest for the six months ended June 30, 2016 was not significant.

The primary items included in the statement of cash flows for investing activities are the purchase and repayment of student loans. The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable used to fund student loans. Cash provided by investing activities for the six months ended June 30, 2016 and 2015 was $1.6 billion and $324.3 million , respectively. Cash used in financing activities was $1.8 billion and $464.4 million for the six months ended June 30, 2016 and 2015, 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 Student Loan Assets and Related Collateral

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

	
						
 	As of June 30, 2016	
 	Carrying
amount	 	Final maturity	
Bonds and notes issued in asset-backed securitizations	$	24,576,893		 	8/26/19 - 8/26/52	
FFELP warehouse facilities	1,811,708		 	7/9/18 - 4/26/19	
Private education loan warehouse facility	221,114		 	4/28/17	
Other borrowings	75,000		 	10/31/16	
 	$	26,684,715		 	 	

Bonds and Notes Issued in Asset-backed Securitizations

The majority of the Company’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. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.

As of June 30, 2016 , 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 portfolio to be approximately $2.37 billion as detailed below.  The $2.37 billion includes approximately $726.5 million (as of June 30, 2016 ) of overcollateralization included in the asset-backed securitizations.  These excess net asset positions are reflected variously in the following balances in the consolidated balance sheet:  "student loans receivable," "restricted cash and investments," and "accrued interest receivable."

47

The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of June 30, 2016 .  As of June 30, 2016 , the Company had $24.6 billion of loans included in asset-backed securitizations, which represented 93.0 percent of its total FFELP student 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 as of June 30, 2016 or loans acquired subsequent to June 30, 2016 .

FFELP Asset-backed Securitization Cash Flow Forecast
$2.37 billion
(dollars in millions)

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 FFEL Program 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 that are generally consistent with those utilized in the Company’s recent asset-backed securitization transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $260 million to $320 million .

Interest rates :  The Company funds the majority of its student loans with three-month LIBOR indexed floating rate securities.  Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to a one-month LIBOR rate.  The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk.  The Company’s cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices.  If the forecast is computed assuming a spread of 24 basis points between three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $65 million to $105 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.  An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving.  The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. As of June 30, 2016 , the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a net liability of $42.8 million . See Item 3, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk."

48

FFELP Warehouse Facilities

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of June 30, 2016 , the Company had three FFELP warehouse facilities with an aggregate maximum financing amount available of $2.1 billion , of which $1.8 billion was outstanding, and $0.3 billion was available for additional funding. Of the three facilities, one facility provides for formula-based advance rates, depending on FFELP loan type, up to a maximum of the principal and interest of loans financed. The advance rate for collateral may increase or decrease based on market conditions. The other two FFELP warehouse facilities have static advance rates that require initial equity for loan funding, but do not require increased equity based on market movements. As of June 30, 2016 , the Company had $105.4 million advanced as equity support on these facilities. For further discussion of the Company's FFELP warehouse facilities outstanding at June 30, 2016 , see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.

Private Education Loan Warehouse Facility

On June 26, 2015, the Company entered into a $275.0 million private education loan warehouse facility. As of June 30, 2016 , there was $221.1 million outstanding on the facility and $53.9 million was available for future use. The facility has a static advance rate that requires initial equity for loan funding, but does not require increased equity based on market movements. The maximum advance rate on the entire facility is 88 percent and minimum advance rates, depending on loan characteristics and program type, ranged from 64 percent to 99 percent . As of June 30, 2016 , $32.0 million was advanced on the facility as equity support. The facility is supported by liquidity provisions, which had an original expiration date of June 24, 2016 .
On April 1, 2016, the Company amended the agreement for this facility to change the expiration date for the liquidity provisions to October 28, 2016, and to change the final maturity date to April 28, 2017. In addition, the minimum advance rates, depending on loan characteristics and program type, were changed to a range from 61.75 percent to 95.00 percent, and the maximum advance rate on the entire facility remained at 88 percent. In the event the Company is unable to renew the liquidity provisions by the amended expiration date of October 28, 2016, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's amended final maturity date of April 28, 2017.
Upon termination or expiration of the warehouse facility, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.
Other Borrowings
The Company has a $75.0 million line of credit, which is collateralized by asset-backed security investments, that expires October 31, 2016. The line of credit has covenants and cross default provisions similar to those under the Company's unsecured line of credit. As of June 30, 2016, $75.0 million was outstanding on this line of credit. Upon termination or expiration of this line of credit, the Company would obtain a replacement facility, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.
Other Uses of Liquidity

Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made through the Federal Direct Loan Program.  As a result, the Company no longer originates new FFELP loans, but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist.

The Company plans to fund future FFELP student loan acquisitions using current cash and investments; using its Union Bank participation agreement (as described below); using its FFELP warehouse facilities (as described above); and continuing to access the asset-backed securitization market.

49

Union Bank Participation Agreement

The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. As of June 30, 2016 , $505.6 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 $750 million or an amount in excess of $750 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 in the Company’s consolidated balance sheets.
 
Asset-backed Securities Transactions

The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations. Fitch Ratings and Moody’s Investors Service have placed numerous tranches of FFELP securitizations by various issuers, including certain tranches of prior FFELP securitizations issued by subsidiaries of the Company, on review for potential downgrade due to principal payments and prepayments on the underlying student loans coming in slower than initial expectations, and the resulting risk that certain principal maturities on those FFELP securitizations may not be met by the final maturity dates, which could result in an event of default under the underlying securitization agreements. Such rating actions have caused the spreads on FFELP securitizations in general to widen and have reduced the liquidity in the secondary market for FFELP securitizations.

