Nelnet Reports Second Quarter 2022 Results

Published: Aug. 8, 2022 at 3:15 PM CDT

LINCOLN, Neb., Aug. 8, 2022 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of $85.1 million, or $2.26 per share, for the second quarter of 2022, compared with GAAP net income of $83.9 million, or $2.16 per share, for the same period a year ago.

Net income, excluding derivative market value adjustments1, was $54.4 million, or $1.44 per share, for the second quarter of 2022, compared with $85.1 million, or $2.20 per share, for the same period in 2021.

"Our strong second quarter results reflect our long-term focus," said Jeff Noordhoek, chief executive officer of Nelnet. "In the quarter, we made several investments for long-term growth and value creation, including product and technology investments to serve our customers well into the future. Our core loan servicing and payment processing businesses increased revenue, added customers, and made investments in product development, which also compressed near-term margins. We will continue to deploy capital to create long-term value in our existing businesses, including investments to support ALLO's expansion, Nelnet Bank, and our solar capabilities with the recent acquisition of GRNE Solar."

Nelnet currently 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 $70.7 million during the second quarter of 2022, compared with $81.3 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 $4.6 million during the second quarter of 2022, compared with an expense of $5.4 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 and derivative settlements decreased to $75.3 million in the second quarter of 2022, compared with $75.9 million for the same period in 2021, due to the expected decrease in the average balance of loans outstanding from $19.0 billion  to $16.4 billion, respectively. This decrease was partially offset by an increase in core loan spread.

Core loan spread2, which includes the impact of derivative settlements, increased to 1.61 percent for the quarter ended June 30, 2022, compared with 1.41 percent for the same period in 2021. Core loan spread was positively impacted for the three months ended June 30, 2022 by an increase in interest rates during the quarter. 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.

AGM recognized a provision for loan losses in the second quarter of 2022 of $8.8 million ($6.7 million after tax), compared with $0.3 million ($0.2 million after tax) in the second quarter of 2021. In addition, in the second quarter of 2022, AGM recognized $40.4 million ($30.7 million after tax) in income related to changes in the fair value of derivative instruments that do not qualify for hedge accounting, and in the second quarter of 2021 recognized a gain of $15.3 million (or $11.6 million after tax, or $0.30 per share) from the sale of a portfolio of consumer loans.

Net income after tax for the AGM segment was $75.5 million for the three months ended June 30, 2022, compared with $60.0 million for the same period in 2021.

Nelnet Bank

As of June 30, 2022, Nelnet Bank had a $423.6 million loan portfolio, consisting of $346.1 million of private education loans and $77.4 million of Federal Family Education Loan (FFEL) Program loans, and had $751.3 million of deposits. Nelnet Bank's net income after tax for the quarter ended June 30, 2022 was $0.4 million, as compared to a net loss of $0.2 million for the same period in 2021.

Loan Servicing and Systems

Revenue from the Loan Servicing and Systems segment increased to $124.9 million for the second quarter of 2022, compared with $112.1 million for the same period in 2021, due primarily to an increase in the number of borrowers serviced under the company's contracts with the Department of Education (Department).

As of June 30, 2022, the company was servicing $589.5 billion in government-owned, FFEL Program, private education, and consumer loans for 17.4 million borrowers, as compared to $506.6 billion in servicing volume for 15.5 million borrowers as of June 30, 2021.

The Loan Servicing and Systems segment reported net income after tax of $10.3 million for the three months ended June 30, 2022, compared with $11.8 million for the same period in 2021. Operating margin decreased in the second quarter of 2022 as compared to the same period in 2021 due to costs incurred to prepare for the expected May 1, 2022 expiration of the CARES Act benefits on government-owned student loans, which was extended to August 31, 2022.

Education Technology, Services, and Payment Processing

For the second quarter of 2022, revenue from the Education Technology, Services, and Payment Processing operating segment was $91.0 million, an increase from $76.7 million for the same period in 2021. Revenue less direct costs to provide services for the second quarter of 2022 was $60.2 million, as compared to $55.0 million for the same period in 2021.

