NELNET INC

(a)The Company utilized $8.6 million and $5.7 million of federal and state tax credits related primarily to renewable energy during the three months ended March 31, 2024 and 2023, respectively.

The following table presents a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts, unless otherwise noted)

(unaudited)

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2023 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results for the year ending December 31, 2024. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Annual Report").

2. Loans and Accrued Interest Receivable and Allowance for Loan Losses

Loans and accrued interest receivable consisted of the following:

The following table summarizes the allowance for loan losses as a percentage of the ending loan balance for each of the Company's loan portfolios.

(a) As of March 31, 2024 and December 31, 2023, the allowance for loan losses as a percent of the risk sharing component of federally insured student loans not covered by the federal guaranty was 21.7% and 21.8%, respectively.

Loan Sales

The Company has sold portfolios of loans to unrelated third parties who securitized such loans. As partial consideration received for the loans sold, the Company received residual interest in the loan securitizations that are included in "investments and notes receivable" on the Company's consolidated balance sheets. The following table summarizes the loans sold and gains/losses recognized by the Company during the three months ended March 31, 2024 and 2023.

(a) In addition to receiving a residual interest in the securitizations, the Company also received $14.5 million and $43.7 million of asset-backed investment securities as part of the January 31 and March 2, 2023 transactions, respectively, that are included in "investments and notes receivable" on the Company's consolidated balance sheet.

Activity in the Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio segment.

The following table summarizes annualized net charge-offs as a percentage of average loans for each of the Company's loan portfolios.

The Company recorded a negative provision for loan losses for the three months ended March 31, 2024 for its Non-Nelnet Bank federally insured and private education loan portfolios primarily due to the amortization of these portfolios. The primary item impacting provision for loan losses for Non-Nelnet Bank consumer loans and Nelnet Bank's loan portfolios for the three months ended March 31, 2024 was the establishment of an initial allowance for loans originated and acquired during the period.

The Company recorded a provision for loan losses for the three months ended March 31, 2023 due to (i) management's estimate of declining economic conditions as of March 31, 2023 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2022; and (ii) the establishment of an initial allowance for loans originated and acquired during the period. These amounts were partially offset by the amortization of the federally insured loan portfolio.

Unfunded Loan Commitments

As of March 31, 2024 and December 31, 2023, Nelnet Bank had a liability of approximately $57,000 and $158,000, respectively, related to $9.1 million and $12.3 million, respectively, of unfunded private education, consumer, and other loan commitments. The liability for unfunded loan commitments is included in "other liabilities" on the consolidated balance sheets. During the three months ended March 31, 2024 and 2023, Nelnet Bank recognized negative provision for loan losses of approximately $101,000 and $15,000, respectively, related to unfunded loan commitments.

Key Credit Quality Indicators

Loan Status and Delinquencies

Key credit quality indicators for the Company’s federally insured, private education, consumer, and other loan portfolios are loan status, including delinquencies. The impact of changes in loan status is incorporated into the allowance for loan losses calculation. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. The following table presents the Company’s loan status and delinquency amounts.

(a) For the periods presented for Nelnet Bank, the delinquency bucket periods conform with the delinquency bucket periods reflected in Nelnet Bank's Call Reports filed with the Federal Deposit Insurance Corporation.

FICO Scores

An additional key credit quality indicator for Nelnet Bank private education and consumer loans is FICO scores at the time of origination. The following tables highlight the gross principal balance of Nelnet Bank's portfolios, by year of origination, stratified by FICO score at the time of origination.

Nelnet Bank Private Education Loans

Nelnet Bank Consumer and Other Loans

Nonaccrual Status

The Company does not place federally insured loans on nonaccrual status due to the government guaranty. The amortized cost of private education, consumer, and other loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of March 31, 2024 and December 31, 2023, was not material.

Amortized Cost Basis by Origination Year

The following table presents the amortized cost of the Company's private education, consumer, and other loans by loan status and delinquency amount as of March 31, 2024 based on year of origination. Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made under the Federal Direct Loan Program. As such, all the Company’s federally insured loans were originated prior to July 1, 2010.

(a) For the periods presented for Nelnet Bank, the delinquency bucket periods conform with the delinquency bucket periods reflected in Nelnet Bank's Call Reports filed with the Federal Deposit Insurance Corporation.

3. Bonds and Notes Payable

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

Warehouse Facilities

The Company funds a portion of its loan acquisitions using warehouse facilities. Loan warehousing allows the Company to buy and manage loans prior to transferring them into more permanent financing arrangements. The following table summarizes the Company's warehouse facilities as of March 31, 2024.