In June 2016, Moody’s published an updated methodology for its ratings of FFELP securitizations, and Fitch announced that it was in the final phase of updating its corresponding ratings criteria. In addition, on June 15, 2016, the Company announced the launch of an online investor communication forum that may facilitate the amendment of securitizations to extend the legal final maturity dates. The ultimate impact of these developments on the Company’s current and future securitizations is uncertain. Depending on future rating agency actions and market conditions, the Company currently anticipates continuing to access the asset-backed securitization market for both FFELP and private education loans. Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, student loans purchased from third parties, and/or student loans in its existing asset-backed securitizations.

Liquidity Impact Related to Hedging Activities

The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. Based on the derivative portfolio outstanding as of June 30, 2016 , the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties. However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to deposit additional collateral with its derivative instrument counterparties and/or a third-party clearinghouse. The collateral deposits, if significant, could negatively impact the Company's liquidity and capital resources. As of June 30, 2016 , the fair value of the Company's derivatives which had a negative fair value (a liability in the Company's balance sheet), was $101.8 million . As of June 30, 2016 , the Company had $110.7 million of collateral deposited with counterparties or a clearinghouse related to these derivatives.

Liquidity Impact Related to the Communications Operating Segment

Allo has made significant investments in its communications network and currently provides fiber directly to homes and businesses in seven Nebraska communities. In November 2015, Allo announced plans to expand its network to make its services available to substantially all commercial and residential premises in Lincoln, Nebraska, and currently plans to expand to additional communities in Nebraska and surrounding states over the next several years. The Company currently plans to spend approximately $50 million in total in network capital expenditures during 2016. However, such amount could change based on customer demand for Allo's services. For the six month period ended June 30, 2016, Allo's capital expenditures were $12.0 million.

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Other Debt Facilities

As discussed above, the Company has a $350.0 million unsecured line of credit with a maturity date of October 30, 2020.  As of June 30, 2016 , the unsecured line of credit had an outstanding balance of $105.0 million and $245.0 million was available for future use. Upon the maturity date in 2020 there can be no assurance that the Company will be able to maintain this line of credit, increase the amount outstanding under the line, or find alternative funding if necessary.

The Company has issued Junior Subordinated Hybrid Securities (the "Hybrid Securities") that have a final maturity date of September 15, 2061. The Hybrid Securities are unsecured obligations of the Company. As of June 30, 2016 , $57.2 million of Hybrid Securities were outstanding.

The Company also has two notes payable, which were each issued by TDP Phase Three, LLC ("TDP") on December 30, 2015 in connection with the development of a commercial building. TDP is an entity established during 2015 for the sole purpose of developing and operating a commercial building. The Company owns 25 percent of TDP. However, because the Company plans to be a tenant in this building once the development is complete, the operating results of TDP are included in the Company's consolidated financial statements. As of June 30, 2016, one of the TDP notes has $12.0 million outstanding with a maturity date of March 31, 2023; the other TDP note has $6.4 million outstanding with a maturity date of December 15, 2045. Recourse to the Company on the outstanding balance of these notes is equal to its ownership percentage of TDP.

Debt Repurchases

Due to the Company's positive liquidity position and opportunities in the capital markets, the Company has repurchased its own debt over the last several years, and may continue to do so in the future. See note 4 of the notes to consolidated financial statements included in the 2015 Annual Report for information on debt repurchased by the Company during the years 2013 through 2015. No significant debt repurchases have been made by the Company during 2016.

Stock Repurchases

On May 7, 2015, the Company announced that its Board of Directors had 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 24, 2018. In May 2016, the Company's Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 25, 2019. The five million shares authorized under the new program included the remaining 1,664,223 un-repurchased shares from the prior program, which the new program replaced. Under the program, shares may be repurchased from time to time depending on various factors, including share prices and other potential uses of liquidity. Shares repurchased by the Company during the three months ended March 31, 2016 and June 30, 2016 are shown below. For additional information on stock repurchases during the second quarter of 2016, see "Stock Repurchases" under Part II, Item 2 of this report.

										
 	Total shares repurchased	 	Purchase price (in thousands)	 	Average price of shares repurchased (per share)	
 		 		 		
Quarter ended March 31, 2016	1,599,099		 	$	52,069		 	32.56		
Quarter ended June 30, 2016	11,942		 	399		 	33.45		
  Total	1,611,041		 	$	52,468		 	32.57		

As of June 30, 2016 , 4,992,360 shares remain authorized for repurchase under this stock repurchase program.

Dividends

On June 15, 2016, the Company paid a second quarter 2016 cash dividend on the Company's Class A and Class B common stock of $0.12 per share. In addition, the Company's Board of Directors has declared a third quarter 2016 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.12 per share. The third quarter cash dividend will be paid on September 15, 2016, to shareholders of record at the close of business on September 1, 2016.

The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors.  In addition, the payment of dividends is subject to the terms of the Company’s outstanding Hybrid Securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock.

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Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued accounting guidance regarding the recognition of revenue from contracts with customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance once it becomes effective on January 1, 2018. Early application is permitted beginning January 1, 2017, and the standard allows the use of either the retrospective or cumulative effect transition method. The Company is evaluating the impact this standard will have on its ongoing financial reporting, and has not yet selected a method of transition.

In January 2016, the FASB issued accounting guidance regarding the recognition and measurement of financial assets and financial liabilities, which will change the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities when the fair value option is elected.   The new guidance requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee) and requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  This guidance is effective for the Company beginning January 1, 2018.  Early adoption is permitted for the provisions related to the recognition of changes in fair value of financial liabilities when the fair value option is elected.  The Company is evaluating the impact this standard will have on its ongoing financial reporting.  

In February 2016, the FASB issued accounting guidance regarding the accounting for leases. The new standard will require most leases where the Company is the lessee to be recognized on the balance sheet, as well as certain changes in the lessor accounting. This guidance is effective for the Company beginning January 1, 2019 and will be applied retrospectively. The Company is evaluating the impact this standard will have on its ongoing financial reporting.

