Nelnet Reports Fourth Quarter 2022 Results

February 28, 2023

LINCOLN, Neb., Feb. 28, 2023 /PRNewswire/ — Nelnet (NYSE: NNI) today reported GAAP net income of $30.8 million, or $0.83 per share, for the fourth quarter of 2022, compared with GAAP net income of $132.7 million, or $3.46 per share, for the same period a year ago.

Net income, excluding derivative market value adjustments1, was $36.4 million, or $0.98 per share, for the fourth quarter of 2022, compared with $95.9 million, or $2.50 per share, for the same period in 2021.

“Our core businesses, including servicing, payments and education technology, and financial services performed very well in 2022,” said Jeff Noordhoek, chief executive officer of Nelnet. “While we believe the future is bright for our fee-based businesses and investments, we expect our quarterly earnings to be choppy as our FFEL Program loans run off and our other investments increase. Consistent with our long-term focus, we laid a tremendous foundation for long-term value creation in 2022 that we believe will be evident in future years.”

Operating Segments

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

Asset Generation and Management

The AGM operating segment reported net interest income of $58.5 million during the fourth quarter of 2022, compared with $70.1 million for the same period a year ago. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The company recognized income from derivative settlements of $20.8 million during the fourth quarter of 2022, compared with an expense of $5.8 million for the same period in 2021. Derivative settlements for each applicable period should be evaluated with the company’s net interest income. Net interest income net of derivative settlements increased to $79.3 million in the fourth quarter of 2022, compared with $64.3 million for the same period in 2021. The increase in 2022 was due to an increase in core loan spread and was partially offset by the expected runoff of the loan portfolio. The average balance of loans outstanding decreased from $18.1 billion for the fourth quarter of 2021 to $14.8 billion for the same period in 2022.

Core loan spread2, which includes the impact of derivative settlements, increased to 1.77 percent for the quarter ended December 31, 2022, compared with 1.36 percent for the same period in 2021. In an increasing interest rate environment, student loan spread 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 that occurs either monthly or quarterly.

Net income after tax for the AGM segment was $22.9 million for the three months ended December 31, 2022, compared with $108.7 million for the same period in 2021.

AGM recognized a provision for loan losses in the fourth quarter of 2022 of $27.4 million ($20.8 million after tax), compared with a negative provision of $2.0 million ($1.5 million after tax) in the fourth quarter of 2021. Provision for loan losses in the fourth quarter of 2022 was impacted by loans acquired during the quarter. In addition, in the fourth quarter of 2022, AGM recognized $7.4 million ($5.6 million after tax) in expense related to changes in the fair value of derivative instruments that do not qualify for hedge accounting, compared with income of $48.4 million ($36.8 million after tax) for the same period in 2021.

Nelnet Bank

As of December 31, 2022, Nelnet Bank had a $419.8 million loan portfolio and had $789.6 million of deposits. Nelnet Bank’s net income after tax for the quarter ended December 31, 2022 was $1.4 million, as compared to a net loss of $0.1 million for the same period in 2021.

Loan Servicing and Systems

Revenue from the Loan Servicing and Systems segment was $140.0 million for the fourth quarter of 2022, compared with $150.4 million for the same period in 2021. During the fourth quarter of 2021, the company earned additional revenue from the Department of Education (Department) based on incremental work performed to support the Department’s borrowers coming out of the CARES Act forbearance. The Department subsequently extended the forbearance period.

As of December 31, 2022, the company was servicing $587.5 billion in government-owned, FFEL Program, private education, and consumer loans for 17.6 million borrowers, as compared to $529.0 billion in servicing volume for 16.4 million borrowers as of December 31, 2021.

The Loan Servicing and Systems segment reported net income after tax of $12.9 million for the three months ended December 31, 2022, compared with $25.8 million for the same period in 2021. During the fourth quarter of 2022, the Loan Servicing and Systems segment recognized $5.5 million ($4.2 million after tax) of non-cash impairment charges on certain facility and other assets.

Education Technology, Services, and Payment Processing

For the fourth quarter of 2022, revenue from the Education Technology, Services, and Payment Processing operating segment was $98.3 million, an increase from $81.0 million for the same period in 2021. Revenue less direct costs to provide services for the fourth quarter of 2022 was $59.0 million, compared with $52.4 million for the same period in 2021.

