Nelnet(NNI) - 2024 Q4 - Annual Results

Introduction and Forward-Looking Statements This section provides the report's release context and outlines the forward-looking nature of statements, subject to various risks detailed in the 2024 10-K Release Information This report provides supplemental financial information for Nelnet, Inc.'s fourth quarter 2024 earnings, released on February 27, 2025, and should be read in conjunction with the company's 2024 Annual Report on Form 10-K - Release Date: February 27, 2025[1] - Context: Supplemental financial information for Q4 2024 earnings, to be read with the 2024 Annual Report on Form 10-K[1] Forward-Looking and Cautionary Statements The report contains forward-looking statements based on management's current expectations, which are subject to various known and unknown risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are based on management's current expectations, historical trends, current conditions, and expected future developments[3] - Statements are subject to known and unknown risks and uncertainties, including those outlined in the 'Risk Factors' section of the 2024 Annual Report on Form 10-K[3] - Key risks include maintaining student loan servicing volumes, loan portfolio risks (credit, prepayment, interest rate), financing and liquidity risks, regulatory changes, cyber breaches, use of artificial intelligence, and risks related to investments in ALLO and solar tax equity[4] Consolidated Financial Performance This section presents Nelnet's consolidated statements of operations and balance sheets, highlighting significant financial changes for the year ended December 31, 2024 Consolidated Statements of Operations Nelnet, Inc. reported a significant increase in net income attributable to Nelnet, Inc. for the year ended December 31, 2024, reaching $184.0 million, more than doubling from $89.8 million in 2023 Consolidated Statements of Operations (Year Ended December 31) | Metric | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Total interest income | $973,399 | $1,109,800 | -12.3% | | Net interest income | $292,862 | $264,709 | +10.6% | | Net interest income after provision for loan losses | $238,255 | $256,594 | -7.2% | | Total other income (expense), net | $1,165,079 | $924,311 | +26.0% | | Total expenses | $1,174,750 | $1,112,190 | +5.6% | | Income (loss) before income taxes | $228,584 | $68,715 | +232.6% | | Net income (loss) attributable to Nelnet, Inc. | $184,045 | $89,826 | +104.9% | | Earnings per common share (basic and diluted) | $5.02 | $2.40 | +109.2% | Condensed Consolidated Balance Sheets As of December 31, 2024, Nelnet's total assets decreased by 17.5% to $13.78 billion from $16.71 billion in 2023, primarily driven by a significant reduction in loans and accrued interest receivable Condensed Consolidated Balance Sheets (As of December 31) | Metric | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Loans and accrued interest receivable, net | $9,992,744 | $13,108,204 | -23.8% | | Cash, cash equivalents, and investments | $2,395,214 | $2,032,788 | +17.8% | | Total assets | $13,777,753 | $16,712,384 | -17.5% | | Bonds and notes payable | $8,309,797 | $11,828,393 | -29.7% | | Bank deposits | $1,186,131 | $743,599 | +59.5% | | Total liabilities | $10,478,636 | $13,512,277 | -22.4% | | Total Nelnet, Inc. shareholders' equity | $3,349,762 | $3,253,751 | +2.9% | Company Overview and Financial Reporting Notes This section details Nelnet's diversified business model, clarifies reclassifications, and reconciles GAAP and non-GAAP net income for enhanced performance analysis Company Overview Nelnet is a diversified hybrid holding company focused on consumer lending, loan servicing, payments, and technology, primarily in the education sector - Nelnet is a diversified hybrid holding company with primary businesses in consumer lending, loan servicing, payments, and technology, largely serving the education space[8] - A significant portion of revenue is net interest income from its existing federally insured student loan (FFELP) portfolio, which is expected to decline over time[8][10] - The company is expanding its private education, consumer, and other loan portfolios, including through Nelnet Bank (launched in 2020), and servicing federally owned student loans[10] - Diversification efforts include investments in ALLO (fiber communications), early-stage and emerging growth companies (venture capital), real estate, reinsurance, and renewable energy (solar)[8] Reclassifications and Immaterial Error Corrections