In June 2016, the FASB issued accounting guidance regarding the measurement of credit losses on financial instruments, which will change the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset's remaining life. This guidance is effective for the Company beginning January 1, 2020. Early application is permitted beginning January 1, 2019. The Company is evaluating the impact this standard will have on its ongoing financial reporting.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(All dollars are in thousands, except share amounts, unless otherwise noted)

Interest Rate Risk

The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact the Company due to shifts in market interest rates.

The following table sets forth the Company’s loan assets and debt instruments by interest rate characteristics:

														
 	As of June 30, 2016	 	As of December 31, 2015	
 	Dollars	 	Percent	 	Dollars	 	Percent	
Fixed-rate loan assets	$	10,010,100		 	37.4	%	 	$	11,229,584		 	39.3	%	
Variable-rate loan assets	16,744,460		 	62.6		 	17,326,165		 	60.7		
Total	$	26,754,560		 	100.0	%	 	$	28,555,749		 	100.0	%	
 	 	 	 	 	 	 	 	
Fixed-rate debt instruments	$	18,355		 	0.1	%	 	$	18,355		 	0.1	%	
Variable-rate debt instruments	26,846,899		 	99.9		 	28,584,976		 	99.9		
Total	$	26,865,254		 	100.0	%	 	$	28,603,331		 	100.0	%	

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FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the special allowance payment ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.

Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for those loans to the Department.

No variable-rate floor income was earned by the Company during 2015 and 2016. A summary of fixed rate floor income earned by the Company follows.

													
 	Three months ended June 30,	Six months ended June 30,	
 	2016	 	2015	 	2016	 	2015	
Fixed rate floor income, gross	$	44,338		 	50,088		 	90,220		 	101,347		
Derivative settlements (a)	(4,841	)	 	(5,019	)	 	(10,084	)	 	(10,034	)	
Fixed rate floor income, net	$	39,497		 	45,069		 	80,136		 	91,313		

(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.	

The high levels of fixed rate floor income earned during 2016 and 2015 are due to historically low interest rates.  If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods. Fixed rate floor income decreased for the three and six months ended June 30, 2016 as compared to the same periods in 2015 due to an increase in interest rates.

Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their special allowance payment formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

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The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%:

The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 2016 .

									
Fixed interest rate range	 	Borrower/lender weighted average yield	 	Estimated variable conversion rate (a)	 	Loan balance	
3.0 - 3.49%	 	3.28%	 	0.64%	 	$	1,536,726		
3.5 - 3.99%	 	3.65%	 	1.01%	 	2,212,385		
4.0 - 4.49%	 	4.20%	 	1.56%	 	1,639,781		
4.5 - 4.99%	 	4.72%	 	2.08%	 	997,829		
5.0 - 5.49%	 	5.22%	 	2.58%	 	627,344		
5.5 - 5.99%	 	5.67%	 	3.03%	 	439,469		
6.0 - 6.49%	 	6.19%	 	3.55%	 	510,363		
6.5 - 6.99%	 	6.70%	 	4.06%	 	500,707		
7.0 - 7.49%	 	7.17%	 	4.53%	 	174,555		
7.5 - 7.99%	 	7.71%	 	5.07%	 	294,973		
8.0 - 8.99%	 	8.18%	 	5.54%	 	685,884		
> 9.0%	 	9.04%	 	6.40%	 	237,633		
 	 	 	 	 	 	$	9,857,649		

(a)	The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of June 30, 2016 , the weighted average estimated variable conversion rate was 2.26% and the short-term interest rate was 45 basis points.	

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The following table summarizes the outstanding derivative instruments as of June 30, 2016 used by the Company to economically hedge loans earning fixed rate floor income.

								
Maturity	 	Notional amount	 	Weighted average fixed rate paid by the Company (a)	
	 		 		
2016	 	$	750,000		 	0.72	%	
2017	 	1,000,000		 	0.97		
2018	 	1,600,000		 	1.08		
2019	 	3,250,000		 	0.97		
2020	 	1,500,000		 	1.01		
2025	 	100,000		 	2.32		
2026	 	50,000		 	1.52		
 	 	$	8,250,000		 	0.99	%	

(a)	For all interest rate derivatives, the Company receives discrete three-month LIBOR.	
In addition, on August 20, 2014, the Company paid $9.1 million for an interest rate swap option to economically hedge loans earning fixed rate floor income. The interest rate swap option gives the Company the right, but not the obligation, to enter into a $250 million notional interest rate swap in which the Company would pay a fixed amount of 3.30% and receive discrete one-month LIBOR. If the interest rate swap option is exercised, the swap would become effective in 2019 and mature in 2024.

The Company is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding for those assets. The following table presents the Company’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of June 30, 2016 :

										
Index	 	Frequency of variable resets	 	Assets	 	Funding of student loan assets	
1 month LIBOR (a)	 	Daily	 	$	24,356,092		 	—		
3 month H15 financial commercial paper	 	Daily	 	1,339,268		 	—		
3 month Treasury bill	 	Daily	 	771,030		 	—		
3 month LIBOR (a) (b)	 	Quarterly	 	—		 	14,741,895		
1 month LIBOR	 	Monthly	 	—		 	9,189,155		
Auction-rate (c)	 	Varies	 	—		 	1,158,415		
Asset-backed commercial paper (d)	 	Varies	 	—		 	1,299,136		
Other (e)	 	 	 	1,220,030		 	1,297,819		
 	 	 	 	$	27,686,420		 	27,686,420		

(a)	The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps outstanding as of June 30, 2016.	

					
Maturity	 	Notional amount	
2016	 	$	2,000,000		
2028	 	125,000		

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2016 was one-month LIBOR plus 9.3 basis points.

