8-K
NELNET INC (NNI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 7, 2022
NELNET, INC.
(Exact name of registrant as specified in its charter)
| Nebraska | 001-31924 | 84-0748903 |
|---|---|---|
| (State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
| 121 South 13th Street, Suite 100 | ||
| --- | --- | --- |
| Lincoln, | Nebraska | 68508 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code (402) 458-2370
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
|---|---|---|
| Class A Common Stock, Par Value $0.01 per Share | NNI | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition.
On November 7, 2022, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended September 30, 2022. A copy of the press release is furnished as Exhibit 99.1 to this report. In addition, a copy of the supplemental financial information for the quarter ended September 30, 2022, which was made available on the Company's website at www.nelnetinvestors.com on November 7, 2022 in connection with the press release, is furnished as Exhibit 99.2 to this report.
The above information and Exhibits 99.1 and 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall such information and Exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. In addition, information on the Company's website is not incorporated by reference into this report and should not be considered part of this report.
Certain statements contained in the exhibits furnished with this report may be considered forward looking in nature and are subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual results may vary materially from those anticipated, estimated, or expected. Among the key risks and uncertainties that may have a direct bearing on the Company's future operating results, performance, or financial condition expressed or implied by the forward-looking statements are the matters discussed in the Risk Factors sections of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022 and the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2022 filed with the SEC on November 7, 2022. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits. The following exhibits are furnished as part of this report:
| Exhibit<br><br>No. | Description |
|---|---|
| 99.1 | Press Release dated November 7, 2022 - "Nelnet Reports Third Quarter 2022 Results" |
| 99.2 | Supplemental Financial Information for the Quarter Ended September 30, 2022 |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and included as Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: November 7, 2022
NELNET, INC.
By: /s/ JAMES D. KRUGER
Name: James D. Kruger
Title: Chief Financial Officer
Document
Nelnet Reports Third Quarter 2022 Results
LINCOLN, Neb., November 7, 2022 - Nelnet (NYSE: NNI) today reported GAAP net income of $104.8 million, or $2.80 per share, for the third quarter of 2022, compared with GAAP net income of $53.1 million, or $1.38 per share, for the same period a year ago.
Net income, excluding derivative market value adjustments1, was $64.5 million, or $1.73 per share, for the third quarter of 2022, compared with $47.6 million, or $1.23 per share, for the same period in 2021.
“During the third quarter, each of our core businesses performed at a high level and delivered strong results,” said Jeff Noordhoek, chief executive officer of Nelnet. “Across Nelnet, our purpose is to serve. While there is a lot of activity and attention on government-owned student loans, our priority is to implement the guidance issued by the Department of Education to the best of our ability and provide our federal student loan customers with exceptional service throughout their loan experience, including debt relief and resumption of payments.”
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 $62.9 million during the third quarter of 2022, compared with $83.1 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 $10.3 million during the third quarter of 2022, compared with an expense of $5.9 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 decreased to $73.2 million in the third quarter of 2022, compared with $77.2 million for the same period in 2021, due to the expected decrease in the average balance of loans outstanding from $19.1 billion to $15.5 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 1.58 percent for the quarter ended September 30, 2022, compared with 1.42 percent for the same period in 2021. Core loan spread was positively impacted for the three months ended September 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 third quarter of 2022 of $9.2 million ($7.0 million after tax), compared with $5.9 million ($4.5 million after tax) in the third quarter of 2021. In addition, in the third quarter of 2022, AGM recognized $53.0 million ($40.3 million after tax) in income related to changes in the fair value of derivative instruments that do not qualify for hedge accounting, compared with income of $7.3 million ($5.5 million after tax) for the same period in 2021.
Net income after tax for the AGM segment was $85.0 million for the three months ended September 30, 2022, compared with $45.7 million for the same period in 2021.
Nelnet Bank
As of September 30, 2022, Nelnet Bank had a $429.5 million loan portfolio, consisting of $356.6 million of private education loans and $72.9 million of Federal Family Education Loan (FFEL) Program loans, and had $751.4 million of deposits. Nelnet Bank's net income after tax for the quarter ended September 30, 2022 was $0.8 million, as compared to $0.6 million for the same period in 2021.
Loan Servicing and Systems
Revenue from the Loan Servicing and Systems segment increased to $134.2 million for the third quarter of 2022, compared with $112.4 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).
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 and the related net interest income net of derivative settlements are non-GAAP measures. 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.
As of September 30, 2022, the company was servicing $590.4 billion in government-owned, FFEL Program, private education, and consumer loans for 17.5 million borrowers, as compared to $513.5 billion in servicing volume for 15.8 million borrowers as of September 30, 2021.
The Loan Servicing and Systems segment reported net income after tax of $16.7 million for the three months ended September 30, 2022, compared with a net loss of $2.3 million for the same period in 2021. During the third quarter of 2021, the company recognized a $13.2 million ($10.1 million after tax) non-cash impairment charge on certain segment-owned buildings as employees continued to work remotely.
Education Technology, Services, and Payment Processing
For the third quarter of 2022, revenue from the Education Technology, Services, and Payment Processing operating segment was $106.9 million, an increase from $85.3 million for the same period in 2021. Revenue less direct costs to provide services for the third quarter of 2022 was $64.2 million, as compared to $54.0 million for the same period in 2021.
Net income after tax for the Education Technology, Services, and Payment Processing segment was $14.1 million for the three months ended September 30, 2022, compared with $10.6 million for the same period in 2021. Included in net income for the three months ended September 30, 2022 and 2021 was $3.7 million and $0.3 million 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.
Share Repurchases
During the nine months ended September 30, 2022, the company repurchased a total of 1,108,170 Class A common shares for $93.2 million ($84.12 per share), including 169,860 shares repurchased during the third quarter of 2022 for $14.3 million ($84.14 per share).