Net income after tax for the Education Technology, Services, and Payment Processing segment was $11.2 million for the three months ended June 30, 2022, compared with $13.1 million for the same period in 2021. Operating margin decreased for the second quarter of 2022 as compared to the same period in 2021 due to increased expenses to support customer growth and investments in the development of new technologies.

Share Repurchases

During the six months ended June 30, 2022, the company repurchased a total of 938,310 Class A common shares for $78.9 million ($84.12 per share), including 558,257 shares repurchased during the second quarter of 2022 for $46.0 million ($82.46 per share).

Board of Directors Declares Third Quarter Dividend

The Nelnet Board of Directors declared a third quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.24 per share. The dividend will be paid on September 15, 2022, to shareholders of record at the close of business on September 1, 2022.

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 severity, magnitude, and duration of the COVID-19 pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on various activities intended to combat the pandemic, and volatility in market conditions resulting from the 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, which current contracts accounted for 29 percent of the company's revenue in 2021; risks to the company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the pending and uncertain nature of the Department's procurement process, risks that the company may not be successful in obtaining any of such potential new contracts, 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 repayment 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, such as risks from the recent increases in interest rates resulting from inflationary pressures and the transition from LIBOR to an alternative reference rate, and changes in the securitization and other financing markets for loans; 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, such as changes resulting from the CARES Act and the expected decline over time in FFEL Program loan interest income due to the discontinuation of new FFEL Program loan originations in 2010, and government initiatives or proposals to consolidate FFEL Program loans to Federal Direct Loan Program loans, otherwise encourage or allow FFEL Program loans to be refinanced with Federal Direct Loan Program loans, and/or create additional loan forgiveness or broad debt cancellation programs; risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; 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; and cybersecurity risks, including disruptions to systems, disclosure of confidential 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, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the second quarter ended June 30, 2022. 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


Six months ended


June 30,
2022


March 31,
2022


June 30,
2021


June 30,
2022


June 30,
2021

Interest income:










Loan interest

$       134,706


111,377


122,005


246,083


246,123

Investment interest

16,881


13,819


11,578


30,700


16,563

Total interest income

151,587


125,196


133,583


276,783


262,686

Interest expense on bonds and notes payable and bank
deposits

73,642


48,079


49,991


121,721


77,764

Net interest income

77,945


77,117


83,592


155,062


184,922

Less provision (negative provision) for loan losses

9,409


(435)


374


8,974


(16,674)

Net interest income after provision for loan losses

68,536


77,552


83,218


146,088


201,596

Other income/expense:










Loan servicing and systems revenue

124,873


136,368


112,094


261,241


223,611

Education technology, services, and payment processing
revenue

91,031


112,286


76,702


203,317


171,960

Other

12,647


9,877


22,921


22,524


18,317

Gain on sale of loans


2,989


15,271


2,989


15,271

Impairment expense and provision for beneficial interests,
 net

(6,284)



(500)


(6,284)


1,936

Derivative market value adjustments and derivative
 settlements, net

45,024


142,925


(6,989)


187,949


27,516

Total other income/expense

267,291


404,445


219,499


671,736


458,611

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

30,852


35,545


21,676


66,397


48,728

Operating expenses:










Salaries and benefits

141,398


149,414


118,968


290,813


234,759

Depreciation and amortization

18,250


16,956


20,236


35,206


40,419

Other expenses

36,940


39,499


32,587


76,439


69,286

Total operating expenses

196,588


205,869


171,791


402,458


344,464

Income before income taxes

108,387


240,583


109,250


348,969


267,015

Income tax expense

(25,483)


(55,697)


(26,237)


(81,180)


(61,098)

Net income

82,904


184,886


83,013


267,789


205,917

Net loss attributable to noncontrolling interests

2,225


1,761


854


3,987


1,548

Net income attributable to Nelnet, Inc.