(b)	The Company has Euro-denominated notes that reprice on the EURIBOR index. The Company has entered into a cross-currency interest rate swap that converts the EURIBOR index to three-month LIBOR. As a result, these notes are reflected in the three-month LIBOR category in the above table. See “Foreign Currency Exchange Risk” below.	

(c)	The interest rates on certain of the Company's asset-backed securities are set and periodically reset via a "dutch auction" (“Auction Rate Securities”). As of June 30, 2016 , the Company was sponsor for $1.2 billion of Auction Rate Securities. Since February 2008, problems in the auction rate securities market as a whole have led to failures of the auctions pursuant to which the Company's Auction Rate Securities' interest rates are set. As a result, the Auction Rate	

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Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents.

(d)	The interest rates on certain of the Company's warehouse facilities are indexed to asset-backed commercial paper rates.	

(e)	Assets include accrued interest receivable and restricted cash and investments.  Funding represents overcollateralization (equity) included in FFELP asset-backed securitizations and warehouse facilities and other liabilities funding student loans and related assets.	

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Sensitivity Analysis

The following tables summarize the effect on the Company’s earnings, based upon a sensitivity analysis performed by the Company assuming hypothetical increases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant. In addition, a sensitivity analysis was performed assuming the funding index increases 10 basis points and 30 basis points while holding the asset index constant, if the funding index is different than the asset index. The sensitivity analysis was performed on the Company’s variable rate assets (including loans earning fixed rate floor income) and liabilities. The analysis includes the effects of the Company’s interest rate and basis swaps in existence during these periods.

																												
 	Interest rates	 	Asset and funding index mismatches	
 	Change from increase of 100 basis points	 	Change from increase of 300 basis points	 	Increase of 10 basis points	 	Increase of 30 basis points	
 		 				 		
 	Dollars	 	Percent	 	Dollars	 	Percent	 	Dollars	 	Percent	 	Dollars	 	Percent	
 	Three months ended June 30, 2016	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Decrease in pre-tax net income before impact of derivative settlements	$	(17,682	)	 	(42.9	)%	 	$	(32,373	)	 	(78.6	)%	 	$	(4,075	)	 	(9.9	)%	 	$	(12,226	)	 	(29.6	)%	
Impact of derivative settlements	13,542		 	32.9		 	40,625		 	98.6		 	717		 	1.7		 	2,151		 	5.2		
Increase (decrease) in net income before taxes	$	(4,140	)	 	(10.0	)%	 	$	8,252		 	20.0	 %	 	$	(3,358	)	 	(8.2	)%	 	$	(10,075	)	 	(24.4	)%	
Increase (decrease) in basic and diluted earnings per share	$	(0.06	)	 	 	 	$	0.12		 	 	 	$	(0.05	)	 	 	 	$	(0.15	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three months ended June 30, 2015	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 		 	 		
Decrease in pre-tax net income before impact of derivative settlements	$	(19,948	)	 	(17.9	)%	 	$	(35,538	)	 	(31.9	)%	 	$	(4,106	)	 	(3.7	)%	 	$	(12,316	)	 	(11.1	)%	
Impact of derivative settlements	8,547		 	7.7		 	25,640		 	23.0		 	1,219		 	1.1		 	3,656		 	3.3		
Increase (decrease) in net income before taxes	$	(11,401	)	 	(10.2	)%	 	$	(9,898	)	 	(8.9	)%	 	$	(2,887	)	 	(2.6	)%	 	$	(8,660	)	 	(7.8	)%	
Increase (decrease) in basic and diluted earnings per share	$	(0.15	)	 	 	 	$	(0.13	)	 	 	 	$	(0.04	)	 	 	 	$	(0.12	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Six months ended June 30, 2016	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 		 	 		
Decrease in pre-tax net income before impact of derivative settlements	$	(36,040	)	 	(31.7	)%	 	$	(66,023	)	 	(58.1	)%	 	$	(8,248	)	 	(7.3	)%	 	$	(24,745	)	 	(21.8	)%	
Impact of derivative settlements	29,250		 	25.7		 	87,750		 	77.2		 	2,340		 	2.1		 	7,020		 	6.2		
Increase (decrease) in net income before taxes	$	(6,790	)	 	(6.0	)%	 	$	21,727		 	19.1	 %	 	$	(5,908	)	 	(5.2	)%	 	$	(17,725	)	 	(15.6	)%	
Increase (decrease) in basic and diluted earnings per share	$	(0.10	)	 	 	 	$	0.31		 	 	 	$	(0.09	)	 	 	 	$	(0.26	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Six months ended June 30, 2015	
Effect on earnings:	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Decrease in pre-tax net income before impact of derivative settlements	$	(39,732	)	 	(18.6	)%	 	$	(69,605	)	 	(32.5	)%	 	$	(8,313	)	 	(3.9	)%	 	$	(24,938	)	 	(11.7	)%	
Impact of derivative settlements	16,547		 	7.7		 	49,640		 	23.2		 	2,781		 	1.3		 	8,343		 	3.9		
Increase (decrease) in net income before taxes	$	(23,185	)	 	(10.9	)%		$	(19,965	)	 	(9.3	)%	 	$	(5,532	)	 	(2.6	)%	 	$	(16,595	)	 	(7.8	)%	
Increase (decrease) in basic and diluted earnings per share	$	(0.31	)	 	 	 	$	(0.26	)	 	 	 	$	(0.08	)	 	 	 	$	(0.23	)	 	 	

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Foreign Currency Exchange Risk

The Company has issued €352.7 million of student loan asset-backed Euro Notes (the "Euro Notes") with an interest rate based on a spread to the EURIBOR index. As a result, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The Company has entered into a cross-currency interest rate swap in connection with the issuance of the Euro Notes. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information, including a summary of the terms of the cross-currency interest rate swap associated with the Euro Notes and the related financial statement impact.

