UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 7, 2019

NELNET, INC.
(Exact name of registrant as specified in its charter)
															
Nebraska		001-31924		84-0748903	
(State or other jurisdiction of incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)	

121 South 13th Street, Suite 100			
Lincoln,	Nebraska	68508 	 	
(Address of principal executive offices)	(Zip Code)	
Registrant's telephone number, including area code (402) 458-2370
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered	
Class A Common Stock, Par Value $0.01 per Share	NNI	New York Stock Exchange	
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         ☐

Item 2.02 Results of Operations and Financial Condition.
On November 7, 2019, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended September 30, 2019. A copy of the press release is furnished as Exhibit 99.1 to this report. In addition, a copy of the supplemental financial information for the quarter ended September 30, 2019, which was made available on the Company's website at www.nelnetinvestors.com on November 7, 2019 in connection with the press release, is furnished as Exhibit 99.2 to this report.
The above information and Exhibits 99.1 and 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall such information and Exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. In addition, information on the Company's website is not incorporated by reference into this report and should not be considered part of this report.
Certain statements contained in the exhibits furnished with this report may be considered forward looking in nature and are subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual results may vary materially from those anticipated, estimated, or expected. Among the key risks and uncertainties that may have a direct bearing on the Company's future operating results, performance, or financial condition expressed or implied by the forward-looking statements are the matters discussed in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 27, 2019. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits. The following exhibits are furnished as part of this report:

Exhibit
No.		Description	
			
99.1 	 		Press Release dated November 7, 2019 - "Nelnet Reports Third Quarter 2019 Results"	
99.2 	 		Supplemental Financial Information for the Quarter Ended September 30, 2019	
104 	 		Cover Page Interactive Data File (formatted as Inline XBRL and included as Exhibit 101).	

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 hereunto duly authorized.
Dated: November 7, 2019
NELNET, INC.
By: /s/ JAMES D. KRUGER
Name: James D. Kruger
Title: Chief Financial Officer

Nelnet Reports Third Quarter 2019 Results

LINCOLN, Neb., November 7, 2019 - Nelnet (NYSE: NNI) today reported GAAP net income of $33.2 million, or $0.83 per share, for the third quarter of 2019, compared with GAAP net income of $42.9 million, or $1.05 per share, for the same period a year ago.

Net income, excluding derivative market value adjustments1, was $37.5 million, or $0.94 per share, for the third quarter of 2019, compared with $46.9 million, or $1.14 per share, for the same period in 2018.

The decrease in net income for the three months ended September 30, 2019, as compared with the same period in 2018, was primarily due to:

•The recognition of $14.0 million ($10.7 million after tax, or $0.27 per share) of expenses during the third quarter of 2019 to extinguish debt securities prior to their contractual maturities; and

•A decrease in derivative settlements received by the company due to a decrease in the notional amount of derivatives outstanding used by the company to hedge loans earning fixed rate floor income.

These factors were partially offset by the contribution to net income from the company's Loan Servicing and Systems and Education Technology, Services, and Payment Processing operating segments.

"Our Nelnet teams continue to produce consistent operating results and performance through the first three quarters of 2019," said Jeff Noordhoek, chief executive officer of Nelnet. "Extinguishing certain securitizations early has been a great decision, we were able to refinance the loans with more favorable terms, earn better returns on the freed up capital, and generate additional liquidity that can be used to invest in superior customer experiences and long-term growth and diversification."

Nelnet operates four primary business segments, earning interest income on loans in its Asset Generation and Management segment and fee-based revenue in its Loan Servicing and Systems; Education Technology, Services, and Payment Processing; and Communications segments.

Asset Generation and Management (AGM)

Nelnet's average balance of loans in the third quarter of 2019 was $21.6 billion, compared with $23.0 billion for the same period in 2018. The company's AGM operating segment reported net interest income of $61.7 million for the three months ended September 30, 2019, compared with $59.2 million for the same period a year ago. Loan spread increased to 1.04 percent for the quarter ended September 30, 2019, compared with 0.90 percent for the same period in 2018.

The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The company's AGM operating segment recognized income from derivative settlements of $7.3 million during the third quarter of 2019, compared with income of $22.4 million for the same period in 2018. Derivative settlements for each applicable period should be evaluated with the company's net interest income. Net interest income and derivative settlements totaled $69.0 million and $81.6 million in the third quarter of 2019 and 2018, respectively. Core loan spread,2 which includes the impact of derivative settlements, decreased to 1.17 percent for the quarter ended September 30, 2019, compared with 1.30 percent for the same period in 2018.

Provision for loan losses was $10.0 million and $10.5 million for the three months ended September 30, 2019 and 2018, respectively. For federally insured loans, the provision for loan losses was $2.0 million and $8.0 million for the three months ended September 30, 2019 and 2018, respectively. Provision for loan losses for consumer loans increased to $8.0 million for the three months ended September 30, 2019, compared with $2.5 million for the same period in 2018, as a result of consumer loan purchases. The company purchased $113.3 million of consumer loans in the third quarter of 2019, compared with $42.8 million in the same period of 2018.
Subsequent to September 30, 2019, the company made the decision to sell $179.3 million (par value) of consumer loans and will recognize a gain in the fourth quarter of 2019 of $15.5 million ($11.8 million after tax, or $0.30 per share).

					

1 Net income, excluding derivative market value adjustments, is a non-GAAP measure. See "Non-GAAP Performance Measures" at the end of this press release and the "Non-GAAP Disclosures" section below for explanatory information and reconciliations of non-GAAP to GAAP financial information.

2 Core loan spread is a non-GAAP measure. See "Non-GAAP Performance Measures" at the end of this press release and the "Non-GAAP Disclosures" section below for explanatory information and reconciliations of non-GAAP to GAAP financial information.

Loan Servicing and Systems

On February 7, 2018, the company acquired Great Lakes Educational Loan Services, Inc. (Great Lakes). The operating results of Great Lakes are included in the company's Loan Servicing and Systems segment from the date of acquisition. Revenue from the Loan Servicing and Systems segment was $113.3 million for the third quarter of 2019, compared with $112.6 million for the same period in 2018. As of September 30, 2019, the company was servicing $474.9 billion in government-owned, Federal Family Education Loan (FFEL) Program, private education, and consumer loans, compared with $464.9 billion of loans serviced by the company as of September 30, 2018.

Net income for the Loan Servicing and Systems segment was $15.4 million for the three months ended September 30, 2019, compared with $10.0 million for the same period in 2018. For the three months ended September 30, 2019 and 2018, the before-tax operating margin (income before income taxes divided by revenue) from the Loan Servicing and Systems segment was 15.9 percent and 10.4 percent, respectively. The third quarter of 2018 included an impairment charge of $3.9 million ($3.0 million after tax). The remaining increase in operating margin was due primarily to efficiencies gained as a result of the completion of certain integration activities related to the Great Lakes acquisition.

Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes are two companies that have student loan servicing contracts awarded by the U.S. Department of Education's Office of Federal Student Aid (the Department) in June 2009 to provide servicing for loans owned by the Department. As of September 30, 2019, Nelnet Servicing was servicing $184.4 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.3 billion of student loans for 7.4 million borrowers under its contract. The servicing contracts with the Department previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a Modification of Contract from the Department pursuant to which the Department extended the expiration date of the current contracts to December 15, 2019.

The Department has a new federal student loan servicing contract procurement process in progress. On April 1, 2019 and October 4, 2019, the company responded to the transitional information technology platform component, and on August 1, 2019, the company responded to the business processing outsourcing component. In addition, the company is part of a team that has responded and intends to respond to various aspects of the third component (future state information technology platform). The company cannot predict the timing, nature, or outcome of these solicitations.

Education Technology, Services, and Payment Processing

On November 20, 2018, the company acquired Tuition Management Systems (TMS), a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions. The TMS acquisition added 380 higher education schools and 170 K-12 schools to the company’s customer base. The results of TMS’ operations are reported in the company’s consolidated financial statements from the date of acquisition.
For the third quarter of 2019, revenue from the Education Technology, Services, and Payment Processing operating segment was $74.3 million, an increase of $15.8 million, or 27 percent, from the same period in 2018. The increase in revenue was due to the acquisition of TMS; growth in managed tuition payment plans, campus commerce customer transactions, and payments volume; and an increase in the number of customers using the operating segment's education and technology services.

Net income for the Education Technology, Services, and Payment Processing segment was $12.7 million for the three months ended September 30, 2019, compared with $7.6 million for the same period in 2018. For the three months ended September 30, 2019, before-tax operating margin (income before income taxes divided by net revenue) was 34.4 percent, compared with 25.4 percent for the same period of 2018. The increase in the before-tax operating margin was due to operating leverage and cost reductions resulting from the company's decision in October 2018 to terminate its investment in a proprietary payment processing platform.

Communications

Revenue from ALLO Communications was $16.5 million for the third quarter of 2019, compared with $11.8 million for the same period in 2018. The number of residential households served as of September 30, 2019, was 45,228, an increase of 12,699, or 39 percent, from the number of households served as of September 30, 2018. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest.

During the second quarter of 2019, ALLO announced plans to expand its network to Breckenridge, Colorado, increasing households in current markets and newly announced markets to almost 160,000, of which over 137,000 are passed by ALLO's existing communications network as of September 30, 2019. ALLO incurred capital expenditures of $10.2 million during the three months ended September 30, 2019. The company currently anticipates total network expenditures during the fourth quarter of 2019 will be approximately $13 million; however, the amount of capital expenditures could change based on customer demand for ALLO's services.

For the third quarter of 2019, ALLO recognized a net loss of $7.2 million, compared with a net loss of $7.7 million for the same period in 2018. The company anticipates this operating segment will be dilutive to consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.
ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA)3 to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the third quarter of 2019, ALLO reported positive EBITDA of $1.5 million, compared with $0.2 million for the same period in 2018.
Liquidity and Capital Activities

As of September 30, 2019, the company had $161.0 million in cash and cash equivalents and $52.6 million in available-for-sale investments, consisting primarily of student loan asset-backed securities. The company also has a $382.5 million unsecured line of credit. As of September 30, 2019, no amount was outstanding on the line of credit and $382.5 million was available for future use.
During the third quarter of 2019, the company extinguished $675.6 million of notes payable in certain asset-backed securitizations prior to the notes' contractual maturities, resulting in the release of $996.4 million in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations. Upon extinguishment of the notes payable, the company refinanced the student loans, resulting in net cash proceeds of $311.5 million. The company used a portion of these proceeds to pay down the outstanding balance on its unsecured line of credit. To extinguish the notes, the company paid a premium of $12.6 million that was expensed by the company in the third quarter of 2019. In addition, the company wrote off $1.4 million of debt issuance costs. In total, the company recognized $14.0 million ($10.7 million after tax) in expenses in the third quarter of 2019 to extinguish these notes.
The cash proceeds generated by the debt extinguishments provide the company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns.
The company intends to use its liquidity position to capitalize on market opportunities, including: FFEL Program, private education, and consumer loan acquisitions; strategic acquisitions and investments; expansion of ALLO's communications 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.
Board of Directors Declares Fourth Quarter Dividend
The Nelnet Board of Directors declared a fourth quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.20 per share. The dividend will be paid on December 13, 2019 to shareholders of record at the close of business on November 29, 2019.