Net income after tax for the Education Technology, Services, and Payment Processing segment was $5.8 million for the three months ended December 31, 2022, compared with $8.0 million for the same period in 2021. During the fourth quarter of 2022, the Education Technology, Services, and Payment Processing segment recognized $2.2 million ($1.7 million after tax) of non-cash impairment charges on previously acquired software assets.

Included in net income for the three months ended December 31, 2022 and 2021 was $4.5 million ($3.4 million after tax) and $0.3 million ($0.2 million after tax) of interest income, respectively. The company earns interest income on tuition funds held in custody for schools. The increase in interest income was due to an increase in interest rates in 2022 as compared to 2021.

Year-End Results

GAAP net income for the year ended December 31, 2022 was $407.3 million, or $10.83 per share, compared with GAAP net income of $393.3 million, or $10.20 per share, for 2021. Net income in 2022, excluding derivative market value adjustments1, was $231.3 million, or $6.15 per share, compared with $322.7 million, or $8.37 per share, for 2021.

Forward-Looking and Cautionary Statements

This press release contains forward-looking statements within the meaning of federal securities laws. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. These statements are based on management’s current expectations as of the date of this release and are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: risks and uncertainties related to the duration, ultimate severity, and continuing impacts of the COVID-19 pandemic; risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the company under existing and any future servicing contracts with the Department and risks related to the company’s ability to comply with agreements with third-party customers for the servicing of loans; risks related to the company’s loan portfolio, such as interest rate basis and repricing risk and changes in levels of loan prepayment or default rates; the use of derivatives to manage exposure to interest rate fluctuations; uncertainties regarding the expected benefits from purchased FFEL Program, private education, and consumer loans, or investment interests therein, and initiatives to purchase additional FFEL Program, private education, and consumer loans; financing and liquidity risks, including risks of changes in the interest rate environment; risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets; risks and uncertainties of the expected benefits from Nelnet Bank’s operations; risks related to our renewable energy business, including availability of federal incentives, regulatory uncertainty, climate change risk, supply change risk, and rising debt and construction costs; our reliance on third parties to provide certain services; risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, including activities that are intended to diversify the company both within and outside of its historical core education-related businesses; risks from changes in economic conditions and consumer behavior; our ability to adapt to technological change; risks related to the exclusive forum provisions in our articles of incorporation; risks related to our executive chairman’s ability to control matters related to the company through voting rights; risks related to related party transactions; risks related to climate change; concerns about the downgrade of the U.S. credit rating; risks related to natural disasters, terrorist activities, or international hostilities; and cybersecurity risks, including disruptions to systems, disclosure of confidential or personal information, and/or damage to reputation resulting from cyber-breaches.

For more information, see the “Risk Factors” sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission. All forward-looking statements in this release are as of the date of this release. Although the company may voluntarily update or revise its forward-looking statements from time to time to reflect actual results or changes in the company’s expectations, the company disclaims any commitment to do so except as required by law.

Non-GAAP Performance Measures

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


Consolidated Statements of Income

(Dollars in thousands, except share data)

(unaudited)


Three months ended


Year ended


December
31, 2022


September
30, 2022


December
31, 2021


December
31, 2022


December
31, 2021

Interest income:

Loan interest

$        228,878

176,244

112,118

651,205

482,337

Investment interest

34,012

26,889

12,376

91,601

41,498

Total interest income

262,890

203,133

124,494

742,806

523,835

Interest expense on bonds and notes payable and
 
   bank deposits

181,790

126,625

48,294

430,137

176,233

Net interest income

81,100

76,508

76,200

312,669

347,602

Less provision (negative provision) for loan losses

27,801

9,665

(1,578)

46,441

(12,426)

Net interest income after provision for loan losses

53,299

66,843

77,778

266,228

360,028

Other income (expense):

Loan servicing and systems revenue

140,021

134,197

150,402

535,459

486,363

Education technology, services, and payment
   
 processing revenue

98,332

106,894

80,950

408,543

338,234

Solar construction revenue

15,186

9,358

24,543

Other, net

735

2,225

48,497

25,486

78,681

(Loss) gain on sale of loans, net

(2,713)