Financial Statement Impact – Derivatives and Foreign Currency Transaction Adjustments

For a table summarizing the effect of derivative instruments in the consolidated statements of income, including the components of "derivative market value and foreign currency adjustments and derivative settlements, net" included in the consolidated statements of income, see note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under supervision and with the participation of certain members of the Company’s management, including the chief executive and chief financial officers, the Company completed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Company’s principal executive and principal financial officers concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to the Company's management, including the chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes from the information set forth in the Legal Proceedings section of the Company's Annual Report on Form 10-K for the year ended December 31, 2015 under Item 3 of Part I of such Form 10-K.

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 in response to Item 1A of Part I of such Form 10-K.

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchases

The following table summarizes the repurchases of Class A common stock during the second quarter of 2016 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934. Certain share repurchases included in the table below were made pursuant to a trading plan adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.

														
Period	 	Total number of shares purchased (a)	 	Average price paid per share	 	Total number of shares purchased as part of publicly announced plans or programs (b)	 	Maximum number of shares that may yet be purchased under the plans or programs (b)	
April 1 - April 30, 2016	 	1,131		 	$	38.40		 	—		 	1,664,223		
May 1 - May 31, 2016	 	—		 	—		 	—		 	5,000,000		
June 1 - June 30, 2016	 	10,811		 	32.93		 	7,640		 	4,992,360		
Total	 	11,942		 	$	33.45		 	7,640		 	 		

(a)	The total number of shares includes: (i) shares repurchased pursuant to the stock repurchase program discussed in footnote (b) below; and (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 1,131 shares, 0 shares, and 3,171 shares in April , May , and June 2016, respectively. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting.	

(b)	On May 7, 2015, the Company announced that its Board of Directors had 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 24, 2018. On August 4, 2016, the Company announced that its Board of Directors authorized a new stock repurchase program in May 2016 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 25, 2019. The five million shares authorized under the new program include the remaining 1,644,223 un-repurchased shares from the prior program, which the new program replaced.	

Working capital and dividend restrictions/limitations

The Company’s credit facilities, including its revolving line of credit which is available through October 30, 2020, impose restrictions with respect to the Company’s minimum consolidated net worth, the ratio of the Company’s adjusted EBITDA to corporate debt interest, the amount of recourse indebtedness, and the amount of private education loans held by the Company. In addition, trust indentures and other financing agreements governing debt issued by the Company's education lending subsidiaries may have general limitations on the amounts of funds that can be transferred to the Company by its subsidiaries through cash dividends.

The supplemental indenture for the Company’s Hybrid Securities issued in September 2006 provides that so long as any Hybrid Securities remain outstanding, if the Company gives notice of its election to defer interest payments but the related deferral period has not yet commenced or a deferral period is continuing, then the Company will not, and will not permit any of its subsidiaries to:

•	declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any of the Company’s capital stock.	

•	except as required in connection with the repayment of principal, and except for any partial payments of deferred interest that may be made through the alternative payment mechanism described in the Hybrid Securities indenture, make any payment of principal of, or interest or premium, if any, on, or repay, repurchase, or redeem any of the Company’s debt securities that rank pari passu with or junior to the Hybrid Securities.	

•	make any guarantee payments regarding any guarantee by the Company of the subordinated debt securities of any of the Company’s subsidiaries if the guarantee ranks pari passu with or junior in interest to the Hybrid Securities.	

59

In addition, if any deferral period lasts longer than one year, the limitation on the Company’s ability to redeem or repurchase any of its securities that rank pari passu with or junior in interest to the Hybrid Securities will continue until the first anniversary of the date on which all deferred interest has been paid or canceled.

If the Company is involved in a business combination where immediately after its consummation more than 50% of the surviving entity’s voting stock is owned by the shareholders of the other party to the business combination, then the immediately preceding sentence will not apply to any deferral period that is terminated on the next interest payment date following the date of consummation of the business combination.

However, at any time, including during a deferral period, the Company will be permitted to:

•	pay dividends or distributions in additional shares of the Company’s capital stock.	

•	declare or pay a dividend in connection with the implementation of a shareholders’ rights plan, or issue stock under such a plan, or redeem or repurchase any rights distributed pursuant to such a plan.	

•	purchase common stock for issuance pursuant to any employee benefit plans.	

ITEM 6.  EXHIBITS

	
		
3.1	Articles of Amendment to Second Amended and Restated Articles of Incorporation of Nelnet, Inc., filed as Exhibit 3.1 to the registrant's Current Report on Form 8-K filed on May 31, 2016 and incorporated by reference herein.	
 	 	
3.2*	Composite Second Amended and Restated Articles of Incorporation of Nelnet, Inc. as amended.	
 	 	
31.1*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Jeffrey R. Noordhoek.	
 	 	
31.2*	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer James D. Kruger.	
 	 	
32**	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
101.INS*	XBRL Instance Document	
 	 	
101.SCH*	XBRL Taxonomy Extension Schema Document	
 	 	
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document	
 	 	
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document	
 	 	
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document	
 	 	
*    Filed herewith	
** Furnished herewith	

60

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	
					
 	 	NELNET, INC.	 	
 	 	 	 	 	