Forward-Looking and Cautionary Statements

This press release contains forward-looking statements within the meaning of federal securities laws. The words "anticipate," "continue," "expect," "future," "intend," "may," "plan," "predict," "scheduled," "will," and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, but are not limited to: risks related to the company's loan portfolio, such as interest rate basis and repricing risk and changes in levels of student loan repayment or default rates; the use of derivatives to manage exposure to interest rate

															
					
3 EBITDA is a non-GAAP measure. See "Non-GAAP Performance Measures" at the end of this press release and the "Non-GAAP Disclosures" section below for explanatory information and reconciliations of non-GAAP to GAAP financial information.

                                     

fluctuations; the uncertain nature of the expected benefits from the acquisitions of Great Lakes and TMS in 2018, and the ability to successfully integrate technology, shared services, and other activities and successfully maintain and increase allocated volumes of student loans serviced by Nelnet Servicing and Great Lakes under existing and any future servicing contracts with the Department, which current contracts accounted for 30 percent of the company's revenue in 2018; risks to the company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the risk that the company or company teams may not be successful in obtaining contracts; risks related to the development by the company of a new student loan servicing platform, including risks as to whether the expected benefits from the new platform will be realized; the uncertain nature of expected benefits from FFEL Program, private education, and consumer loan purchases and initiatives to purchase additional FFEL Program, private education, and consumer loans; financing and liquidity risks, including risks of changes in the securitization and other financing markets for student loans; risks and uncertainties from changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFEL Program loan interest income and fee-based revenues due to the discontinuation of FFEL Program loan originations in 2010 and the resulting initiatives by the company to adjust to a post-FFEL Program environment; risks and uncertainties related to the ability of ALLO to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks; 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, as well as other strategic initiatives; cybersecurity risks, including potential disruptions to systems, disclosure of confidential information, and/or damage to reputation resulting from cyber-breaches; and changes in general economic and credit market conditions, including the availability of any relevant money-market index rate such as LIBOR or the relationship between the relevant money-market index rate and the rate at which the company's assets and liabilities are priced.

For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the third quarter ended September 30, 2019. All forward-looking statements in this release are as of the date of this release. Although the company may voluntarily update or revise its forward-looking statements from time to time 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.

Non-GAAP Performance Measures

The company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. Reconciliations of non-GAAP to GAAP financial information and a discussion of why the company believes providing this additional information is useful to investors, is provided in the "Non-GAAP Disclosures" section below.

Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)

																														
	Three months ended		Nine months ended	
	September 30, 2019		June 30,
2019		September 30, 2018		September 30, 2019		September 30, 2018	
	
Interest income:										
Loan interest	$	229,063 	 		238,222 	 		232,320 	 		709,618 	 		653,414 	 	
Investment interest	9,882 	 		8,566 	 		7,628 	 		26,701 	 		18,581 	 	
Total interest income	238,945 	 		246,788 	 		239,948 	 		736,319 	 		671,995 	 	
Interest expense:										
Interest on bonds and notes payable	172,488 	 		186,963 	 		180,175 	 		551,221 	 		487,174 	 	
Net interest income	66,457 	 		59,825 	 		59,773 	 		185,098 	 		184,821 	 	
Less provision for loan losses	10,000 	 		9,000 	 		10,500 	 		26,000 	 		18,000 	 	
Net interest income after provision for loan losses	56,457 	 		50,825 	 		49,273 	 		159,098 	 		166,821 	 	
Other income:										
Loan servicing and systems revenue	113,286 	 		113,985 	 		112,579 	 		342,169 	 		327,265 	 	
Education technology, services, and payment processing revenue	74,251 	 		60,342 	 		58,409 	 		213,753 	 		167,372 	 	
Communications revenue	16,470 	 		15,758 	 		11,818 	 		46,770 	 		31,327 	 	
Other income	13,439 	 		16,152 	 		16,673 	 		38,658 	 		44,808 	 	
	
  Derivative settlements, net	7,298 	 		12,972 	 		22,324 	 		39,306 	 		51,018 	 	
  Derivative market value adjustments, net	(5,630)	 		(37,060)	 		(5,226)	 		(73,265)	 		49,909 	 	
Total other income	219,114 	 		182,149 	 		216,577 	 		607,391 	 		671,699 	 	
Cost of services:										
 Cost to provide education technology, services, and payment processing services	25,671 	 		15,871 	 		19,087 	 		62,601 	 		44,087 	 	
Cost to provide communications services	5,236 	 		5,101 	 		4,310 	 		15,096 	 		11,892 	 	
Total cost of services	30,907 	 		20,972 	 		23,397 	 		77,697 	 		55,979 	 	
Operating expenses:										
Salaries and benefits	116,670 	 		111,214 	 		114,172 	 		338,942 	 		321,932 	 	
Depreciation and amortization	27,701 	 		24,484 	 		22,992 	 		76,398 	 		62,943 	 	
Loan servicing fees to third parties	3,382 	 		3,156 	 		3,087 	 		9,431 	 		9,428 	 	
Other expenses	54,947 	 		42,261 	 		45,194 	 		138,131 	 		119,020 	 	
Total operating expenses	202,700 	 		181,115 	 		185,445 	 		562,902 	 		513,323 	 	
Income before income taxes	41,964 	 		30,887 	 		57,008 	 		125,890 	 		269,218 	 	
Income tax expense	(8,829)	 		(6,209)	 		(13,882)	 		(26,429)	 		(63,369)	 	
Net income	33,135 	 		24,678 	 		43,126 	 		99,461 	 		205,849 	 	
Net loss (income) attributable to noncontrolling interests	77 	 		(59)	 		(199)	 		(38)	 		438 	 	
Net income attributable to Nelnet, Inc.	$	33,212 	 		24,619 	 		42,927 	 		99,423 	 		206,287 	 	
Earnings per common share:										
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	0.83 	 		0.61 	 		1.05 	 		2.48 	 		5.04 	 	
Weighted average common shares outstanding - basic and diluted	39,877,129 	 		40,050,065 	 		40,988,965 	 		40,098,346 	 		40,942,177 	 	

Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)

	As of		As of		As of		
	September 30, 2019		December 31, 2018		September 30, 2018		
	
Assets:							
Loans receivable, net	$	21,071,441 	 		22,377,142 	 		22,528,362 	 		
Cash, cash equivalents, investments, and notes receivable	373,395 	 		370,717 	 		330,352 	 		
Restricted cash	977,228 	 		1,071,044 	 		911,929 	 		
Goodwill and intangible assets, net	246,411 	 		271,202 	 		249,462 	 		
Other assets	1,268,244 	 		1,130,863 	 		1,084,820 	 		
Total assets	$	23,936,719 	 		25,220,968 	 		25,104,925 	 		
Liabilities:							
Bonds and notes payable	$	20,910,190 	 		22,218,740 	 		22,251,433 	 		
Other liabilities	671,864 	 		687,449 	 		526,364 	 		
Total liabilities	21,582,054 	 		22,906,189 	 		22,777,797 	 		
Equity:							
Total Nelnet, Inc. shareholders' equity	2,350,150 	 		2,304,464 	 		2,316,864 	 		
Noncontrolling interests	4,515 	 		10,315 	 		10,264 	 		
Total equity	2,354,665 	 		2,314,779 	 		2,327,128 	 		
Total liabilities and equity	$	23,936,719 	 		25,220,968 	 		25,104,925 	 		
Contacts:
Media, Ben Kiser, 402.458.3024, or Investors, Phil Morgan, 402.458.3038, both of Nelnet, Inc.

                                     

Non-GAAP Disclosures
(Dollars in thousands, except share data)
(unaudited)

Non-GAAP financial measures disclosed by management are meant to provide additional information and insight relative to business trends to investors and, in certain cases, to present financial information as measured by rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. 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.

Net income, excluding derivative market value adjustments
												
	Three months ended September 30,	
	2019		2018	
GAAP net income attributable to Nelnet, Inc.	$	33,212 	 		42,927 	 	
Realized and unrealized derivative market value adjustments (a)	5,630 	 		5,226 	 	
Tax effect (b)	(1,351)	 		(1,254)	 	
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments	$	37,491 	 		46,899 	 	
				
Earnings per share:				
GAAP net income attributable to Nelnet, Inc.	$	0.83 	 		1.05 	 	
Realized and unrealized derivative market value adjustments (a)	0.14 	 		0.12 	 	
Tax effect (b)	(0.03)	 		(0.03)	 	
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments	$	0.94 	 		1.14 	 	

(a)  "Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives that do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the company’s derivative transactions with the intent that each is economically effective; however, the company’s derivative instruments do not qualify for hedge accounting.  As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item.  Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period.
The company believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility, primarily 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.

(b) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.

Core loan spread

The following table analyzes the loan spread on the company’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the "Net interest income, net of settlements on derivatives" table on the following page, divided by the average balance of loans or debt outstanding.

 	Three months ended September 30,	
	2019		2018	
Variable loan yield, gross	4.78 	%		4.57 	%	
Consolidation rebate fees	(0.83)	 		(0.83)	 	
Discount accretion, net of premium and deferred origination costs amortization	0.02 	 		0.03 	 	
Variable loan yield, net	3.97 	 		3.77 	 	
Loan cost of funds - interest expense	(3.16)	 		(3.10)	 	
Loan cost of funds - derivative settlements (a) (b)	— 	 		0.06 	 	
Variable loan spread	0.81 	 		0.73 	 	
Fixed rate floor income, gross	0.23 	 		0.23 	 	
Fixed rate floor income - derivative settlements (a) (c)	0.13 	 		0.34 	 	
Fixed rate floor income, net of settlements on derivatives	0.36 	 		0.57 	 	
Core loan spread	1.17 	%		1.30 	%	
				
Average balance of loans	$	21,600,850 	 		22,971,361 	 	
Average balance of debt outstanding	21,371,482 	 		22,557,437 	 	

	Three months ended September 30,	
	2019		2018	
Core loan spread	1.17 	%		1.30 	%	
Derivative settlements (1:3 basis swaps)	— 	 		(0.06)	 	
Derivative settlements (fixed rate floor income)	(0.13)	 		(0.34)	 	
Loan spread	1.04 	%		0.90 	%	
				
(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument
counterparties the economic effect of the company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the company’s net interest income (loan spread) as presented in this table.
(b) Derivative settlements include the net settlements received related to the company’s 1:3 basis swaps.
(c) Derivative settlements include the net settlements received related to the company’s floor income interest rate swaps.