Board of Directors Declares Fourth Quarter Dividend
The Nelnet Board of Directors declared a fourth 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 December 15, 2022, to shareholders of record at the close of business on December 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 duration, ultimate severity, and continuing impacts 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 Biden-Harris Administration's student debt relief plan announced on August 24, 2022 that may significantly decrease the number of borrowers serviced and revenue earned by the company under such contracts; 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 third quarter ended September 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 | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| Interest income: | ||||||
| Loan interest | $ | 176,244 | 134,706 | 124,096 | 422,327 | 370,219 |
| Investment interest | 26,889 | 16,881 | 12,558 | 57,589 | 29,122 | |
| Total interest income | 203,133 | 151,587 | 136,654 | 479,916 | 399,341 | |
| Interest expense on bonds and notes payable and bank deposits | 126,625 | 73,642 | 50,176 | 248,347 | 127,939 | |
| Net interest income | 76,508 | 77,945 | 86,478 | 231,569 | 271,402 | |
| Less provision (negative provision) for loan losses | 9,665 | 9,409 | 5,827 | 18,640 | (10,847) | |
| Net interest income after provision for loan losses | 66,843 | 68,536 | 80,651 | 212,929 | 282,249 | |
| Other income/expense: | ||||||
| Loan servicing and systems revenue | 134,197 | 124,873 | 112,351 | 395,438 | 335,961 | |
| Education technology, services, and payment processing revenue | 106,894 | 91,031 | 85,324 | 310,211 | 257,284 | |
| Solar construction revenue | 9,358 | — | — | 9,358 | — | |
| Other | 2,225 | 12,647 | 11,867 | 24,750 | 30,183 | |
| Gain on sale of loans | 2,627 | — | 3,444 | 5,616 | 18,715 | |
| Impairment expense and provision for beneficial interests, net | 121 | (6,284) | (14,159) | (6,163) | (12,223) | |
| Derivative market value adjustments and derivative settlements, net | 63,262 | 45,024 | 1,351 | 251,210 | 28,868 | |
| Total other income/expense | 318,684 | 267,291 | 200,178 | 990,420 | 658,788 | |
| Cost of services: | ||||||
| Cost to provide education technology, services, and payment processing services | 42,676 | 30,852 | 31,335 | 109,073 | 80,063 | |
| Cost to provide solar construction services | 5,968 | — | — | 5,968 | — | |
| Total cost of services | 48,644 | 30,852 | 31,335 | 115,041 | 80,063 | |
| Operating expenses: | ||||||
| Salaries and benefits | 147,198 | 141,398 | 128,592 | 438,010 | 363,351 | |
| Depreciation and amortization | 18,772 | 18,250 | 15,710 | 53,978 | 56,129 | |
| Other expenses | 43,858 | 36,940 | 38,324 | 120,297 | 107,611 | |
| Total operating expenses | 209,828 | 196,588 | 182,626 | 612,285 | 527,091 | |
| Income before income taxes | 127,055 | 108,387 | 66,868 | 476,023 | 333,883 | |
| Income tax expense | (26,586) | (25,483) | (15,649) | (107,765) | (76,747) | |
| Net income | 100,469 | 82,904 | 51,219 | 368,258 | 257,136 | |
| Net loss attributable to noncontrolling interests | 4,329 | 2,225 | 1,919 | 8,315 | 3,467 | |
| Net income attributable to Nelnet, Inc. | $ | 104,798 | 85,129 | 53,138 | 376,573 | 260,603 |
| Earnings per common share: | ||||||
| Net income attributable to Nelnet, Inc. shareholders - basic and diluted | $ | 2.80 | 2.26 | 1.38 | 9.99 | 6.74 |
| Weighted average common shares outstanding - basic and diluted | 37,380,493 | 37,710,214 | 38,595,721 | 37,708,425 | 38,646,892 |
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
| As of | As of | As of | ||
|---|---|---|---|---|
| September 30, 2022 | December 31, 2021 | September 30, 2021 | ||
| Assets: | ||||
| Loans and accrued interest receivable, net | $ | 15,876,251 | 18,335,197 | 19,304,203 |
| Cash, cash equivalents, and investments | 2,126,712 | 1,714,482 | 1,566,849 | |
| Restricted cash | 980,131 | 1,068,626 | 1,059,142 | |
| Goodwill and intangible assets, net | 242,401 | 194,121 | 197,268 | |
| Other assets | 338,038 | 365,615 | 275,277 | |
| Total assets | $ | 19,563,533 | 21,678,041 | 22,402,739 |
| Liabilities: | ||||
| Bonds and notes payable | $ | 15,042,595 | 17,631,089 | 18,610,748 |
| Bank deposits | 580,825 | 344,315 | 200,651 | |
| Other liabilities | 773,754 | 749,799 | 734,377 | |
| Total liabilities | 16,397,174 | 18,725,203 | 19,545,776 | |
| Equity: | ||||
| Total Nelnet, Inc. shareholders' equity | 3,180,614 | 2,951,206 | 2,859,254 | |
| Noncontrolling interests | (14,255) | 1,632 | (2,291) | |
| Total equity | 3,166,359 | 2,952,838 | 2,856,963 | |
| Total liabilities and equity | $ | 19,563,533 | 21,678,041 | 22,402,739 |
Contacts:
Media, Ben Kiser, 402.458.3024, or Investors, Phil Morgan, 402.458.3038, both of Nelnet, Inc.
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 September 30, | |||
|---|---|---|---|
| 2022 | 2021 | ||
| GAAP net income attributable to Nelnet, Inc. | $ | 104,798 | 53,138 |
| Realized and unrealized derivative market value adjustments (a) | (52,991) | (7,260) | |
| Tax effect (b) | 12,718 | 1,742 | |
| Net income attributable to Nelnet, Inc., excluding derivative market value adjustments | $ | 64,525 | 47,620 |
| Earnings per share: | |||
| GAAP net income attributable to Nelnet, Inc. | $ | 2.80 | 1.38 |
| Realized and unrealized derivative market value adjustments (a) | (1.42) | (0.19) | |
| Tax effect (b) | 0.35 | 0.04 | |
| Net income attributable to Nelnet, Inc., excluding derivative market value adjustments | $ | 1.73 | 1.23 |
(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 September 30, | |||||
|---|---|---|---|---|---|
| 2022 | 2021 | ||||
| Variable loan yield, gross | 5.05 | % | 2.61 | % | |
| Consolidation rebate fees | (0.84) | (0.85) | |||
| Discount accretion, net of premium and deferred origination costs amortization | 0.02 | 0.03 | |||
| Variable loan yield, net | 4.23 | 1.79 | |||
| Loan cost of funds - interest expense (a) | (3.11) | (0.99) | |||
| Loan cost of funds - derivative settlements (b) (c) | (0.03) | (0.02) | |||
| Variable loan spread | 1.09 | 0.78 | |||
| Fixed rate floor income, gross | 0.19 | 0.75 | |||
| Fixed rate floor income - derivative settlements (b) (d) | 0.30 | (0.11) | |||
| Fixed rate floor income, net of settlements on derivatives | 0.49 | 0.64 | |||
| Core loan spread | 1.58 | % | 1.42 | % | |
| Average balance of AGM's loans | $ | 15,466,505 | 19,084,320 | ||
| Average balance of AGM's debt outstanding | 15,060,823 | 18,863,730 |
(a) In the third quarter of 2021, the Company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of $1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense 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 September 30, | ||||
|---|---|---|---|---|
| 2022 | 2021 | |||
| Core loan spread | 1.58 | % | 1.42 | % |
| Derivative settlements (1:3 basis swaps) | 0.03 | 0.02 | ||
| Derivative settlements (fixed rate floor income) | (0.30) | 0.11 | ||
| Loan spread | 1.31 | % | 1.55 | % |
(c) Derivative settlements consist of net settlements received (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 September 30, | |||
|---|---|---|---|
| 2022 | 2021 | ||
| Variable interest income, gross | $ | 196,910 | 126,270 |
| Consolidation rebate fees | (32,612) | (40,340) | |
| Discount accretion, net of premium and deferred origination costs amortization | 737 | 1,230 | |
| Variable interest income, net | 165,035 | 87,160 | |
| Interest on bonds and notes payable | (118,135) | (48,549) | |
| Derivative settlements (basis swaps), net (a) | (1,085) | (700) | |
| Variable loan interest margin, net of settlements on derivatives (a) | 45,815 | 37,911 | |
| Fixed rate floor income, gross | 7,585 | 35,850 | |
| Derivative settlements (interest rate swaps), net (a) | 11,356 | (5,209) | |
| Fixed rate floor income, net of settlements on derivatives (a) | 18,941 | 30,641 | |
| Core loan interest income (a) | 64,756 | 68,552 | |
| Investment interest | 10,312 | 8,771 | |
| Intercompany interest | (1,874) | (113) | |
| Net interest income (net of settlements on derivatives) (a) | $ | 73,194 | 77,210 |
(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 September 30, | |||
|---|---|---|---|
| 2022 | 2021 | ||
| Net interest income (net of settlements on derivatives) | $ | 73,194 | 77,210 |
| Derivative settlements (1:3 basis swaps) | 1,085 | 700 | |
| Derivative settlements (fixed rate floor income) | (11,356) | 5,209 | |
| Net interest income | $ | 62,923 | 83,119 |
Document
For Release: November 7, 2022
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the third quarter 2022
(All dollars are in thousands, except per share amounts, unless otherwise noted)
The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for third quarter 2022 earnings, dated November 7, 2022, and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the "Q3 2022 10-Q Quarterly Report").
