Nelnet Reports First Quarter 2023 Results

LINCOLN, Neb., May 8, 2023 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of $26.5 million, or $0.71 per share, for the first quarter of 2023, compared with GAAP net income of $186.6 million, or $4.91 per share, for the same period a year ago.

Net income, excluding derivative market value adjustments¹, was $54.9 million, or $1.47 per share, for the first quarter of 2023, compared with $75.9 million, or $1.99 per share, for the same period in 2022.

"The results of the first quarter positions Nelnet for a bright future," said Jeff Noordhoek, chief executive officer of Nelnet. "We believe Nelnet has the financial strength and liquidity to continue investing in our core businesses and asset strategy, allowing us to benefit from turbulence in the market as well as successfully navigate a variety of economic conditions that might lay ahead. In addition, after the quarter, we were excited to be awarded a new, long-term federal student loan servicing contract that will continue our partnership with the Department of Education. With the foundation of the company rooted in our purpose to serve others, beginning with our dedication to helping federal student loan borrowers, we are grateful for the opportunity to continue this important work more than 40 years later."

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. Other business activities and operating segments that are not reportable are combined and included in corporate activities. Corporate activities also includes income earned on the majority of the company's investments.

Asset Generation and Management

The AGM operating segment reported net interest income of $45.5 million during the first quarter of 2023, compared with $72.6 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 $23.3 million during the first quarter of 2023, compared with an expense of $2.8 million for the same period in 2022. Derivative settlements for each applicable period should be evaluated with the company's net interest income. Net interest income net of derivative settlements was $68.8 million in the first quarter of 2023, compared with $69.8 million for the same period in 2022. The decrease in 2023 was due to the expected runoff of the loan portfolio and was partially offset by an increase in core loan spread. The average balance of loans outstanding decreased from $17.2 billion for the first quarter of 2022 to $14.0 billion for the same period in 2023.

Core loan spread², which includes the impact of derivative settlements, increased to 1.57% for the quarter ended March 31, 2023, compared with 1.45% for the same period in 2022. 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 net loss after tax of $0.2 million for the three months ended March 31, 2023, compared with net income after tax of $162.2 million for the same period in 2022.

AGM recognized a provision for loan losses in the first quarter of 2023 of $31.9 million ($24.2 million after tax), compared with a negative provision of $0.9 million ($0.7 million after tax) in the first quarter of 2022. Provision for loan losses in the first quarter of 2023 was impacted by management's expectations of deteriorating economic conditions and loans acquired during the quarter. In addition, in the first quarter of 2023, AGM recognized $37.4 million ($28.4 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 $145.7 million ($110.7 million after tax) for the same period in 2022.

On March 15, 2023, to minimize the company's exposure to market volatility, the company terminated its portfolio of derivatives used to hedge loans earning fixed rate floor income for total proceeds of  $183.2 million, which included $19.1 million related to current period settlements. This will significantly reduce the income statement impact related to derivative settlements and the changes in fair value of derivative instruments in future periods.

Subsequent to the end of the first quarter, in April 2023, the company redeemed certain asset-backed securities (debt) funding Federal Family Education Loan (FFEL) Program loans prior to their legal maturities. The remaining unamortized debt discount associated with these bonds at the time of redemption was written-off, resulting in a $25.9 million ($19.7 million or $0.53 per share after tax) non-cash expense recognized by the company in April 2023.

Nelnet Bank

As of March 31, 2023, Nelnet Bank had a $439.0 million loan portfolio and total deposits, including intercompany deposits, of $869.8 million. Nelnet Bank recognized a net loss after tax for the quarter ended March 31, 2023 of $0.1 million, compared with net income after tax of $0.7 million for the same period in 2022.

Loan Servicing and Systems

Revenue from the Loan Servicing and Systems segment was $139.2 million for the first quarter of 2023, compared with $136.4 million for the same period in 2022.

As of March 31, 2023, the company was servicing $578.6 billion in government-owned, FFEL Program, private education, and consumer loans for 17.3 million borrowers, compared with $556.7 billion in servicing volume for 16.8 million borrowers as of March 31, 2022.

The Loan Servicing and Systems segment reported net income after tax of $19.2 million for the three months ended March 31, 2023, compared with $9.2 million for the same period in 2022. Operating margin improved in 2023 compared with 2022 due to a decrease in operating expenses, primarily salaries and benefits. In January 2023, the company announced a reduction in staff to manage excess staff capacity due to delays in the government's return to repayment program under the CARES Act.

On April 24, 2023, the company received a contract award from the Department of Education (Department) to provide continued servicing capabilities for the Department. The Unified Servicing and Data Solution (USDS) contract will replace the existing legacy Department student loan servicing contracts that were scheduled to expire in December 2023. According to the Department, the legacy servicer contracts will be extended through December 2024 to help facilitate a smooth transition for borrowers. The USDS contract has a five-year base period, with five years of possible extensions.

Education Technology, Services, and Payment Processing

For the first quarter of 2023, revenue from the Education Technology, Services, and Payment Processing operating segment was $133.6 million, an increase from $112.3 million for the same period in 2022. Revenue less direct costs to provide services for the first quarter of 2023 was $85.9 million, compared with $76.7 million for the same period in 2022.

Net income after tax for the Education Technology, Services, and Payment Processing segment was $28.7 million for the three months ended March 31, 2023, compared with $25.2 million for the same period in 2022. Included in net income for the three months ended March 31, 2023 and 2022 was $6.0 million ($4.6 million after tax) and $0.3 million ($0.2 million after tax) of interest income, respectively. The increase in interest income was due to an increase in interest rates in 2023 compared with 2022.

This segment is subject to seasonal fluctuations. Based on the timing of when revenue is recognized and when expenses are incurred, revenue and operating margin are higher in the first quarter compared with the remainder of the year.

Corporate Activities

During the first quarter of 2023, the company recognized a loss of $20.2 million ($15.4 million after tax) on its 45 percent voting membership interests in ALLO Holdings LLC, a holding company for ALLO Communications LLC (ALLO), compared with a loss of $13.1 million ($10.0 million after tax) for the same period in 2022.

In addition, the company recognized net investment losses of $3.3 million ($2.5 million after tax) for the three months ended March 31, 2023 compared with net investment income and gains of $8.5 million ($6.5 million after tax) for the same period in 2022.

Board of Directors Declares Second Quarter Dividend

The Nelnet Board of Directors declared a second quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.26 per share. The dividend will be paid on June 15, 2023, to shareholders of record at the close of business on June 1, 2023.

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," "ensure," "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 related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the company under existing and 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 Federal Direct Loan Program, FFEL Program, private education, and consumer loans; loan portfolio risks such as interest rate basis and repricing risk, the risk of loss of floor income on certain student loans originated under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFEL Program, private education, consumer, and other loans, or investment interests therein, and initiatives to purchase additional FFEL Program, private education, consumer, and other loans, and risks from changes in levels of loan prepayment or default rates; 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 related to a breach of or failure in the company's operational or information systems or infrastructure, or those of third-party vendors, including disclosure of confidential or personal information and/or damage to reputation resulting from cyber-breaches; uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; 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 related to the expected benefits to the company from its continuing investment in ALLO, and risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; 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 and uncertainties associated with climate change; 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; concerns about the downgrade of the U.S. credit rating; risks related to natural disasters, terrorist activities, or international hostilities; and risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the company's businesses.

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.

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.

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.

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.

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SOURCE Nelnet, Inc.