$         85,129


186,647


83,867


271,776


207,465

Earnings per common share:










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

$             2.26


4.91


2.16


7.18


5.36

Weighted average common shares outstanding - basic
 and diluted

37,710,214


38,041,834


38,741,486


37,875,108


38,672,902

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(unaudited)



As of


As of


As of


June 30, 2022


December 31, 2021


June 30, 2021

Assets:






Loans and accrued interest receivable, net

$                   16,916,344


18,335,197


20,187,670

Cash, cash equivalents, and investments

2,116,949


1,714,482


1,480,946

Restricted cash

1,045,543


1,068,626


864,384

Goodwill and intangible assets, net

219,203


194,121


200,556

Other assets

325,974


365,615


295,307

Total assets

$                   20,624,013


21,678,041


23,028,863

Liabilities:






Bonds and notes payable

$                   16,115,269


17,631,089


19,381,835

Bank deposits

588,474


344,315


202,841

Other liabilities

829,125


749,799


615,569

Total liabilities

17,532,868


18,725,203


20,200,245

Equity:






Total Nelnet, Inc. shareholders' equity

3,097,382


2,951,206


2,833,800

Noncontrolling interests

(6,237)


1,632


(5,182)

Total equity

3,091,145


2,952,838


2,828,618

Total liabilities and equity

$                   20,624,013


21,678,041


23,028,863

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 June 30,


2022


2021

GAAP net income attributable to Nelnet, Inc.

$                 85,129


83,867

Realized and unrealized derivative market value adjustments (a)

(40,401)


1,615

Tax effect (b)

9,696


(388)

Net income attributable to Nelnet, Inc., excluding derivative market value adjustments

$                 54,424


85,094





Earnings per share:




GAAP net income attributable to Nelnet, Inc.

$                     2.26


2.16

Realized and unrealized derivative market value adjustments (a)

(1.07)


0.04

Tax effect (b)

0.25


Net income attributable to Nelnet, Inc., excluding derivative market value adjustments

$                     1.44


2.20

(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 June 30,


2022


2021

Variable loan yield, gross

3.59 %


2.63 %

Consolidation rebate fees

(0.85)


(0.84)

Discount accretion, net of premium and deferred origination costs amortization

0.03


0.01

Variable loan yield, net

2.77


1.80

Loan cost of funds - interest expense

(1.73)


(1.04)

Loan cost of funds - derivative settlements (a) (b)

0.02


(0.01)

Variable loan spread

1.06


0.75

Fixed rate floor income, gross

0.46


0.78

Fixed rate floor income - derivative settlements (a) (c)

0.09


(0.12)

Fixed rate floor income, net of settlements on derivatives

0.55


0.66

Core loan spread

1.61 %


1.41 %





Average balance of AGM's loans

$      16,437,861


18,958,042

Average balance of AGM's debt outstanding

15,923,648


18,656,465


(a)

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 June 30,


2022


2021

Core loan spread

1.61 %


1.41 %

Derivative settlements (1:3 basis swaps)

(0.02)


0.01

Derivative settlements (fixed rate floor income)

(0.09)


0.12

Loan spread

1.50 %


1.54 %


(b)

Derivative settlements consist of net settlements received (paid) related to the company's 1:3 basis swaps.


(c)

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 June 30,


2022


2021

Variable interest income, gross

$              146,911


124,267

Consolidation rebate fees

(34,952)


(40,250)

Discount accretion, net of premium and deferred origination costs amortization

1,474


427

Variable interest income, net

113,433


84,444

Interest on bonds and notes payable

(68,616)


(48,542)

Derivative settlements (basis swaps), net (a)

931


(221)

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

45,748


35,681

Fixed rate floor income, gross

18,292


36,639

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

3,692


(5,153)

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

21,984


31,486

Core loan interest income (a)

67,732


67,167

Investment interest

8,671


8,882

Intercompany interest

(1,092)


(128)

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

$                75,311


75,921


(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 (a) 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 June 30,


2022


2021

Net interest income (net of settlements on derivatives)

$                75,311


75,921

Derivative settlements (1:3 basis swaps)

(931)


221

Derivative settlements (fixed rate floor income)

(3,692)


5,153

Net interest income

$                70,688


81,295

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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