Forward-looking and cautionary statements
This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. 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.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements 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. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report"), the "Risk Factors" section of the Company's Q3 2022 10-Q Quarterly Report, and subsequent reports filed by the Company with the SEC and include such risks and uncertainties as:
•risks and uncertainties related to the duration, ultimate severity, and continuing impacts of the coronavirus disease 2019 (“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, including interest rates, the value of equities, and other financial assets;
•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 U.S. Department of Education (the "Department"), which current contracts accounted for 29 percent of the Company's revenue in 2021, risks to the Company related to the Biden-Harris Administration's student debt relief plan announced on August 24, 2022 that may significantly decrease the number of borrowers serviced and revenue earned by the Company under such contracts, 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 Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), private education, and consumer loans;
•loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, 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 FFELP, private education, consumer, and other loans, or investment interests therein, and initiatives to purchase additional FFELP, 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, 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, including adverse changes resulting from recent market volatility resulting from rising interest rates and other economic pressures and from unanticipated repayment trends on student loans in the Company's securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student 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 Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income due to the discontinuation of new FFELP loan originations in 2010 and government initiatives or proposals to consolidate existing FFELP loans to Federal Direct Loan Program loans, otherwise encourage or allow FFELP loans to be refinanced with Federal Direct Loan Program loans, and/or create additional loan forgiveness or broad debt cancellation programs;
•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 cybersecurity risks related to a disclosure of confidential loan borrower and other customer information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's 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 Holdings, LLC (referred to collectively with its subsidiary ALLO Communications LLC as "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, including extreme weather events and related natural disasters, which could result in increased loan portfolio credit risks and other asset and operational risks, as well as risks and uncertainties associated with efforts to address climate change; and
•risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.
All forward-looking statements contained in this supplement are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law.
Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| Interest income: | ||||||
| Loan interest | $ | 176,244 | 134,706 | 124,096 | 422,327 | 370,219 |
| Investment interest | 26,889 | 16,881 | 12,558 | 57,589 | 29,122 | |
| Total interest income | 203,133 | 151,587 | 136,654 | 479,916 | 399,341 | |
| Interest expense on bonds and notes payable and bank deposits | 126,625 | 73,642 | 50,176 | 248,347 | 127,939 | |
| Net interest income | 76,508 | 77,945 | 86,478 | 231,569 | 271,402 | |
| Less provision (negative provision) for loan losses | 9,665 | 9,409 | 5,827 | 18,640 | (10,847) | |
| Net interest income after provision for loan losses | 66,843 | 68,536 | 80,651 | 212,929 | 282,249 | |
| Other income/expense: | ||||||
| Loan servicing and systems revenue | 134,197 | 124,873 | 112,351 | 395,438 | 335,961 | |
| Education technology, services, and payment processing revenue | 106,894 | 91,031 | 85,324 | 310,211 | 257,284 | |
| Solar construction revenue | 9,358 | — | — | 9,358 | — | |
| Other | 2,225 | 12,647 | 11,867 | 24,750 | 30,183 | |
| Gain on sale of loans | 2,627 | — | 3,444 | 5,616 | 18,715 | |
| Impairment expense and provision for beneficial interests, net | 121 | (6,284) | (14,159) | (6,163) | (12,223) | |
| Derivative settlements, net | 10,271 | 4,623 | (5,909) | 12,085 | (15,587) | |
| Derivative market value adjustments, net | 52,991 | 40,401 | 7,260 | 239,125 | 44,455 | |
| Total other income/expense | 318,684 | 267,291 | 200,178 | 990,420 | 658,788 | |
| Cost of services: | ||||||
| Cost to provide education technology, services, and payment processing services | 42,676 | 30,852 | 31,335 | 109,073 | 80,063 | |
| Cost to provide solar construction services | 5,968 | — | — | 5,968 | — | |
| Total cost of services | 48,644 | 30,852 | 31,335 | 115,041 | 80,063 | |
| Operating expenses: | ||||||
| Salaries and benefits | 147,198 | 141,398 | 128,592 | 438,010 | 363,351 | |
| Depreciation and amortization | 18,772 | 18,250 | 15,710 | 53,978 | 56,129 | |
| Other expenses | 43,858 | 36,940 | 38,324 | 120,297 | 107,611 | |
| Total operating expenses | 209,828 | 196,588 | 182,626 | 612,285 | 527,091 | |
| Income before income taxes | 127,055 | 108,387 | 66,868 | 476,023 | 333,883 | |
| Income tax expense | (26,586) | (25,483) | (15,649) | (107,765) | (76,747) | |
| Net income | 100,469 | 82,904 | 51,219 | 368,258 | 257,136 | |
| Net loss attributable to noncontrolling interests | 4,329 | 2,225 | 1,919 | 8,315 | 3,467 | |
| Net income attributable to Nelnet, Inc. | $ | 104,798 | 85,129 | 53,138 | 376,573 | 260,603 |
| Earnings per common share: | ||||||
| Net income attributable to Nelnet, Inc. shareholders - basic and diluted | $ | 2.80 | 2.26 | 1.38 | 9.99 | 6.74 |
| Weighted average common shares outstanding - basic and diluted | 37,380,493 | 37,710,214 | 38,595,721 | 37,708,425 | 38,646,892 |
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
| As of | As of | As of | ||
|---|---|---|---|---|
| September 30, 2022 | December 31, 2021 | September 30, 2021 | ||
| Assets: | ||||
| Loans and accrued interest receivable, net | $ | 15,876,251 | 18,335,197 | 19,304,203 |
| Cash, cash equivalents, and investments | 2,126,712 | 1,714,482 | 1,566,849 | |
| Restricted cash | 980,131 | 1,068,626 | 1,059,142 | |
| Goodwill and intangible assets, net | 242,401 | 194,121 | 197,268 | |
| Other assets | 338,038 | 365,615 | 275,277 | |
| Total assets | $ | 19,563,533 | 21,678,041 | 22,402,739 |
| Liabilities: | ||||
| Bonds and notes payable | $ | 15,042,595 | 17,631,089 | 18,610,748 |
| Bank deposits | 580,825 | 344,315 | 200,651 | |
| Other liabilities | 773,754 | 749,799 | 734,377 | |
| Total liabilities | 16,397,174 | 18,725,203 | 19,545,776 | |
| Equity: | ||||
| Total Nelnet, Inc. shareholders' equity | 3,180,614 | 2,951,206 | 2,859,254 | |
| Noncontrolling interests | (14,255) | 1,632 | (2,291) | |
| Total equity | 3,166,359 | 2,952,838 | 2,856,963 | |
| Total liabilities and equity | $ | 19,563,533 | 21,678,041 | 22,402,739 |
Overview
The Company is a diverse, innovative company with a purpose to serve others and a vision to make dreams possible. The largest operating businesses engage in loan servicing and education technology, services, and payment processing, and the Company also has a significant investment in communications. 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 investments to further diversify both within and outside of its historical core education-related businesses including, but not limited to, investments in early-stage and emerging growth companies, real estate, and renewable energy (solar). The Company is also actively expanding its private education, consumer, and other loan portfolios, and in November 2020 launched Nelnet Bank.
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 net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| GAAP net income attributable to Nelnet, Inc. | $ | 104,798 | 85,129 | 53,138 | 376,573 | 260,603 |
| Realized and unrealized derivative market value adjustments | (52,991) | (40,401) | (7,260) | (239,125) | (44,455) | |
| Tax effect (a) | 12,718 | 9,696 | 1,742 | 57,390 | 10,669 | |
| Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) | $ | 64,525 | 54,424 | 47,620 | 194,838 | 226,817 |
| Earnings per share: | ||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 2.80 | 2.26 | 1.38 | 9.99 | 6.74 |
| Realized and unrealized derivative market value adjustments | (1.42) | (1.07) | (0.19) | (6.34) | (1.15) | |
| Tax effect (a) | 0.35 | 0.25 | 0.04 | 1.52 | 0.28 | |
| Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) | $ | 1.73 | 1.44 | 1.23 | 5.17 | 5.87 |
(a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.
(b) "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. 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. 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.
Operating Segments
The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in the 2021 Annual Report. They include:
•Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Services ("NDS")
•Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS")
•Asset Generation and Management ("AGM")
•Nelnet Bank
The Company earns fee-based revenue through its NDS and NBS operating segments. The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its AGM 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 by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow.
On November 2, 2020, the Company obtained final approval for federal deposit insurance from the Federal Deposit Insurance Corporation ("FDIC") and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah.
Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions. On July 1, 2022, the Company purchased 80 percent of the ownership interests of GRNE Solar. The operating results from this acquisition are also included in Corporate.
