NELNET INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the years ended December 31, 2024 and 2023. All dollars are in thousands, except share data, unless otherwise noted.) The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements subject to various risks and uncertainties and should be read in conjunction with the disclosures and information contained in "Forward-Looking and Cautionary Statements" and Item 1A "Risk Factors" included in this report. A discussion related to the results of operations and changes in financial condition for the year ended December 31, 2024 compared with the year ended December 31, 2023 is presented below. A discussion related to the results of operations and changes in financial condition for the year ended December 31, 2023 compared with the year ended December 31, 2022 can be found in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2023 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on February 27, 2024. OVERVIEW The Company is a diversified hybrid holding company with primary businesses being consumer lending, loan servicing, payments, and technology – with many of these businesses serving customers in the education space. The largest operating businesses engage in loan servicing and education technology services and payments. 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 and manages investments to further diversify both within and outside of its historical core education-related businesses including, but not limited to, investments in a fiber communications company (ALLO), early-stage and emerging growth companies (venture capital investments), real estate, reinsurance, and renewable energy (solar). The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the FFEL Program. The Reconciliation Act of 2010 discontinued new loan originations under the FFEL Program, effective July 1, 2010, and requires all new federal student loan originations be made directly by the Department through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions of existing FFELP loans. Subsequent to the Reconciliation Act of 2010, the Company no longer originates FFELP loans. However, a significant portion of the Company's income continues to be derived from its existing FFELP student loan portfolio. Interest income on the Company's existing FFELP loan portfolio will decline over time as the portfolio is paid down. To reduce its reliance on interest income from FFELP loans, the Company has expanded its services and products. This expansion has been accomplished through internal growth and innovation as well as business and certain investment acquisitions. The Company is also actively expanding its private education, consumer, and other loan portfolios, or investment interests therein, and as part of this strategy launched Nelnet Bank in 2020. In addition, the Company has been servicing federally owned student loans for the Department since 2009. Reclassifications and Immaterial Error Corrections The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the immaterial error corrections made to the previously reported consolidated financial statements for the year ended December 31, 2023. For additional information, see “Reclassification and Immaterial Error Corrections” within note 2 of the notes to consolidated financial statements included in this report. 39 GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments The Company prepares its financial statements and presents its financial results in accordance with 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 Non-GAAP net income excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, are provided below. Year ended December 31, 2024 2023 GAAP net income attributable to Nelnet, Inc. $ 184,045 89,826 Realized and unrealized derivative market value adjustments (a) (10,124) 41,773 Tax effect (b) 2,430 (10,026) Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 176,351 121,573 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 5.02 2.40 Realized and unrealized derivative market value adjustments (a) (0.28) 1.12 Tax effect (b) 0.07 (0.27) Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 4.81 3.25 (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 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 respective 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 are 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 in the consolidated financial statements. 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 and represents what earnings would have been had these derivatives qualified for hedge accounting. 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. (b) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate. Operating Segments The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in this report. They include: • Loan Servicing and Systems (LSS) - referred to as Nelnet Diversified Services (NDS) • Education Technology Services and Payments (ETSP) - referred to as Nelnet Business Services (NBS) • Asset Generation and Management (AGM), part of the Nelnet Financial Services (NFS) division • Nelnet Bank, part of the NFS division The Company earns fee-based revenue through its NDS and NBS reportable operating segments. The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, through its AGM reportable operating segment. This segment is expected to generate significant amounts of cash as the FFELP portfolio amortizes. The Company actively works to maximize the amount and timing of cash flows generated from its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. Nelnet Bank operates as an internet 40 industrial bank franchise focused on the private education and unsecured consumer loan markets, with a home office in Salt Lake City, Utah. The NFS division was formed to focus on the Company’s key objective to maximize the amount and timing of cash flows generated from its FFELP portfolio and reposition itself for the post-FFELP environment by expanding its private education, consumer, and other loan portfolios. In addition to AGM and Nelnet Bank being part of the NFS division, NFS’s other operating segments that are not reportable include: • The operating results of Whitetail Rock Capital Management, LLC (WRCM), the Company's U.S. Securities and Exchange Commission (SEC)-registered investment advisor subsidiary • The operating results of Nelnet Insurance Services, which primarily includes multiple reinsurance treaties on property and casualty policies • The operating results of the Company’s investment activities in real estate • The operating results of the Company’s investment debt securities (primarily student loan and other asset-backed securities) and interest expense incurred on debt used to finance such investments Other business activities and operating segments that are not reportable and not part of the NFS division are combined and included in Corporate and Other Activities ("Corporate"). Corporate includes the following items: • Shared service activities related to internal audit, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services • Corporate costs and overhead functions not allocated to operating segments, including executive management, investments in innovation, and other holding company organizational costs • The operating results of solar tax equity investments made by the Company and administrative and management services provided by the Company on solar tax equity investments made by third parties • The operating results of Nelnet Renewable Energy, the Company’s solar engineering, procurement, and construction business • The operating results of certain of the Company’s investment activities, including its investment in ALLO and early-stage and emerging growth companies (venture capital investments) • Interest income earned on cash balances held at the corporate level and interest expense incurred on unsecured corporate related debt transactions • Other product and service offerings that are not considered reportable operating segments 41 The following table presents the operating results (net income (loss) before taxes) for each of the Company’s reportable and certain other operating segments reconciled to the consolidated financial statements. Year ended December 31, 2024 2023 NDS $ 40,497 77,714 NBS 117,896 91,101 Nelnet Financial Services division: AGM 75,202 80,636 Nelnet Bank (1,942) (368) NFS other operating segments 55,718 50,872 Corporate: Unallocated corporate costs (46,194) (63,223) Nelnet Renewable Energy - solar construction (35,972) (54,691) Solar tax equity investments (2,179) (60,982) ALLO investment 8,087 (57,972) Venture capital investments 6,912 (6,008) Other corporate activities 10,481 11,635 Eliminations/reclassifications 77 — Net income before taxes 228,584 68,715 Income tax expense (52,669) (19,385) Net loss attributable to noncontrolling interests (a) 8,130 40,496 Net income $ 184,045 89,826 (a) For the periods presented, the majority of noncontrolling interests represents losses attributed to noncontrolling membership interests in the Company’s Nelnet Renewable Energy and solar tax equity investments operating segments, which were $8.5 million and $41.0 million, in 2024 and 2023, respectively. 2024 Operating and Liquidity Highlights See below for a summary of (i) certain highlights of the Company’s 2024 operating results; (ii) a description of significant and/or unusual events and transactions in 2024 that impacted and may potentially impact the Company’s operating results; and (iii) a summary of the Company’s current liquidity, including certain items that will impact the Company’s liquidity in future periods. See “Results of Operations” for each reportable operating segment, the NFS division, and Corporate and Other Activities and “Liquidity and Capital Resources” under this Item 7 for additional detail. Loan Servicing and Systems In April 2023, the Company and four other third-party servicers were awarded servicing contracts to provide continued servicing for the Department under a new Unified Servicing and Data Solutions (USDS) contract which replaced the Company’s legacy servicing contract with the Department. The USDS contract became effective in April 2023 and has a five-year base period, with 5 years of possible extensions. Servicing under the USDS contract went live on April 1, 2024 and the Company recognized revenue in accordance with this new contract beginning in the second quarter of 2024. The Company recognized less revenue from the Department in 2024 under the USDS contract due to a decrease in the number of borrowers serviced and lower revenue earned on a per borrower blended basis under the new contract versus the legacy contract. The new USDS 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. Education Technology Services and Payments Education technology services and payments revenue grew to $487.0 million in 2024. The growth was from existing and new customers. Operating margin increased from recent historical periods as a result of increases in tuition payment plan services and payment processing revenue, while maintaining a consistent cost structure for services. 42 Asset Generation and Management Net interest income decreased in 2024 compared to 2023 after removing the impacts to interest expense for the write-off of the remaining unamortized debt discount associated with the redemption of certain asset-backed debt securities in 2024 and 2023 discussed below. Net interest income was negatively impacted in 2024 due to the expected continued amortization of the Company’s FFELP student loan portfolio and a decrease in core loan spread. The average balance of student loans decreased $3.0 billion from $13.3 billion in 2023 to $10.3 billion in 2024. Beginning in late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to initiatives offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness, income-driven repayment plans, and other programs. However, the Company has observed a significant decrease in FFELP borrowers consolidating their loans into the Federal Direct Loan Program since August 2024 that has resulted in prepayment rates on the Company’s FFELP portfolio being more consistent with longer-term historical rates. In 2024 and 2023, the Company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of $6.3 million and $25.9 million, respectively, in interest expense from the write-off of the remaining unamortized debt discount associated with these bonds at the time of redemption. The Company has partial ownership in certain consumer, private education, and federally insured student loan securitizations, which are accounted for as held-to-maturity beneficial interest investments. An increase in cumulative loss expectations in 2024 on certain securitizations and loan vintages caused a change in estimate of future cash flows related to certain of the Company's beneficial interest securitization investments. As a result, during 2024, the Company recorded a $39.5 million allowance for credit losses (and related provision expense) related to these investments. Nelnet Renewable Energy (NRE) NRE is the Company’s solar construction company that provides full-service engineering, procurement, and construction (EPC) services to residential homes and commercial entities. In April 2024, the Company announced a change in its solar EPC operations to focus exclusively on the commercial solar market and consequently discontinued its residential solar operations in 2024. As a result, residential revenue will continue to decline from recent historical amounts as existing customer contracts are completed. Residential solar construction revenue was $3.3 million and $10.7 million for the year ended December 31, 2024 and 2023, respectively. The Company entered the EPC business with its July 2022 acquisition of GRNE Solar. Since the acquisition, NRE has incurred low and, in some cases, negative margins on certain legacy projects. During 2023 and 2024, NRE recognized a net loss before taxes of $54.7 million and $36.0 million, respectively. These losses in 2023 and 2024 include impairment charges on goodwill, intangible assets, and other assets of $20.6 million and $1.9 million, respectively. The Company has a handful of remaining legacy construction contracts to complete, down from over 30 at the beginning of 2024. As new projects are completed and the legacy contracts are substantially complete, the Company believes operating results will improve from prior historical periods. Solar Tax Equity Investments As of December 31, 2024, the Company has invested a total of $314.8 million and its third-party investors have invested $271.4 million in tax equity investments that remain outstanding in renewable energy solar partnerships that support the development and operations of solar projects throughout the country. Due to the management and control of each of these investment partnerships, such partnerships that invest in tax equity investments are consolidated on the Company’s consolidated financial statements, with the co-investor’s portion being presented