(a) Effective March 6, 2024, the maximum financing amount on this facility was reduced from $1.25 billion to $950 million.

(b) This facility has a static advance rate until the expiration date of the liquidity provisions. The maximum advance rates for this facility are 90% to 96%, and the minimum advance rates are 84% to 90%. In the event the liquidity provisions are not extended, the valuation agent has the right to perform a one-time mark to market on the underlying loans funded in this facility, subject to a floor. The loans would then be funded at this new advance rate until the final maturity date of the facility.

(c) On April 2, 2024, this facility was amended to reduce the maximum financing amount from $432 million to $375 million, and to extend the expiration of liquidity provisions and final maturity date to April 1, 2025 and April 1, 2026, respectively.

(d) On March 11, 2024, this facility was amended to reduce the maximum financing amount from $200 million to $150 million.

Unsecured Line of Credit

The Company has a $495.0 million unsecured line of credit that has a maturity date of September 22, 2026. As of March 31, 2024, no amount was outstanding on the line of credit and $495.0 million was available for future use.

Repurchase Agreement

The Company has a repurchase agreement with a non-affiliated third party, the proceeds of which are collateralized by certain private education loan asset-backed securities (bond investments). The outstanding balance under this agreement as of March 31, 2024 was $114.5 million. The agreement has various maturity dates through December 20, 2024 or earlier if either party provides 180 days’ prior written notice, and the Company is subject to margin deficit payment requirements if the fair value of the securities subject to the agreement is less than the original purchase price of such securities on any scheduled reset date. See note 5 for additional information about the private education loan asset-backed securities investments serving as collateral for this repurchase agreement.

Debt Repurchases

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 March 31, 2024, the Company holds $310.3 million (par value) of its own FFELP asset-backed securities.

4. Derivative Financial Instruments

Non-Nelnet Bank Derivatives

The Company uses settled-to-market derivative financial instruments to manage interest rate risk. Derivative instruments used as part of the Company's interest rate risk management strategy are further described in note 5 of the notes to consolidated financial statements included in the 2023 Annual Report. A tabular presentation of such derivatives outstanding as of March 31, 2024 and December 31, 2023 is presented below.

Basis Swaps

The following table summarizes the Company’s outstanding basis swaps as of March 31, 2024 and December 31, 2023, in which the Company receives and pays the term adjusted Secured Overnight Financing Rate (SOFR) plus the tenor spread adjustment to LIBOR. Prior to the discontinuation of LIBOR on June 30, 2023, the Company received three-month LIBOR set discretely in advance and paid one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2024 and December 31, 2023 was the term adjusted SOFR (plus the tenor spread adjustment relating to LIBOR) plus 10.1 basis points.

Interest Rate Swaps – Floor Income Hedges

The following table summarizes the outstanding derivative instruments used by the Company as of March 31, 2024 and December 31, 2023, to economically hedge loans earning fixed rate floor income.

(a) For all interest rate derivatives, the Company receives payments based on SOFR, the majority of which reset quarterly.

(b) This $50 million notional amount derivative has a forward effective start date in January 2026.

(c) A $50 million notional amount derivative maturing in 2030 has a forward effective start date in November 2025.

During the first quarter of 2023, the Company received $183.2 million, which included $19.1 million related to 2023 settlements, to terminate $2.8 billion in notional amount of floor income interest rate swaps prior to their final maturity.

Nelnet Bank Derivatives

Interest Rate Swaps

The following table summarizes the outstanding non-centrally cleared derivative instruments used by Nelnet Bank as of March 31, 2024 and December 31, 2023, to hedge exposure to variability in cash flows related to variable rate intercompany deposits.

(a) For all interest rate derivatives, the Company receives payments based on SOFR that reset monthly or quarterly.

(b) These $25 million notional amount derivatives have forward effective start dates in April 2026 and May 2026, respectively.

(c) This $25 million notional amount derivative has a forward effective start date in February 2027.

(d) This $25 million notional amount derivative has a forward effective start date in November 2025.

Consolidated Financial Statement Impact Related to Derivatives

Balance Sheets

Unlike the Company's Non-Nelnet Bank derivatives, Nelnet Bank's derivatives are not cleared post-execution at a regulated clearinghouse. As such, the Company records these derivative instruments in the consolidated balance sheets on a gross basis as either an asset (included in "other assets") or liability (included in "other liabilities") measured at fair value. The following table summarizes the fair value of the Company's Nelnet Bank derivatives as reflected in the consolidated balance sheets.