The information below provides the operating results (income (loss) before income taxes) for each reportable operating segment and Corporate and Other Activities for the three and nine months ended September 30, 2022 and 2021.
| Three months ended September 30, | ||||
|---|---|---|---|---|
| 2022 | 2021 | Certain Items Impacting Comparability<br>(All dollar amounts below are pre-tax) | ||
| NDS | $ | 21,914 | (3,042) | •The recognition of an impairment charge of $13.2 million in the third quarter of 2021 related primarily to building and building improvement assets due to an evaluation of the use of office space as a large number of employees continued to work from home as a result of the COVID-19 pandemic |
| NBS | 18,655 | 13,992 | •The recognition of $3.7 million of interest income in the third quarter of 2022 as compared to $0.3 million in the same period of 2021 due to higher interest rates | |
| AGM | 111,872 | 60,085 | •A net gain of $53.0 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the third quarter of 2022 as compared to a net gain of $7.3 million for the same period in 2021<br><br>•An increase of $6.2 million in net interest income due to an increase in FFELP core loan spread in 2022 as compared to 2021<br><br>•A decrease of $14.3 million in net interest income due to the decrease in the average balance of FFELP loans in the third quarter of 2022 as compared to 2021<br><br>•The recognition of a $6.3 million investment loss during the third quarter of 2021 | |
| Nelnet Bank | 1,055 | 836 | ||
| Corporate | (26,442) | (5,003) | •The recognition of a net loss of $17.6 million in the third quarter of 2022 related to the Company’s investment in ALLO, as compared to a net loss of $10.5 million for the same period in 2021<br><br>•Investment income of $10.5 million in the third quarter of 2022 as compared to $21.9 million for the same period in 2021. In 2022, the Company recognized $5.9 million in gains from the sale of real estate investments, as compared to $11.2 million in 2021. In addition, the Company recognized $5.8 million in net realized and unrealized gains from marketable securities in 2021. | |
| Income before income taxes | 127,055 | 66,868 | ||
| Income tax expense | (26,586) | (15,649) | ||
| Net loss attributable to noncontrolling interests | 4,329 | 1,919 | ||
| Net income | $ | 104,798 | 53,138 | |
| Nine months ended September 30, | ||||
| --- | --- | --- | --- | --- |
| 2022 | 2021 | Certain Items Impacting Comparability<br>(All dollar amounts below are pre-tax) | ||
| NDS | $ | 47,494 | 28,554 | •The recognition of an impairment charge of $13.2 million in the third quarter of 2021 related primarily to building and building improvement assets due to an evaluation of the use of office space as a large number of employees continued to work from home as a result of the COVID-19 pandemic |
| NBS | 66,454 | 62,199 | •The recognition of $4.9 million of interest income in the first three quarters of 2022 as compared to $0.8 million in the same period of 2021 due to higher interest rates | |
| AGM | 424,647 | 280,613 | •A net gain of $239.1 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the first three quarters of 2022 as compared to a net gain of $44.5 million for the same period in 2021<br><br>•A decrease of $23.8 million in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid<br><br>•The recognition of provision for loan losses of $17.2 million in the first three quarters of 2022 as compared to negative provision of $11.2 million for the same period in 2021<br><br>•The recognition of $18.7 million of gains from the sale of loans during the first three quarters of 2021 compared to $5.6 million for the same period in 2022<br><br>•An increase of $13.5 million in net interest income due to an increase in FFELP core loan spread in 2022 as compared to 2021<br><br>•A decrease of $32.4 million in net interest income due to the decrease in the average balance of FFELP loans in the first three quarters of 2022 as compared to 2021 | |
| Nelnet Bank | 2,489 | (686) | ||
| Corporate | (65,061) | (36,796) | •The recognition of a net loss of $47.6 million for the first three quarters of 2022 related to the Company’s investment in ALLO, as compared to a net loss of $31.6 million for the same period in 2021<br><br>•Investment income of $37.2 million for the first three quarters of 2022 as compared to $43.7 million for the same period in 2021. Investment income in 2022 included $13.5 million in gains from the sale of real estate investments and a $15.2 million gain as a result of the revaluation of the Company's previously held 50 percent ownership interests in NextGen. In 2021, the Company recognized $22.2 million from the sale of real estate investments and $6.3 million in net realized and unrealized gains from marketable securities.<br><br>•The recognition of an impairment charge of $6.3 million in the second quarter of 2022 related primarily to a venture capital investment and certain real estate leases (as the Company continues to downsize its facility footprint as a result of associates working from home) | |
| Income before income taxes | 476,023 | 333,883 | ||
| Income tax expense | (107,765) | (76,747) | ||
| Net loss attributable to noncontrolling interests | 8,315 | 3,467 | ||
| Net income | $ | 376,573 | 260,603 |
Recent Developments
On August 24, 2022, the Department issued a bulletin titled “Biden-Harris Administration Announces Final Student Loan Pause Extension Through December 31 and Targeted Debt Cancellation to Smooth Transition to Repayment” (the “August 24, 2022 Bulletin”). The August 24, 2022 Bulletin extends the CARES Act repayment pause on Department held student loans through December 31, 2022 and indicates the Department will provide targeted student debt cancellation to borrowers with loans held by the Department, and that borrowers whose annual income for either 2020 or 2021 was under $125,000 (for single or married, filing separately) or under $250,000 (for married couples, filing jointly or heads of household) will be eligible for otherwise unconditional loan cancellation in amounts of up to $20,000 for eligible borrowers who received a Pell Grant, or of up to $10,000 for eligible borrowers who did not receive a Pell Grant.
Following the initial announcement, the Department provided more specific publicly available guidance on the student debt relief plan through the website of the Department’s Office of Federal Student Aid (“FSA”) on September 29, 2022, which guidance was subsequently revised and published in the Federal Register on October 12, 2022. As of November 7, 2022, the following guidance on loan forgiveness was provided on the FSA website (information on the FSA website is not incorporated by reference in this report):
•All loans eligible for the CARES Act student loan payment pause are also eligible for debt relief, including loans held by the Department and guaranty agencies
•As of September 29, 2022, borrowers with federal student loans not held by the Department cannot obtain one-time debt relief by consolidating those loans into Federal Direct Loan Program loans by the Department
•Borrowers with FFEL Program loans not held by the Department and who applied to consolidate into the Federal Direct Loan Program prior to September 29, 2022, are eligible for one-time debt relief through the Federal Direct Loan Program, subject to meeting the other terms and conditions
•The Department has indicated it is assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by the Department, including FFEL Program loans
On October 21, 2022, the U.S. Court of Appeals for the Eighth Circuit issued a temporary administrative stay of implementation of the Department's student debt relief plan in response to a legal challenge that was initiated by other parties (not the Company).
In view of this recent announcement and guidance by the Department, the Company does not currently expect there to be significant FFELP loan consolidation activity specifically as a result of the one-time student debt relief plan announced in the August 24, 2022 Bulletin. However, since 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 the continued extension 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. Sustained higher FFELP loan prepayments will impact net interest income in the Company’s AGM operating segment, FFELP servicing revenue in the Company’s LSS operating segment, investment advisory services revenue earned by the Company’s SEC-registered investment advisor subsidiary (Whitetail Rock Capital Management, LLC) on FFELP loan asset-backed securities under management, and interest income earned on the Company’s FFELP loan asset-backed securities investments in future periods.
In addition, as of September 30, 2022, the Company was servicing 15.7 million borrowers under its government servicing contracts. The Company cannot currently estimate how many borrowers meet the eligibility requirements and other terms and conditions for one-time debt relief under the Department's announcement. If there was a broad $10,000 or $20,000 per borrower forgiveness on all government owned loans, the Company estimates it would decrease the number of borrowers serviced (based on the borrower loan information as of September 30, 2022) by approximately 4.4 million borrowers and 7.5 million borrowers, respectively. The actual impact to the number of borrowers serviced is expected to be less than these amounts due to annual income ceilings for borrowers to qualify for forgiveness and the impact of whether a Pell Grant was received on the amount of forgiveness for a borrower.
Revenue earned under the current Department servicing contracts, and software services revenue earned in providing remote hosted services to other Department servicers, will decrease in future periods if the Department's student debt relief plan or other broad based loan forgiveness is implemented.
See “Risk Factors” in the Company's Q3 2022 10-Q Quarterly Report for additional information.