as noncontrolling interests. Included in the Company’s operating results is the Company's share of income or loss from solar investments accounted for under the Hypothetical Liquidation at Book Value (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 pre-tax losses on its tax equity investments of $6.5 million in 2024, which includes $4.6 million attributable to noncontrolling interests. The pre-tax losses were partially offset by recognizing gains of $15.3 million, which includes $1.8 million attributable to noncontrolling interests, related to investments that were sold during 2024. In periods in which the Company makes significant investments in solar tax equity investments, operating results are negatively impacted due to the accelerated losses recognized in the initial years of investment. However, given the timing and amount of cash flows expected to be generated over the life of these investments, the Company considers these investments a good use of capital. Through December 31, 2024, the Company has recognized cumulative pre-tax losses (excluding noncontrolling interests) of approximately $70 million on its tax equity investments currently outstanding. The Company expects its current investments (assuming no additional investments are made subsequent to December 31, 2024) to generate approximately $93 million of pre-tax earnings (excluding noncontrolling interests) over the life of the investments. Accordingly, the Company 43 expects to recognize approximately $163 million in pre-tax income (excluding noncontrolling interests) between January 1, 2025 and December 31, 2030 (the remaining years of its current investments). Investments - ALLO and Hudl The Company has a 45% voting membership interests in ALLO. The Company accounts for its ALLO voting membership interests investment under the HLBV method of accounting that resulted in the recognition of a net loss of $10.7 million during 2024. Absent additional equity contributions with respect to ALLO's voting membership interests, the Company will not recognize additional losses for its voting membership interests in ALLO. The Company also owns preferred membership interests in ALLO that earn a preferred return. As of December 31, 2024, the outstanding preferred membership interests of ALLO held by the Company was $225.6 million. The Company recognized income on its ALLO preferred membership interests of $17.5 million in 2024. Nelnet continues to work with ALLO and SDC, a third-party global digital infrastructure investor that holds a significant investment in ALLO, to explore various funding and capital options to support ALLO’s growth. The Company has an approximately 22% preferred ownership investment in Agile Sports Technologies, Inc. (doing business as “Hudl.”) During the fourth quarter of 2024 and first quarter of 2023, the Company acquired additional ownership interests in Hudl for $3.3 million and $31.5 million, respectively, from existing Hudl investors. These transactions were not considered observable market transactions (not orderly) because they were not subject to customary marketing activities. Accordingly, the Company did not adjust its carrying value of its Hudl investment to the transaction values. As of December 31, 2024, the carrying amount of the Company's investment in Hudl is $168.7 million. Certain investments, including solar tax equity, ALLO, and Hudl, may be recorded at a carrying value that is less than its market value due to HLBV (solar investments and ALLO) and the measurement alternative (Hudl) method of accounting. Future operating results of solar and ALLO, an observable transaction of Hudl, or a liquidation event of ALLO or Hudl could impact the valuation on our financial statements or our investments in them and may result in significant fluctuations of the Company’s earnings. Liquidity As of December 31, 2024, the Company had $717.1 million of unencumbered cash and investments. In addition, the Company has a $495.0 million unsecured line of credit that matures in September 2026. No amounts were outstanding on the line of credit as of December 31, 2024 and $495.0 million was available for future use. Further, as of December 31, 2024, the Company expects to generate future undiscounted cash flows from its AGM loan portfolio of approximately $1.07 billion (including approximately $675.0 million in the next five years); and from its beneficial interest investments of approximately $323.4 million (the majority of which is expected to be received over the next five years). The Company intends to use its current and future liquidity position to capitalize on market opportunities, including FFELP, private education, consumer, and other loan acquisitions (or investment interests therein); strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances. CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's consolidated operating results for the year ended December 31, 2024 compared with 2023 is provided below. The Company’s operating results are primarily driven by the performance of its existing loan portfolio and the revenues generated by its fee-based businesses and the costs to provide such services. The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt. The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 16 of the notes to consolidated financial statements included in this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis. 44 Year ended December 31, 2024 2023 Additional information Loan interest $ 787,498 931,945 Decrease due to decreases in the average balance of loans in the AGM operating segment partially offset by an increase in the gross yield earned on loans. Investment interest 185,901 177,855 Includes income from unrestricted interest-earning deposits and investments, and restricted cash in asset-backed securitizations. Increase due to an increase in the average balances and interest rates. Total interest income 973,399 1,109,800 Interest expense 680,537 845,091 Decrease due to a decrease in the average balance of debt outstanding partially offset by an increase in cost of funds and deposits at Nelnet Bank. In addition, the Company recognized a $6.3 million and $25.9 million non-cash expense during 2024 and 2023, respectively, as the result of writing off the remaining unamortized debt discount related to the redemption of certain asset-backed debt securities prior to their maturity. Net interest income 292,862 264,709 Less provision for loan losses 54,607 8,115 Represents the current period provision to reflect the lifetime expected credit losses related to the Company’s loan portfolio. See note 3 of the notes to consolidated financial statements in this report for the factors impacting provision for loan losses for the periods presented. Net interest income after provision for loan losses 238,255 256,594 Other income (expense): LSS revenue 482,408 517,954 See LSS operating segment - results of operations. ETSP revenue 486,962 463,311 See ETSP operating segment - results of operations. Reinsurance premiums earned 62,923 20,067 Represents premiums earned, net of ceded portion, from reinsurance treaties on property and casualty policies. Increase due to a higher number of policies the Company reinsures. Solar construction revenue 56,569 31,669 Represents revenue earned from NRE providing solar construction services, including design and installations of residential and commercial solar systems. In April 2024, the Company announced a change in its solar EPC operations to focus exclusively on the commercial solar market and will discontinue its residential solar operations. As a result, residential revenue will continue to decline in future periods as existing customer contracts are completed. Other, net 61,602 (74,327) See table below for components of “other, net.” Loss on sale of loans, net (1,643) (17,662) The AGM operating segment recognized losses from selling portfolios of loans. See note 3 of the notes to consolidated financial statements in this report for additional information. Derivative settlements, net 6,134 25,072 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. The majority of derivative settlements received by the Company during the periods presented was from the Company’s derivatives used to hedge loans earning fixed rate floor income. To minimize the Company’s exposure to market volatility and increase liquidity, the Company terminated this derivative portfolio in March 2023. Subsequent to terminating these derivatives, during the second and fourth quarters of 2023, the Company entered into a total of $400 million notional amount of derivatives to hedge loans earning fixed rate floor income and other loans and investments in which the Company receives a fixed rate. See AGM operating segment - results of operations for additional information. Derivative market value adjustments, net 10,124 (41,773) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments during the periods presented related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of such swaps. To minimize the Company's exposure to market volatility and increase liquidity, the Company terminated this derivative portfolio ($2.8 billion notional amount) in March 2023. Subsequent to terminating these derivatives, during the second and fourth quarters of 2023, the Company entered into a total of $400.0 million notional amount of derivatives to hedge loans earning fixed rate floor income and other loans and investments in which the Company receives a fixed rate. The Company expects the derivative market value adjustments in future periods will be less substantial. Total other income (expense), net 1,165,079 924,311 Cost of services and expenses: Costs incurred to provide loan servicing 1,889 — Represents primarily the amortization of previously capitalized contract fulfillment costs. The costs were pre-contract costs incurred to enhance the resources of the Company to satisfy future performance obligations and are expected to be recovered. Cost to provide education technology services and payments 172,763 171,183 Represents direct costs to provide payment processing and instructional services in ETSP. Increase primarily due to additional instructional services costs. See ETSP operating segment - results of operations. Cost to provide solar construction services 77,673 48,576 Represents direct costs related to NRE providing solar construction services. Since the acquisition of GRNE Solar in 2022, it has incurred low and, in some cases, negative margins on certain projects. During 2024, the Company recorded an expense of $24.6 million related to estimated losses on legacy construction projects. The Company has a handful of remaining legacy construction contracts to complete, down from over 30 at the beginning of 2024. As new projects are completed and the legacy contracts are now substantially complete, the Company believes operating results will improve from prior historical periods. Total cost of services 252,325 219,759 45 Salaries and benefits 576,931 591,537 Decrease primarily due to staff reductions in the first half of 2023 in LSS to manage expenses due to lower pricing and reduced servicing volume for LSS's Department servicing contract, partially offset by an increase in ETSP due to annual merit pay increases and an increase in headcount to support the growth of the customer base and the investment in the development of new technologies. Depreciation and amortization 58,116 79,118 Includes depreciation of property and equipment and the amortization of intangibles from prior business acquisitions. Decrease primarily due to reduction in depreciation due to prior year non-cash impairment charges recognized for lease, buildings, and associated improvements as the Company continues to evaluate the use of office space as it modifies its hybrid work model for associates. See note 11 of the notes to the consolidated financial statements in this report for additional information. Reinsurance losses and underwriting expenses 55,246 16,781 Represents case reserve, estimated loss reserve, and amortization of acquisition costs, which consist primarily of commissions and brokerage expenses, net of ceded portion, from reinsurance treaties on property and casualty policies. Increase due to a higher number of policies the Company reinsures. Other expenses 189,503 173,070 Includes expenses such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs. Increase due to an increase in LSS due to additional postage costs as a result of borrowers returning to repayment on September 1, 2023. Total operating expenses 879,796 860,506 Impairment expense and provision for beneficial interests 42,629 31,925 Represents impairment charges recognized by the Company and the establishment of an allowance for credit losses (and related provision expense) related to the Company’s beneficial interest in certain loan securitizations. See note 11 of the notes to consolidated financial statements in this report for additional information. Total expenses 1,174,750 1,112,190 Income before income taxes 228,584 68,715 Income tax expense 52,669 19,385 The effective tax rate was 22.25% and 17.75% for 2024 and 2023, respectively. The increase in the effective tax rate in 2024 was due to an increase in state income taxes and a reduction of state tax incentives. The Company expects its future effective tax rate will range between 22% and 24%. Net income 175,915 49,330 Net loss attributable to noncontrolling interests 8,130 40,496 Represents the net loss attributable to the holders of noncontrolling membership interests. The majority is attributed to noncontrolling membership interests in the Company’s solar construction and tax equity investments operating segments. Net income attributable to Nelnet, Inc. $ 184,045 89,826 Additional information: Net income attributable to Nelnet, Inc. $ 184,045 89,826 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP financial information. Derivative market value adjustments, net (10,124) 41,773 Tax effect 2,430 (10,026) Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 176,351 121,573 The following table summarizes the components of "other, net" in "other income (expense)." Year ended December 31, 2024 2023 Additional information ALLO preferred return $ 17,486 9,120 See Corporate - results of operations. Investment activity, net (a) 12,438 (8,586) See note (b) below for additional information. Borrower late fee income 8,828 8,997 See NFS division - results of operations - AGM operating segment. Investment advisory services (WRCM) 5,934 6,760 See NFS division - results of operations - NFS other operating segments. Administration/sponsor fee income 5,823 6,793 See NFS division - results of operations - AGM operating segment. Management fee revenue 2,769 2,587 See LSS operating segment - results of operations. Loss from ALLO voting membership interest investment (a) (10,693) (65,277) See Corporate - results of operations. Loss from solar investments, net (a) (6,477) (59,645) See Corporate - results of operations. Other 25,494 24,924 