During the second quarter of 2024, Nelnet identified and corrected immaterial errors in previously issued consolidated financial statements to ensure conformity with the December 31, 2024 presentation - Immaterial errors in previously issued consolidated financial statements were identified and corrected in Q2 2024 to conform to the December 31, 2024 presentation[11] GAAP and Non-GAAP Net Income Reconciliation Nelnet provides non-GAAP net income, excluding derivative market value adjustments, to offer a more consistent view of operational performance by removing the volatility caused by fair value changes in derivatives - Non-GAAP net income excludes realized and unrealized derivative market value adjustments, which are subject to significant period-to-period fluctuations due to timing and market factors[13][14][15] - Management utilizes operating results excluding these items for comparability when assessing performance and in presentations with credit rating agencies, lenders, and investors[15] GAAP vs. Non-GAAP Net Income Attributable to Nelnet, Inc. (Year Ended December 31) | Metric | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | GAAP net income (loss) | $184,045 | $89,826 | +104.9% | | Realized & unrealized derivative market value adjustments | $(10,124) | $41,773 | -124.2% | | Tax effect | $2,430 | $(10,026) | +124.2% | | Non-GAAP net income (loss) | $176,351 | $121,573 | +45.0% | | GAAP EPS | $5.02 | $2.40 | +109.2% | | Non-GAAP EPS | $4.81 | $3.25 | +48.0% | Operating Segments This section describes Nelnet's key operating segments and presents their individual net income (loss) before taxes for the year ended December 31, 2024 Segment Descriptions Nelnet operates through reportable segments including Loan Servicing and Systems (NDS), Education Technology Services and Payments (NBS), and the Nelnet Financial Services (NFS) division - Reportable operating segments include Nelnet Diversified Services (NDS) for loan servicing and systems, Nelnet Business Services (NBS) for education technology services and payments, and the Nelnet Financial Services (NFS) division[16][18] - The NFS division includes Asset Generation and Management (AGM), focused on maximizing cash flows from the FFELP portfolio and acquiring new loan assets, and Nelnet Bank, an internet industrial bank for private education and unsecured consumer loans[16][17][18] - 'Corporate and Other Activities' comprises investment management (WRCM), reinsurance, real estate investments, solar tax equity investments, Nelnet Renewable Energy (solar EPC), ALLO investment, venture capital, and unallocated corporate costs[17][19] Segment Operating Results (Net Income (Loss) Before Taxes) For the year ended December 31, 2024, NBS and AGM were the primary contributors to pre-tax income, with NBS showing strong growth, while Nelnet Bank and Nelnet Renewable Energy continued to report pre-tax losses Segment Net Income (Loss) Before Taxes (Year Ended December 31) | Segment | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | NDS | $40,497 | $77,714 | -47.9% | | NBS | $117,896 | $91,101 | +29.4% | | AGM | $75,202 | $80,636 | -6.7% | | Nelnet Bank | $(1,942) | $(368) | -427.7% | | Nelnet Renewable Energy - solar construction | $(35,972) | $(54,691) | +34.2% | | Solar tax equity investments | $(2,179) | $(60,982) | +96.4% | | ALLO investment | $8,087 | $(57,972) | +113.9% | | Venture capital investments | $6,912 | $(6,008) | +215.1% | | Total Net income (loss) before taxes | $228,584 | $68,715 | +232.6% | 2024 Operating and Liquidity Highlights This section summarizes key operational developments and liquidity positions across Nelnet's business segments for the year 2024 Loan Servicing and Systems Nelnet's Loan Servicing and Systems segment transitioned to a new Unified Servicing and Data Solutions (USDS) contract with the Department of Education in April 2024 - The company began servicing under a new Unified Servicing and Data Solutions (USDS) contract with the Department of Education in April 2024, replacing the legacy contract[23][24] - Revenue from the Department decreased in 2024 due to a reduction in the number of borrowers serviced and lower per-borrower blended revenue under the new USDS contract[24] Education Technology Services and Payments The Education Technology Services and Payments segment experienced revenue growth to $487.0 million in 2024, driven by both existing and new customers - Education technology services and payments revenue grew to $487.0 million in 2024, driven by existing and