2,627

2,903

18,715

Impairment expense and provision for beneficial
 
   interests, net

(9,361)

121

(4,137)

(15,523)

(16,360)

Derivative market value adjustments and derivative
 
   settlements, net

13,424

63,262

42,579

264,634

71,446

Total other income (expense)

255,624

318,684

318,291

1,246,045

977,079

Cost of services:

Cost to provide education technology, services, and
 
   payment processing services

39,330

42,676

28,597

148,403

108,660

Cost to provide solar construction services

14,004

5,968

19,971

Total cost of services

53,334

48,644

28,597

168,374

108,660

Operating expenses:

Salaries and benefits

151,568

147,198

143,781

589,579

507,132

Depreciation and amortization

20,099

18,772

17,612

74,077

73,741

Other expenses

50,481

43,858

37,857

170,778

145,469

Total operating expenses

222,148

209,828

199,250

834,434

726,342

Income before income taxes

33,441

127,055

168,222

509,465

502,105

Income tax expense

(5,459)

(26,586)

(39,075)

(113,224)

(115,822)

Net income

27,982

100,469

129,147

396,241

386,283

Net loss attributable to noncontrolling interests

2,791

4,329

3,536

11,106

7,003

Net income attributable to Nelnet, Inc.

$         
30,773

104,798

132,683

407,347

393,286

Earnings per common share:

Net income attributable to Nelnet, Inc. shareholders – basic and
diluted

$             
0.83

2.80

3.46

10.83

10.20

Weighted average common shares outstanding –

 basic and diluted

37,290,293

37,380,493

38,352,942

37,603,033

38,572,801


Condensed Consolidated Balance Sheets

(Dollars in thousands)

(unaudited)


As of


As of


As of


December 31, 2022


September 30, 2022


December 31, 2021

Assets:

Loans and accrued interest receivable, net

$                  
15,243,889

15,876,251

18,335,197

Cash, cash equivalents, and investments

2,230,063

2,126,712

1,714,482

Restricted cash

1,239,470

980,131

1,068,626

Goodwill and intangible assets, net

240,403

242,401

194,121

Other assets

420,219

338,038

365,615

Total assets

$                  
19,374,044

19,563,533

21,678,041

Liabilities:

Bonds and notes payable

$                  
14,637,195

15,042,595

17,631,089

Bank deposits

691,322

580,825

344,315

Other liabilities

845,625

773,754

749,799

Total liabilities

16,174,142

16,397,174

18,725,203

Equity:

Total Nelnet, Inc. shareholders’ equity

3,198,959

3,180,614

2,951,206

Noncontrolling interests

943

(14,255)

1,632

Total equity

3,199,902

3,166,359

2,952,838

Total liabilities and equity

$                  
19,374,044

19,563,533

21,678,041

Non-GAAP Disclosures

(Dollars in thousands, except share data)
(unaudited)

Non-GAAP financial measures disclosed by management are meant to provide additional information and insight relative to business trends to investors and, in certain cases, to present financial information as measured by rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. The company reports this non-GAAP information because the company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.


Net income, excluding derivative market value adjustments


Three months ended December 31,


Year ended December 31,


2022


2021


2022


2021

GAAP net income attributable to Nelnet, Inc.

$              
30,773

132,683

407,347

393,286

Realized and unrealized derivative market value
adjustments
(a)

7,434

(48,359)

(231,691)

(92,813)

Tax effect (b)

(1,784)

11,606

55,606

22,275

Non-GAAP net income attributable to Nelnet, Inc.,
excluding
derivative market value adjustments

$              
36,423

95,930

231,262

322,748

Earnings per share:

GAAP net income attributable to Nelnet, Inc.

$                  
0.83

3.46

10.83

10.20

Realized and unrealized derivative market value
adjustments
(a)

0.20

(1.26)

(6.16)

(2.41)

Tax effect (b)

(0.05)

0.30

1.48

0.58

Non-GAAP net income attributable to Nelnet, Inc.,
excluding
derivative market value adjustments

$                  
0.98

2.50

6.15

8.37

(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 current period to settle with derivative
instrument counterparties the economic effect of the company’s
derivative instruments based on their contractual terms.