Date:	August 4, 2016	By:	/s/ JEFFREY R. NOORDHOEK	 	
 	 	Name:	Jeffrey R. Noordhoek	 	
 	 	Title:	Chief Executive Officer
Principal Executive Officer	 	

	
					
 	 	By:	/s/ JAMES D. KRUGER	 	
Date:	August 4, 2016	Name:	James D. Kruger	 	
 	 	Title: 	Chief Financial Officer
Principal Financial Officer and Principal Accounting Officer	 	

61

Exhibit 32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Nelnet, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
		
1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
		
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

 

			
Date:	August 4, 2016	By: /s/ JEFFREY R. NOORDHOEK	
 	 	Name: Jeffrey R. Noordhoek
Title:   Chief Executive Officer
Principal Executive Officer	
 	 	 	
 	 	By: /s/ JAMES D. KRUGER	
 	 	Name: James D. Kruger
Title:  Chief Financial Officer
Principal Financial Officer and Principal Accounting Officer	

 

Exhibit 31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Jeffrey R. Noordhoek, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Nelnet, Inc. (the “Company”);	
		
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
		
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
		
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
		
(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and	
		
5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):	
		
(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and	
		
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.	

	
			
Date:	August 4, 2016	/s/ JEFFREY R. NOORDHOEK	
 	 	Jeffrey R. Noordhoek Chief Executive Officer
Principal Executive Officer	

Exhibit 31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, James D. Kruger, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Nelnet, Inc. (the “Company”);	
		
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
		
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
		
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
		
(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and	
		
5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):	
		
(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and	
		
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.	

    

			
Date:	August 4, 2016	/s/ JAMES D. KRUGER	
 	 	James D. Kruger
Chief Financial Officer
Principal Financial Officer and Principal Accounting Officer	

Exhibit 3.2 [THE FOLLOWING COMPOSITE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NELNET, INC. (THE “CORPORATION”), AS AMENDED, REFLECT THE PROVISIONS OF THE CORPORATION’S SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS FILED WITH THE NEBRASKA SECRETARY OF STATE ON NOVEMBER 4, 2003, AND ALL SUBSEQUENT AMENDMENTS THERETO, WHICH WERE FILED WITH THE NEBRASKA SECRETARY OF STATE ON AUGUST 25, 2006, AUGUST 9, 2007, AND MAY 27, 2016, BUT THEY ARE NOT AN AMENDMENT AND/OR RESTATEMENT THEREOF.] COMPOSITE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NELNET, INC., AS AMENDED NAME The name of the Corporation shall be Nelnet, Inc. PRINCIPAL AND REGISTERED OFFICES The principal and registered offices of the Corporation shall be at 121 South 13th Street, Suite 201, Lincoln, Nebraska 68508, or such other place or places as the Corporation may establish and maintain in the State of Nebraska or elsewhere as the Board of Directors may deem prudent, necessary or expedient from time to time. The Corporation's initial registered agent at such registered office shall be Terry J. Heimes. PURPOSE AND POWERS The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the Nebraska Business Corporation Act (the "Nebraska Act"). The Corporation shall have all powers that may now or hereafter be lawful for a corporation to exercise under the Nebraska Act and under the laws of the State of Nebraska generally. The Corporation shall have perpetual existence. 

 

-2- CAPITAL STOCK 4.1. Total Number of Shares of Stock. The total number of shares of capital stock of all classes that the Corporation shall have authority to issue is 710,000,000 shares. The authorized capital stock is divided into (i) 50,000,000 shares of preferred stock, with par value of $0.01 per share (the “Preferred Stock”); (ii) 600,000,000 shares of Class A Common Stock (the “Class A Common Stock”), with par value of $0.01 per share; and (iii) 60,000,000 shares of Class B Common Stock (the “Class B Common Stock”), with par value of $0.01 per share. The number of authorized shares of any of the Preferred Stock, Class A Common Stock or Class B Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative votes of the holders of a majority in voting power of the stock of the Corporation entitled to vote thereon irrespective of any provision of the Nebraska Act now or hereafter in effect, and no vote of the holders of the Preferred Stock, the Class A Common Stock or the Class B Common Stock voting separately as a class shall be required therefor. None of the Class A Common Stock or Class B Common Stock may be subdivided, consolidated, reclassified or otherwise changed in any manner unless the other class is subdivided, consolidated, reclassified or otherwise changed in the same manner and proportion. Except for shares of Class B Common Stock issued in connection with stock splits, stock dividends and other similar distributions, the Corporation shall not issue additional shares of Class B Common Stock after May 25, 2006 unless approved by the affirmative votes of the holders of a majority in voting power of the stock of the Corporation entitled to vote thereon irrespective of any provision of the Nebraska Act now or hereafter in effect, and no vote of the holders of the Preferred Stock, the Class A Common Stock or the Class B Common Stock voting separately as a class shall be required therefor. 4.2. Preferred Stock. Subject to limitations of applicable law, the Board of Directors is hereby expressly authorized, by resolution or resolutions, to provide, out of the unissued shares of Preferred Stock, for one or more series of Preferred Stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. Such rights and restrictions as referred to above shall include, without limitation, dividend rights, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. 4.3. Class A Common Stock. Each holder of Class A Common Stock shall be entitled to one (1) vote for each share of Class A Common Stock held of record by such holder on all matters on which shareholders generally are entitled to vote. 4.4. Class B Common Stock. Each holder of Class B Common Stock shall be entitled to ten (10) votes for each share of Class B Common Stock held of record by such holder on all 

 