new customers[25] - Operating margin increased due to higher tuition payment plan services and payment processing revenue, while maintaining a consistent cost structure[25] Asset Generation and Management Net interest income for the Asset Generation and Management (AGM) segment decreased in 2024, primarily due to the continued amortization of the FFELP student loan portfolio and a decrease in core loan spread - Net interest income decreased in 2024 due to the amortization of the FFELP student loan portfolio and a decrease in core loan spread[26] - The average balance of student loans decreased by $3.0 billion, from $13.3 billion in 2023 to $10.3 billion in 2024[26] - Accelerated run-off of the FFELP portfolio has significantly decreased since August 2024, with prepayment rates returning to historical levels[26] - A $39.5 million allowance for credit losses was recorded in 2024 on beneficial interest securitization investments due to increased cumulative loss expectations[28] Nelnet Renewable Energy (NRE) Nelnet Renewable Energy (NRE) strategically shifted its focus exclusively to the commercial solar market in April 2024, discontinuing residential solar operations - NRE discontinued residential solar operations in April 2024 to focus exclusively on the commercial solar market[29] - NRE recognized a net loss before taxes of $36.0 million in 2024, an improvement from $54.7 million in 2023[30] - Losses in 2023 and 2024 included impairment charges on goodwill, intangible assets, and other assets ($1.9 million in 2024, $20.6 million in 2023)[30] - Operating results are expected to improve as remaining legacy construction contracts are completed[30] Solar Tax Equity Investments As of December 31, 2024, Nelnet had $314.8 million invested in solar tax equity partnerships, recognizing pre-tax losses of $6.5 million, partially offset by gains from sold investments - As of December 31, 2024, Nelnet had invested $314.8 million in solar tax equity partnerships[31] - The company recognized pre-tax losses of $6.5 million in 2024 from solar tax equity investments, which includes $4.6 million attributable to noncontrolling interests[31] - These losses were partially offset by $15.3 million in gains from investments sold during 2024[31] - Despite accelerated initial losses under HLBV accounting, current investments are expected to generate approximately $163 million in pre-tax income (excluding noncontrolling interests) between January 1, 2025, and December 31, 2030[32] Investments - ALLO and Hudl Nelnet holds a 45% voting interest in ALLO, resulting in a $10.7 million net loss in 2024 under HLBV accounting, while its preferred membership interests in ALLO generated $17.5 million in income - Nelnet holds a 45% voting membership interest in ALLO, recognizing a $10.7 million net loss in 2024 under the HLBV method of accounting[33] - Income from ALLO preferred membership interests was $17.5 million in 2024[33] - The company has an approximately 22% preferred ownership investment in Hudl, with a carrying amount of $168.7 million as of December 31, 2024[34] - Future operating results or liquidation events for solar, ALLO, or Hudl could significantly impact the company's earnings due to their accounting methods (HLBV and measurement alternative)[35] Liquidity As of December 31, 2024, Nelnet maintained strong liquidity with $717.1 million in unencumbered cash and investments and a fully available $495.0 million unsecured line of credit - As of December 31, 2024, the company had $717.1 million of unencumbered cash and investments[36] - A $495.0 million unsecured line of credit was fully available as of December 31, 2024[36] - Expected future undiscounted cash flows include approximately $1.07 billion from the AGM loan portfolio (with $675.0 million in the next five years) and $323.4 million from beneficial interest investments (majority within five years)[36] - Liquidity will be used for FFELP, private education, consumer, and other loan acquisitions, strategic investments, stock repurchases, debt repurchases, and dividend distributions[37] Detailed Financial and Operational Data This section provides granular financial and operational data across Nelnet's various segments, including revenue breakdowns, loan volumes, and spread analysis Loan Servicing and Systems Revenue Breakdown For the year ended December 31, 2024, government loan servicing revenue decreased by 7.6% to $380.9 million, while private education and consumer loan servicing revenue increased by 29.5% to $63.5 million Loan