Segment Reporting
The following tables include the results of each of the Company's reportable operating segments reconciled to the consolidated financial statements.
| Three months ended September 30, 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Asset<br>Generation and<br>Management | Nelnet Bank | Corporate and Other Activities | Eliminations | Total | ||
| Total interest income | $ | 831 | 3,707 | 182,932 | 7,551 | 10,860 | (2,748) | 203,133 |
| Interest expense | — | — | 120,009 | 3,298 | 6,067 | (2,748) | 126,625 | |
| Net interest income | 831 | 3,707 | 62,923 | 4,253 | 4,793 | — | 76,508 | |
| Less provision (negative provision) for loan losses | — | — | 9,215 | 450 | — | — | 9,665 | |
| Net interest income after provision for loan losses | 831 | 3,707 | 53,708 | 3,803 | 4,793 | — | 66,843 | |
| Other income/expense: | ||||||||
| Loan servicing and systems revenue | 134,197 | — | — | — | — | — | 134,197 | |
| Intersegment revenue | 8,281 | 8 | — | — | — | (8,289) | — | |
| Education technology, services, and payment processing revenue | — | 106,894 | — | — | — | — | 106,894 | |
| Solar construction revenue | — | — | — | — | 9,358 | — | 9,358 | |
| Other | 596 | — | 4,627 | 566 | (3,564) | — | 2,225 | |
| Gain on sale of loans | — | — | 2,627 | — | — | — | 2,627 | |
| Impairment expense and provision for beneficial interests, net | — | — | — | — | 121 | — | 121 | |
| Derivative settlements, net | — | — | 10,271 | — | — | — | 10,271 | |
| Derivative market value adjustments, net | — | — | 52,991 | — | — | — | 52,991 | |
| Total other income/expense | 143,074 | 106,902 | 70,516 | 566 | 5,915 | (8,289) | 318,684 | |
| Cost of services: | ||||||||
| Cost to provide education technology, services, and payment processing services | — | 42,676 | — | — | — | — | 42,676 | |
| Cost to provide solar construction services | — | — | — | — | 5,968 | — | 5,968 | |
| Total cost of services | — | 42,676 | — | — | 5,968 | — | 48,644 | |
| Operating expenses: | ||||||||
| Salaries and benefits | 82,067 | 34,950 | 653 | 1,814 | 27,713 | — | 147,198 | |
| Depreciation and amortization | 5,784 | 2,532 | — | 4 | 10,452 | — | 18,772 | |
| Other expenses | 16,654 | 7,034 | 3,349 | 1,427 | 15,395 | — | 43,858 | |
| Intersegment expenses, net | 17,486 | 4,762 | 8,350 | 69 | (22,378) | (8,289) | — | |
| Total operating expenses | 121,991 | 49,278 | 12,352 | 3,314 | 31,182 | (8,289) | 209,828 | |
| Income (loss) before income taxes | 21,914 | 18,655 | 111,872 | 1,055 | (26,442) | — | 127,055 | |
| Income tax (expense) benefit | (5,259) | (4,475) | (26,849) | (246) | 10,244 | — | (26,586) | |
| Net income (loss) | 16,655 | 14,180 | 85,023 | 809 | (16,198) | — | 100,469 | |
| Net (income) loss attributable to noncontrolling interests | — | (61) | — | — | 4,390 | — | 4,329 | |
| Net income (loss) attributable to Nelnet, Inc. | $ | 16,655 | 14,119 | 85,023 | 809 | (11,808) | — | 104,798 |
| Three months ended June 30, 2022 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Asset<br>Generation and<br>Management | Nelnet Bank | Corporate and Other Activities | Eliminations | Total | ||
| Total interest income | $ | 246 | 874 | 140,396 | 5,212 | 6,235 | (1,376) | 151,587 |
| Interest expense | 20 | — | 69,708 | 1,639 | 3,652 | (1,376) | 73,642 | |
| Net interest income | 226 | 874 | 70,688 | 3,573 | 2,583 | — | 77,945 | |
| Less provision (negative provision) for loan losses | — | — | 8,827 | 582 | — | — | 9,409 | |
| Net interest income after provision for loan losses | 226 | 874 | 61,861 | 2,991 | 2,583 | — | 68,536 | |
| Other income/expense: | ||||||||
| Loan servicing and systems revenue | 124,873 | — | — | — | — | — | 124,873 | |
| Intersegment revenue | 8,381 | 7 | — | — | — | (8,388) | — | |
| Education technology, services, and payment processing revenue | — | 91,031 | — | — | — | — | 91,031 | |
| Solar construction revenue | — | — | — | — | — | — | — | |
| Other | 611 | — | 5,133 | 157 | 6,747 | — | 12,647 | |
| Gain on sale of loans | — | — | — | — | — | — | — | |
| Impairment expense and provision for beneficial interests, net | — | — | — | — | (6,284) | — | (6,284) | |
| Derivative settlements, net | — | — | 4,623 | — | — | — | 4,623 | |
| Derivative market value adjustments, net | — | — | 40,401 | — | — | — | 40,401 | |
| Total other income/expense | 133,865 | 91,038 | 50,157 | 157 | 463 | (8,388) | 267,291 | |
| Cost of services: | ||||||||
| Cost to provide education technology, services, and payment processing services | — | 30,852 | — | — | — | — | 30,852 | |
| Cost to provide solar construction services | — | — | — | — | — | — | — | |
| Total cost of services | — | 30,852 | — | — | — | — | 30,852 | |
| Operating expenses: | ||||||||
| Salaries and benefits | 83,220 | 32,120 | 614 | 1,714 | 23,729 | — | 141,398 | |
| Depreciation and amortization | 5,318 | 2,698 | — | 4 | 10,230 | — | 18,250 | |
| Other expenses | 13,507 | 6,750 | 3,543 | 899 | 12,241 | — | 36,940 | |
| Intersegment expenses, net | 18,558 | 4,805 | 8,513 | 57 | (23,545) | (8,388) | — | |
| Total operating expenses | 120,603 | 46,373 | 12,670 | 2,674 | 22,655 | (8,388) | 196,588 | |
| Income (loss) before income taxes | 13,488 | 14,687 | 99,348 | 474 | (19,609) | — | 108,387 | |
| Income tax (expense) benefit | (3,237) | (3,525) | (23,844) | (106) | 5,228 | — | (25,483) | |
| Net income (loss) | 10,251 | 11,162 | 75,504 | 368 | (14,381) | — | 82,904 | |
| Net (income) loss attributable to noncontrolling interests | — | 53 | — | — | 2,172 | — | 2,225 | |
| Net income (loss) attributable to Nelnet, Inc. | $ | 10,251 | 11,215 | 75,504 | 368 | (12,209) | — | 85,129 |
| Three months ended September 30, 2021 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Asset<br>Generation and<br>Management | Nelnet Bank | Corporate and Other Activities | Eliminations | Total | ||
| Total interest income | $ | 31 | 344 | 131,781 | 2,061 | 2,609 | (172) | 136,654 |
| Interest expense | 24 | — | 48,662 | 421 | 1,242 | (172) | 50,176 | |
| Net interest income | 7 | 344 | 83,119 | 1,640 | 1,367 | — | 86,478 | |
| Less provision (negative provision) for loan losses | — | — | 5,940 | (113) | — | — | 5,827 | |
| Net interest income after provision for loan losses | 7 | 344 | 77,179 | 1,753 | 1,367 | — | 80,651 | |
| Other income/expense: | ||||||||
| Loan servicing and systems revenue | 112,351 | — | — | — | — | — | 112,351 | |
| Intersegment revenue | 8,621 | 3 | — | — | — | (8,624) | — | |
| Education technology, services, and payment processing revenue | — | 85,324 | — | — | — | — | 85,324 | |
| Solar construction revenue | — | — | — | — | — | — | — | |
| Other | 727 | 13 | (7,275) | 450 | 17,952 | — | 11,867 | |
| Gain on sale of loans | — | — | 3,444 | — | — | — | 3,444 | |
| Impairment expense and provision for beneficial interests, net | (13,243) | — | — | — | (916) | — | (14,159) | |
| Derivative settlements, net | — | — | (5,909) | — | — | — | (5,909) | |
| Derivative market value adjustments, net | — | — | 7,260 | — | — | — | 7,260 | |