                                     

Net interest income, net of settlements on derivatives
The following table summarizes the components of "net interest income" and "derivative settlements, net" from the company's Asset Generation and Management segment statements of income.

 	Three months ended September 30,	
 	2019		2018	
Variable interest income, gross	$	260,089 	 		264,675 	 	
Consolidation rebate fees	(44,717)	 		(47,868)	 	
Discount accretion, net of premium and deferred origination costs amortization	1,006 	 		1,855 	 	
Variable interest income, net	216,378 	 		218,662 	 	
Interest on bonds and notes payable	(170,327)	 		(176,207)	 	
Derivative settlements (basis swaps), net (a)	234 	 		3,361 	 	
Variable loan interest margin, net of settlements on derivatives (a)	46,285 	 		45,816 	 	
Fixed rate floor income, gross	12,685 	 		13,659 	 	
Derivative settlements (interest rate swaps), net (a)	7,064 	 		19,087 	 	
Fixed rate floor income, net of settlements on derivatives (a)	19,749 	 		32,746 	 	
Core loan interest income (a)	66,034 	 		78,562 	 	
Investment interest	4,162 	 		3,719 	 	
Intercompany interest	(1,158)	 		(668)	 	
Net interest income (net of settlements on derivatives) (a)	$	69,038 	 		81,613 	 	

(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the company’s net interest income as presented in this table. Core loan interest income and net interest income (net of settlements on derivatives) are non-GAAP financial measures.

                                     

Earnings before interest, taxes, depreciation, and amortization (EBITDA)

A reconciliation of ALLO's GAAP net loss to earnings before net interest expense, income taxes, depreciation, and amortization, is provided below.

	Three months ended September 30,	
	2019		2018	
Net loss	$	(7,194)	 		(7,741)	 	
Net interest expense	— 	 		4,173 	 	
Income tax benefit	(2,272)	 		(2,444)	 	
Depreciation and amortization	10,926 	 		6,167 	 	
Earnings before interest, income taxes,
depreciation, and amortization (EBITDA)	$	1,460 	 		155 	 	

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 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. 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.

For Release: November 7, 2019
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the third quarter 2019
(All dollars are in thousands, except per share amounts, unless otherwise noted)
The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for third quarter 2019 earnings, dated November 7, 2019, and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.
Forward-looking and cautionary statements
This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2018 Annual Report, and include such risks and uncertainties as:
•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, private education, and consumer loans and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment or default rates;
•financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in FFELP securitization trusts that could accelerate or delay repayment of the associated bonds, 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;
•the uncertain nature of the expected benefits from the acquisition of Great Lakes Educational Loan Services, Inc. ("Great Lakes") on February 7, 2018 and the ability to successfully integrate technology and other activities and successfully maintain and increase allocated volumes of student loans serviced under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 30 percent of the Company's revenue in 2018, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the risk that the Company or Company teams may not be successful in obtaining contracts, risks related to the development by the Company of a new student loan servicing platform, including risks as to whether the expected benefits from the new platform will be realized, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, FFELP, and private education and consumer 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, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches;
•uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;
•risks and uncertainties related to the ability of ALLO Communications LLC to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks;
•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, as well as other strategic initiatives; 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 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.

1

Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)

	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Interest income:										
Loan interest	$	229,063 	 		238,222 	 		232,320 	 		709,618 	 		653,414 	 	
Investment interest	9,882 	 		8,566 	 		7,628 	 		26,701 	 		18,581 	 	
Total interest income	238,945 	 		246,788 	 		239,948 	 		736,319 	 		671,995 	 	
Interest expense:										
Interest on bonds and notes payable	172,488 	 		186,963 	 		180,175 	 		551,221 	 		487,174 	 	
Net interest income	66,457 	 		59,825 	 		59,773 	 		185,098 	 		184,821 	 	
Less provision for loan losses	10,000 	 		9,000 	 		10,500 	 		26,000 	 		18,000 	 	
Net interest income after provision for loan losses	56,457 	 		50,825 	 		49,273 	 		159,098 	 		166,821 	 	
Other income:										
Loan servicing and systems revenue	113,286 	 		113,985 	 		112,579 	 		342,169 	 		327,265 	 	
Education technology, services, and payment processing revenue	74,251 	 		60,342 	 		58,409 	 		213,753 	 		167,372 	 	
Communications revenue	16,470 	 		15,758 	 		11,818 	 		46,770 	 		31,327 	 	
Other income	13,439 	 		16,152 	 		16,673 	 		38,658 	 		44,808 	 	
	
Derivative settlements, net	7,298 	 		12,972 	 		22,324 	 		39,306 	 		51,018 	 	
Derivative market value adjustments, net	(5,630)	 		(37,060)	 		(5,226)	 		(73,265)	 		49,909 	 	
Total other income	219,114 	 		182,149 	 		216,577 	 		607,391 	 		671,699 	 	
Cost of services:										
Cost to provide education technology, services, and payment processing services	25,671 	 		15,871 	 		19,087 	 		62,601 	 		44,087 	 	
Cost to provide communications services	5,236 	 		5,101 	 		4,310 	 		15,096 	 		11,892 	 	
Total cost of services	30,907 	 		20,972 	 		23,397 	 		77,697 	 		55,979 	 	
Operating expenses:										
Salaries and benefits	116,670 	 		111,214 	 		114,172 	 		338,942 	 		321,932 	 	
Depreciation and amortization	27,701 	 		24,484 	 		22,992 	 		76,398 	 		62,943 	 	
Loan servicing fees to third parties	3,382 	 		3,156 	 		3,087 	 		9,431 	 		9,428 	 	
Other expenses	54,947 	 		42,261 	 		45,194 	 		138,131 	 		119,020 	 	
Total operating expenses	202,700 	 		181,115 	 		185,445 	 		562,902 	 		513,323 	 	
Income before income taxes	41,964 	 		30,887 	 		57,008 	 		125,890 	 		269,218 	 	
Income tax expense	(8,829)	 		(6,209)	 		(13,882)	 		(26,429)	 		(63,369)	 	
Net income	33,135 	 		24,678 	 		43,126 	 		99,461 	 		205,849 	 	
Net loss (income) attributable to noncontrolling interests	77 	 		(59)	 		(199)	 		(38)	 		438 	 	
Net income attributable to Nelnet, Inc.	$	33,212 	 		24,619 	 		42,927 	 		99,423 	 		206,287 	 	
Earnings per common share:										
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	0.83 	 		0.61 	 		1.05 	 		2.48 	 		5.04 	 	
Weighted average common shares outstanding - basic and diluted	39,877,129 	 		40,050,065 	 		40,988,965 	 		40,098,346 	 		40,942,177 	 	

2

Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
																		
	As of		As of		As of	
	September 30, 2019		December 31, 2018		September 30, 2018	
	
Assets:						
Loans receivable, net	$	21,071,441 	 		22,377,142 	 		22,528,362 	 	
Cash, cash equivalents, investments, and notes receivable	373,395 	 		370,717 	 		330,352 	 	
Restricted cash	977,228 	 		1,071,044 	 		911,929 	 	
Goodwill and intangible assets, net	246,411 	 		271,202 	 		249,462 	 	
Other assets	1,268,244 	 		1,130,863 	 		1,084,820 	 	
Total assets	$	23,936,719 	 		25,220,968 	 		25,104,925 	 	
Liabilities:						
Bonds and notes payable	$	20,910,190 	 		22,218,740 	 		22,251,433 	 	
Other liabilities	671,864 	 		687,449 	 		526,364 	 	
Total liabilities	21,582,054 	 		22,906,189 	 		22,777,797 	 	
Equity:						
Total Nelnet, Inc. shareholders' equity	2,350,150 	 		2,304,464 	 		2,316,864 	 	
Noncontrolling interests	4,515 	 		10,315 	 		10,264 	 	
Total equity	2,354,665 	 		2,314,779 	 		2,327,128 	 	
Total liabilities and equity	$	23,936,719 	 		25,220,968 	 		25,104,925 	 	

3

Overview
The Company is a diverse company with a focus on delivering education-related products and services and loan asset management. The largest operating businesses engage in student loan servicing; education technology, services, and payment processing; 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 early-stage and emerging growth companies.
GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments
The Company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the Company's GAAP net income to net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.
																														
	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
GAAP net income attributable to Nelnet, Inc.	$	33,212 	 		24,619 	 		42,927 	 		99,423 	 		206,287 	 	
Realized and unrealized derivative market value adjustments	5,630 	 		37,060 	 		5,226 	 		73,265 	 		(49,909)	 	
Tax effect (a)	(1,351)	 		(8,894)	 		(1,254)	 		(17,584)	 		11,978 	 	
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b)	$	37,491 	 		52,785 	 		46,899 	 		155,104 	 		168,356 	 	
										
Earnings per share:										
GAAP net income attributable to Nelnet, Inc.	$	0.83 	 		0.61 	 		1.05 	 		2.48 	 		5.04 	 	
Realized and unrealized derivative market value adjustments	0.14 	 		0.93 	 		0.12 	 		1.83 	 		(1.22)	 	
Tax effect (a)	(0.03)	 		(0.22)	 		(0.03)	 		(0.44)	 		0.29 	 	
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b)	$	0.94 	 		1.32 	 		1.14 	 		3.87 	 		4.11 	 	

(a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.
(b) "Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms.
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting.  As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period.
The Company believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

4

Operating Results
The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, 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 September 30, 2019, the Company had a $21.1 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. However, due to the continued amortization of the Company’s FFELP loan portfolio, over time, the Company's net income generated by the AGM segment will continue to decrease. The Company currently believes that in the short-term it will most likely not be able to invest the excess cash generated from the FFELP loan portfolio into assets that immediately generate the rates of return historically realized from that portfolio.
In addition, the Company earns fee-based revenue through the following reportable operating segments:
•Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Solutions ("NDS")
•Education Technology, Services, and Payment Processing ("ETS&PP") - 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.
The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the three and nine months ended September 30, 2019 and 2018 (dollars in millions).

(a) Revenue includes intersegment revenue earned by LSS as a result of servicing loans for AGM.
(b) Total revenue includes "net interest income" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives. Net income excludes changes in fair values of derivatives, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.