Servicing and Systems Revenue (Year Ended December 31) | Service Offering | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Government loan servicing | $380,921 | $412,478 | -7.6% | | Private education and consumer loan servicing | $63,453 | $48,984 | +29.5% | | FFELP loan servicing | $12,212 | $13,704 | -10.9% | | Software services | $21,032 | $29,208 | -28.0% | | Outsourced services | $4,790 | $13,580 | -64.7% | | Total Loan servicing and systems revenue | $482,408 | $517,954 | -6.9% | Loan Servicing Volumes As of December 31, 2024, total servicing volume remained relatively stable at $532.4 billion, a slight decrease from $532.6 billion in 2023 Servicing Volume (Dollars in millions, As of December 31) | Category | 2024 | 2023 | YoY Change | | :----------------------------------- | :--------- | :--------- | :--------- | | Government | $489,877 | $494,691 | -1.0% | | FFELP | $13,260 | $17,462 | -24.1% | | Private and consumer | $29,226 | $20,493 | +42.6% | | Total | $532,363 | $532,646 | -0.1% | Number of Servicing Borrowers (As of December 31) | Category | 2024 | 2023 | YoY Change | | :----------------------------------- | :--------- | :--------- | :--------- | | Government | 14,049,550 | 14,503,057 | -3.1% | | FFELP | 549,861 | 725,866 | -24.3% | | Private and consumer | 1,168,293 | 894,703 | +30.6% | | Total | 15,767,704 | 16,123,626 | -2.2% | Education Technology Services and Payments Revenue Breakdown Education technology services and payments revenue increased by 5.1% to $487.0 million in 2024, primarily driven by an 8.4% increase in tuition payment plan services and a 9.3% increase in payment processing revenue Education Technology Services and Payments Revenue (Year Ended December 31) | Service Offering | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Tuition payment plan services | $135,851 | $125,326 | +8.4% | | Payment processing | $179,043 | $163,859 | +9.3% | | Education technology services | $169,065 | $170,754 | -1.0% | | Total Education technology services and payments revenue | $486,962 | $463,311 | +5.1% | Solar Construction Revenue Breakdown Solar construction revenue significantly increased by 78.6% to $56.6 million in 2024, primarily driven by a substantial 153.1% rise in commercial revenue to $53.3 million Solar Construction Revenue (Year Ended December 31) | Customer Type | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Commercial revenue | $53,269 | $20,969 | +153.1% | | Residential revenue | $3,300 | $10,700 | -69.2% | | Total Solar construction revenue | $56,569 | $31,669 | +78.6% | - The company discontinued residential solar operations in April 2024 to focus exclusively on the commercial solar market[54] Other Income (Expense) Breakdown The 'Other, net' income category significantly improved in 2024, turning from a net expense of $(74.3) million in 2023 to a net income of $61.6 million Other Income (Expense), Net (Year Ended December 31) | Component | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | ALLO preferred return | $17,486 | $9,120 | +91.7% | | Investment activity, net | $12,438 | $(8,586) | +244.8% | | Loss from ALLO voting membership interest investment | $(10,693) | $(65,277) | +83.6% | | Loss from solar investments, net | $(6,477) | $(59,645) | +89.2% | | Total Other, net | $61,602 | $(74,327) | +182.9% | - Solar investments are accounted for using the Hypothetical Liquidation at Book Value (HLBV) method, which typically results in accelerated losses in the initial years of investment[56] Impairment Expense and Provision for Beneficial Interests Total impairment expense and provision for beneficial interests increased to $42.6 million in 2024, primarily due to a significant $39.5 million provision for beneficial interest in loan securitizations Impairment Expense and Provision for Beneficial Interests (Year Ended December 31) | Item | 2024 (in thousands) | 2023 (in thousands) | | :----------------------------------- | :------------------ | :------------------ | | Investments - beneficial interest in loan securitizations | $39,491 | — | | Goodwill | — | $18,873 | | Property and equipment - internally developed software | — | $4,310 | | Intangible assets | — | $1,708 | | Total | $42,629 | $31,925 | - The 2024 increase was primarily due to a non-cash allowance for credit losses related to beneficial interest in certain loan securitizations[59] - In 2023, significant impairment charges were related to goodwill and intangible assets of the GRNE operating segment and internally developed software[61][64] - In 