Statements of Income

The following table summarizes the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income.

5. Investments and Notes Receivable

"Restricted investments" and “investments and notes receivable” consisted of the following:

(a) A portion of the private education loan asset-backed securities were subject to a repurchase agreement with a third party, as discussed in note 3 under "Repurchase Agreement." As of March 31, 2024, the par value and fair value of these securities was $151.9 million and $135.3 million, respectively.

(b) The Company accounts for its voting membership interests in ALLO under the Hypothetical Liquidation at Book Value (HLBV) method of accounting. The Company recognized losses under the HLBV method of accounting on its ALLO voting membership interests investment of $10.7 million and $20.2 million during the three months ended March 31, 2024 and 2023, respectively. Losses from the Company's investment in ALLO are included in "other, net" in "other income (expense)" on the consolidated statements of income. Absent additional equity contributions, the Company will not recognize additional losses for its voting membership interests in ALLO.

(c) As of March 31, 2024, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $155.0 million and $2.4 million, respectively. The preferred membership interests of ALLO held by the Company historically earned a preferred annual return of 6.25% that increased to 10.00% on April 1, 2024. The Company recognized income on its ALLO preferred membership interests of $2.4 million and $2.2 million during the three months ended March 31, 2024 and 2023, respectively. This income is included in "other, net" in "other income (expense)" on the consolidated statements of income.

(d) The Company has partial ownership in certain consumer, private education, and federally insured student loan securitizations. As of the latest remittance reports filed by the various trusts prior to or as of March 31, 2024, the Company's ownership correlates to approximately $965 million, $490 million, and $335 million of consumer, private education, and federally insured student loans, respectively, included in these securitizations.

(e) As of March 31, 2024, the Company has funded a total of $491.8 million in solar investments, which includes $208.9 million funded by syndication partners. The carrying value of the Company’s investment in a solar project is reduced by tax credits earned when the solar project is placed-in-service. As of March 31, 2024, the Company has earned a total of $511.6 million of tax credits, which includes $248.6 million earned by syndication partners. The solar investment carrying value on the consolidated balance sheet of $(133.8) million as of March 31, 2024 represents the sum of total tax credits earned on solar projects placed-in-service through March 31, 2024 and the calculated HLBV cumulative net losses being larger than the total investment contributions made by the Company and its syndication partners on such projects. The solar investment balance as of March 31, 2024, excluding the portion owned by syndication partners and reflected as "noncontrolling interests" on the consolidated balance sheet, was $(70.1) million.

The Company accounts for its solar investments using the HLBV method of accounting. For the majority of the Company’s solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment. The Company recognized net gains of $3.0 million and net losses of $1.9 million on its solar investments during the three months ended March 31, 2024 and 2023, respectively. These amounts, which include net losses attributable to third-party noncontrolling interest investors (syndication partners), are included in “other, net” in "other income (expense)" on the consolidated statements of income. Solar net losses attributed to noncontrolling interest investors was $1.2 million and $2.7 million for the three months ended March 31, 2024 and 2023, respectively, and is reflected in “net loss attributable to noncontrolling interests” in the consolidated statements of income. Excluding net losses attributed to noncontrolling interest investors, the Company recognized net gains on its solar investments of $4.2 million and $0.8 million during the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, the Company is committed to fund an additional $146.6 million on solar investments, of which $76.2 million is expected to be provided by syndication partners.

The following table presents, by remaining contractual maturity, the amortized cost and fair value of debt securities as of March 31, 2024:

(a) The Company's beneficial interest in loan securitizations are not due at a singe maturity date.

The following table summarizes the unrealized positions for held-to-maturity investments and the beneficial interest in loan securitizations as of March 31, 2024:

(a)None of the unrealized losses at March 31, 2024 were due to credit losses.

The following table presents securities classified as available-for-sale that have gross unrealized losses at March 31, 2024 and the fair value of such securities as of March 31, 2024. These securities are segregated between investments that had been in a continuous unrealized loss position for less than twelve months and twelve months or more, based on the point in time that the fair value declined below the amortized cost basis. All securities in the table below have been evaluated to determine if a credit loss exists. As part of that assessment, the Company concluded it currently has the intent and ability to retain these investments, andnone of the unrealized losses were due to credit losses.

The following table summarizes the gross proceeds received and gross realized gains and losses related to sales of available-for-sale asset-backed securities.