5

Certain events and transactions from 2018 and 2019, which have impacted or will impact the operating results of the Company and its operating segments, are discussed below.
Loan Servicing and Systems
•On February 7, 2018, the Company acquired Great Lakes. The operating results of Great Lakes are reported in the Company's consolidated financial statements from the date of acquisition. Thus, there are nine months of Great Lakes' operations included in the nine months ended September 30, 2019 as compared to approximately eight months of activity in the nine months ended September 30, 2018.
•Nelnet Servicing, LLC ("Nelnet Servicing") and Great Lakes have student loan servicing contracts awarded by the Department in June 2009 to provide servicing for loans owned by the Department. As of September 30, 2019, Nelnet Servicing was servicing $184.4 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.3 billion of student loans for 7.4 million borrowers under its contract. These contracts previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a Modification of Contract from the Department's Office of Federal Student Aid ("FSA") pursuant to which FSA extended the expiration date of the current contracts to December 15, 2019.
In addition, Nelnet Servicing's current Authority to Operate as a loan servicer for the Department expires on December 13, 2019 and is currently under review for renewal. The Company cannot predict the timing or outcome of this review.
FSA is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, FSA issued solicitations for three NextGen components:
•NextGen Enhanced Processing Solution ("EPS")
•NextGen Business Process Operations ("BPO")
•NextGen Optimal Processing Solution ("OPS")
On April 1, 2019 and October 4, 2019, the Company responded to the EPS component. In addition, on August 1, 2019, the Company responded to the BPO component. The Company is also part of a team that has responded and intends to respond to various aspects of the OPS component. The Company cannot predict the timing, nature, or outcome of these solicitations.
•For the three months ended September 30, 2019 and 2018, and nine months ended September 30, 2019 and 2018, the before tax and noncontrolling interest operating margin (income before income taxes and noncontrolling interest divided by revenue) was 15.9 percent, 10.4 percent, 16.8 percent, and 14.1 percent, respectively. The third quarter of 2018 included an impairment charge of $3.9 million ($3.0 million after tax). The remaining increase in operating margin in the 2019 periods as compared to the same periods in 2018 was due primarily to efficiencies gained as a result of the completion of certain integration activities related to the Great Lakes acquisition.
Education Technology, Services, and Payment Processing
•On November 20, 2018, the Company acquired Tuition Management Systems ("TMS"), a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions. The TMS acquisition added 380 higher education schools and 170 K-12 schools to the Company’s customer base. The results of TMS’ operations are reported in the Company’s consolidated financial statements from the date of acquisition.
•For the three months ended September 30, 2019 and 2018 and nine months ended September 30, 2019 and 2018, before tax operating margin (income before income taxes divided by net revenue) was 34.4 percent, 25.4 percent, 34.9 percent, and 28.4 percent, respectively. The increase in the before tax operating margin in the 2019 periods as compared to the same periods in 2018 was due to operating leverage and cost reductions resulting from the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform.
Communications
•ALLO recognized losses of $7.2 million and $16.9 million for the three and nine months ended September 30, 2019, respectively, as compared to losses of $7.7 million and $22.9 million for the same periods in 2018, respectively. The decrease in ALLO's net loss in 2019, as compared to 2018, was primarily due to a decrease in interest expense. ALLO recognized $4.2 million and $10.0 million of interest expense to Nelnet, Inc. (parent company) during the three and nine months ended September 30, 2018, respectively. Subsequent to October 1, 2018, ALLO will not report interest expense in its income statement related to amounts contributed to ALLO from Nelnet, Inc. due to a recapitalization of ALLO.
6

•ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the three months ended September 30, 2019 and 2018, ALLO had positive EBITDA of $1.5 million and $0.2 million, respectively, and for the nine months ended September 30, 2019 and 2018, ALLO has positive EBITDA of $3.7 million and negative EBITDA of $3.5 million, respectively. EBITDA is a supplemental non-GAAP performance measure which the Company believes provides useful additional information regarding a key metric used by management to assess ALLO's performance. See "Communications Financial and Operating Data" below for additional information regarding the computation and use of EBITDA for ALLO.
•ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest. During the second quarter of 2019, ALLO announced plans to expand its network to make services available in Breckenridge, Colorado. ALLO began providing services in Lincoln, Nebraska in September 2016 as part of a multi-year project to pass substantially all commercial and residential properties in the community. As of the end of the first quarter of 2019, the build-out of the Lincoln community was substantially complete. For the nine months ended September 30, 2019, ALLO's capital expenditures were $37.2 million. The Company anticipates total ALLO network capital expenditures in the fourth quarter of 2019 will be approximately $13.0 million. However, this amount could change based on customer demand for ALLO's services.
•The Company currently anticipates ALLO's operating results will be dilutive to the Company's consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.
Asset Generation and Management
•For the third quarter of 2019, the AGM segment recognized net interest income of $61.7 million, compared with $59.2 million for the same period in 2018. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The AGM segment recognized income from derivative settlements of $7.3 million during the third quarter of 2019, compared with income of $22.4 million for the same period in 2018. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. Net interest income and derivative settlements for the AGM segment totaled $69.0 million and $81.6 million in the third quarter of 2019 and 2018, respectively.
•The Company's average balance of loans decreased to $21.6 billion for the third quarter of 2019, compared with $23.0 billion for the same period in 2018. Loan spread increased to 1.04 percent for the quarter ended September 30, 2019, compared with 0.90 percent for the same period in 2018. Core loan spread, which includes the impact of derivative settlements, decreased to 1.17 percent for the quarter ended September 30, 2019, compared with 1.30 percent for the same period in 2018. Management believes core loan spread is a useful supplemental non-GAAP measure that reflects adjustments for derivative settlements related to net interest income (loan spread). However, there is no comprehensive authoritative guidance for the presentation of this measure, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.
The Company recognized $19.7 million and $32.7 million in fixed rate floor income during the three months ended September 30, 2019 and 2018, respectively (which includes $7.1 million and $19.1 million, respectively, of settlement payments received on derivatives used to hedge student loans earning fixed rate floor income). Fixed rate floor income contributed 36 basis points and 57 basis points of core loan spread for the three months ended September 30, 2019 and 2018, respectively. The decrease in gross fixed rate floor income was due to higher interest rates in 2019 as compared to 2018, and the decrease in derivative settlement payments received on derivatives used to hedge student loans earning fixed rate floor income was due to a decrease in the notional amount of derivatives outstanding in 2019 as compared to 2018, partially offset by higher interest rates.
•Provision for loan losses was $10.0 million and $10.5 million for the three months ended September 30, 2019 and 2018, respectively, and $26.0 million and $18.0 million for the nine months ended September 30, 2019 and 2018, respectively.
Provision for loan losses for federally insured loans was $2.0 million and $8.0 million for the three months ended September 30, 2019 and 2018, respectively, and $6.0 million and $12.0 million for the nine months ended September 30, 2019 and 2018, respectively. During the third quarter of 2018, the Company determined an additional allowance was necessary related to a portfolio of federally insured loans that were purchased in 2013 and 2014, and recognized $5.0 million in provision expense related to these loans.

7

Provision for loan losses for consumer loans was $8.0 million and $2.5 million for the three months ended September 30, 2019 and 2018, respectively, and $20.0 million and $6.0 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in provision was a result of the increased amount of consumer loan purchases during 2019. The Company purchased $298.1 million of consumer loans during the nine months ended September 30, 2019 ($113.3 million of which were purchased during the third quarter) compared to $80.4 million during the same period in 2018 ($42.8 million during the third quarter of 2018).
•The Company recognized $14.0 million of expenses during the three months ended September 30, 2019 and $15.8 million of expenses during the nine months ended September 30, 2019 related to the extinguishment of notes payable in certain asset-backed securitizations prior to the notes' contractual maturities (as further described below). These expenses consisted of premium payments made by the Company of $12.6 million and $14.0 million during the three and nine months ended September 30, 2019, respectively, and the write off of $1.4 million and $1.8 million of debt issuance costs during the three and nine months ended September 30, 2019, respectively.
Corporate and Other Activities
•The Company adopted a new lease accounting standard effective January 1, 2019. The most significant impact of the standard to the Company relates to (1) the recognition of new right-of-use ("ROU") assets and lease liabilities on its balance sheet primarily for office, data center, and dark fiber operating leases; (2) the deconsolidation of assets and liabilities for certain sale-leaseback transactions arising from build-to-suit lease arrangements for which construction was completed and the Company is leasing the constructed assets that did not qualify for sale accounting prior to the adoption of the new standard; and (3) significant new disclosures about the Company’s leasing activities.
Adoption of the new standard resulted in recognizing lease liabilities of $33.7 million based on the present value of the remaining minimum rental payments. In addition, the Company recognized ROU assets of $32.8 million, which corresponds to the lease liabilities reduced by deferred rent expense as of the effective date. The Company also deconsolidated total assets of $43.8 million and total liabilities of $34.8 million for entities that had been consolidated due to sale-leaseback transactions that failed to qualify for recognition as sales under the prior guidance. Deconsolidation of these entities reduced noncontrolling interests by $6.1 million.
Liquidity and Capital Resources
•As of September 30, 2019, the Company had cash and cash equivalents of $161.0 million. In addition, the Company had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of $52.6 million as of September 30, 2019.
•As of September 30, 2019, the Company's $382.5 million unsecured line of credit had no amount outstanding and $382.5 million was available for future use. During the second quarter of 2019, the Company entered into a $22.0 million secured line of credit agreement, and as of September 30, 2019, this line of credit had $5.0 million outstanding and $17.0 million available for future use.
•The Company has repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As of September 30, 2019, the Company holds $15.0 million (par value) of its own asset-backed securities.
•During the nine months ended September 30, 2019, the Company generated $142.9 million of cash from operating activities.
•The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that will generate significant earnings and cash flow over the life of these transactions. As of September 30, 2019, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $1.88 billion.
Certain of the Company’s asset-backed securitizations were structured as “Turbo Transactions” which required all cash generated from the student loans (including excess spread) to be directed toward payment of interest and any outstanding principal generally until such time as all principal on the notes had been paid in full.  Once the notes in such transactions were paid in full, the remaining unencumbered student loans (and other remaining assets, if any) in the securitization would be released to the Company, at which time the Company would have the option to refinance or sell these assets, or retain them on the balance sheet as unencumbered assets.