2024, impairment charges also included solar facilities and inventory due to the discontinuation of residential solar operations[64] Derivative Settlements Total derivative settlements decreased significantly by 75.5% to $6.1 million in 2024 compared to $25.1 million in 2023, primarily driven by an 81.4% decrease in income from interest rate swaps related to floor income hedges Derivative Settlements - Income (Year Ended December 31) | Component | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | 1:3 basis swaps | $929 | $1,544 | -39.8% | | Interest rate swaps - floor income hedges | $4,288 | $23,044 | -81.4% | | Interest rate swaps - Nelnet Bank | $917 | $484 | +89.5% | | Total derivative settlements - income | $6,134 | $25,072 | -75.5% | Loans and Accrued Interest Receivable and Allowance for Loan Losses Total loans and accrued interest receivable, net, decreased by 23.8% to $9.99 billion in 2024, primarily due to a significant reduction in Non-Nelnet Bank federally insured loans Loans and Accrued Interest Receivable, Net (As of December 31) | Category | 2024 (in thousands) | 2023 (in thousands) | YoY Change | | :----------------------------------- | :------------------ | :------------------ | :--------- | | Non-Nelnet Bank loans | $8,955,868 | $12,049,462 | -25.7% | | Nelnet Bank loans | $644,597 | $432,872 | +48.9% | | Accrued interest receivable | $549,283 | $764,385 | -28.1% | | Total Loans and accrued interest receivable, net | $9,992,744 | $13,108,204 | -23.8% | Allowance for Loan Losses as a Percentage of Ending Loan Balance (As of December 31) | Category | 2024 | 2023 | | :----------------------------------- | :--------- | :--------- | | Non-Nelnet Bank: Federally insured loans | 0.59% | 0.59% | | Non-Nelnet Bank: Private education loans | 5.02% | 5.68% | | Non-Nelnet Bank: Consumer and other loans | 11.13% | 13.66% | | Nelnet Bank: Private education loans | 2.09% | 0.93% | | Nelnet Bank: Consumer and other loans | 3.77% | 7.40% | Loan Activity Nelnet's loan portfolios exhibited contrasting trends in 2024: Non-Nelnet Bank loans significantly decreased due to substantial repayments, claims, and loans lost to external parties, while Nelnet Bank's portfolio grew substantially Non-Nelnet Bank Loan Portfolios Activity Non-Nelnet Bank loan portfolios saw a significant decrease in 2024, primarily driven by substantial repayments, claims, and loans lost to external parties Non-Nelnet Bank Loan Portfolios Activity (Year Ended December 31) | Activity | 2024 (in thousands) | 2023 (in thousands) | | :----------------------------------- | :------------------ | :------------------ | | Balance as of Dec 31, prior year | $11,686,207 | $12,049,462 | | Loan acquisitions | $706,459 | $1,132,291 | | Repayments, claims, capitalized interest, participations, and other, net | $(1,452,435) | $(1,461,803) | | Loans lost to external parties | $(1,621,038) | $(1,062,662) | | Loans sold | $(726,580) | $(728,135) | | Balance as of December 31, current year | $8,388,564 | $11,686,207 | Nelnet Bank Loan Portfolios Activity Nelnet Bank's loan portfolio experienced substantial growth in 2024, driven by significant new loan acquisitions and originations, despite repayments and sales to AGM Nelnet Bank Loan Portfolios Activity (Year Ended December 31) | Activity | 2024 (in thousands) | 2023 (in thousands) | | :----------------------------------- | :------------------ | :------------------ | | Balance as of Dec 31, prior year | $432,872 | $432,872 | | Loan acquisitions and originations | $391,446 | $139,253 | | Repayments | $(114,633) | $(68,475) | | Loans sold to AGM | $(65,088) | $(57,701) | | Balance as of December 31, current year | $644,597 | $432,872 | Loan Spread Analysis AGM's core loan spread for the full year 2024 was 0.97%, a decrease from 1.04% in 2023, despite an increase in variable loan yield and a decrease in loan cost of funds AGM Loan Spread Analysis (Year Ended December 31) | Metric | 2024 | 2023 | | :----------------------------------- | :--------- | :--------- | | Variable loan yield, net | 7.25% | 6.82% | | Loan cost of funds - interest expense | (6.34)% | (5.99)% | | Variable loan spread | 0.92% | 0.84% | | Core loan spread | 0.97% | 1.04% | | Average balance of AGM's loans | $10,310,430 | $13,316,525 | - Core loan spread for the full year decreased to 0.97% in 2024 from 1.04% in 2023, but showed an increase in Q4 2024 to 1.18% from 0.63% in Q4 2023[73] - The average balance of AGM's loans decreased by $3.0 billion, from $13.3 billion in 2023 to $10.3 billion in 2024[73]