-3- matters on which shareholders generally are entitled to vote except as may otherwise expressly be provided for herein. 4.5. Class Voting. Subject to limitations of applicable law, Class A Common Stock and Class B Common Stock shall vote as a single class on all matters to be voted on including, without limitation, any consolidation or merger of the Corporation into or with any other corporation or the sale or transfer of all or substantially all of its assets; provided, however, that the vote of a majority of the shares of Class B Common Stock, voting separately as a class, shall be required to lower the number of votes per share that each share of Class B Common Stock entitles its holder to have. 4.6. Conversion. Class A Common Stock is not convertible. Each share of Class B Common Stock is convertible at any time at the holder's option into one (1) share of Class A Common Stock. Each share of Class B Common Stock shall automatically convert into one (1) share of Class A Common Stock, without any action by the Corporation or further action by the holder thereof, upon the Transfer (as defined below) of such share, other than the following Transfers: (i) to any other holder of Class B Common Stock or to any natural person or business organization that, directly or indirectly, controls, is controlled by or is under common control with such holder ("business organization" shall mean any corporation, limited liability company, partnership or like entity); (ii) to a spouse, sibling, parent, grandparent or descendant, whether natural or adopted, of a holder of Class B Common Stock; (iii) to any charitable foundation or other organization qualified under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or the corresponding provision of any subsequent federal tax law; (iv) to a trust all of the beneficiaries of which are holders of Class B Common Stock each of whom is a natural person, natural persons described in clause (ii) hereof and/or entities described in clause (iii) hereof; (v) by will to any transferee described in clause (ii), (iii) or (iv) hereof; (vi) pursuant to the laws of descent and distribution to a spouse, sibling, parent, grandparent and/or descendant, whether natural or adopted, of a holder of Class B Common Stock; or (vii) to the Corporation. Notwithstanding the foregoing, a share of Class B Common Stock shall automatically convert into one (1) share of Class A Common Stock, without any action by the Corporation or further action by the holder thereof, upon any Transfer of such share pursuant to a divorce or separation agreement, decree or order. "Transfer" means a sale, assignment, transfer, gift, encumbrance or other disposition, other than a bona fide pledge for collateral security purposes. In the event at any time the shares of the Class B Common Stock outstanding constitute less than 50% of the Class B Common Stock outstanding as of the date of the final prospectus relating to the Corporation' s initial public offering (as adjusted for any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities, the issuance of warrants or other rights to purchase shares or other securities, or other similar capitalization change), each remaining share of Class B Common Stock outstanding shall automatically be converted into one (1) share of Class A Common Stock. The Corporation will reserve and at all times keep available out of its authorized but unissued shares of Class A Common Stock or its shares of treasury stock of such class a 

 

-4- sufficient number of shares of Class A Common Stock to satisfy the conversion requirements of all outstanding shares of Class B Common Stock. 4.7. Dividend Rights. Holders of Class A Common Stock and Class B Common Stock shall be entitled to receive ratably dividends payable in cash, in stock or otherwise, as and when declared by the Board of Directors out of assets legally available therefor, subject to any preferential rights of any outstanding Preferred Stock. 4.8. Other Rights. Upon liquidation, dissolution or winding up of the Corporation, after payment in full of the amounts required to be paid to the holders of any outstanding Preferred Stock, all holders of Class A Common Stock and Class B Common Stock are entitled to receive ratably any assets available for distribution to holders thereof after the payment of all debts and other liabilities of the Corporation. No shares of the Class A Common Stock or the Class B Common Stock shall have preemptive rights to purchase additional shares. The rights, preferences and privileges of holders of Class A Common Stock and Class B Common Stock shall be subject to, and may be adversely affected by, the rights of holders of outstanding Preferred Stock. All shares of Class A Common Stock, Class B Common Stock and Preferred Stock which are acquired by the Corporation shall be available for re-issuance by the Corporation at any time. 4.9. Rights With Respect to Future Issuances and Sales. The Board of Directors shall be authorized to create and issue by one or more resolutions, whether or not in connection with the issuance and sale of any of the Corporation's securities or properties, rights entitling the holders thereof to purchase securities issued by the Corporation or any other entity. The times at and the terms upon which such rights are to be issued are to be determined by the Board of Directors and set forth in contracts or other instruments which evidence such rights. The authority of the Board of Directors with respect to such rights shall include, without limitation, the determination of the initial purchase price, the times and circumstances under which such rights may be exercised, provisions denying such holders of a specified percentage of the Corporation's outstanding capital stock the right to exercise such rights and provisions to permit the Corporation to redeem or exchange such rights. 4.10. Recapitalization Plan; Exchange of Certificates. Each share of the Corporation's Class B (nonvoting) Common Stock owned by Michael S. Dunlap, Terri Dunlap, Stephen F. Butterfield and Union Financial Services, Inc., and each share of the Corporation's Class A (voting) Common Stock issued and outstanding or held in treasury, immediately prior to the filing of the Amended and Restated Articles of Incorporation with the Nebraska Secretary of State on August 14, 2003, was, upon such filing and thereafter, exchanged for and classified as 210 shares of the Corporation's Class B Common Stock. Each share of the Corporation's Class B (nonvoting) Common Stock issued and outstanding or held in treasury immediately prior to the filing of the Amended and Restated Articles of Incorporation on August 14, 2003 (other than shares of Class B (nonvoting) Common Stock owned by Michael S. Dunlap, Terri Dunlap, Stephen F. Butterfield and Union Financial Services, Inc.), was, upon such filing and thereafter, exchanged for and classified as 210 shares of the Corporation's Class A Common Stock. Promptly after the filing of the Amended and Restated Articles of Incorporation on August 14, 2003, each holder of the 

 