8

During the second and third quarters of 2019, the Company extinguished a total of $768.5 million of notes payable in certain asset-backed securitizations, including six of the Company's seven Turbo Transactions, prior to the notes' contractual maturities, resulting in the release of $1.15 billion in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations. Upon extinguishment of the notes payable throughout the second and third quarters, the Company refinanced the student loans in its FFELP warehouse facilities and new asset-backed securitizations, resulting in net cash proceeds of $369.0 million. The Company used a portion of these proceeds to pay down the outstanding balance on its unsecured line of credit.
The cash proceeds generated by the debt extinguishments provide the Company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns.
•On January 11, 2019, the Company obtained a consumer loan warehouse facility with an aggregate maximum financing amount available of $100.0 million. On April 25, 2019, the Company amended the agreement for this warehouse facility to increase the aggregate maximum financing amount available to $200.0 million and extend the final maturity date to April 23, 2022. As of September 30, 2019, $144.0 million was outstanding under this facility and $56.0 million was available for future funding.
•During the first nine months of 2019, the Company completed five FFELP asset-backed securitizations totaling $2.2 billion (par value). The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities and unencumbered student loans from the extinguishment of certain asset-backed securitizations.
•On June 25, 2019, the Company completed a private education loan asset-backed securitization totaling $47.2 million (par value). The proceeds from this transaction were used to refinance private education loans previously funded via a private loan repurchase agreement that was terminated on June 25, 2019.
•During the nine months ended September 30, 2019, the Company repurchased a total of 723,832 shares of Class A common stock for $40.3 million ($55.62 per share), including 3,365 shares of Class A common stock repurchased during the three months ended September 30, 2019 for $0.2 million ($65.81 per share).
On May 8, 2019, the 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 7, 2022. The five million shares authorized under the new program include the remaining unrepurchased shares from the prior program, which the new program replaces. As of September 30, 2019, 4.8 million shares remained authorized for repurchase under the Company's stock repurchase program.
•During the nine months ended September 30, 2019, the Company paid cash dividends of $21.5 million ($0.54 per share), including $7.1 million ($0.18 per share) paid during the three months ended September 30, 2019. In addition, the Company's Board of Directors has declared a fourth quarter 2019 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.20 per share. The fourth quarter cash dividend will be paid on December 13, 2019 to shareholders of record at the close of business on November 29, 2019.
•The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer 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.
Subsequent Event
•Subsequent to September 30, 2019, the Company made the decision to sell $179.3 million (par value) of consumer loans to an unrelated third party who securitized such loans. As partial consideration received for the consumer loans sold, the Company received an approximate 29 percent residual interest in the consumer loan securitization. The Company will recognize a gain in the fourth quarter of 2019 of $15.5 million (pre-tax) from the sale of these loans.

9

Segment Reporting
The following tables include the results of each of the Company's reportable operating segments reconciled to the consolidated financial statements.
																																										
 	Three months ended September 30, 2019 	 	
	Loan Servicing and Systems 	 		Education Technology, Services, and Payment Processing 	 		Communications 	 		Asset
Generation and
Management 	 		Corporate and Other Activities 	 		Eliminations 	 		Total 	 	
Total interest income	$	532 	 		3,499 	 		— 	 		233,225 	 		2,859 	 		(1,171)	 		238,945 	 	
Interest expense	51 	 		12 	 		— 	 		171,485 	 		2,110 	 		(1,171)	 		172,488 	 	
Net interest income (expense)	481 	 		3,487 	 		— 	 		61,740 	 		749 	 		— 	 		66,457 	 	
Less provision for loan losses	— 	 		— 	 		— 	 		10,000 	 		— 	 		— 	 		10,000 	 	
Net interest income (loss) after provision for loan losses	481 	 		3,487 	 		— 	 		51,740 	 		749 	 		— 	 		56,457 	 	
Other income:														
Loan servicing and systems revenue	113,286 	 		— 	 		— 	 		— 	 		— 	 		— 	 		113,286 	 	
Intersegment servicing revenue	11,611 	 		— 	 		— 	 		— 	 		— 	 		(11,611)	 		— 	 	
Education technology, services, and payment processing revenue	— 	 		74,251 	 		— 	 		— 	 		— 	 		— 	 		74,251 	 	
Communications revenue	— 	 		— 	 		16,470 	 		— 	 		— 	 		— 	 		16,470 	 	
Other income	2,291 	 		— 	 		532 	 		3,384 	 		7,231 	 		— 	 		13,439 	 	
Derivative settlements, net	— 	 		— 	 		— 	 		7,298 	 		— 	 		— 	 		7,298 	 	
Derivative market value adjustments, net	— 	 		— 	 		— 	 		(5,630)	 		— 	 		— 	 		(5,630)	 	
Total other income	127,188 	 		74,251 	 		17,002 	 		5,052 	 		7,231 	 		(11,611)	 		219,114 	 	
Cost of services:														
Cost to provide education technology, services, and payment processing services	— 	 		25,671 	 		— 	 		— 	 		— 	 		— 	 		25,671 	 	
Cost to provide communications services	— 	 		— 	 		5,236 	 		— 	 		— 	 		— 	 		5,236 	 	
Total cost of services	— 	 		25,671 	 		5,236 	 		— 	 		— 	 		— 	 		30,907 	 	
Operating expenses:														
Salaries and benefits	69,209 	 		23,826 	 		5,763 	 		394 	 		17,479 	 		— 	 		116,670 	 	
Depreciation and amortization	8,565 	 		2,997 	 		10,926 	 		— 	 		5,212 	 		— 	 		27,701 	 	
Loan servicing fees to third parties	— 	 		— 	 		— 	 		3,382 	 		— 	 		— 	 		3,382 	 	
Other expenses	16,686 	 		5,325 	 		3,842 	 		15,672 	 		13,422 	 		— 	 		54,947 	 	
Intersegment expenses, net	12,955 	 		3,194 	 		701 	 		11,678 	 		(16,917)	 		(11,611)	 		— 	 	
Total operating expenses	107,415 	 		35,342 	 		21,232 	 		31,126 	 		19,196 	 		(11,611)	 		202,700 	 	
Income (loss) before income taxes	20,254 	 		16,725 	 		(9,466)	 		25,666 	 		(11,216)	 		— 	 		41,964 	 	
Income tax (expense) benefit	(4,861)	 		(4,014)	 		2,272 	 		(6,160)	 		3,935 	 		— 	 		(8,829)	 	
Net income (loss)	15,393 	 		12,711 	 		(7,194)	 		19,506 	 		(7,281)	 		— 	 		33,135 	 	
  Net loss (income) attributable to noncontrolling interests	— 	 		— 	 		— 	 		— 	 		77 	 		— 	 		77 	 	
Net income (loss) attributable to Nelnet, Inc.	$	15,393 	 		12,711 	 		(7,194)	 		19,506 	 		(7,204)	 		— 	 		33,212 	 	

10

																																										
	Three months ended June 30, 2019	
	Loan Servicing and Systems 	 		Education Technology, Services, and Payment Processing 	 		Communications 	 		Asset
Generation and
Management 	 		Corporate and Other Activities 	 		Eliminations 	 		Total 	 	
Total interest income	$	550 	 		1,659 	 		1 	 		243,295 	 		2,258 	 		(974)	 		246,788 	 	
Interest expense	19 	 		11 	 		— 	 		184,035 	 		3,872 	 		(974)	 		186,963 	 	
Net interest income (expense)	531 	 		1,648 	 		1 	 		59,260 	 		(1,614)	 		— 	 		59,825 	 	
Less provision for loan losses	— 	 		— 	 		— 	 		9,000 	 		— 	 		— 	 		9,000 	 	
Net interest income (loss) after provision for loan losses	531 	 		1,648 	 		1 	 		50,260 	 		(1,614)	 		— 	 		50,825 	 	
Other income:														
Loan servicing and systems revenue	113,985 	 		— 	 		— 	 		— 	 		— 	 		— 	 		113,985 	 	
Intersegment servicing revenue	11,598 	 		— 	 		— 	 		— 	 		— 	 		(11,598)	 		— 	 	
Education technology, services, and payment processing revenue	— 	 		60,342 	 		— 	 		— 	 		— 	 		— 	 		60,342 	 	
Communications revenue	— 	 		— 	 		15,758 	 		— 	 		— 	 		— 	 		15,758 	 	
Other income	2,277 	 		— 	 		362 	 		4,888 	 		8,624 	 		— 	 		16,152 	 	
	
Derivative settlements, net	— 	 		— 	 		— 	 		12,972 	 		— 	 		— 	 		12,972 	 	
Derivative market value adjustments, net	— 	 		— 	 		— 	 		(37,060)	 		— 	 		— 	 		(37,060)	 	
Total other income	127,860 	 		60,342 	 		16,120 	 		(19,200)	 		8,624 	 		(11,598)	 		182,149 	 	
Cost of services:														
Cost to provide education technology, services, and payment processing services	— 	 		15,871 	 		— 	 		— 	 		— 	 		— 	 		15,871 	 	
Cost to provide communications services	— 	 		— 	 		5,101 	 		— 	 		— 	 		— 	 		5,101 	 	
Total cost of services	— 	 		15,871 	 		5,101 	 		— 	 		— 	 		— 	 		20,972 	 	
Operating expenses:														
Salaries and benefits	66,496 	 		22,823 	 		5,192 	 		382 	 		16,321 	 		— 	 		111,214 	 	
Depreciation and amortization	8,799 	 		3,324 	 		7,737 	 		— 	 		4,623 	 		— 	 		24,484 	 	
Loan servicing fees to third parties	— 	 		— 	 		— 	 		3,156 	 		— 	 		— 	 		3,156 	 	
Other expenses	17,118 	 		5,805 	 		3,865 	 		3,051 	 		12,423 	 		— 	 		42,261 	 	
Intersegment expenses, net	13,604 	 		3,148 	 		716 	 		11,665 	 		(17,535)	 		(11,598)	 		— 	 	
Total operating expenses	106,017 	 		35,100 	 		17,510 	 		18,254 	 		15,832 	 		(11,598)	 		181,115 	 	
Income (loss) before income taxes	22,374 	 		11,019 	 		(6,490)	 		12,806 	 		(8,822)	 		— 	 		30,887 	 	
Income tax (expense) benefit	(5,370)	 		(2,645)	 		1,558 	 		(3,074)	 		3,321 	 		— 	 		(6,209)	 	
Net income (loss)	17,004 	 		8,374 	 		(4,932)	 		9,732 	 		(5,501)	 		— 	 		24,678 	 	
  Net loss (income) attributable to noncontrolling interests	— 	 		— 	 		— 	 		— 	 		(59)	 		— 	 		(59)	 	
Net income (loss) attributable to Nelnet, Inc.	$	17,004 	 		8,374 	 		(4,932)	 		9,732 	 		(5,560)	 		— 	 		24,619 	 	