6. Intangible Assets

Intangible assets consisted of the following:

The Company recorded amortization expense on its intangible assets of $2.1 million and $2.7 million for the three months ended March 31, 2024 and 2023, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of March 31, 2024, the Company estimates it will record amortization expense as follows:

7. Goodwill

The following table presents the carrying amount of goodwill as of March 31, 2024 and December 31, 2023 by reportable operating segment:

8. Bank Deposits

The following table summarizes Nelnet Bank’s interest-bearing deposits, excluding intercompany deposits:

As of March 31, 2024 and December 31, 2023, Nelnet Bank had intercompany deposits from Nelnet, Inc. and its subsidiaries totaling $158.6 million and $104.0 million, respectively, including a $40.0 million pledged deposit from Nelnet, Inc. as required under a Capital and Liquidity Maintenance Agreement with the FDIC. All intercompany deposits held at Nelnet Bank are eliminated for consolidated financial reporting purposes.

The following table presents certificates of deposit remaining maturities as of March 31, 2024:

Retail and other deposits include savings deposits from Educational 529 College Savings, Short Term Federal Investment Trusts, and Health Savings plan deposits. These deposits are large interest-bearing omnibus accounts structured to allow FDIC insurance to flow through to underlying individual depositors. There were no deposits exceeding the FDIC insurance limits as of March 31, 2024, with the exception of $45.0 million, which includes the commercial deposit, the pledged deposit from Nelnet, Inc., and an earmarked deposit required for intercompany transactions.

9. Earnings per Common Share

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

10. Segment Reporting

See note 16 of the notes to consolidated financial statements included in the 2023 Annual Report for a description of the Company's operating segments. The following tables present the results of each of the Company's reportable operating segments reconciled to the consolidated financial statements.

11. Disaggregated Revenue

The following tables present disaggregated revenue by service offering or customer type for the Company's fee-based operating segments.

Loan Servicing and Systems

Education Technology Services and Payments

Solar Construction

(a) On April 12, 2024, the Company announced a change in its solar engineering, procurement, and construction operations to focus exclusively on the commercial solar market and will discontinue its residential solar operations. As a result, residential revenue will decline in future periods as existing customer contracts are completed.

Other Income (Expense)

The following table presents the components of "other, net" in "other income (expense)" on the consolidated statements of income:

12. Major Customer

Government Loan Servicing

Nelnet Servicing, a subsidiary of the Company, earns loan servicing revenue from a servicing contract with the Department of Education (the "Department"). Revenue earned by the Company related to this contract was $105.5 million and $108.9 million for the three months ended March 31, 2024 and 2023, respectively.

The Company's legacy student loan servicing contract with the Department was scheduled to expire on December 14, 2023. In April 2023, Nelnet Servicing received a contract award from the Department, pursuant to which it was selected to provide continued servicing capabilities for the Department's student aid recipients under a new Unified Servicing and Data Solution (USDS) contract (the "New Government Servicing Contract") which replaced the legacy Department student loan servicing contract.

The New Government Servicing Contract became effective April 24, 2023 and has afive year base period, with 2 two-year and 1 one-year possible extensions. The Department's total loan servicing volume of existing borrowers will be allocated by the Department to Nelnet Servicing and four other third-party servicers that were awarded a USDS contract based on service and performance levels. Under the New Government Servicing Contract, Nelnet Servicing immediately began to make required servicing platform enhancements, for which it will be compensated from the Department on certain of these investments. Servicing under the New Government Servicing Contract went live on April 1, 2024 and the Company will recognize revenue in accordance with this new contract beginning in the second quarter of 2024. The Company earned revenue for servicing borrowers under the legacy servicing contract with the Department through March 31, 2024.

The New Government Servicing Contract has multiple revenue components with tiered pricing based on borrower volume, while revenue earned under the legacy servicing contract was primarily based on borrower status. Assuming borrower volume remains consistent under the New Government Servicing Contract, the Company expects revenue earned on a per borrower blended basis will decrease under the New Government Servicing Contract versus the legacy contract. However, consistent with the legacy contract, the Company expects to earn additional revenue from the Department under the New Government Servicing Contact for change requests and other support services.

13. Fair Value

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis.

(a) In accordance with the Fair Value Measurements Topic of the FASB Accounting Standards Codification, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

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

The methodologies for estimating the fair value of financial assets and liabilities are described in note 23 of the notes to consolidated financial statements included in the 2023 Annual Report.