| Total other income/expense | 108,456 | 85,340 | (2,480) | 450 | 17,036 | (8,624) | 200,178 | |
| Cost of services: | ||||||||
| Cost to provide education technology, services, and payment processing services | — | 31,335 | — | — | — | — | 31,335 | |
| Cost to provide solar construction services | — | — | — | — | — | — | — | |
| Total cost of services | — | 31,335 | — | — | — | — | 31,335 | |
| Operating expenses: | ||||||||
| Salaries and benefits | 75,305 | 29,119 | 542 | 890 | 22,735 | — | 128,592 | |
| Depreciation and amortization | 4,245 | 2,762 | — | — | 8,702 | — | 15,710 | |
| Other expenses | 12,738 | 4,804 | 5,420 | 445 | 14,918 | — | 38,324 | |
| Intersegment expenses, net | 19,217 | 3,672 | 8,652 | 32 | (22,949) | (8,624) | — | |
| Total operating expenses | 111,505 | 40,357 | 14,614 | 1,367 | 23,406 | (8,624) | 182,626 | |
| Income (loss) before income taxes | (3,042) | 13,992 | 60,085 | 836 | (5,003) | — | 66,868 | |
| Income tax (expense) benefit | 730 | (3,358) | (14,421) | (200) | 1,600 | — | (15,649) | |
| Net income (loss) | (2,312) | 10,634 | 45,664 | 636 | (3,403) | — | 51,219 | |
| Net (income) loss attributable to noncontrolling interests | — | — | — | — | 1,919 | — | 1,919 | |
| Net income (loss) attributable to Nelnet, Inc. | $ | (2,312) | 10,634 | 45,664 | 636 | (1,484) | — | 53,138 |
| Nine months ended September 30, 2022 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Asset<br>Generation and<br>Management | Nelnet Bank | Corporate and Other Activities | Eliminations | Total | ||
| Total interest income | $ | 1,144 | 4,920 | 441,926 | 15,792 | 21,087 | (4,953) | 479,916 |
| Interest expense | 44 | — | 235,720 | 5,792 | 11,745 | (4,953) | 248,347 | |
| Net interest income | 1,100 | 4,920 | 206,206 | 10,000 | 9,342 | — | 231,569 | |
| Less provision (negative provision) for loan losses | — | — | 17,178 | 1,462 | — | — | 18,640 | |
| Net interest income after provision for loan losses | 1,100 | 4,920 | 189,028 | 8,538 | 9,342 | — | 212,929 | |
| Other income/expense: | ||||||||
| Loan servicing and systems revenue | 395,438 | — | — | — | — | — | 395,438 | |
| Intersegment revenue | 25,142 | 16 | — | — | — | (25,158) | — | |
| Education technology, services, and payment processing revenue | — | 310,211 | — | — | — | — | 310,211 | |
| Solar construction revenue | — | — | — | — | 9,358 | — | 9,358 | |
| Other | 1,946 | — | 16,270 | 2,224 | 4,309 | — | 24,750 | |
| Gain on sale of loans | — | — | 5,616 | — | — | — | 5,616 | |
| Impairment expense and provision for beneficial interests, net | — | — | — | — | (6,163) | — | (6,163) | |
| Derivative settlements, net | — | — | 12,085 | — | — | — | 12,085 | |
| Derivative market value adjustments, net | — | — | 239,125 | — | — | — | 239,125 | |
| Total other income/expense | 422,526 | 310,227 | 273,096 | 2,224 | 7,504 | (25,158) | 990,420 | |
| Cost of services: | ||||||||
| Cost to provide education technology, services, and payment processing services | — | 109,073 | — | — | — | — | 109,073 | |
| Cost to provide solar construction services | — | — | — | — | 5,968 | — | 5,968 | |
| Total cost of services | — | 109,073 | — | — | 5,968 | — | 115,041 | |
| Operating expenses: | ||||||||
| Salaries and benefits | 257,259 | 98,356 | 1,858 | 5,082 | 75,455 | — | 438,010 | |
| Depreciation and amortization | 16,056 | 7,544 | — | 11 | 30,366 | — | 53,978 | |
| Other expenses | 46,375 | 19,549 | 9,925 | 3,009 | 41,438 | — | 120,297 | |
| Intersegment expenses, net | 56,442 | 14,171 | 25,694 | 171 | (71,320) | (25,158) | — | |
| Total operating expenses | 376,132 | 139,620 | 37,477 | 8,273 | 75,939 | (25,158) | 612,285 | |
| Income (loss) before income taxes | 47,494 | 66,454 | 424,647 | 2,489 | (65,061) | — | 476,023 | |
| Income tax (expense) benefit | (11,399) | (15,947) | (101,915) | (574) | 22,070 | — | (107,765) | |
| Net income (loss) | 36,095 | 50,507 | 322,732 | 1,915 | (42,991) | — | 368,258 | |
| Net (income) loss attributable to noncontrolling interests | — | (8) | — | — | 8,323 | — | 8,315 | |
| Net income (loss) attributable to Nelnet, Inc. | $ | 36,095 | 50,499 | 322,732 | 1,915 | (34,668) | — | 376,573 |
| Nine months ended September 30, 2021 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Asset<br>Generation and<br>Management | Nelnet Bank | Corporate and Other Activities | Eliminations | Total | ||
| Total interest income | $ | 95 | 818 | 388,149 | 5,479 | 5,379 | (578) | 399,341 |
| Interest expense | 70 | — | 124,282 | 1,007 | 3,158 | (578) | 127,939 | |
| Net interest income | 25 | 818 | 263,867 | 4,472 | 2,221 | — | 271,402 | |
| Less provision (negative provision) for loan losses | — | — | (11,225) | 378 | — | — | (10,847) | |
| Net interest income after provision for loan losses | 25 | 818 | 275,092 | 4,094 | 2,221 | — | 282,249 | |
| Other income/expense: | ||||||||
| Loan servicing and systems revenue | 335,961 | — | — | — | — | — | 335,961 | |
| Intersegment revenue | 25,369 | 9 | — | — | — | (25,378) | — | |
| Education technology, services, and payment processing revenue | — | 257,284 | — | — | — | — | 257,284 | |
| Solar construction revenue | — | — | — | — | — | — | — | |
| Other | 2,541 | 13 | (4,514) | 475 | 31,668 | — | 30,183 | |
| Gain on sale of loans | — | — | 18,715 | — | — | — | 18,715 | |
| Impairment expense and provision for beneficial interests, net | (13,243) | — | 2,436 | — | (1,416) | — | (12,223) | |
| Derivative settlements, net | — | — | (15,587) | — | — | — | (15,587) | |
| Derivative market value adjustments, net | — | — | 44,455 | — | — | — | 44,455 | |
| Total other income/expense | 350,628 | 257,306 | 45,505 | 475 | 30,252 | (25,378) | 658,788 | |
| Cost of services: | ||||||||
| Cost to provide education technology, services, and payment processing services | — | 80,063 | — | — | — | — | 80,063 | |
| Cost to provide solar construction services | — | — | — | — | — | — | — | |
| Total cost of services | — | 80,063 | — | — | — | — | 80,063 | |
| Operating expenses: | ||||||||
| Salaries and benefits | 210,151 | 82,154 | 1,594 | 3,956 | 65,496 | — | 363,351 | |
| Depreciation and amortization | 20,411 | 8,789 | — | — | 26,927 | — | 56,129 | |
| Other expenses | 39,296 | 14,063 | 12,763 | 1,227 | 40,265 | — | 107,611 | |
| Intersegment expenses, net | 52,241 | 10,856 | 25,627 | 72 | (63,419) | (25,378) | — | |
| Total operating expenses | 322,099 | 115,862 | 39,984 | 5,255 | 69,269 | (25,378) | 527,091 | |
| Income (loss) before income taxes | 28,554 | 62,199 | 280,613 | (686) | (36,796) | — | 333,883 | |
| Income tax (expense) benefit | (6,853) | (14,928) | (67,347) | 151 | 12,230 | — | (76,747) | |
| Net income (loss) | 21,701 | 47,271 | 213,266 | (535) | (24,566) | — | 257,136 | |
| Net (income) loss attributable to noncontrolling interests | — | — | — | — | 3,467 | — | 3,467 | |
| Net income (loss) attributable to Nelnet, Inc. | $ | 21,701 | 47,271 | 213,266 | (535) | (21,099) | — | 260,603 |
Loan Servicing and Systems Revenue
The following table provides disaggregated revenue by service offering for the Loan Servicing and Systems operating segment.