11

																																										
 	Three months ended September 30, 2018 	 	
	Loan Servicing and Systems 	 		Education Technology, Services, and Payment Processing 	 		Communications 	 		Asset
Generation and
Management 	 		Corporate and Other
Activities 	 		Eliminations 	 		Total 	 	
Total interest income	$	381 	 		1,513 	 		1 	 		236,039 	 		6,860 	 		(4,846)	 		239,948 	 	
Interest expense	— 	 		3 	 		4,174 	 		176,874 	 		3,968 	 		(4,846)	 		180,175 	 	
Net interest income (expense)	381 	 		1,510 	 		(4,173)	 		59,165 	 		2,892 	 		— 	 		59,773 	 	
Less provision for loan losses	— 	 		— 	 		— 	 		10,500 	 		— 	 		— 	 		10,500 	 	
Net interest income (loss) after provision for loan losses	381 	 		1,510 	 		(4,173)	 		48,665 	 		2,892 	 		— 	 		49,273 	 	
Other income:														
Loan servicing and systems revenue	112,579 	 		— 	 		— 	 		— 	 		— 	 		— 	 		112,579 	 	
Intersegment servicing revenue	12,290 	 		— 	 		— 	 		— 	 		— 	 		(12,290)	 		— 	 	
Education technology, services, and payment processing revenue	— 	 		58,409 	 		— 	 		— 	 		— 	 		— 	 		58,409 	 	
Communications revenue	— 	 		— 	 		11,818 	 		— 	 		— 	 		— 	 		11,818 	 	
Other income	1,948 	 		— 	 		950 	 		3,267 	 		10,508 	 		— 	 		16,673 	 	
	
Derivative settlements, net	— 	 		— 	 		— 	 		22,448 	 		(124)	 		— 	 		22,324 	 	
Derivative market value adjustments, net	— 	 		— 	 		— 	 		(6,056)	 		830 	 		— 	 		(5,226)	 	
Total other income	126,817 	 		58,409 	 		12,768 	 		19,659 	 		11,214 	 		(12,290)	 		216,577 	 	
Cost of services:														
Cost to provide education technology, services, and payment processing services	— 	 		19,087 	 		— 	 		— 	 		— 	 		— 	 		19,087 	 	
Cost to provide communications services	— 	 		— 	 		4,310 	 		— 	 		— 	 		— 	 		4,310 	 	
Total cost of services	— 	 		19,087 	 		4,310 	 		— 	 		— 	 		— 	 		23,397 	 	
Operating expenses:														
Salaries and benefits	70,440 	 		19,972 	 		4,554 	 		424 	 		18,782 	 		— 	 		114,172 	 	
Depreciation and amortization	8,957 	 		3,435 	 		6,167 	 		— 	 		4,433 	 		— 	 		22,992 	 	
Loan servicing fees to third parties	— 	 		— 	 		— 	 		3,087 	 		— 	 		— 	 		3,087 	 	
Other expenses	19,638 	 		4,943 	 		3,151 	 		845 	 		16,616 	 		— 	 		45,194 	 	
Intersegment expenses, net	15,029 	 		2,494 	 		598 	 		12,378 	 		(18,208)	 		(12,290)	 		— 	 	
Total operating expenses	114,064 	 		30,844 	 		14,470 	 		16,734 	 		21,623 	 		(12,290)	 		185,445 	 	
Income (loss) before income taxes	13,134 	 		9,988 	 		(10,185)	 		51,590 	 		(7,517)	 		— 	 		57,008 	 	
Income tax (expense) benefit	(3,152)	 		(2,397)	 		2,444 	 		(12,381)	 		1,604 	 		— 	 		(13,882)	 	
Net income (loss)	9,982 	 		7,591 	 		(7,741)	 		39,209 	 		(5,913)	 		— 	 		43,126 	 	
  Net loss (income) attributable to noncontrolling interests	— 	 		— 	 		— 	 		— 	 		(199)	 		— 	 		(199)	 	
Net income (loss) attributable to Nelnet, Inc.	$	9,982 	 		7,591 	 		(7,741)	 		39,209 	 		(6,112)	 		— 	 		42,927 	 	

12

																																										
	
	Nine months ended September 30, 2019 	 	
	Loan Servicing and Systems 	 		Education Technology, Services, and Payment Processing 	 		Communications 	 		Asset
Generation and
Management 	 		Corporate and Other
Activities 	 		Eliminations 	 		Total 	 	
Total interest income	$	1,579 	 		7,175 	 		3 	 		723,388 	 		7,170 	 		(2,995)	 		736,319 	 	
Interest expense	70 	 		32 	 		— 	 		544,319 	 		9,796 	 		(2,995)	 		551,221 	 	
Net interest income (expense)	1,509 	 		7,143 	 		3 	 		179,069 	 		(2,626)	 		— 	 		185,098 	 	
Less provision for loan losses	— 	 		— 	 		— 	 		26,000 	 		— 	 		— 	 		26,000 	 	
Net interest income (loss) after provision for loan losses	1,509 	 		7,143 	 		3 	 		153,069 	 		(2,626)	 		— 	 		159,098 	 	
Other income:														
Loan servicing and systems revenue	342,169 	 		— 	 		— 	 		— 	 		— 	 		— 	 		342,169 	 	
Intersegment servicing revenue	35,426 	 		— 	 		— 	 		— 	 		— 	 		(35,426)	 		— 	 	
Education technology, services, and payment processing
revenue	— 	 		213,753 	 		— 	 		— 	 		— 	 		— 	 		213,753 	 	
Communications revenue	— 	 		— 	 		46,770 	 		— 	 		— 	 		— 	 		46,770 	 	
Other income	6,642 	 		— 	 		1,019 	 		11,796 	 		19,200 	 		— 	 		38,658 	 	
	
Derivative settlements, net	— 	 		— 	 		— 	 		39,306 	 		— 	 		— 	 		39,306 	 	
Derivative market value adjustments, net	— 	 		— 	 		— 	 		(73,265)	 		— 	 		— 	 		(73,265)	 	
Total other income	384,237 	 		213,753 	 		47,789 	 		(22,163)	 		19,200 	 		(35,426)	 		607,391 	 	
Cost of services:														
Cost to provide education technology, services, and payment
processing services	— 	 		62,601 	 		— 	 		— 	 		— 	 		— 	 		62,601 	 	
Cost to provide communications services	— 	 		— 	 		15,096 	 		— 	 		— 	 		— 	 		15,096 	 	
Total cost of services	— 	 		62,601 	 		15,096 	 		— 	 		— 	 		— 	 		77,697 	 	
Operating expenses:														
Salaries and benefits	201,924 	 		69,656 	 		15,692 	 		1,153 	 		50,517 	 		— 	 		338,942 	 	
Depreciation and amortization	26,236 	 		9,832 	 		26,025 	 		— 	 		14,305 	 		— 	 		76,398 	 	
Loan servicing fees to third parties	— 	 		— 	 		— 	 		9,431 	 		— 	 		— 	 		9,431 	 	
Other expenses	52,732 	 		16,440 	 		11,184 	 		19,667 	 		38,107 	 		— 	 		138,131 	 	
Intersegment expenses, net	40,317 	 		9,642 	 		2,081 	 		35,630 	 		(52,244)	 		(35,426)	 		— 	 	
Total operating expenses	321,209 	 		105,570 	 		54,982 	 		65,881 	 		50,685 	 		(35,426)	 		562,902 	 	
Income (loss) before income taxes	64,537 	 		52,725 	 		(22,286)	 		65,025 	 		(34,111)	 		— 	 		125,890 	 	
Income tax (expense) benefit	(15,489)	 		(12,654)	 		5,349 	 		(15,606)	 		11,971 	 		— 	 		(26,429)	 	
Net income (loss)	49,048 	 		40,071 	 		(16,937)	 		49,419 	 		(22,140)	 		— 	 		99,461 	 	
Net loss (income) attributable to noncontrolling interests	— 	 		— 	 		— 	 		— 	 		(38)	 		— 	 		(38)	 	
Net income (loss) attributable to Nelnet, Inc.	$	49,048 	 		40,071 	 		(16,937)	 		49,419 	 		(22,178)	 		— 	 		99,423 	 	

13

																																										
	Nine months ended September 30, 2018	
	Loan Servicing and Systems 	 		Education Technology, Services, and Payment Processing 	 		Communications 	 		Asset Generation and Management		Corporate and Other Activities 	 		Eliminations 	 		Total 	 	
Total interest income	$	931 	 		2,927 	 		3 	 		662,881 	 		17,673 	 		(12,420)	 		671,995 	 	
Interest expense	— 	 		3 	 		9,987 	 		480,729 	 		8,875 	 		(12,420)	 		487,174 	 	
Net interest income (expense)	931 	 		2,924 	 		(9,984)	 		182,152 	 		8,798 	 		— 	 		184,821 	 	
Less provision for loan losses	— 	 		— 	 		— 	 		18,000 	 		— 	 		— 	 		18,000 	 	
Net interest income (loss) after provision for loan losses	931 	 		2,924 	 		(9,984)	 		164,152 	 		8,798 	 		— 	 		166,821 	 	
Other income:														
Loan servicing and systems revenue	327,265 	 		— 	 		— 	 		— 	 		— 	 		— 	 		327,265 	 	
Intersegment servicing revenue	34,670 	 		— 	 		— 	 		— 	 		— 	 		(34,670)	 		— 	 	
Education technology, services, and payment processing revenue	— 	 		167,372 	 		— 	 		— 	 		— 	 		— 	 		167,372 	 	
Communications revenue	— 	 		— 	 		31,327 	 		— 	 		— 	 		— 	 		31,327 	 	
Other income	5,196 	 		— 	 		950 	 		9,391 	 		29,272 	 		— 	 		44,808 	 	
	
Derivative settlements, net	— 	 		— 	 		— 	 		51,428 	 		(410)	 		— 	 		51,018 	 	
Derivative market value adjustments, net	— 	 		— 	 		— 	 		47,070 	 		2,839 	 		— 	 		49,909 	 	
Total other income	367,131 	 		167,372 	 		32,277 	 		107,889 	 		31,701 	 		(34,670)	 		671,699 	 	
Cost of services:														
Cost to provide education technology, services, and payment processing services	— 	 		44,087 	 		— 	 		— 	 		— 	 		— 	 		44,087 	 	
Cost to provide communications services	— 	 		— 	 		11,892 	 		— 	 		— 	 		— 	 		11,892 	 	
Total cost of services	— 	 		44,087 	 		11,892 	 		— 	 		— 	 		— 	 		55,979 	 	
Operating expenses:														
Salaries and benefits	198,411 	 		58,552 	 		13,284 	 		1,183 	 		50,502 	 		— 	 		321,932 	 	
Depreciation and amortization	23,237 	 		10,062 	 		16,585 	 		— 	 		13,058 	 		— 	 		62,943 	 	
Loan servicing fees to third parties	— 	 		— 	 		— 	 		9,428 	 		— 	 		— 	 		9,428 	 	
Other expenses	51,591 	 		14,950 	 		8,811 	 		2,982 	 		40,686 	 		— 	 		119,020 	 	
Intersegment expenses, net	43,968 	 		7,630 	 		1,802 	 		34,943 	 		(53,672)	 		(34,670)	 		— 	 	
Total operating expenses	317,207 	 		91,194 	 		40,482 	 		48,536 	 		50,574 	 		(34,670)	 		513,323 	 	
Income (loss) before income taxes	50,855 	 		35,015 	 		(30,081)	 		223,505 	 		(10,075)	 		— 	 		269,218 	 	
Income tax (expense) benefit	(12,399)	 		(8,404)	 		7,220 	 		(53,641)	 		3,855 	 		— 	 		(63,369)	 	
Net income (loss)	38,456 	 		26,611 	 		(22,861)	 		169,864 	 		(6,220)	 		— 	 		205,849 	 	
Net loss (income) attributable to noncontrolling interests	808 	 		— 	 		— 	 		— 	 		(371)	 		— 	 		438 	 	
Net income (loss) attributable to Nelnet, Inc.	$	39,264 	 		26,611 	 		(22,861)	 		169,864 	 		(6,591)	 		— 	 		206,287 	 	

14

Net Interest Income, Net of Settlements on Derivatives
The following table summarizes the components of "net interest income" and "derivative settlements, net."
Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in the table below. Net interest income (net of settlements on derivatives) is a non-GAAP financial measure, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See "Derivative Settlements" included in this supplement for the net settlement activity recognized by the Company for each type of derivative for the periods presented in the table below.

