Nelnet, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023; filed February 27, 2024. The filing presents full-year results for 2023, 2022, and 2021, rather than standalone fourth-quarter results.
Business context
Nelnet operates four reportable segments: Loan Servicing and Systems (LSS), Education Technology Services and Payments (ETSP), Asset Generation and Management (AGM), and Nelnet Bank. The company is diversifying beyond its declining legacy FFELP student-loan portfolio through education technology, private education and consumer lending, banking, renewable energy, reinsurance, real estate, ALLO, and venture investments.
- As of December 31, 2023, Nelnet serviced $532.6 billion of loans for 16.1 million borrowers.
- The Department of Education represented 32% of consolidated revenue in 2023 and 74% of LSS revenue.
- AGM held a $12.0 billion loan portfolio, including $11.7 billion of FFELP loans; 97.0% of AGM’s portfolio was federally insured.
- Nelnet employed approximately 7,550 associates at year-end.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total interest income | $1.110 billion | $742.8 million | Up 49.4% |
| Net interest income | $264.7 million | $312.7 million | Down 15.3% |
| Net interest income after provision for loan losses | $199.3 million | $266.2 million | Down 25.1% |
| LSS revenue | $518.0 million | $535.5 million | Down 3.3% |
| ETSP revenue | $463.3 million | $408.5 million | Up 13.4% |
| Income before income taxes | $74.2 million | $509.5 million | Down 85.4% |
| Net income attributable to Nelnet | $91.5 million | $407.3 million | Down 77.5% |
| GAAP diluted EPS | $2.45 | $10.83 | Down 77.4% |
| Non-GAAP net income excluding derivative market value adjustments | $123.3 million | $231.3 million | Down 46.7% |
| Operating cash flow | $433.0 million | $684.1 million | Down 36.7% |
Net interest income declined despite higher interest income because interest expense rose to $845.1 million from $430.1 million, reflecting higher funding costs. The provision for loan losses increased to $65.5 million from $46.4 million.
The consolidated effective tax rate decreased to 17.8% from 21.8%. Management expects future effective tax rates to range between 21% and 24%.
Segment performance
- LSS: Pretax income increased to $77.7 million from $64.5 million, and the GAAP pretax operating margin increased to 14.1% from 11.3%. Revenue declined because of a $0.19 per-borrower Department fee reduction, the transfer of up to one million government borrowers to another servicer, declining FFELP servicing volumes, and the loss of remote-hosted government borrowers. Cost reductions and $4.8 million of non-recurring deconversion revenue partially offset the pressure.
- ETSP: Pretax income rose to $91.1 million from $74.1 million. Revenue increased 13.4%, led by tuition payment plans, payment processing, and education technology services. EANS-related revenue was $46.9 million, but EANS I funding ended September 30, 2023 and EANS II funding ends September 30, 2024, creating a significant future revenue headwind.
- AGM: Pretax income fell to $80.6 million from $454.7 million. The average loan balance declined to $13.3 billion from $16.0 billion, while core loan spread narrowed to 1.04% from 1.58%. Gross fixed-rate floor income fell to $2.2 million from $57.4 million. AGM acquired $556.1 million of private education, consumer, and other non-FFELP loans during 2023.
- Nelnet Bank: The bank reported a pretax loss of $0.4 million versus pretax income of $4.4 million. Its loan portfolio increased to $432.9 million and deposits increased to $847.6 million. The bank’s regulatory leverage ratio was 12.5%, above the FDIC-required 12% level.
- Corporate and other: Results were negatively affected by renewable-energy losses, ALLO losses, and corporate costs. Nelnet Renewable Energy recognized $46.7 million of losses on tax equity investments, and GRNE Solar reported a $34.2 million net loss.
Liquidity, debt, and capital
- Year-end cash and cash equivalents were $168.1 million, including $133.2 million held at a related party. Management identified $1.235 billion of total liquidity sources, including unencumbered cash, investments, loans, repurchased securities, and an unused $495.0 million unsecured line of credit.
- The unsecured line of credit matures September 22, 2026, had no balance outstanding at year-end, and all reported covenants were satisfied.
- Total bonds and notes payable were $11.83 billion, down from $14.64 billion. Approximately $10.27 billion was secured by asset-backed securitizations and $1.42 billion by loan warehouse facilities.