| Three month ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| Government servicing | $ | 104,428 | 98,815 | 84,084 | 312,368 | 241,497 |
| Private education and consumer loan servicing | 12,198 | 12,122 | 13,198 | 37,194 | 34,563 | |
| FFELP servicing | 4,127 | 4,011 | 4,557 | 12,386 | 13,930 | |
| Software services | 8,229 | 7,907 | 6,952 | 23,536 | 22,779 | |
| Outsourced services and other | 5,215 | 2,018 | 3,560 | 9,954 | 23,192 | |
| Loan servicing and systems revenue | $ | 134,197 | 124,873 | 112,351 | 395,438 | 335,961 |
Loan Servicing Volumes
| As of | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2020 | March 31,<br>2021 | June 30,<br>2021 | September 30,<br>2021 | December 31,<br>2021 | March 31,<br>2022 | June 30,<br>2022 | September 30,<br>2022 | ||
| Servicing volume (dollars in millions): | |||||||||
| Government | $ | 443,248 | 453,681 | 452,450 | 461,054 | 478,402 | 507,653 | 542,398 | 545,546 |
| FFELP | 30,763 | 30,084 | 29,361 | 28,244 | 26,916 | 25,646 | 24,224 | 22,412 | |
| Private and consumer | 16,226 | 21,397 | 24,758 | 24,229 | 23,702 | 23,433 | 22,838 | 22,461 | |
| Total | $ | 490,237 | 505,162 | 506,569 | 513,527 | 529,020 | 556,732 | 589,460 | 590,419 |
| Number of servicing borrowers: | |||||||||
| Government | 13,251,930 | 13,301,364 | 13,253,051 | 13,570,056 | 14,196,520 | 14,727,860 | 15,426,607 | 15,657,942 | |
| FFELP | 1,300,677 | 1,233,461 | 1,198,863 | 1,150,214 | 1,092,066 | 1,034,913 | 977,785 | 910,188 | |
| Private and consumer | 636,136 | 882,477 | 1,039,537 | 1,097,252 | 1,065,439 | 1,030,863 | 998,454 | 979,816 | |
| Total | 15,188,743 | 15,417,302 | 15,491,451 | 15,817,522 | 16,354,025 | 16,793,636 | 17,402,846 | 17,547,946 | |
| Number of remote hosted borrowers: | 6,555,841 | 4,307,342 | 4,338,570 | 4,548,541 | 4,799,368 | 5,487,943 | 5,738,381 | 6,025,377 |
Education Technology, Services, and Payment Processing
The following table provides disaggregated revenue by servicing offering for the Education Technology, Services, and Payment Processing operating segment.
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| Tuition payment plan services | $ | 25,779 | 27,637 | 23,618 | 84,131 | 79,706 |
| Payment processing | 47,957 | 27,968 | 39,852 | 113,996 | 97,898 | |
| Education technology and services | 32,548 | 34,956 | 21,295 | 110,755 | 78,752 | |
| Other | 610 | 470 | 559 | 1,329 | 928 | |
| Education technology, services, and payment processing revenue | $ | 106,894 | 91,031 | 85,324 | 310,211 | 257,284 |
Other Income/Expense
The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of income:
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| Income/gains from investments, net | $ | 10,701 | 18,127 | 16,050 | 40,685 | 40,141 |
| Borrower late fee income | 2,824 | 2,436 | 514 | 7,693 | 1,698 | |
| ALLO preferred return | 2,164 | 2,140 | 2,043 | 6,420 | 6,384 | |
| Administration/sponsor fee income | 1,920 | 2,012 | 1,670 | 6,055 | 1,670 | |
| Investment advisory services | 1,612 | 1,482 | 2,400 | 4,375 | 6,242 | |
| Loss from ALLO voting membership interest investment | (17,562) | (16,941) | (10,495) | (47,633) | (31,620) | |
| Loss from solar investments | (4,216) | (1,854) | (3,393) | (7,100) | (7,375) | |
| Other | 4,782 | 5,245 | 3,078 | 14,255 | 13,043 | |
| Other income | $ | 2,225 | 12,647 | 11,867 | 24,750 | 30,183 |
Derivative Settlements
The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| 1:3 basis swaps | $ | (1,085) | 931 | (700) | 242 | (939) |
| Interest rate swaps - floor income hedges | 11,356 | 3,692 | (5,209) | 11,843 | (14,648) | |
| Total derivative settlements - income (expense) | $ | 10,271 | 4,623 | (5,909) | 12,085 | (15,587) |
Loans and Accrued Interest Receivable and Allowance for Loan Losses
Loans and accrued interest receivable and allowance for loan losses consisted of the following:
| As of | As of | As of | ||
|---|---|---|---|---|
| September 30, 2022 | December 31, 2021 | September 30, 2021 | ||
| Non-Nelnet Bank: | ||||
| Federally insured student loans: | ||||
| Stafford and other | $ | 3,298,138 | 3,904,000 | 4,142,059 |
| Consolidation | 11,002,253 | 13,187,047 | 13,939,429 | |
| Total | 14,300,391 | 17,091,047 | 18,081,488 | |
| Private education loans | 262,183 | 299,442 | 319,212 | |
| Consumer and other loans | 231,441 | 51,301 | 36,994 | |
| Non-Nelnet Bank loans | 14,794,015 | 17,441,790 | 18,437,694 | |
| Nelnet Bank: | ||||
| Federally insured student loans | 72,905 | 88,011 | 93,930 | |
| Private education loans | 356,571 | 169,890 | 98,395 | |
| Nelnet Bank loans | 429,476 | 257,901 | 192,325 | |
| Accrued interest receivable | 793,838 | 788,552 | 834,831 | |
| Loan discount, net of unamortized loan premiums and deferred origination costs | (22,021) | (25,933) | (22,603) | |
| Allowance for loan losses: | ||||
| Non-Nelnet Bank: | ||||
| Federally insured loans | (87,778) | (103,381) | (115,859) | |
| Private education loans | (15,577) | (16,143) | (17,053) | |
| Consumer and other loans | (13,290) | (6,481) | (4,429) | |
| Non-Nelnet Bank allowance for loan losses | (116,645) | (126,005) | (137,341) | |
| Nelnet Bank: | ||||
| Federally insured loans | (164) | (268) | (289) | |
| Private education loans | (2,248) | (840) | (414) | |
| Nelnet Bank allowance for loan losses | (2,412) | (1,108) | (703) | |
| $ | 15,876,251 | 18,335,197 | 19,304,203 |
The following table summarizes the allowance for loan losses as a percentage of the ending loan balance for each of the Company's loan portfolios.
| As of | As of | As of | ||||
|---|---|---|---|---|---|---|
| September 30, 2022 | December 31, 2021 | September 30, 2021 | ||||
| Non-Nelnet Bank: | ||||||
| Federally insured student loans (a) | 0.61 | % | 0.60 | % | 0.64 | % |
| Private education loans | 5.94 | % | 5.39 | % | 5.34 | % |
| Consumer and other loans (b) | 5.74 | % | 12.63 | % | 11.97 | % |
| Nelnet Bank: | ||||||
| Federally insured student loans (a) | 0.22 | % | 0.30 | % | 0.31 | % |
| Private education loans | 0.63 | % | 0.49 | % | 0.42 | % |
(a) As of September 30, 2022, December 31, 2021, and September 30, 2021, the allowance for loan losses as a percent of the risk sharing component of federally insured student loans not covered by the federal guaranty for non-Nelnet Bank was 22.3%, 22.2%, and 23.6%, respectively, and for Nelnet Bank was 8.9%, 12.1%, and 12.2%, respectively.