Other, net $ 61,602 (74,327) 46 (a) The Company anticipates fluctuations in future periodic earnings resulting from investment purchases, sales, and valuation adjustments. (b) Investment activity by operating segment and investment type follows: Real Estate Venture Capital and Funds Equity / Bonds Total Year ended December 31, 2024 NFS - AGM $ — 720 — 720 NFS - Nelnet Bank — (12) 2,926 2,914 NFS - Other Operating Segments (2,297) — 2,598 301 Corporate — 8,503 — 8,503 $ (2,297) 9,211 5,524 12,438 Year ended December 31, 2023 NFS - AGM $ — (4,303) (219) (4,522) NFS - Nelnet Bank — (229) 1,147 918 NFS - Other Operating Segments 439 — (2,544) (2,105) Corporate — (2,640) (237) (2,877) $ 439 (7,172) (1,853) (8,586) LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Servicing Volumes As of December 31, 2024 September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Servicing volume (dollars in millions): Government $ 489,877 492,142 489,298 495,409 494,691 500,554 519,308 537,291 545,373 FFELP 13,260 13,745 14,576 15,783 17,462 18,400 19,021 19,815 20,226 Private and consumer 29,226 20,666 19,876 21,015 20,493 20,394 20,805 21,484 21,866 Total $ 532,363 526,553 523,750 532,207 532,646 539,348 559,134 578,590 587,465 Number of servicing borrowers: Government 14,049,550 14,114,468 14,096,152 14,328,013 14,503,057 14,543,382 14,898,901 15,518,751 15,777,328 FFELP 549,861 574,979 610,745 656,814 725,866 764,660 788,686 819,791 829,939 Private and consumer 1,168,293 851,747 829,072 882,256 894,703 896,613 899,095 925,861 951,866 Total 15,767,704 15,541,194 15,535,969 15,867,083 16,123,626 16,204,655 16,586,682 17,264,403 17,559,133 Number of remote hosted borrowers: 842,200 662,075 133,681 65,295 70,580 103,396 716,908 5,048,324 6,135,760 47 Summary and Comparison of Operating Results Year ended December 31, 2024 2023 Additional information Interest income $ 4,877 4,845 Represents interest income on cash balances primarily collected from borrower remittances that are subsequently disbursed to servicing customers (lenders). Loan servicing and systems revenue 482,408 517,954 See table below for additional information. Intersegment servicing revenue 24,493 28,911 Represents revenue earned by LSS from servicing loans for AGM and Nelnet Bank. Decrease due to the continued amortization of AGM's FFELP portfolio. Intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. Other income 2,769 2,587 Represents revenue earned from providing administrative support services. Total other income 509,670 549,452 Cost of services 1,889 — Represents primarily the amortization of previously capitalized contract fulfillment costs. The costs were pre-contract costs incurred to enhance the resources of the Company to satisfy future performance obligations and are expected to be recovered. Salaries and benefits 300,366 317,885 Decrease due to the Company being fully staffed at the beginning of 2023 with contact center operations and support associates as the Company prepared for expiration of the federal student loan payment pause under the CARES Act. In the first half of 2023, the Company reduced staff to manage expenses due to lower pricing and reduced servicing volume for LSS's Department servicing contract. In June 2024, the Company announced an additional reduction in headcount after the completion of required servicing platform enhancements for the new government servicing contract and the transfer of direct loan servicing volume to one platform. These staff reductions took place during the second half of 2024. Depreciation 19,475 19,257 Postage expense 36,820 21,194 Increase due to borrowers returning to repayment on September 1, 2023 after the expiration of the federal student loan payment pause under the CARES Act, requiring an increase in outreach. Other expenses 43,282 39,323 The total of other expenses and intercompany expenses decreased due to moving to one platform in 2024 and continued focus on expense reductions. Intersegment expenses represents costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Intersegment expenses 71,482 78,628 Total operating expenses 471,425 476,287 Impairment expense 736 296 The Company recorded an impairment charge in the fourth quarter of 2024 and third quarter of 2023, respectively, related to owned office space and certain facilities as a result of the Company's on-going evaluation of the use of office space and adapting to a hybrid work model. Total expenses 474,050 476,583 Income before income taxes 40,497 77,714 Income tax expense (9,719) (18,651) Represents income tax expense at an effective tax rate of 24%. Net income $ 30,778 59,063 Before tax operating margin 8.0 % 14.1 % Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for LSS is calculated as income before income taxes divided by the total of loan servicing and systems revenue (less cost of services), intersegment servicing revenue, and other income. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it provides additional information to facilitate an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin decreased due primarily to a decrease in loan servicing and systems revenue as described in the table below, while total expenses have remained relatively consistent period over period. Expenses have remained consistent despite a decrease in revenue due to costs incurred for the completion of the transfer of direct loan servicing volume to one platform, making platform enhancements for the new student loan servicing contract with the Department, preparation of the conversion of the Discover portfolio, and an increase in postage and communication costs due to borrowers returning to repayment on September 1, 2023. The Company expects before tax operating margin to continue to be lower than historical prior year results until the full impact of its cost-saving measures take effect and revenue is generated from servicing the entire Discover and Sofi portfolios after their full conversion to the Company's platform. 48 Loan servicing and systems revenue Year ended December 31, 2024 2023 Additional information Government loan servicing $ 380,921 412,478 Represents revenue from the Company's servicing contracts with the Department. The Company recognized revenue under the new government servicing USDS contract beginning April 1, 2024. Decrease due to (i) a decrease in the number of borrowers serviced (due primarily from the Department transferring one million of the Company's existing borrowers to another third-party servicer during the second and third quarters of 2023); (ii) lower revenue earned on a per borrower blended basis under the new contract, and (iii) the legacy servicing contract reduction of the monthly fee earned per borrower on certain borrower statuses by $0.19 effective April 1, 2023. These decreases were partially offset by an increase in the average revenue earned on a per borrower blended basis as a result of borrowers moving to a repayment status on September 1, 2023 and the recognition of $10.9 million of revenue in the fourth quarter of 2024 to reflect a settlement related to certain provisions included in the legacy contract concerning inflation adjustments. Private education and consumer loan servicing 63,453 48,984 On July 17, 2024, Discover Financial Services (Discover) announced the sale of its approximately $10 billion private education student loan portfolio, representing approximately 400,000 borrowers, to partnerships managed by two global investment firms, with Firstmark Services, a division of the Company, assuming responsibility for servicing the portfolio upon the sale. The conversion of these loans to the Company’s platform began in September 2024 with the majority of loan conversions completed in the fourth quarter of 2024. Increase due to (i) an increase in backup servicing volume and loan servicing volume from the Discover portfolio; (ii) $4.0 million of non-recurring revenue recognized in 2024 associated with conversions and deconversions; and (iii) rate increases based on contractual consumer price index changes. During 2024, Sofi Technologies, Inc. (Sofi) selected the Company as a sub-servicer for its school and refinance loan programs. Transfer of new and existing Sofi loans began in the fourth quarter of 2024, with the anticipated completion of all existing loans to be complete by the second quarter of 2025. The addition of the Sofi servicing borrowers did not have a significant impact to revenue in 2024 but will have a positive impact to revenue in future periods. FFELP loan servicing 12,212 13,704 Represents revenue from servicing third-party customers' FFELP portfolios. Over time, FFELP servicing revenue will decrease as third-party customers' FFELP portfolios pay off. Software services 21,032 29,208 Represents revenue from providing remote hosted servicing software to certain Department and other servicers and providing diversified technology services. Decrease primarily due to (i) the transfer of all Department remote hosted borrowers to other third-party servicers throughout 2023 under the Department's legacy servicing contracts and (ii) the recognition of $4.8 million of revenue in the third quarter of 2023 associated with deconversion of remote hosted borrowers from a customer leaving the Company's platform. This decrease was partially offset by the Company beginning in the second quarter of 2024 to recognize revenue from a new remote hosted servicing customer awarded a USDS contract. Outsourced services 4,790 13,580 Represents revenue from providing contact center and back office operational outsourcing services. Decrease was due to the contracts for support provided to certain Department servicers expiring in July 2023. Loan servicing and systems revenue $ 482,408 517,954 49 EDUCATION TECHNOLOGY SERVICES AND PAYMENTS OPERATING SEGMENT – RESULTS OF OPERATIONS This segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Higher amounts of revenue are typically recognized during the first quarter due to fees related to grant and aid applications as well as online applications and enrollment services. The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to generally fixed year-round personnel costs and seasonal marketing costs. Based on the timing of revenue recognition and when expenses are incurred, revenue and before tax operating margin are higher in the first quarter compared with the remainder of the year. Summary and Comparison of Operating Results Year ended December 31, 2024 2023 Additional information Interest income $ 29,891 26,962 Represents interest income on tuition funds held in custody for schools. Increase due to higher balances and interest rates. Education technology services and payments revenue 486,962 463,311 See table below for additional information. Intersegment revenue 220 253 Total other income 487,182 463,564 Cost of services 172,763 171,183 See table below for additional information. Salaries and benefits 164,716 155,296 Increase due to annual merit pay increases, an increase in headcount to support the growth of the customer base, and the investment in the development of new technologies. Depreciation and amortization 10,531 11,319 Represents primarily amortization of intangible assets from prior business acquisitions and depreciation of capitalized software development costs. Other expenses 32,281 34,133 Decrease due to a decrease in consulting and professional services resulting from reduced outsourced work and an improvement in allowance for doubtful accounts period over period. Decrease was partially offset by an increase in technology services. Intersegment expenses, net 18,886 23,184 Represents costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Total operating expenses 226,414 223,932 Impairment expense — 4,310 In 2023, the Company recognized non-cash impairment charges related to previously acquired computer software. Total expenses 399,177 399,425 Income before income taxes 117,896 91,101 Income tax expense (28,333) (21,891) Represents income tax expense at an effective tax rate of 24%. Net income 89,563 69,210 Net loss attributable to noncontrolling interests 158 109 Amounts for noncontrolling interests reflect the net loss attributable to the holders of minority membership interests in NextGen. Net income $ 89,721 69,319 The Company expects net income to be impacted in 2025 as compared to 2024 due to a decrease in contribution from FACTS education services as a result of the end of the EANS program as described in the revenue table below and an expected increase in expenses. 50 Education technology services and payments revenue The following table presents disaggregated revenue by service offering and before tax operating margin for each reporting period. Year ended December 31, 2024 2023 Additional information Tuition payment plan services $ 135,851 125,326 Increase due to a higher number of payment plans in the K-12 and higher education markets for both new and existing customers. Payment processing 179,043 163,859 Increase due to increase in payment volumes for both the K-12 and higher education markets due to new customers and an increase in volume from existing customers. Education technology services 169,065 170,754 Decrease due to a decrease in FACTS education services revenue which resulted from the wind down of economic aid provided to private schools in response to the COVID 19 pandemic. Learning management instructional services revenue provided to private schools has been funded by the CARES Act and the Emergency Assistance to Non-Public Schools (EANS) programs. The EANS I program funding ended on September 30, 2023 and EANS II program funding ended on September 30, 2024. Future instructional services revenue will be adversely impacted compared to recent historical results as a result of the EANS programs ending. Revenue earned under the EANS programs was $23.1 million and $46.9 million in 2024 and 2023, respectively. This decrease was partially offset by an increase in revenue from the Company’s school information system software and application and enrollment services. Other 3,003 3,372 Education technology services and payments revenue 486,962 463,311 Cost of services 172,763 171,183 Represents direct costs to provide payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also a component of this expense and decrease/increase in relationship to instructional services revenues. Net revenue $ 314,199 292,128 GAAP before tax operating margin 37.5 % 31.2 % Before tax operating margin, excluding net interest income, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the ETSP segment is calculated as income before income taxes less net interest income divided by net revenue. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin, excluding net interest income, increased due to increased net revenue while maintaining a consistent cost structure. The Company expects operating margin to decrease in 2025 compared to 2024 as a result of a decrease in FACTS education services revenue and an increase in operating expenses. Net interest income (9.5) (9.2) Non-GAAP before tax operating margin, excluding net interest income 28.0 % 22.0 % 51 NELNET FINANCIAL SERVICES DIVISION - RESULTS OF OPERATIONS Asset Generation and Management Operating Segment Loan Portfolio As of December 31, 2024, the AGM operating segment had a $9.0 billion loan portfolio, consisting primarily of federally insured loans. For a summary of the Company's loan portfolio as of December 31, 2024 and 2023, see note 3 of the notes to consolidated financial statements included in this report. Loan Activity The following table sets forth the activity of loans in the AGM operating segment: FFELP Private Consumer and other Total Balance as of December 31, 2022 $ 13,566,473 252,383 350,915 14,169,771 Loan acquisitions 576,224 77,401 478,666 1,132,291 Repayments, claims, capitalized interest, participations, and other, net (1,342,866) (45,942) (72,995) (1,461,803) Loans lost to external parties (1,056,140) (6,522) — (1,062,662) Loans sold (57,484) — (670,651) (728,135) Balance as of December 31, 2023 11,686,207 277,320 85,935 12,049,462 Loan acquisitions 106,916 — 599,543 706,459 Repayments, claims, capitalized interest, participations, and other, net (1,209,242) (51,262) (191,931) (1,452,435) Loans lost to external parties (1,616,724) (4,314) — (1,621,038) Loans sold (578,593) — (147,987) (726,580) Balance as of December 31, 2024 $ 8,388,564 221,744 345,560 8,955,868 The Company has partial ownership in certain consumer, private education, and federally insured student loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "other investments and notes receivable, net" in the Company's consolidated financial statements. As of the latest remittance reports filed by the various trusts prior to or as of December 31, 2024, the Company’s ownership correlates to approximately $1.97 billion of loans included in these securitizations. The loans held in these securitizations are not included in the above table. Investment interest income earned by the Company from the beneficial interest in loan securitizations is included in "investment interest" on the Company's consolidated statements of income and is not a component of the Company's loan interest income. Beginning in late 2021, the Company has experienced accelerated run-off of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans as a result of multiple extensions of the CARES Act payment pause on Department held loans and the initiatives offered by the Department for FFELP borrowers to consolidate their loans to qualify for loan forgiveness under the Public Service Loan Forgiveness and other programs. After multiple extensions of the student loans payment pause under the CARES Act, the payment and interest accrual suspension ended August 31, 2023, and Federal Direct Loan Program borrowers returned to repayment on September 1, 2023. While more unlikely now due to the change in presidential administration, if the federal government or the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs, such initiatives could further increase prepayments and reduce interest income. Even if a broad debt cancellation program only applied to student loans held by the Department, such program could result in a significant increase in consolidations of FFELP loans to Federal Direct Loan Program loans and a corresponding increase in prepayments with respect to our FFELP loan portfolio. See Part I, Item 1A, “Risk Factors - Loan Portfolio - Prepayment risk” included in this report for further information. The Company has observed a significant decrease in FFELP borrowers consolidating their loans into the Federal Direct Loan Program since August 2024 that has resulted in prepayment rates on the Company’s FFELP portfolio being more consistent with longer-term historical rates. 52 Allowance for Loan Losses, Loan Delinquencies, and Loan Charge-offs For a summary of the allowance as a percentage of the ending balance, loan status, delinquency amounts, and other key credit quality indicators for each of AGM’s loan portfolios as of December 31, 2024 and 2023; and the activity in AGM’s allowance for loan losses and net charge-offs as a percentage of average loans in 2024 and 2023, see note 3 of the notes to consolidated financial statements included in this report. Loan Spread Analysis The following table analyzes the loan spread on AGM’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 table under the caption "Net loan interest income, including settlements on derivatives" below, divided by the average balance of loans or debt outstanding. Year ended December 31, 2024 2023 Variable loan yield, gross 8.03 % 7.56 % Consolidation rebate fees (0.80) (0.80) Discount accretion, net of premium and deferred origination costs amortization 0.02 0.06 Variable loan yield, net 7.25 6.82 Loan cost of funds - interest expense (a) (6.34) (5.99) Loan cost of funds - derivative settlements (b) (c) 0.01 0.01 Variable loan spread 0.92 0.84 Fixed rate floor income, gross 0.01 0.02 Fixed rate floor income - derivative settlements (b) (d) 0.04 0.18 Fixed rate floor income, net of settlements on derivatives 0.05 0.20 Core loan spread 0.97 % 1.04 % Average balance of AGM’s loans $ 10,310,430 13,316,525 Average balance of AGM’s debt outstanding 9,871,828 12,720,097 (a) The Company recognized $6.3 million and $25.9 million in non-cash interest expense during 2024 and 2023, respectively, as a result of writing off the remaining unamortized debt discount related to the redemption of certain asset-backed debt securities prior to their maturity. This non-cash expense was excluded from the respective periods in the table above. (b) Derivative settlements represent the cash paid or received during the respective 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 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 note 5 of the notes to consolidated financial statements included in this report for additional information on the Company's Non-Nelnet Bank derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2024 and 2023 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income” in note 5 and in this table. A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. Year ended December 31, 2024 2023 Core loan spread 0.97 % 1.04 % Derivative settlements (1:3 basis swaps) (0.01) (0.01) Derivative settlements (fixed rate floor income) (0.04) (0.18) Loan spread 0.92 % 0.85 % (c) Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps. (d) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps. 53 The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets. In an increasing interest rate environment, student loan spread on FFELP loans increases in the short term because of the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest rate resets on the Company's debt occurring either monthly or quarterly. This also results in student loan spread decreasing in the short term in a decreasing interest rate environment. Variable loan spread was higher during 2024 compared with 2023 due to an increase in consumer loans funded by the Company with operating cash (versus funded with debt). The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows: Year ended December 31, 2024 2023 Fixed rate floor income, gross $ 1,249 2,169 Derivative settlements (a) 4,288 23,044 Fixed rate floor income, net $ 5,537 25,213 Fixed rate floor income contribution to spread, net 0.05 % 0.20 % (a) Derivative settlements consist of net settlements received related to the Company's derivatives used to hedge student loans earning fixed rate floor income. Gross fixed rate floor income decreased in 2024 compared with 2023 due to higher interest rates. The Company had a significant portfolio of derivative instruments in which the Company paid a fixed rate and received a floating rate to economically hedge loans earning fixed rate floor income. On March 15, 2023, to minimize the Company's exposure to market volatility and increase liquidity, the Company terminated its derivative portfolio hedging loans earning fixed rate floor income ($2.8 billion in notional amount of derivatives). Through March 15, 2023, the Company had received cash or had a receivable from its clearinghouse related to variation margin equal to the fair value of the $2.8 billion notional amount of fixed rate floor derivatives as of March 15, 2023 of $183.2 million, which included $19.1 million related to 2023 settlements. Subsequent to terminating these derivatives, during the second and fourth quarters of 2023, the Company entered into a total of $400.0 million notional amount of derivatives to hedge loans earning fixed rate floor income and other loans and investments in which the Company receives a fixed rate. The decrease in net derivative settlements received by the Company in 2024 compared with 2023 was due to a decrease in the notional amount of derivatives outstanding and less favorable terms on the $400.0 million of notional derivatives entered into in 2023 compared with the $2.8 billion notional derivatives that were terminated due to an increase in interest rates from when the terminated derivatives were initially executed. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans. 54 Summary and Comparison of Operating Results Year ended December 31, 2024 2023 Additional information Interest income: Loan interest $ 749,117 910,139 See table below for additional analysis. Investment interest 68,302 67,019 Represents primarily investment interest earned on beneficial interest investments and restricted cash included in student loan securitizations and other secured borrowings. AGM earned $36.4 million and $35.7 million on beneficial interest investments during 2024 and 2023, respectively. Total interest income 817,419 977,158 Loan interest expense 632,742 788,251 See table below for additional analysis. Intercompany interest expense 21,604 34,833 Represents interest paid by AGM to Nelnet, Inc. (parent company) related to (i) internal borrowings to fund equity advances on certain AGM debt facilities; and (ii) AGM issued bonds held by Nelnet, Inc. Decrease due to a decrease in the weighted average balance of outstanding AGM issued bonds held by Nelnet, Inc. Intercompany interest is eliminated for consolidated financial reporting purposes. Net interest income 163,073 154,074 Less provision (negative provision) for loan losses 27,691 (360) See note 3 of the notes to consolidated financial statements in this report for factors impacting provision (negative provision) for loan losses for the periods presented. Net interest income after provision for loan losses 135,382 154,434 Other income, net 15,879 11,269 Represents primarily borrower late fees, income from providing administration activities for third parties, sponsor fee income, and income/losses from AGM's investment in joint ventures. See "Overview - Consolidated Results of Operations" for further detail included in other income. Loss on sale of loans, net (1,643) (17,662) The Company recognized losses from selling portfolios of loans. See note 3 of the notes to consolidated financial statements included in this report for additional information. Derivative settlements, net 5,217 24,588 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. The majority of derivative settlements received in the periods presented was from the Company's derivative portfolio used to hedge loans earning fixed rate floor income. Decrease due to the termination of the floor income interest rate swaps ($2.8 billion notional amount) in March 2023. See above under "Loan Spread Analysis" for further information. Derivative market value adjustments, net 5,422 (40,250) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments during the periods presented related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of such swaps. To minimize the Company's exposure to market volatility and increase liquidity, AGM terminated its portfolio of floor income interest rate swaps ($2.8 billion notional amount) in March 2023. As such, the Company expects the derivative market value adjustments in future periods to be less substantial. See above under "Loan Spread Analysis" for further information. Total other income, net 24,875 (22,055) Salaries and benefits 4,784 4,191 Increase due to additional headcount as the Company actively expands into new asset loan classes. Servicing fees 31,591 37,389 Represents servicing fees paid to (i) third parties and (ii) LSS for the servicing of AGM’s loans. The amounts paid to LSS exceed the actual cost of servicing the loans. Decrease due to the amortization of the FFELP student loan portfolio, the majority of which is serviced by LSS. Intercompany servicing is eliminated for consolidated financial reporting purposes. Other expenses 4,152 4,988 Intersegment expenses 5,037 5,175 Includes costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Total operating expenses 45,564 51,743 Total operating expenses were 44 basis points and 39 basis points of the average balance of loans in 2024 and 2023, respectively. The increase in operating expenses as a percent of the average balance of loans was due to an increase in servicing fees and salaries and benefit costs as the Company actively expands into new asset classes. 55 Provision for beneficial interests 39,491 — During 2024, the Company recorded an allowance for credit losses (and related provision expense) related to the Company's beneficial interest in certain loan securitizations. See note 6 of the notes to consolidated financial statements included in this report for additional information. Total expenses 85,055 51,743 Income before income taxes 75,202 80,636 Income tax expense (18,048) (19,353) Represents income tax expense at an effective tax rate of 24%. Net income $ 57,154 61,283 Additional information: GAAP Net income $ 57,154 61,283 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP financial information. Derivative market value adjustments, net (5,422) 40,250 Tax effect 1,301 (9,660) Non-GAAP net income, excluding derivative market value adjustments $ 53,033 91,873 Net loan interest income, including settlements on derivatives The following table summarizes the components of "loan interest," "loan interest expense" and "derivative settlements, net." Year ended December 31, 2024 2023 Additional information Variable interest income, gross $ 829,024 1,007,424 Decrease due to a decrease in the average balance of loans partially offset by an increase in the gross yield earned on loans. Consolidation rebate fees (82,872) (106,756) Decreases due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization 1,716 7,302 Net discount accretion due to the Company’s purchase of loans at a net discount over the last several years, partially offset in 2024 due to consumer loans purchased at a premium. Variable interest income, net 747,868 907,970 Interest on bonds and notes payable (632,742) (788,251) Decrease due to a decrease in the average balance of debt outstanding, partially offset by an increase in cost of funds. In addition, the Company recognized a $6.3 million and $25.9 million non-cash expense during 2024 and 2023, respectively, as the result of writing off the remaining unamortized debt discount related to the redemption of certain asset-backed debt securities prior to their maturity. Derivative settlements, net (a) 929 1,544 Represents net derivative settlements received related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives 116,055 121,263 Fixed rate floor income, gross 1,249 2,169 Decrease due to higher interest rates. Derivative settlements, net (a) 4,288 23,044 Represents net derivative settlements received related to the Company's floor income interest rate swaps. Decrease due to the termination of the floor income interest rate swaps ($2.8 billion notional amount) in March 2023. See above under "Loan Spread Analysis" for further information. Fixed rate floor income, net of settlements on derivatives 5,537 25,213 Net loan interest income, including derivative settlements (core loan interest income) (a) $ 121,592 146,476 (a) Net loan interest income, including derivative settlements (core loan interest income) is a non-GAAP financial measure. For an explanation of GAAP accounting for derivative settlements and the reasons why the Company reports these non-GAAP measures (and the limitations thereof), see footnote (b) to the table immediately under the caption “Loan Spread Analysis” above. See note 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2024 and 2023 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 5 and in this table. 