	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Variable loan interest margin	$	46,051 	 		44,310 	 		42,455 	 		134,312 	 		129,756 	 	
Settlements on associated derivatives (a)	234 	 		807 	 		3,361 	 		3,375 	 		4,676 	 	
Variable loan interest margin, net of settlements on derivatives	46,285 	 		45,117 	 		45,816 	 		137,687 	 		134,432 	 	
Fixed rate floor income	12,685 	 		10,840 	 		13,659 	 		33,950 	 		45,359 	 	
Settlements on associated derivatives (b)	7,064 	 		12,165 	 		19,087 	 		35,931 	 		46,752 	 	
Fixed rate floor income, net of settlements on derivatives	19,749 	 		23,005 	 		32,746 	 		69,881 	 		92,111 	 	
Investment interest	9,882 	 		8,566 	 		7,628 	 		26,701 	 		18,581 	 	
Corporate debt interest expense	(2,161)	 		(3,891)	 		(3,969)	 		(9,865)	 		(8,875)	 	
Non-portfolio related derivative settlements (c)	— 	 		— 	 		(124)	 		— 	 		(410)	 	
Net interest income (net of settlements on derivatives)	$	73,755 	 		72,797 	 		82,097 	 		224,404 	 		235,839 	 	

(a) Includes the net settlements received related to the Company’s 1:3 basis swaps.

(b) Includes the net settlements received related to the Company’s floor income interest rate swaps.

(c) Includes the net settlements paid related to the Company’s hybrid debt hedges.

15

Loan Servicing and Systems Revenue
The following table provides disaggregated revenue by service offering for the Loan Servicing and Systems operating segment. The Company purchased Great Lakes on February 7, 2018. The results of Great Lakes' operations are reported in the Company's consolidated financial statements from the date of acquisition.
																														
	Three months ended 	 		Nine months ended 	 	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Government servicing - Nelnet	$	38,645 	 		40,459 	 		38,907 	 		118,744 	 		118,015 	 	
Government servicing - Great Lakes	46,234 	 		45,973 	 		45,671 	 		139,285 	 		122,107 	 	
Private education and consumer loan servicing	9,561 	 		8,985 	 		10,007 	 		28,026 	 		31,990 	 	
FFELP servicing	6,089 	 		6,424 	 		7,422 	 		19,208 	 		24,259 	 	
Software services	10,493 	 		10,021 	 		8,201 	 		30,255 	 		24,461 	 	
 Outsourced services and other	2,264 	 		2,123 	 		2,371 	 		6,651 	 		6,433 	 	
Loan servicing and systems revenue	$	113,286 	 		113,985 	 		112,579 	 		342,169 	 		327,265 	 	
Loan Servicing Volumes
																																																
	As of	
	December 31,
2017		March 31,
2018		June 30,
2018		September 30,
2018		December 31,
2018		March 31,
2019		June 30,
2019		September 30,
2019	
Servicing volume
(dollars in millions):																
Nelnet:																
Government	$	172,669 	 		176,605 	 		176,179 	 		179,283 	 		179,507 	 		183,093 	 		181,682 	 		184,399 	 	
FFELP	27,262 	 		26,969 	 		37,599 	 		37,459 	 		36,748 	 		35,917 	 		35,003 	 		33,981 	 	
Private and consumer	11,483 	 		12,116 	 		15,016 	 		15,466 	 		15,666 	 		16,065 	 		16,025 	 		16,286 	 	
Great Lakes:																
Government	— 	 		242,063 	 		241,902 	 		232,741 	 		232,694 	 		237,050 	 		236,500 	 		240,268 	 	
FFELP (a)	— 	 		11,136 	 		— 	 		— 	 		— 	 		— 	 		— 	 		— 	 	
Private and consumer (a)	— 	 		1,927 	 		31 	 		— 	 		— 	 		— 	 		— 	 		— 	 	
Total	$	211,414 	 		470,816 	 		470,727 	 		464,949 	 		464,615 	 		472,125 	 		469,210 	 		474,934 	 	
																
Number of servicing borrowers:																
Nelnet:																
Government	5,877,414 	 		5,819,286 	 		5,745,181 	 		5,805,307 	 		5,771,923 	 		5,708,582 	 		5,592,989 	 		5,635,653 	 	
FFELP	1,420,311 	 		1,399,280 	 		1,787,419 	 		1,754,247 	 		1,709,853 	 		1,650,785 	 		1,588,530 	 		1,529,392 	 	
Private and consumer	502,114 	 		508,750 	 		672,520 	 		692,763 	 		696,933 	 		699,768 	 		693,410 	 		701,299 	 	
Great Lakes:																
Government	— 	 		7,456,830 	 		7,378,875 	 		7,486,311 	 		7,458,684 	 		7,385,284 	 		7,300,691 	 		7,430,165 	 	
FFELP (a)	— 	 		461,553 	 		— 	 		— 	 		— 	 		— 	 		— 	 		— 	 	
Private and consumer (a)	— 	 		118,609 	 		3,987 	 		— 	 		— 	 		— 	 		— 	 		— 	 	
Total	7,799,839 	 		15,764,308 	 		15,587,982 	 		15,738,628 	 		15,637,393 	 		15,444,419 	 		15,175,620 	 		15,296,509 	 	
																
Number of remote hosted borrowers:	2,812,713 	 		6,207,747 	 		6,145,981 	 		6,406,923 	 		6,393,151 	 		6,332,261 	 		6,211,132 	 		6,457,296 	 	

(a) During the second quarter of 2018, the Company converted Great Lakes' FFELP and private education servicing
volume to Nelnet Servicing's platform to leverage the efficiencies of supporting more volume on fewer systems.

16

Education Technology, Services, and Payment Processing
The following table provides disaggregated revenue by servicing offering for the Education Technology, Services, and Payment Processing operating segment.
																														
	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Tuition payment plan services	$	25,760 	 		24,655 	 		19,771 	 		80,589 	 		63,209 	 	
Payment processing	35,138 	 		21,311 	 		26,956 	 		85,428 	 		62,908 	 	
Education technology and services	13,067 	 		14,096 	 		11,419 	 		46,872 	 		40,411 	 	
Other	286 	 		280 	 		263 	 		864 	 		844 	 	
Education technology, services, and payment processing revenue	$	74,251 	 		60,342 	 		58,409 	 		213,753 	 		167,372 	 	
Communications Financial and Operating Data
Certain financial and operating data for ALLO is summarized in the tables below.
																																																												
	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Residential revenue	$	12,397 	 		75.3 	%		$	11,890 	 		75.5 	%		$	8,896 	 		75.3 	%		$	35,351 	 		75.6 	%		$	23,367 	 		74.6 	%	
Business revenue	4,025 	 		24.4 	 		3,816 	 		24.2 	 		2,861 	 		24.2 	 		11,256 	 		24.1 	 		7,779 	 		24.8 	 	
Other	48 	 		0.3 	 		52 	 		0.3 	 		61 	 		0.5 	 		163 	 		0.3 	 		181 	 		0.6 	 	
Communications revenue	$	16,470 	 		100.0 	%		$	15,758 	 		100.0 	%		$	11,818 	 		100.0 	%		$	46,770 	 		100.0 	%		$	31,327 	 		100.0 	%	

Internet	$	9,899 	 		60.1 	%		$	9,297 	 		59.0 	%		$	6,453 	 		54.6 	%		$	27,641 	 		59.1 	%		$	16,541 	 		52.8 	%	
Television	4,068		24.7 	 		4,050 	 		25.7 	 		3,380		28.6 	 		12,020 	 		25.7 	 		9,241 	 		29.5 	 	
Telephone	2,487		15.1 	 		2,395 	 		15.2 	 		1,962		16.6 	 		7,062 	 		15.1 	 		5,482 	 		17.5 	 	
Other	16		0.1 	 		16 	 		0.1 	 		23		0.2 	 		47 	 		0.1 	 		63 	 		0.2 	 	
Communications revenue	$	16,470 	 		100.0 	%		$	15,758 	 		100.0 	%		$	11,818 	 		100.0 	%		$	46,770 	 		100.0 	%		$	31,327 	 		100.0 	%	
																				
Net loss	$	(7,194)	 				(4,932)	 				(7,741)	 				(16,937)	 				(22,861)	 			
EBITDA (a)	1,460 	 				1,246 	 				155 	 				3,736 	 				(3,512)	 			
																				
Capital expenditures	10,187 	 				15,040 	 				21,728 	 				37,185 	 				66,816 	 			

	As of September 30, 2019		As of
June 30,
2019		As of
March 31,
2019		As of December 31, 2018		As of September 30, 2018		As of
June 30,
2018		As of
March 31,
2018		As of December 31, 2017	
Residential customer information:																
Households served	45,228 	 		42,760 	 		40,338 	 		37,351 	 		32,529 	 		27,643 	 		23,541 	 		20,428 	 	
Households passed (b)	137,269 	 		132,984 	 		127,253 	 		122,396 	 		110,687 	 		98,538 	 		84,475 	 		71,426 	 	
Households served/passed	32.9 	%		32.2 	%		31.7 	%		30.5 	%		29.4 	%		28.1 	%		27.9 	%		28.6 	%	
Total households in current markets and new markets announced (c)	159,974 	 		159,974 	 		152,840 	 		152,840 	 		142,602 	 		137,500 	 		137,500 	 		137,500 	 	

(a) Earnings (loss) before interest, income 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 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. 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
17

measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP. A reconciliation of EBITDA from ALLO's net loss under GAAP is presented below:

	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Net loss	$	(7,194)	 		(4,932)	 		(7,741)	 		(16,937)	 		(22,861)	 	
Net interest (income) expense	— 	 		(1)	 		4,173 	 		(3)	 		9,984 	 	
Income tax benefit	(2,272)	 		(1,558)	 		(2,444)	 		(5,349)	 		(7,220)	 	
Depreciation and amortization	10,926 	 		7,737 	 		6,167 	 		26,025 	 		16,585 	 	
Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA)	$	1,460 	 		1,246 	 		155 	 		3,736 	 		(3,512)	 	
(b) Represents the 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.
(c) During the second quarter of 2019, ALLO announced plans to expand its network to make services available in Breckenridge Colorado. ALLO is now in ten communities, including eight in Nebraska and two in Colorado.
Other Income
The following table summarizes the components of "other income."
																														