-5- Corporation' s issued and outstanding capital stock surrendered, or is entitled to surrender, to the Corporation all certificates representing all such shares of the Corporation's capital stock, properly endorsed for transfer to the Corporation, which certificates were in any event deemed cancelled at the time of such filing, and the Corporation thereupon issued and delivered, or will issue and deliver, to such holder certificates representing the number of shares of the Corporation's capital stock that such holder was, or is, entitled to receive pursuant to the recapitalization plan set forth above. BOARD OF DIRECTORS 5.1. Powers of Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors which shall consist of not less than three (3) members. In furtherance, and not in limitation, of the powers conferred by the laws of the State of Nebraska, the Board of Directors is expressly authorized to: (a) adopt, amend, alter, change or repeal the By-laws of the Corporation; provided, however, that no By-laws hereafter adopted shall invalidate any prior act of the directors that would have been valid if such new By-laws had not been adopted; (b) determine the rights, powers, duties, rules and procedures that affect the power of the Board of Directors to manage and direct the business and affairs of the Corporation, including the power to designate and empower committees of the Board of Directors, to elect, appoint and empower the officers and other agents of the Corporation, and to determine the time and place of, the notice requirements for, Board meetings, as well as quorum and voting requirements for, and the manner of taking, Board action; and (c) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of the Nebraska Act, these Second Amended and Restated Articles of Incorporation and the By-laws of the Corporation. 5.2. Number of Directors. Subject to Section 5.1, the number of directors constituting the Board of Directors shall be determined from time to time exclusively by a vote of a majority of the Board of Directors in office at the time of such vote. 5.3. Vacancies. Any vacancies in the Board of Directors for any reason and any newly created directorship resulting by reason of any increase in the number of directors may be filled only by the Board of Directors, acting by a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director, and any directors so appointed shall hold office until removed or until the next election at the next annual shareholder's meeting and until their successors are elected and qualified. 

 

-6- 5.4. Removal of Directors. Any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. SHAREHOLDER ACTIONS AND MEETINGS OF SHAREHOLDERS Special meetings of shareholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office, except as may otherwise be required by the Nebraska Act. Elections of officers need not be by written ballot, unless otherwise provided in the By- laws. For purposes of all meetings of shareholders, a quorum shall consist of shares constituting a majority of the voting power of all the shares of the capital stock of the Corporation entitled to vote at such meeting of shareholders, unless otherwise required by law. In all elections for directors of the Corporation, directors shall be elected by a majority of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present, and not be a plurality of such votes. LIMITATION ON LIABILITY OF DIRECTORS No person shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, including without limitation directors serving on committees of the Board of Directors; provided, however, that the foregoing shall not eliminate or limit the liability of a director for (i) any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) acts or omissions which the Nebraska Act does not permit indemnity for directors under Section 21-2018(2)(e) of the Nebraska Act or otherwise; or (iv) any transaction from which the director derived an improper personal benefit. If the Nebraska Act is amended hereafter to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Nebraska Act, as so amended. Any amendment, repeal or modification of this Article VII shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such amendment, repeal or modification. INDEMNIFICATION OF DIRECTORS, OFFICERS EMPLOYEES AND OTHER AGENTS 8.1. Indemnification of Directors and Officers. The Corporation shall, to the maximum extent and in the manner permitted by the Nebraska Act, indemnify each of its 

 

-7- directors and officers against expenses (as defined in Section 21-20,102 of the Nebraska Act), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 21-20,102 of the Nebraska Act) arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Article VIII, a "director" or "officer" of the Corporation includes any person (i) who is or was a director or officer of the Corporation, (ii) who is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 8.2. Indemnification of Others. The Corporation shall have the power, to the extent and in the manner permitted by the Nebraska Act, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 21- 20,102 of the Nebraska Act) judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 21-20,102 of the Nebraska Act) arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Article VIII, an "employee" or "agent" of the Corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the Corporation, (ii) who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 8.3. Payment of Expenses in Advance. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 8.1 or for which indemnification is permitted pursuant to Section 8.2 following authorization thereof by the Board of Directors, shall be paid by the Corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined by final judicial decision, from which there is not further right of appeal, that the indemnified party is not entitled to be indemnified as authorized in this Article VIII. 8.4. Indemnity Not Exclusive. The indemnification provided by this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-law of the Corporation, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in this Article VIII. 8.5. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the Corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VIII. 

 

-8- 8.6. Conflicts. No indemnification or advance shall be made under this Article VIII, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears that: (a) it would be inconsistent with a provision of this Article VIII, the By-laws of the Corporation, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) it would be inconsistent with any condition expressly imposed by a court in approving a settlement. AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION The Corporation hereby reserves the right to amend, alter, change or repeal any provision contained in these Second Amended and Restated Articles of Incorporation in any manner permitted by the Nebraska Act and all rights and powers conferred upon shareholders, directors and officers herein are granted subject to this reservation; provided, however, that the affirmative vote of the holders of a majority of the voting power of all the shares of the capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with Section 4.9, Article VI or this proviso. SEVERABILITY In the event that any of the provisions of these Second Amended and Restated Articles of Incorporation (including any provision within a single Section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law. INCORPORATOR The name and street address of the incorporator is: Jay L. Dunlap, 111 Oenida, Milford, Nebraska. 

 

-9- EXCLUSIVE FORUM FOR ADJUDICATION OF CERTAIN LEGAL ACTIONS Unless the Corporation consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf or in the right of the Corporation; (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or employee of the Corporation to the Corporation or the Corporation’s shareholders; (iii) any action asserting a claim arising pursuant to any provision of the Nebraska Business Corporation Act (effective until January 1, 2017), the Nebraska Model Business Corporation Act (effective January 1, 2017), or the Articles of Incorporation or By-laws of the Corporation (as each may be amended from time to time); or (iv) any action asserting a claim governed by the internal affairs doctrine shall be the District Court for the State of Nebraska located in the City of Lincoln, County of Lancaster, Nebraska (or, if such court does not have jurisdiction, the United States District Court for the District of Nebraska located in the City of Lincoln, Nebraska). If any action the subject matter of which is within the scope of the preceding sentence is filed in a court other than a court referred to in the preceding sentence (a “Foreign Action”) in the name of any shareholder, such shareholder shall be deemed to have consented to (i) the personal jurisdiction of the state and federal courts located within the State of Nebraska in connection with any action brought in any such court to enforce the preceding sentence and (ii) having service of process made upon such shareholder in any such action by service upon such shareholder’s counsel in the Foreign Action as agent for such shareholder. Any person or entity owning, purchasing, or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XII.