- Warehouse facilities had $1.40 billion outstanding and $283.5 million available at year-end. Liquidity provisions for certain facilities expire in 2024, with final maturities in 2025.
- The company generated $1.94 billion of investing cash flow and used $2.70 billion in financing cash flow. Debt repayments were $3.61 billion versus $761.2 million of new debt issuance.
- Nelnet paid $1.06 per share in dividends during 2023 and repurchased 336,943 shares for $28.0 million. Approximately 4.2 million shares remained authorized for repurchase at year-end.
Material changes and unusual items
- Nelnet terminated its $2.8 billion notional portfolio of fixed-rate floor-income derivatives on March 15, 2023, retaining $183.2 million of cash related to the termination. Derivative market value adjustments shifted from a $231.7 million gain in 2022 to a $41.8 million loss in 2023, materially reducing reported earnings.
- The company redeemed certain asset-backed debt securities early and recorded a $25.9 million non-cash write-off of unamortized debt discount.
- Nelnet recognized $31.9 million of impairment expense, including $18.9 million of GRNE goodwill impairment and $1.7 million of related intangible-asset impairment.
- ALLO generated approximately $150 million of revenue and had approximately $715 million of debt at year-end, up from approximately $340 million. Nelnet’s ALLO voting-interest carrying value was $10.7 million, and management expected to expense the remaining balance during the first quarter of 2024.
- The ALLO preferred investment had a carrying value of $155.0 million and a preferred return of 6.25%, scheduled to increase to 10.0% in April 2024.
- All USD LIBOR-indexed financial instruments transitioned to SOFR after June 30, 2023. Management identified continued uncertainty regarding the relationship between SOFR indices and related basis risk.
- The company’s allowance for loan losses declined to $104.6 million from $131.8 million, although consumer-loan credit exposure increased and the company recorded higher provisions on newer portfolios.
Guidance, outlook, and principal risks
Management did not provide a consolidated earnings or revenue forecast in the filing. The company expects the new Department of Education Unified Servicing and Data Solution contract to go live in April 2024. Assuming comparable borrower volumes, management expects blended revenue per borrower to decline relative to the legacy contract. A new remote-hosted software customer is expected to begin generating revenue when USDS goes live, but management does not expect that volume to fully offset lost remote-hosted borrowers.
The most significant risks include continued FFELP portfolio runoff and increased prepayments from federal consolidation or forgiveness initiatives; dependence on the Department of Education; lower USDS pricing; interest-rate, basis, repricing, and derivative risks; refinancing and warehouse-facility maturities; unsecured credit losses in private education and consumer loans; regulatory, litigation, privacy, cybersecurity, and artificial-intelligence risks; and execution risk in solar construction and tax equity investments.
Management estimates approximately $1.30 billion of future undiscounted cash flows from AGM’s securitized loan portfolio, including approximately $850 million expected within five years. This estimate assumes specified prepayment, default, and interest-rate conditions and is sensitive to adverse changes in those assumptions.
Investor verification checklist
- Verify the implementation timing, borrower allocation, pricing, and cost requirements of the USDS Department of Education contract.
- Track government-servicing volumes, FFELP runoff, consolidation activity, and future federal loan-forgiveness or repayment policies.
- Reconcile GAAP earnings with non-GAAP earnings and separately assess recurring operating performance versus derivative, investment, and impairment effects.
- Monitor AGM loan spread, funding costs, warehouse renewals, repurchase-agreement maturities, and basis risk after the LIBOR-to-SOFR transition.
- Assess ETSP growth after the expiration of EANS funding and the effect of continued technology and service investments on margins.
- Evaluate credit performance and allowance adequacy for unsecured private education, consumer, and Nelnet Bank loans.
- Review GRNE Solar project profitability, remaining commitments, tax-credit recapture exposure, and additional impairment risk.
- Consider ALLO’s leverage, preferred-return step-ups, potential capital requirements, and the expected write-down of Nelnet’s voting-interest carrying value.
- Review related-party transactions, including Union Bank arrangements and the November 2023 repurchase of shares from family members of Executive Chairman Michael S. Dunlap.
- Note that KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2023.