(b) During 2022, the Company purchased home equity loans that generally have lower default rates than unsecured consumer loans. As such, the allowance for loan losses as a percentage of the ending loan balance has decreased as of September 30, 2022 as compared to December 31, 2021.
Loan Activity
The following table sets forth the activity of the Company's loan portfolios:
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||
| Non-Nelnet Bank: | ||||||
| Beginning balance | $ | 15,855,137 | 16,618,627 | 19,331,725 | 17,441,790 | 19,559,108 |
| Loan acquisitions: | ||||||
| Federally insured student loans | 896 | 43,747 | 70,844 | 54,845 | 833,313 | |
| Private education loans | 667 | 6,484 | 1,680 | 8,177 | 88,131 | |
| Consumer and other loans | 120,465 | 118,012 | 20,939 | 256,998 | 61,319 | |
| Total loan acquisitions | 122,028 | 168,243 | 93,463 | 320,020 | 982,763 | |
| Repayments, claims, capitalized interest, participations, and other, net | (385,312) | (478,461) | (818,554) | (1,310,913) | (1,415,249) | |
| Loans lost to external parties | (768,923) | (453,158) | (145,270) | (1,609,728) | (587,841) | |
| Loans sold | (28,915) | (114) | (23,670) | (47,154) | (101,087) | |
| Ending balance | $ | 14,794,015 | 15,855,137 | 18,437,694 | 14,794,015 | 18,437,694 |
| Nelnet Bank: | ||||||
| Beginning balance | $ | 423,553 | 368,257 | 190,571 | 257,901 | 17,543 |
| Federally insured student loan acquisitions | — | — | — | — | 99,973 | |
| Private education loan acquisitions | 6,856 | — | — | 6,856 | — | |
| Private education loan originations | 14,311 | 75,204 | 13,006 | 219,857 | 99,161 | |
| Repayments | (15,244) | (17,373) | (10,865) | (51,011) | (21,863) | |
| Sales to AGM segment | — | (2,535) | (387) | (4,127) | (2,489) | |
| Ending balance | $ | 429,476 | 423,553 | 192,325 | 429,476 | 192,325 |
The Company has also purchased partial ownership in certain private education, consumer, and federally insured student loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "investments and notes receivable" in the Company's consolidated financial statements. As of the latest remittance reports filed by the various trusts prior to or as of September 30, 2022, the Company’s ownership correlates to approximately $630 million, $150 million, and $420 million of private education, consumer, and federally insured student loans, respectively, included in these securitizations. The loans held in these securitizations are not included in the above table.
Since 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 the continued extension 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.
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.
| Three months ended | Nine months ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||
| Variable loan yield, gross | 5.05 | % | 3.59 | % | 2.61 | % | 3.76 | % | 2.65 | % | |
| Consolidation rebate fees | (0.84) | (0.85) | (0.85) | (0.85) | (0.84) | ||||||
| Discount accretion, net of premium and deferred origination costs amortization | 0.02 | 0.03 | 0.03 | 0.03 | 0.01 | ||||||
| Variable loan yield, net | 4.23 | 2.77 | 1.79 | 2.94 | 1.82 | ||||||
| Loan cost of funds - interest expense (a) (b) | (3.11) | (1.73) | (0.99) | (1.95) | (1.03) | ||||||
| Loan cost of funds - derivative settlements (c) (d) | (0.03) | 0.02 | (0.02) | 0.00 | (0.01) | ||||||
| Variable loan spread | 1.09 | 1.06 | 0.78 | 0.99 | 0.78 | ||||||
| Fixed rate floor income, gross | 0.19 | 0.46 | 0.75 | 0.45 | 0.75 | ||||||
| Fixed rate floor income - derivative settlements (c) (e) | 0.30 | 0.09 | (0.11) | 0.10 | (0.10) | ||||||
| Fixed rate floor income, net of settlements on derivatives | 0.49 | 0.55 | 0.64 | 0.55 | 0.65 | ||||||
| Core loan spread | 1.58 | % | 1.61 | % | 1.42 | % | 1.54 | % | 1.43 | % | |
| Average balance of AGM's loans | $ | 15,466,505 | 16,437,861 | 19,084,320 | 16,371,092 | 19,178,788 | |||||
| Average balance of AGM's debt outstanding | 15,060,823 | 15,923,648 | 18,863,730 | 15,905,170 | 18,890,832 |
(a) In the first quarter of 2021, the Company reversed a historical accrued interest liability of $23.8 million on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. The reduction of this liability is reflected in (a reduction of) "interest expense on bonds and notes payable and bank deposits" in the consolidated statements of income and the impact of this reduction to interest expense was excluded from the table above.
(b) In the third quarter of 2021, the Company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of $1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense was excluded from the table above.
(c) 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. 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 "Derivative Settlements" included in this supplement for the net settlement activity recognized by the Company for each type of derivative for the periods presented in the 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 | Nine months ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||
| Core loan spread | 1.58 | % | 1.61 | % | 1.42 | % | 1.54 | % | 1.43 | % |
| Derivative settlements (1:3 basis swaps) | 0.03 | (0.02) | 0.02 | (0.00 | ) | 0.01 | ||||
| Derivative settlements (fixed rate floor income) | (0.30) | (0.09) | 0.11 | (0.10) | 0.10 | |||||
| Loan spread | 1.31 | % | 1.50 | % | 1.55 | % | 1.44 | % | 1.54 | % |
(d) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps.
(e) Derivative settlements consist of net settlements received (paid) related to the Company’s floor income interest rate swaps.
Variable loan spread increased during the three and nine months ended September 30, 2022 compared to the same periods in 2021 due to a significant increase in short-term interest rates during each of the first three quarters of 2022. In an increasing interest rate environment, student loan spread increases due to the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest resets on the Company's debt that occurs either monthly or quarterly.
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:
| Three months ended | Nine months ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||
| Fixed rate floor income, gross | $ | 7,585 | 18,292 | 35,850 | 54,870 | 108,029 | |||||
| Derivative settlements (a) | 11,356 | 3,692 | (5,209) | 11,843 | (14,648) | ||||||
| Fixed rate floor income, net | $ | 18,941 | 21,984 | 30,641 | 66,713 | 93,381 | |||||
| Fixed rate floor income contribution to spread, net | 0.49 | % | 0.55 | % | 0.64 | % | 0.55 | % | 0.65 | % |
(a) Derivative settlements consist of net settlements received (paid) related to the Company's derivatives used to hedge student loans earning fixed rate floor income.
Fixed Rate Floor Income
The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of September 30, 2022.
| Fixed interest rate range | Borrower/lender weighted average yield | Estimated variable conversion rate (a) | Loan balance | |
|---|---|---|---|---|
| 5.0 - 5.49% | 5.35% | 2.71% | $ | 177,056 |
| 5.5 - 5.99% | 5.68% | 3.04% | 199,123 | |
| 6.0 - 6.49% | 6.19% | 3.55% | 245,508 | |
| 6.5 - 6.99% | 6.70% | 4.06% | 238,899 | |
| 7.0 - 7.49% | 7.17% | 4.53% | 87,432 | |
| 7.5 - 7.99% | 7.72% | 5.08% | 167,776 | |
| 8.0 - 8.99% | 8.18% | 5.54% | 390,549 | |
| > 9.0% | 9.05% | 6.41% | 150,258 | |
| $ | 1,656,601 |
(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of September 30, 2022, the weighted average estimated variable conversion rate was 4.41% and the short-term interest rate was 251 basis points.
The following table summarizes the outstanding derivative instruments as of September 30, 2022 used by AGM to economically hedge loans earning fixed rate floor income.
| Maturity | Notional amount | Weighted average fixed rate paid by the Company (a) | ||
|---|---|---|---|---|
| 2024 | $ | 2,000,000 | 0.35 | % |
| 2026 | 500,000 | 1.02 | ||
| 2031 | 100,000 | 1.53 | ||
| $ | 2,600,000 | 0.52 | % |
(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.
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