56 Nelnet Bank Operating Segment Loan Portfolio As of December 31, 2024, Nelnet Bank had a $644.6 million loan portfolio, consisting of $482.4 million of private education loans and $162.2 million of consumer and other loans. For a summary of the Company’s loan portfolio as of December 31, 2024 and 2023, see note 3 of the notes to consolidated financial statements included in this report. Loan Activity The following table sets forth the activity in the Nelnet Bank operating segment: FFELP Private Consumer and other Total Balance as of December 31, 2022 $ 65,913 353,882 — 419,795 Loan acquisitions and originations — 53,286 85,967 139,253 Repayments (8,429) (46,431) (13,615) (68,475) Loans sold to AGM (57,484) (217) — (57,701) Balance as of December 31, 2023 — 360,520 72,352 432,872 Loan acquisitions and originations — 180,919 210,527 391,446 Repayments — (58,994) (55,639) (114,633) Loans sold to AGM — — (65,088) (65,088) Balance as of December 31, 2024 $ — 482,445 162,152 644,597 In October 2024, Nelnet Bank purchased a residual trust that included $133 million of private education loans. The trust is consolidated as part of the bank’s financial statements. These loans are included in “loan acquisitions and originations” in the table above. Allowance for Loan Losses, Loan Delinquencies, and Loan Charge-offs For a summary of the allowance as a percentage of the ending balance, loan status, delinquency amounts, and other key credit quality indicators for each of Nelnet Bank’s loan portfolios as of December 31, 2024 and 2023; and the activity in Nelnet Bank’s allowance for loan losses and net charge-offs as a percentage of average loans in 2024 and 2023, see note 3 of the notes to consolidated financial statements included in this report. Deposits As of December 31, 2024, Nelnet Bank had $1.25 billion of deposits. All of Nelnet Bank’s deposits are interest-bearing and primarily consist of brokered certificates of deposit (CDs), retail and other savings deposits and CDs, and intercompany deposits. Retail and other savings deposits include deposits from Educational 529 College Savings plans, Health Savings plans, retirement savings plans, Short Term Federal Investment Trust (STFIT), commercial and consumer savings, and FDIC sweep deposits. Union Bank, a related party, is the program manager for the Educational 529 College Savings plans and trustee for the STFIT. As of December 31, 2024, Nelnet Bank’s deposits included $68.5 million from Nelnet, Inc. (parent company) and its subsidiaries (intercompany), and thus have been eliminated for consolidated financial reporting purposes. The intercompany deposits include a pledged deposit of $40.0 million from Nelnet, Inc. as required under the Capital and Liquidity Maintenance Agreement with the FDIC, deposits required for intercompany transactions, operating deposits, and NBS custodial deposits consisting of tuition payments collected which are subsequently remitted to the appropriate school. 57 Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Year ended December 31, (a) 2024 2023 Balance Rate Balance Rate Average assets Federally insured student loans $ — — % $ 59,389 6.43 % Private education loans 390,195 4.98 356,201 3.82 Consumer and other loans 160,648 11.79 33,829 12.96 Cash and investments 642,102 7.16 563,199 6.40 Total interest-earning assets 1,192,945 7.07 % 1,012,618 5.71 % Non-interest-earning assets 16,653 9,339 Total assets $ 1,209,598 $ 1,021,957 Average liabilities and equity Brokered deposits $ 234,423 1.80 % $ 204,410 1.38 % Intercompany deposits 145,868 4.64 179,740 4.84 Retail and other deposits 666,392 4.85 502,177 4.52 Federal funds purchased and other borrowed money 6,167 10.02 132 6.07 Total interest-bearing liabilities 1,052,850 4.17 % 886,459 3.86 % Non-interest-bearing liabilities 7,928 5,433 Equity 148,820 130,065 Total liabilities and equity $ 1,209,598 $ 1,021,957 Net interest margin 3.39 % 2.33 % (a) Calculated using average daily balances. 58 Summary and Comparison of Operating Results Year ended December 31, 2024 2023 Additional information Interest income: Loan interest $ 38,381 21,806 Represents interest earned on loans. Increase due to an increase in the balance and mix of loans and interest rates. Investment interest 45,992 36,053 Represents interest earned on cash and investments. Increase due to an increase of these balances and interest rates. Total interest income 84,373 57,859 Interest expense 44,859 34,704 Represents interest expense on deposits. Increase due to an increase in the balance of deposits and interest rates. Net interest income 39,514 23,155 Provision for loan losses 26,916 8,475 Increase due to the mix of loans and an increase in the notional amount of loans acquired and originated in 2024 compared with 2023. See note 3 of the notes to consolidated financial statements included in this report for additional information. Net interest income after provision for loan losses 12,598 14,680 Other income, net 2,951 1,095 Represents primarily net gains and income from investments. Derivative settlements, net 917 484 Nelnet Bank's use of derivatives is to hedge its exposure related to variable rate intercompany deposits to minimize volatility from future changes in interest rates. Nelnet Bank has designated its derivative instruments as cash flow hedges; however, because the hedged items are intercompany deposits, the derivative instruments are not eligible for hedge accounting in the consolidated financial statements. Accordingly, all changes in fair value of such derivatives are recorded through earnings and presented as "derivative market value adjustments, net" in the statements of operations. "Derivative settlements" represent the cash paid or received during the respective period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. For additional information on Nelnet Bank's derivative portfolio, see note 5 of the notes to consolidated financial statements in this report. Derivative market value adjustments, net 4,702 (1,523) Total other income, net 8,570 56 Salaries and benefits 11,122 9,074 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Increase due to the overall growth of Nelnet Bank activities. Depreciation 1,282 574 Servicing fees 1,373 509 Represents primarily fees paid to LSS for servicing certain of Nelnet Bank's loans. Intercompany servicing is eliminated for consolidated financial reporting purposes. Other expenses 6,972 4,994 Represents various expenses such as consulting and professional fees, Nelnet Bank director fees, occupancy, certain technology-related costs, insurance, and marketing. Increase due to the overall growth of Nelnet Bank activities. Intersegment expenses 2,361 (47) Includes costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. The majority of shared service costs incurred by the Company to support Nelnet Bank were not allocated to Nelnet Bank through the bank’s de novo period which ended at the end of 2023. The shared service and support costs incurred by the Company related to Nelnet Bank and not allocated to Nelnet Bank was $7.7 million in 2023. Total operating expenses 23,110 15,104 Loss before income taxes (1,942) (368) Income tax benefit 579 153 Net loss $ (1,363) (215) Additional information: Net loss $ (1,363) (215) See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional details about non-GAAP financial information. Derivative market value adjustments, net (4,702) 1,523 Tax effect 1,128 (366) Net (loss) income, excluding derivative market value adjustments $ (4,937) 942 59 NFS Other Operating Segments The following table summarizes the operating results of other operating segments included in NFS that are not reportable. Income taxes are allocated based on 24% of income (loss) before taxes for each activity. Summary and Comparison of Operating Results WRCM (a) Nelnet Insurance Services (b) Real estate investments (c) Investment securities (d) Total Year ended December 31, 2024 Investment interest $ 14 5,876 380 48,087 54,357 Interest expense — (1,541) — (7,296) (8,837) Net interest income 14 4,335 380 40,791 45,520 Reinsurance premiums earned — 62,923 — — 62,923 Other income, net 5,866 3,060 (2,297) 1,684 8,313 Salaries and benefits (196) (591) (800) — (1,587) Reinsurance losses and underwriting expenses — (55,246) — — (55,246) Other expenses (279) (2,894) (175) (4) (3,352) Intersegment expenses, net (14) (255) (441) (143) (853) Income (loss) before income taxes 5,391 11,332 (3,333) 42,328 55,718 Income tax (expense) benefit (1,164) (2,720) 781 (10,158) (13,261) Net (income) loss attributable to noncontrolling interests (539) — 76 — (463) Net income (loss) $ 3,688 8,612 (2,476) 32,170 41,994 Year ended December 31, 2023 Investment interest $ 11 1,563 564 72,719 74,857 Interest expense — — — (29,747) (29,747) Net interest income 11 1,563 564 42,972 45,110 Reinsurance premiums earned — 20,067 — — 20,067 Other income, net 6,746 1,787 451 (2,403) 6,581 Salaries and benefits (216) (370) (544) — (1,130) Reinsurance losses and underwriting expenses — (16,781) — — (16,781) Other expenses (326) (1,976) (82) (7) (2,391) Intersegment expenses, net (12) (175) (397) — (584) Income (loss) before income taxes 6,203 4,115 (8) 40,562 50,872 Income tax (expense) benefit (1,340) (988) (10) (9,735) (12,073) Net (income) loss attributable to noncontrolling interests (620) — 52 — (568) Net income (loss) $ 4,243 3,127 34 30,827 38,231 (a) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC (WRCM), the Company's SEC-registered investment advisor subsidiary, under various arrangements. WRCM earns annual fees of 10 basis points to 25 basis points for asset-backed securities under management and a share of the gains from the sale of securities or securities being called prior to the full contractual maturity for which it provides advisory services. As of December 31, 2024, the outstanding balance of asset-backed securities under management subject to these arrangements was $2.4 billion, of which the majority of such securities were FFELP student loan asset-backed securities. In addition, WRCM earns annual management fees of five basis points for Nelnet stock under management (primarily shares of Nelnet Class B common stock held in various trust estates). During 2024 and 2023, WRCM earned $5.6 million and $6.2 million, respectively, in management fees. During 2024 and 2023, WRCM earned $0.3 million and $0.6 million in performance fees, respectively. Fees earned by WRCM are included in “other income, net” in the table above. (b) Represents the operating results of the Company’s reinsurance treaties on property and casualty policies and the Company’s Nebraska chartered life and health company, which is in run-off mode and reinsures a decreasing term life insurance product distributed to FACTS. The timing and magnitude of catastrophic losses can produce significant volatility in the Company’s periodic underwriting results. The Company’s reinsurance treaties include loss limits, which the Company believes reduces the magnitude of a potential catastrophic loss. There were no material catastrophic events in 2024. The Company has exposure to the January 2025 California wildfires; however, the impact is not expected to be material. (c) Represents the operating results of the Company’s real estate investments and the administrative costs to manage this portfolio. During 2024 and 2023, the Company recognized net losses of $2.3 million and net gains of $0.4 million, respectively, from its real estate investments, which are included in “other income, net” in the table above. The net results recognized relates primarily to the 60 Company's proportionate share of certain real estate investments accounted for under the equity method. The net loss for 2024 was partially offset by a $2.9 million gain from the sale of a real estate investment. (d) Represents interest income earned on investment debt securities (primarily student loan and other asset-backed securities, including Nelnet-owned asset-backed securities which it has repurchased and are eliminated in consolidation), interest income on certain notes receivable, unrealized gains/losses on marketable equity securities, realized gains/losses on marketable equity securities and investment debt securities, and other costs to manage these investments. Also includes interest expense incurred on debt used to finance such investments. As of December 31, 2024, this debt had been repaid in full. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate and Market Risk - Investments,” which provides additional detail on NFS’s investment debt securities. CORPORATE AND OTHER ACTIVITIES – RESULTS OF OPERATIONS Other business activities and operating segments that are not reportable and not part of the NFS division are combined and included in Corporate and Other Activities (“Corporate.”) The following table summarizes the operating results of these activities. Income taxes are allocated based on 24% of income (loss) before taxes for each activity. The difference between the Corporate income tax expense and the sum of taxes calculated for each activity is included in income taxes in “other” in the table below. Summary and Comparison of Operating Results Shared services (a) Solar tax equity investments (b) Nelnet Renewable Energy (c) ALLO investment (d) Venture capital investments (e) Other Total Year ended December 31, 2024 Investment interest $ — 2 32 — — 11,739 11,773 Interest expense — — (833) — — (954) (1,787) Net interest income (expense) — 2 (801) — — 10,785 9,986 Solar construction revenue — — 56,569 — — — 56,569 Other income, net 3,102 285 246 6,593 8,503 12,884 31,613 Cost to provide solar construction services — — (77,673) — — — (77,673) Salaries and benefits (80,572) (1,552) (6,791) — (849) (6,384) (96,148) Depreciation and amortization (25,299) — (1,130) — (29) (370) (26,828) Other expenses (45,417) (964) (2,735) 1,498 (79) (5,884) (53,581) Intersegment expenses, net 101,992 50 (1,792) (4) (97) (550) 99,599 Impairment expense — — (1,865) — (537) — (2,402) (Loss) income before income taxes (46,194) (2,179) (35,972) 8,087 6,912 10,481 (58,865) Income tax benefit (expense) 11,087 (1,123) 8,236 (1,941) (1,659) 1,514 16,114 Net loss attributable to noncontrolling interests — 6,857 1,655 — — — 8,512 Net (loss) income $ (35,107) 3,555 (26,081) 6,146 5,253 11,995 (34,239) Year ended December 31, 2023 Investment interest $ — — 87 — — 12,054 12,141 Interest expense — — (933) — — (645) (1,578) Net interest income (expense) — — (846) — — 11,409 10,563 Solar construction revenue — — 31,669 — — — 31,669 Other income, net 2,754 (50,724) 159 (55,763) (2,878) 10,593 (95,859) Cost to provide solar construction services — — (48,576) — — — (48,576) Salaries and benefits (90,558) (3,658) (4,439) (30) (783) (6,063) (105,531) Depreciation and amortization (38,301) — (9,252) — — (416) (47,969) Other expenses (44,012) (1,475) (3,064) (2,177) (229) (5,350) (56,307) Intersegment expenses, net 111,572 (5,125) 239 (2) (58) 1,462 108,088 Impairment expense (4,678) — (20,581) — (2,060) — (27,319) (Loss) income before income taxes (63,223) (60,982) (54,691) (57,972) (6,008) 11,635 (231,241) Income tax benefit (expense) 15,173 7,125 10,807 13,913 1,442 3,969 52,429 Net loss attributable to noncontrolling interests — 31,293 9,662 — — — 40,955 Net (loss) income $ (48,050) (22,564) (34,222) (44,059) (4,566) 15,604 (137,857) 61 (a) Includes corporate activities related to internal audit, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services. The amount allocated to operating segments is reflected as “intersegment expenses, net” in the table above. Also includes corporate costs and overhead functions not allocated to operating segments, including executive management, investments in innovation, and other holding company organizational costs. (b) Includes solar tax equity investments made by the Company and administrative and management services provided by the Company on tax equity investments made by third parties. As of December 31, 2024, the Company has invested a total of $314.8 million and its third-party investors have invested $271.4 million in tax equity investments that remain outstanding in renewable energy solar partnerships that support the development and operations of solar projects throughout the country. Due to the management and control of each of these investment partnerships, such partnerships that invest in tax equity investments are consolidated on the Company’s consolidated financial statements, with the co-investor’s portion being presented as noncontrolling interests. Included in tax equity investments in the table above is the Company's share of income or loss from solar investments accounted for under the Hypothetical Liquidation at Book Value (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 losses on its solar tax equity investments of $6.5 million and $59.6 million during 2024 and 2023, respectively. The net losses in 2024 were partially offset by recognizing gains of $15.3 million related to investments that were sold during 2024. These income statement amounts, which include amounts attributable to third-party noncontrolling interest investors, are included in “other income, net” in the table above. The amount of net losses attributable to third-party noncontrolling interest investors was $4.6 million and $37.9 million during 2024 and 2023, respectively, and are reflected in “net loss attributable to noncontrolling interests” in the table above. The Company syndicates solar tax equity investments to third parties and earns management and performance fees. Management fee income recognized by the Company was $3.6 million and $1.8 million during 2024 and 2023, respectively, which is included in “other income, net” in the table above. During 2024, the Company also recognized solar consulting revenue of $6.1 million. (c) Nelnet Renewable Energy (NRE) is the Company’s solar construction business that provides full-service engineering, procurement, and construction services to residential homes and commercial entities. The Company entered this business from its acquisition of 80% of GRNE Solar in June 2022. Since the acquisition of GRNE Solar, it has incurred low and, in some cases, negative margins on certain projects. In addition, higher interest rates reduced residential demand and made community solar projects more costly. On April 12, 2024, the Company announced a change in its solar EPC operations to focus exclusively on the commercial solar market and discontinued its residential solar operations. As a result, residential revenue will continue to decline from recent historical amounts as existing customer contracts are completed. Residential solar construction revenue was $3.3 million and $10.7 million during 2024 and 2023, respectively. During 2023 and 2024, NRE recognized impairment charges on goodwill, intangible assets, and other assets of $20.6 million and $1.9 million, respectively. See note 11 of the notes to consolidated financial statements included in this report for additional information on such impairment charges. The Company has a handful of remaining legacy construction contracts to complete, down from over 30 at the beginning of 2024. As new projects are completed and the legacy contracts are now substantially complete, the Company believes operating results will improve from prior historical periods. On June 30, 2024, the Company acquired the remaining 20% of the ownership interest of GRNE Solar for $0.3 million. (d) Represents primarily the Company's share of loss on its voting membership interests and income on its preferred membership interests in ALLO. The Company accounts for its approximately 45% voting membership interests in ALLO under the HLBV method of accounting. Under the HLBV method of accounting on its ALLO voting membership interests investment, the Company recognized losses of $10.7 million and $65.3 million in 2024 and 2023, respectively. These amounts are reflected in “other income, net” in the table above. Absent additional equity contributions with respect to ALLO's voting membership interests, the Company will not recognize additional losses for its voting membership interests in ALLO. As of December 31, 2024, the outstanding preferred membership interests of ALLO held by the Company was $225.6 million. Accrued and unpaid preferred return capitalizes to preferred membership interests annually on each December 31. The Company historically earned a preferred annual return of 6.25% that increased to 10.00% on April 1, 2024 for $155.0 million of preferred membership interests of ALLO held by the Company. On December 31, 2024, $14.1 million of accrued preferred return was capitalized to preferred membership interests. The preferred annual return on the updated balance of $169.1 million preferred membership interests increased to 13.5% on January 1, 2025. During 2024, the Company purchased an additional $53.1 million of preferred membership interests of ALLO, which earn a preferred annual return of 20.0%. Including the accrued preferred return of $3.4 million that was capitalized on December 31, 2024, the updated balance of preferred membership interests that earns at 20.0% was $56.5 million as of December 31, 2024. The Company recognized income on its ALLO preferred membership interests of $17.5 million and $9.1 million during December 31, 2024 and 2023, respectively. These amounts are reflected in “other income, net” in the table above. As part of the ALLO recapitalization transaction completed in 2020, the Company and SDC (a third-party global digital infrastructure investor and member of ALLO) entered into an agreement in which the Company has a contingent obligation to pay SDC an amount up to $35.0 million in the event the Company disposes of its voting membership interests of ALLO that it holds, and realizes from such disposition certain targeted return levels. The Company adjusts the balance of this contingent liability each reporting period. For the year ended December 31, 2024, the Company reduced the obligation resulting in an expense reduction of $1.5 million, and for the year ended December 31, 2023, recognized expense of $2.2 million, which is included in “other expenses” in the table above. (e) Represents the operating results of the Company’s venture capital investments, including Hudl which the Company accounts for using the measurement alternative method, and the administrative costs to manage this portfolio. 62 LIQUIDITY AND CAPITAL RESOURCES The Company’s Loan Servicing and Systems, and Education Technology Services and Payments operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Nelnet Financial Services division, which includes the Asset Generation and Management and Nelnet Bank reportable operating segments, and the Company's other initiatives to pursue additional strategic investments. The Company may issue equity and debt securities in the future in order to improve capital, increase liquidity, refinance upcoming maturities, or provide for general corporate purposes. Moreover, the Company may from time to time repurchase certain amounts of its outstanding secured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities. Such repurchases or exchanges may be made in open market transactions, privately negotiated transactions, or otherwise. Any such repurchases or exchanges will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, compliance with securities laws, and other factors. The amounts involved in any such transactions may be material. The Company has historically utilized operating cash flow, secured financing transactions (which include warehouse facilities and asset-backed securitizations), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and loan acquisitions. In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, repurchase agreements, and unsecured debt offerings to fund corporate activities; business acquisitions; solar, real estate, and other investments; repurchases of common stock; and repurchases of its own debt. Sources of Liquidity As of December 31, 2024, the Company's sources of liquidity included: Cash and cash equivalents $ 194,518 Less: Cash and cash equivalents held at Nelnet Bank (a) (48,166) Net cash and cash equivalents 146,352 Available-for-sale (AFS) debt securities (investments) - at fair value 1,085,826 Less: AFS debt securities held at Nelnet Bank - at fair value (a) (536,323) AFS private education and consumer loan debt securities - held as risk retention - at fair value (b) (227,726) Restricted investments (101,987) Unencumbered AFS debt securities (investments) - at fair value 219,790 Unencumbered private, consumer, and other loans (Non-Nelnet Bank) - at par 253,484 Unencumbered repurchased Nelnet issued asset-backed debt securities - at par (not included on consolidated financial statements) (c) 97,482 Unused capacity on unsecured line of credit (d) 495,000 Sources of liquidity as of December 31, 2024 $ 1,212,108 (a) Cash and investments held at Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. (b) The Company is sponsor for certain private education and consumer loan securitizations and as sponsor, is required to provide a certain level of risk retention. To satisfy this requirement, the Company has purchased bonds issued in the securitizations. The majority of the purchased bonds reflected in the table above relate to private education loan securitizations. For these securitizations, the Company is required to retain these bonds until the latest of (i) the date the aggregate outstanding principal balance of the loans in the securitization is 33% or less of the initial loan balance, and (ii) the date the aggregate outstanding principal balance of the bonds is 33% or less of the aggregate initial outstanding principal balance of the bonds, at which time the Company can sell these bonds to a third party. (c) 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 63 statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties, redeem the notes at par as cash is generated by the trust estate, or pledge the securities as collateral on repurchase agreements. 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. (d) The Company has a $495.0 million unsecured line of credit that matures on September 22, 2026. As of December 31, 2024, there was no amount outstanding on the unsecured line of credit and $495.0 million was available for future use. The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, consumer, and other loan acquisitions (or investment interests therein); strategic acquisitions and investments; 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. Cash Flows The Company has historically generated positive cash flow from operations. During the years ended December 31, 2024 and 2023, the Company generated $662.9 million and $432.0 million, respectively, in cash from operating activities. The increase in 2024 compared with 2023 was due to: • An increase in net income; • Proceeds received from the Company’s clearinghouse for margin payments on derivatives in 2024 compared with payments in 2023; • Adjustments to net income for the impact of non-cash changes to deferred taxes, provision for loan losses, and impairment expense and provision for beneficial interests; and • The impact of changes to loan and investment accrued interest receivable, accounts receivable, and other assets in 2024 compared with 2023. These factors were partially offset by: • Adjustments to net income for the impact of depreciation and amortization, loan discount and deferred lender fees accretion, derivative market value adjustments, loss on sale of loans, and gain on investments; • Proceeds from termination of derivative instruments in 2023 compared with none in 2024; and • The impact of changes to accrued interest payable and other liabilities in 2024 compared with 2023. The primary items included in the statement of cash flows for investing activities are the purchase, origination, repayment, and sale of loans, the purchase and sale of available-for-sale securities, and the purchase of other investments (primarily solar investments). The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable, the change in deposits at Nelnet Bank used to fund loans and investment activity at Nelnet Bank, and repurchases of common stock. Cash provided by investing activities and used in financing activities for the year ended December 31, 2024 was $2.41 billion and $3.17 billion, respectively. Cash provided by investing activities and used in financing activities for the year ended December 31, 2023 was $1.94 billion and $2.70 billion, respectively. Investing and financing activities are further addressed in the discussion that follows. Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral - AGM Operating Segment The following table shows AGM’s debt obligations outstanding that are secured by loan assets and related collateral. As of December 31, 2024 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 7,411,966 8/26/30 - 9/25/69 FFELP and consumer loan warehouse facilities 943,165 1/31/26 - 11/13/27 $ 8,355,131 Bonds and Notes Issued in Asset-backed Securitizations The majority of AGM’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. Cash generated from student loans funded in asset-backed securitizations provides the sources of liquidity to satisfy all obligations related to the outstanding bonds and notes issued in such securitizations. In addition, due to (i) the difference between the yield AGM receives on the loans and cost of 64 financing within these transactions, and (ii) the servicing and administration fees AGM earns from these transactions, AGM has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. As of December 31, 2024, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, AGM expects future undiscounted cash flows from its portfolio to be approximately $1.07 billion as detailed below. The actual timing of cash flows released from the securitizations could be impacted based on when and if the Company terminates a securitization by exercising clean-up calls on the underlying securities when the assets in such securitization get to a certain threshold. The forecasted cash flow presented below includes loans funded in asset-backed securitizations as of December 31, 2024, the majority of which are federally insured student loans. As of December 31, 2024, AGM had $7.7 billion of loans included in asset-backed securitizations, which represented 86.0% of its total loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive in relation to loans funded in its warehouse facilities, unencumbered private education, consumer, and other loans funded with operating cash, its ownership of beneficial interest in loan securitizations (such beneficial interest investments are classified as "other investments and notes receivable, net" on the Company's consolidated balance sheets), loans acquired subsequent to December 31, 2024, and loans owned by Nelnet Bank. Asset-backed Securitization Cash Flow Forecast $1.07 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $1.07 billion include approximately $0.73 billion (as of December 31, 2024) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are included in the consolidated balance sheets in the balances of "loans and accrued interest receivable, net" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $0.34 billion, or approximately $0.26 billion after income taxes based on the estimated effective tax rate, represents estimated future net interest income (earnings) from the portfolio and is expected to be accretive to the Company's balance of consolidated shareholders' equity from the December 31, 2024 balance. The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below. Prepayments : The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the amount of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect estimated prepayment rates, including the level of consolidation activity, borrower default rates, and utilization of debt management options such as income-based repayment, deferments, and forbearance. Should any of these factors change, management may revise its assumptions, which in turn would impact the 65 projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates of 6% for both federally insured consolidation and Stafford loans. Prepayment rates for private education loans range from 11% to 20%. Beginning in late 2021, the Company experienced accelerated run-off (prepayments) of its FFELP portfolio due to FFELP borrowers consolidating their loans into Federal Direct Loan Program loans to qualify for loan forgiveness under various initiatives and programs offered by the federal government and the Department. See Item 1A, "Risk Factors - Loan Portfolio - Prepayment risk" for additional information related to risks associated with loan prepayments. While more unlikely now due to the change in presidential administration, prepayments could increase if the federal government and the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs. However, the Company has observed a significant decrease in FFELP borrowers consolidating their loans into the Federal Direct Loan Program since August 2024 that has resulted in prepayment rates on the Company’s FFELP portfolio being more consistent with longer-term historical rates. The following table summarizes the estimated impact to the above forecasted cash flows if prepayments were greater than the prepayment rate assumptions used to calculate the forecasted cash flows. Increase in prepayment rate Reduction in forecasted cash flow from table above Forecasted cash flow using increased prepayment rate 2x $0.07 billion $1.00 billion 4x $0.22 billion $0.85 billion If the entire AGM student loan portfolio prepaid, the Company would receive the full amount of overcollateralization included in the asset-backed securitizations of approximately $0.73 billion (as of December 31, 2024); however, the Company would not receive the $0.34 billion ($0.26 billion after tax) of estimated future earnings from the portfolio. Interest rates : The Company funds a portion of its student loans with floating rate securities that are indexed to 90-day SOFR. Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to the 30-day average SOFR in effect for each day in a calendar quarter. The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk. The Company’s cash flow forecast assumes, for the life of the portfolio, a relationship between the various SOFR indices that is implied by the current forward SOFR curves. If the forecast is computed assuming a spread of an additional 12 basis points between Term SOFR and 30-day average SOFR for the life of the portfolio, the cash flow forecast would be reduced by approximately $5 million to $15 million. The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk — AGM Operating Segment" for additional information about various interest rate risks which may impact future cash flows from AGM's loan assets. Warehouse Facilities Warehousing allows the Company to buy and manage loans prior to transferring them into more permanent financing arrangements. See note 4 of the notes to consolidated financial statements included in this report for a discussion of the Company's warehouse facilities outstanding as of December 31, 2024. The Company has been reducing its warehouse capacity based on its estimated future loan purchases and to save on unused facility costs. Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. Asset-backed Securities Transactions The Company, through its subsidiaries, has historically funded loans by completing asset-backed securitizations. Depending on market conditions, the Company anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance loans included in its warehouse facilities and existing asset-backed securitizations and/or finance loans purchased from third parties and loans that are currently unencumbered. There were no asset-backed securitization transactions completed during the year ended December 31, 2024. 66 Other Uses of Liquidity Subsequent to the Reconciliation Act of 2010, the Company no longer originates FFELP loans but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist, including opportunities to purchase private education, consumer, and other loans (or investment interests therein). The Company plans to fund additional loan acquisitions and related investments using current cash; cash provided by operating activities; proceeds from the sale of certain investments; its unsecured line of credit, its Union Bank student loan participation agreement, and its Union Bank student loan asset-backed securities participation agreement (each as described below), and/or establishing similar secured and unsecured borrowing facilities; using its existing warehouse facilities (as described above); increasing the capacity under existing and/or establishing new warehouse facilities; and continuing to access the asset-backed securities market. Union Bank Participation Agreements The Company maintains an agreement with Union Bank, a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. As of December 31, 2024, $687.1 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company. The Company can sell participation interests in loans to Union Bank to the extent of availability under the grantor trusts, up to $900.0 million or an amount in excess of $900.0 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. The Company also has an agreement with Union Bank under which Union Bank has agreed to purchase from the Company participation interests in FFELP loan asset-backed securities (bond investments). The agreement automatically renews annually and is terminable by either party upon five business days' notice. The Company can participate FFELP loan asset-backed securities to Union Bank to the extent of availability under the grantor trusts, up to $400.0 million or an amount in excess of $400.0 million if mutually agreed to by both parties. The Company maintains legal ownership of the FFELP loan asset-backed securities and, in its discretion, approves and accomplishes any sale, assignment, transfer, encumbrance, or other disposition of the securities. As such, the FFELP loan asset-backed securities subject to this agreement are included on the Company's consolidated balance sheets as "investments at fair value" and the participation interests outstanding have been accounted for by the Company as a secured borrowing. As of December 31, 2024, $0.1 million (par value) of FFELP loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. Liquidity Impact Related to Beneficial Interest in Loan Securitizations The Company has partial ownership in consumer, private education, and federally insured student loan third-party securitizations that are classified as "beneficial interest in loan securitizations" and included in "other investments and notes receivable, net" on the Company's consolidated balance sheets. These residual interests were acquired by the Company or have been received by the Company as consideration from selling portfolios of loans to unrelated third parties who securitized such loans. As of the latest remittance reports filed by the various trusts prior to or as of December 31, 2024, the Company's ownership correlates to approximately $1.97 billion of loans included in these securitizations. Investment interest income earned by the Company from the beneficial interest in loan securitizations is included in "investment interest" on the Company's consolidated statements of income and is not a component of the Company's loan interest income. As of December 31, 2024, the investment balance on the Company's consolidated balance sheet of its beneficial interest in loan securitizations was $213.8 million. For a summary of this investment balance, see note 6 of the notes to consolidated financial statements included in this report. The Company's partial ownership percentage in each loan securitization grants the Company the right to receive the corresponding percentage of cash flows generated by the securitization. As of December 31, 2024, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its partial ownership in these securitizations to be approximately $323.4 million. The vast majority of these cash flows are expected to be received over the next 5 years. The difference between the total estimated future undiscounted cash flows from these residual interests ($323.4 million) and the investment carrying value ($213.8 million) of $109.6 million, or $83.3 million after income taxes based on the estimated effective tax rate, represents estimated future investment interest income (earnings) from these investments and is expected to be accretive to the Company's balance of consolidated shareholders' equity from the December 31, 2024 balance. 67 The undiscounted future cash flows from the consumer and private education loan securitizations are highly subject to credit risk (defaults). If defaults are higher than management's current estimate, the forecasted cash flows and estimated future investment interest income (earnings) from these securitizations would be adversely impacted. For example, the Company established an allowance of $39.5 million in 2024 related to certain of the Company's beneficial interest securitization investments. The Company's change in estimate of future cash flows from the beneficial interest in certain loan securitizations was lower than previously anticipated due to actual and estimated loan defaults within such securitizations. Sources and Needs of Liquidity - Nelnet Bank Sources of Liquidity Nelnet Bank launched operations in November 2020. Nelnet Bank was funded by the Company with an initial capital contribution of $100 million and the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC as discussed below. The Company has contributed an additional $72 million to Nelnet Bank since its inception. Based on Nelnet Bank's business plan for growth and current financial condition, the Company believes it will make additional capital contributions to the bank in future periods. The growth of Nelnet Bank is primarily driven by its ability to achieve loan growth goals while sustaining credit quality and maintaining cost-efficient funding sources to support its loan growth. Deposits Nelnet Bank utilizes brokered, retail, and other deposits to meet its funding needs and enhance its liquidity position. The deposits can be term or liquid deposits. The term deposits have terms from three months to ten years. Retail, commercial, and institutional deposits are sourced through a direct banking platform and a deposit marketplace and provide diversified funding sources. Brokered deposits are sourced through a network of brokers and provide a stable source of funding. In addition, Nelnet Bank accepts certain deposits considered non-brokered that are held in large accounts structured to allow FDIC insurance to flow through to underlying individual depositors. The deposits are diversified with deposits from Educational 529 College Savings and Health Savings plans, STFIT, and FDIC sweep deposits. Regulatory Capital Prior to Nelnet Bank’s launch of operations, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12%; (ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10% of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank. Under the regulatory framework for prompt corrective action, Nelnet Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI and must meet specific capital standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on Nelnet Bank’s business, results of operations, or financial condition. On January 1, 2020, the Community Bank Leverage Ratio (CBLR) framework, as issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC, became effective. Any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio. Nelnet Bank has opted into the CBLR framework for the quarter ended December 31, 2024 with a leverage ratio of 12.4%. Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework and the minimum level required by the FDIC. 68 Liquidity Impact Related to Solar Tax Equity Investments The Company makes solar tax equity investments in renewable energy solar partnerships that support the development and operations of solar projects throughout the county. As of December 31, 2024, the Company has funded a total of $314.8 million in tax equity investments which remain outstanding for itself and $271.4 million on behalf of its syndication partners, for a funded total of $586.2 million. These investments provide a federal income tax credit under the Internal Revenue Code, currently equaling 30% to 70% of the eligible project cost, with the tax credit available when the project is placed in service. The Company is then allowed to reduce its tax estimates paid to the U.S. Treasury based on the credits earned. In addition to the credits, the Company structures the investments to receive quarterly distributions of cash from the operating earnings of the solar project for a period of at least five years after the project is placed in service. After that period, the contractual agreements typically provide for the Company’s entire interest in the projects to be sold at the fair market value of the discounted forecasted future cash flows allocable to the Company. Based on the timing of when the Company funds a project and decreases its tax estimate to the U.S. Treasury due to earning of the tax credit, the net amount of capital funded to solar tax equity investments at any point in time is not significant and has a minimal impact on the Company’s liquidity. As of December 31, 2024, the Company is committed to fund an additional $55.6 million directly in solar tax equity investments and $36.4 million will be funded by its syndication partners, for a total commitment of $92.0 million. Liquidity Impact Related to ALLO Upon the deconsolidation of ALLO on December 21, 2020, the Company recorded its 45% voting membership interests in ALLO at fair value, and accounts for such investment under the HLBV method of accounting. In addition, the Company recorded its remaining non-voting preferred membership units of ALLO at fair value, and accounts for such investment as a separate equity investment. As of December 31, 2024, the outstanding preferred membership interests of ALLO held by the Company were $225.6 million. The accrued preferred return capitalizes to preferred membership interests annually on each December 31. On January 1, 2025, the preferred annual return on $169.1 million of preferred membership interests of ALLO increased to 13.50%, commencing July 1, 2025, the return will increase to 15.00%, commencing January 1, 2026, the preferred return will increase to 17.50%, and beginning on January 1, 2027 and on each January 1 of each calendar year thereafter, the annual return will increase by an additional 2.50%. During 2024, the Company purchased an additional $53.1 million of preferred membership interests in ALLO, which earn a preferred annual return of 20.00%. Including the accrued preferred return of $3.4 million that was capitalized on December 31, 2024, the updated balance of preferred membership interests that earns at 20.00% was $56.5 million as of December 31, 2024. If ALLO needs additional capital to support its growth in existing or new markets, the Company has the option to contribute additional capital to maintain its voting equity interest and/or may purchase additional preferred membership interests that include a preferred return. In addition to equity contributions, ALLO has issued debt to fund its growth. As of December 31, 2024, ALLO has $1.14 billion (par value) of debt outstanding. Nelnet continues to work with ALLO and SDC, a third-party global digital infrastructure investor that holds a significant investment in ALLO, to explore various funding and capital options to support ALLO’s growth. As part of the ALLO recapitalization transaction in December 2020, the Company and SDC entered into an agreement in which the Company has a contingent obligation to pay SDC an amount up to $35.0 million in the event the Company disposes of its voting membership interests of ALLO that it holds, and realizes from such disposition certain targeted return levels. As of December 31, 2024, the estimated fair value of the contingent payment is $8.3 million. Liquidity Impact Related to Hedging Activities The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. All Non-Nelnet Bank over-the-counter derivative contracts executed by the Company are cleared post-execution at a regulated clearinghouse. Clearing is a process by which a third party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default. Nelnet Bank derivative contracts have protection against counterparty risk provided by International Swaps and Derivatives Association, Inc. agreements. The agreements require collateral to be exchanged based on the net fair value of derivatives with each counterparty. The Company’s exposure related to the Nelnet Bank derivatives is limited to the value of the derivative contracts in a gain position, less any collateral held by us. Based on the derivative portfolio outstanding as of December 31, 2024, the Company does not anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in 69 interest rates would have a material impact on its ability to make variation margin payments to its third-party clearinghouse and/or payments to its counterparties for its non-centrally cleared derivatives. However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to make variation margin payments to its third-party clearinghouse and/or collateral payments to it non-centrally cleared counterparties. The variation margin and collateral payments, if significant, could negatively impact the Company's liquidity and capital resources. In addition, clearing rules require the Company to post amounts of liquid collateral when executing new derivative instruments, which could prevent or limit the Company from utilizing additional derivative instruments to manage interest rate sensitivity and risks. See note 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative portfolio. Unsecured Line of Credit As discussed above, the Company has a $495.0 million unsecured line of credit with a maturity date of September 22, 2026. As of December 31, 2024, the unsecured line of credit had no amount outstanding and $495.0 million was available for future use. Upon the maturity date of this facility, there can be no assurance that the Company will be able to maintain this line of credit, increase or maintain the amount outstanding under the line, or find alternative funding if necessary. Stock Repurchases The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 8, 2025. As of December 31, 2024, 3,341,735 shares remained authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time on the open market, in private transactions (including with related parties), or otherwise, depending on various factors, including share prices and other potential uses of liquidity. Shares repurchased by the Company during 2024 and 2023 are shown below, and include shares repurchased under the Company's stock repurchase program and shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Certain of these repurchases were made pursuant to trading plans adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) (a) Year ended December 31, 2024 894,108 $ 83,290 $ 93.15 Year ended December 31, 2023 336,943 28,028 83.18 (a) The average price of shares repurchased includes excise taxes. On November 13, 2023, the Company repurchased, in a privately negotiated transaction under the Company’s existing stock repurchase program, a total of 283,112 shares of the Company’s Class A common stock from certain family members of Mr. Dunlap. The shares were repurchased at a discount to the closing market price of the Company’s Class A common stock as of November 10, 2023, and the transaction was separately approved by the Company’s Board of Directors and its Nominating and Corporate Governance Committee. Dividends Dividends of $0.28 per share on the Company’s Class A and Class B common stock were paid on March 15, 2024, June 14, 2024, September 13, 2024, and December 16, 2024. The Company's Board of Directors declared a first quarter 2025 cash dividend on the Company's Class A and Class B common stock of $0.28 per share. The dividend will be paid on March 14, 2025, to shareholders of record at the close of business on February 28, 2025. The Company plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. 70 CRITICAL ACCOUNTING ESTIMATES This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2 of the notes to consolidated financial statements included in this report includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are most “critical” - that is, they are most important to the portrayal of the Company’s financial condition and results of operations and they require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting estimate. Allowance for Loan Losses The allowance for loan losses represents the Company’s estimate of the expected lifetime credit losses inherent in loan receivables as of the balance sheet date. The adequacy of the allowance for loan losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. Such assumptions are discussed below, and such uncertainty is due in part to the fact that the weighted average maturity of the Company’s loan portfolio is approximately 12 years, and actual credit losses will be affected by, among other things, future economic conditions and future personal financial situations for borrowers, over that extended time frame. Changes in the Company’s assumptions affect “provision for loan losses” on the Company’s consolidated statements of income and the “allowance for loan losses” contained within “loans and accrued interest receivable, net” on the Company’s consolidated balance sheets. For additional information regarding the Company’s allowance for loan losses, see notes 2 and 3 of the notes to consolidated financial statements included in this report. The Company estimates the allowance for loan losses for receivables that share similar risk characteristics based on a collective assessment using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses, recent portfolio performance, and forward-looking macroeconomic conditions. The models vary by portfolio type including FFELP, private education, and consumer and other loans. If management does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors including economic uncertainty, observable changes in portfolio performance, and other relevant factors. The Company’s allowance for loan losses is based on various assumptions including: probability of default; loss given default; exposure at default; net loss rates for its consumer portfolio; contractual terms, including prepayments; forecast period; reversion method; reversion period; and macroeconomic factors, including unemployment rates, gross domestic product, and the consumer price index. The allowance for loan losses is made at a specific point in time and based on relevant information as discussed above. The allowance for loan losses is maintained at a level management believes is appropriate to provide for expected lifetime credit losses inherent in loan receivables as of the balance sheet date. This evaluation is inherently subjective because it requires numerous estimates made by management. These estimates are subjective in nature and involve uncertainties and matters of significant judgment. Changes in estimates could significantly affect the Company's recorded balance for the allowance for loan losses. For additional information regarding changes in the Company’s allowance for loan losses for the years ended December 31, 2024, 2023, and 2022, see the caption “Activity in the Allowance for Loan Losses” in note 3 of the notes to consolidated financial statements included in this report. The Company considers a range of economic scenarios in its determination of the allowance for loan losses. These scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses, and also the expectation that conditions will eventually normalize over the longer run. Under the range of economic scenarios considered, the allowance for loan losses would have been lower by $13 million (11%) or higher by $10 million (9%). This range reflects the sensitivity of the allowance for loan losses specifically related to the scenarios and weights considered as of December 31, 2024, and does not consider other potential adjustments that could increase or decrease loss estimates calculated using alternative economic scenarios. 71 Because several quantitative and qualitative factors are considered in determining the allowance for loan losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for loan losses. They are intended to provide insights into the impact of adverse changes in the economy on the Company’s modeled loss estimates for the loan portfolio and do not imply any expectation of future deterioration in loss rates. Given current processes employed by the Company, management believes the loss model estimates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be significant to the Company’s financial statements. RECENT ACCOUNTING PRONOUNCEMENTS In December 2023, the FASB issued accounting guidance to address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This guidance will be effective for the Company for the year ending December 31, 2025 annual financial statements, with early adoption permitted. The guidance will be applied on a prospective basis. The Company intends to adopt the standard when it becomes effective for the year ending December 31, 2025. Management is currently evaluating the impact this guidance will have on the disclosures included in the notes to the consolidated financial statements. In November 2024, the FASB issued accounting guidance to increase disclosure requirements primarily through enhanced disclosures about types of expenses (including employee compensation, depreciation, and amortization) in commonly presented expense captions. This guidance will be effective for the Company for fiscal years beginning after December 15, 2026. The guidance is required to be applied prospectively with the option for retrospective application. Management is currently evaluating the impact this guidance will have on the disclosures included in the notes to the consolidated financial statements. There are no other recently issued, but not yet adopted, accounting pronouncements which are expected to have a material impact on the Company’s consolidated financial statements and related disclosures.