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

The company believes these point-in-time estimates of asset and
liability values related to its derivative instruments that are
subject to interest rate fluctuations are subject to volatility
mostly due to timing and market factors beyond the control of
management, and affect the period-to-period comparability of the
results of operations. Accordingly, the company’s management
utilizes operating results excluding these items for
comparability purposes when making decisions regarding the
company’s performance and in presentations with credit rating
agencies, lenders, and investors.

(b)

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


Core loan spread

The following table analyzes the loan spread on 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 “Net interest
income, net of settlements on
derivatives” table on the
following page, divided by the average balance of loans or debt
outstanding.


Three months ended December 31,


2022


2021

Variable loan yield, gross

6.52 %

2.62 %

Consolidation rebate fees

(0.82)

(0.85)

Discount accretion, net of premium and deferred origination costs
amortization (a)

0.06

0.02

Variable loan yield, net

5.76

1.79

Loan cost of funds – interest expense

(4.64)

(1.06)

Loan cost of funds – derivative settlements (b) (c)

(0.01)

(0.02)

Variable loan spread

1.11

0.71

Fixed rate floor income, gross

0.07

0.76

Fixed rate floor income – derivative settlements (b) (d)

0.59

(0.11)

Fixed rate floor income, net of settlements on derivatives

0.66

0.65

Core loan spread

1.77 %

1.36 %

Average balance of AGM’s loans

$     14,764,466

18,063,787

Average balance of AGM’s debt outstanding

14,352,548

17,777,230

(a)

During each of the fourth quarters of 2022 and 2021, the
company changed its estimate of the constant prepayment rate
used to amortize/accrete federally insured loan
premium/discounts for its loans which resulted in a $8.4 million
increase and a $6.2 million decrease, respectively, to interest
income. The impact of these adjustments was excluded from the
table above.

(b)

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

A reconciliation of core loan spread, which includes the impact
of derivative settlements on loan spread, to loan spread without
derivative
settlements follows.


Three months ended December 31,


2022


2021

Core loan spread

1.77 %

1.36 %

Derivative settlements (1:3 basis swaps)

0.01

0.02

Derivative settlements (fixed rate floor income)

(0.59)

0.11

Loan spread

1.19 %

1.49 %

(c)

Derivative settlements consist of net settlements paid related
to the company’s 1:3 basis swaps.

(d)

Derivative settlements consist of net settlements received
(paid) related to the company’s floor income interest rate
swaps.



Net interest income, net of settlements on derivatives

The following table summarizes the components of “net interest
income” and “derivative settlements, net” from the 
AGM segment
statements of income.


Three months ended December 31,


2022


2021

Variable interest income, gross

$            
242,241

119,994

Consolidation rebate fees

(30,243)

(38,566)

Discount accretion, net of premium and deferred origination
costs amortization

10,341

(5,123)

Variable interest income, net

222,339

76,305

Interest on bonds and notes payable

(167,846)

(47,459)

Derivative settlements (basis swaps), net (a)

(448)

(699)

Variable loan interest margin, net of settlements on
derivatives (a)

54,045

28,147

Fixed rate floor income, gross

2,510

34,577

Derivative settlements (interest rate swaps), net (a)

21,306

(5,081)

Fixed rate floor income, net of settlements on derivatives
(a)

23,816

29,496

Core loan interest income (a)

77,861

57,643

Investment interest

9,782

7,871

Intercompany interest

(8,334)

(1,177)

Net interest income (net of settlements on derivatives)
(a)

$              
79,309

64,337

(a)

Core loan interest income and net interest income (net of
settlements on derivatives) are non-GAAP financial measures. For
an explanation of GAAP accounting for derivative settlements and
the reasons why the company reports these non-GAAP measures, see
footnote (b) to the table immediately under the caption “Core
loan spread” above.

A reconciliation of net interest income (net of settlements on
derivatives) to net interest income for the
company’s 
AGM segment
follows.


Three months ended December 31,


2022


2021

Net interest income (net of settlements on derivatives)

$                
79,309

64,337

Derivative settlements (1:3 basis swaps)

448

699

Derivative settlements (fixed rate floor income)

(21,306)

5,081

Net interest income

$                
58,451

70,117


1

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


2

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


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