 	Three months ended		Nine months ended	
 	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Borrower late fee income	$	3,196 	 		3,161 	 		3,253 	 		9,870 	 		8,994 	 	
Management fee revenue	2,084 	 		2,051 	 		1,756 	 		6,007 	 		4,673 	 	
Gain on investments and notes receivable, net of losses	1,948 	 		4,258 	 		2,503 	 		5,779 	 		10,291 	 	
Investment advisory services	753 	 		731 	 		1,183 	 		2,194 	 		4,169 	 	
	
Other	5,458 	 		5,951 	 		7,978 	 		14,808 	 		16,681 	 	
Other income	$	13,439 	 		16,152 	 		16,673 	 		38,658 	 		44,808 	 	
Derivative Settlements
The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
																														
 	Three months ended		Nine months ended	
 	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
1:3 basis swaps	$	234 	 		807 	 		3,361 	 		3,375 	 		4,676 	 	
Interest rate swaps - floor income hedges	7,064 	 		12,165 	 		19,087 	 		35,931 	 		46,752 	 	
Interest rate swaps - hybrid debt hedges	— 	 		— 	 		(124)	 		— 	 		(410)	 	
Total derivative settlements - income	$	7,298 	 		12,972 	 		22,324 	 		39,306 	 		51,018 	 	

18

Loans Receivable
Loans receivable consisted of the following:
																		
	As of		As of		As of	
 	September 30, 2019		December 31, 2018		September 30, 2018	
Federally insured student loans:						
Stafford and other	$	4,720,338 	 		4,969,667 	 		4,956,324 	 	
Consolidation	15,975,499 	 		17,186,229 	 		17,434,419 	 	
Total	20,695,837 	 		22,155,896 	 		22,390,743 	 	
Private education loans	189,912 	 		225,975 	 		169,467 	 	
Consumer loans	321,199 	 		138,627 	 		112,547 	 	
 	21,206,948 	 		22,520,498 	 		22,672,757 	 	
Loan discount, net of unamortized loan premiums and deferred origination costs	(36,483)	 		(53,572)	 		(63,566)	 	
Non-accretable discount	(32,607)	 		(29,396)	 		(20,612)	 	
Allowance for loan losses:						
Federally insured loans	(37,676)	 		(42,310)	 		(43,053)	 	
Private education loans	(9,882)	 		(10,838)	 		(11,253)	 	
Consumer loans	(18,859)	 		(7,240)	 		(5,911)	 	
 	$	21,071,441 	 		22,377,142 	 		22,528,362 	 	
Loan Activity
The following table sets forth the activity of loans:
																														
 	Three months ended		Nine months ended	
 	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Beginning balance	$	21,590,836 	 		22,082,643 	 		22,856,285 	 		22,520,498 	 		21,995,877 	 	
Loan acquisitions:										
Federally insured student loans	248,542 	 		570,092 	 		591,196 	 		1,088,649 	 		3,124,154 	 	
Private education loans	3,804 	 		— 	 		— 	 		3,804 	 		194 	 	
Consumer loans	113,338 	 		114,633 	 		42,819 	 		298,092 	 		80,385 	 	
Total loan acquisitions	365,684 	 		684,725 	 		634,015 	 		1,390,545 	 		3,204,733 	 	
Repayments, claims, capitalized interest, and other	(497,762)	 		(873,466)	 		(502,474)	 		(1,875,948)	 		(1,714,820)	 	
Consolidation loans lost to external parties	(251,810)	 		(255,386)	 		(292,749)	 		(780,467)	 		(789,321)	 	
Loans sold	— 	 		(47,680)	 		(22,320)	 		(47,680)	 		(23,712)	 	
Ending balance	$	21,206,948 	 		21,590,836 	 		22,672,757 	 		21,206,948 	 		22,672,757 	 	

19

Loan Spread Analysis
The following table analyzes the loan spread on the Company’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets.
																														
	Three months ended		Nine months ended	
 	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Variable loan yield, gross	4.78 	%		5.00 	%		4.57 	%		4.94 	%		4.40 	%	
Consolidation rebate fees	(0.83)	 		(0.84)	 		(0.83)	 		(0.83)	 		(0.84)	 	
Discount accretion, net of premium and deferred origination costs amortization	0.02 	 		0.02 	 		0.03 	 		0.02 	 		0.04 	 	
Variable loan yield, net	3.97 	 		4.18 	 		3.77 	 		4.13 	 		3.60 	 	
Loan cost of funds - interest expense	(3.16)	 		(3.42)	 		(3.10)	 		(3.35)	 		(2.89)	 	
Loan cost of funds - derivative settlements (a) (b)	0.00 	 		0.02 	 		0.06 	 		0.02 	 		0.03 	 	
Variable loan spread (d)	0.81 	 		0.78 	 		0.73 	 		0.80 	 		0.74 	 	
Fixed rate floor income, gross	0.23 	 		0.20 	 		0.23 	 		0.21 	 		0.27 	 	
Fixed rate floor income - derivative settlements (a) (c)	0.13 	 		0.23 	 		0.34 	 		0.22 	 		0.28 	 	
Fixed rate floor income, net of settlements on derivatives	0.36 	 		0.43 	 		0.57 	 		0.43 	 		0.55 	 	
Core loan spread (d)	1.17 	%		1.21 	%		1.30 	%		1.23 	%		1.29 	%	
										
Average balance of loans	$	21,600,850 	 		21,837,774 	 		22,971,361 	 		21,917,298 	 		22,600,841 	 	
Average balance of debt outstanding	21,371,482 	 		21,536,878 	 		22,557,437 	 		21,632,256 	 		22,165,059 	 	

																														
	Three months ended		Nine months ended	
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018	
Core loan spread	1.17 	%		1.21 	%		1.30 	%		1.23 	%		1.29 	%	
Derivative settlements (1:3 basis swaps)	0.00 	%		(0.02)	 		(0.06)	%		(0.02)	 	— 	 	(0.03)	 	
Derivative settlements (fixed rate floor income)	(0.13)	%		(0.23)	 		(0.34)	%		(0.22)	 		(0.28)	 	
Loan spread	1.04 	%		0.96 	%		0.90 	%		0.99 	%		0.98 	%	

(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See "Derivative Settlements" included in this supplement for the net settlement activity recognized by the Company for each type of derivative for the periods presented in the table.

(b) Derivative settlements include the net settlements received related to the Company’s 1:3 basis swaps.
(c) Derivative settlements include the net settlements received related to the Company’s floor income interest rate swaps.
(d) Variable loan spread, excluding consumer loans, would have been 0.67%, 0.73%, and 0.68% for the three months ended September 30, 2019, June 30, 2019, and September 30, 2018, respectively, and 0.69% and 0.70% for the nine months ended September 30, 2019 and 2018, respectively. Core loan spread, excluding consumer loans, would have been 1.03%, 1.16%, and 1.25% for the three months ended September 30, 2019, June 30, 2019, and September 30, 2018, respectively, and 1.12% and 1.25% for the nine months ended September 30, 2019 and 2018, respectively.

20

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

(a) The interest earned on the majority of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. The Company funds a large portion 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 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.
The difference between variable loan spread and core loan spread is fixed rate floor income. A summary of fixed rate floor income and its contribution to core loan spread follows:

	Three months ended		Nine months ended	
 	September 30, 2019		June 30,
2019		September 30, 2018		September 30, 2019		September 30, 2018	
Fixed rate floor income, gross	$	12,685 	 		10,840 	 		13,659 	 		33,950 	 		45,359 	 	
Derivative settlements (a)	7,064 	 		12,165 	 		19,087 	 		35,931 	 		46,752 	 	
Fixed rate floor income, net	$	19,749 	 		23,005 	 		32,746 	 		69,881 	 		92,111 	 	
Fixed rate floor income contribution to spread, net	0.36 	%		0.43 	%		0.57 	%		0.43 	%		0.55 	%	

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

21

Fixed Rate Floor Income
The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of September 30, 2019.
																					
Fixed interest rate range		Borrower/lender weighted average yield		Estimated variable conversion rate (a)		Loan balance	
4.5 - 4.99% 	 		4.87% 	 		2.23% 	 		$	223,809 	 	
5.0 - 5.49% 	 		5.22% 	 		2.58% 	 		493,537 	 	
5.5 - 5.99% 	 		5.67% 	 		3.03% 	 		328,048 	 	
6.0 - 6.49% 	 		6.19% 	 		3.55% 	 		373,744 	 	
6.5 - 6.99% 	 		6.70% 	 		4.06% 	 		367,782 	 	
7.0 - 7.49% 	 		7.17% 	 		4.53% 	 		127,786 	 	
7.5 - 7.99% 	 		7.71% 	 		5.07% 	 		226,558 	 	
8.0 - 8.99% 	 		8.18% 	 		5.54% 	 		530,678 	 	
> 9.0% 	 		9.05% 	 		6.41% 	 		200,884 	 	
 		 				$	2,872,826 	 	

(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of September 30, 2019, the weighted average estimated variable conversion rate was 4.02% and the short-term interest rate was 221 basis points.

The following table summarizes the outstanding derivative instruments as of September 30, 2019 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)	
					
2019		$	500,000 	 		1.12 	%	
2020		1,500,000 	 		1.01 	 	
2021		600,000 	 		2.15 	 	
2022 (b)		250,000 	 		1.65 	 	
2023		150,000 	 		2.25 	 	

 		$	3,000,000 	 		1.37 	%	

(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.
(b) These derivatives have forward effective start dates in June 2021.
22