EX-99.1 2 aex991-080723xearningsrele.htm EX-99.1 Document

Nelnet Reports Second Quarter 2023 Results
LINCOLN, Neb., August 7, 2023 - Nelnet (NYSE: NNI) today reported GAAP net income of $28.3 million, or $0.75 per share, for the second quarter of 2023, compared with GAAP net income of $85.1 million, or $2.26 per share, for the same period a year ago.
Net income, excluding derivative market value adjustments1, was $26.7 million, or $0.71 per share, for the second quarter of 2023, compared with $54.4 million, or $1.44 per share, for the same period in 2022.
In April 2023, the company redeemed certain loan asset-backed debt securities (bonds and notes payable) prior to their maturity. The remaining unamortized debt discount associated with these bonds at the time of redemption was written-off, resulting in a non-cash expense of $25.9 million ($19.7 million or $0.53 per share after tax) recognized by the company in the second quarter of 2023.
“The details of the quarter highlight the strength and resilience of our core operating businesses, which performed well in the second quarter,” said Jeff Noordhoek, chief executive officer of Nelnet. “The beginning of the school year is an exciting time for Nelnet. We are fortunate to serve millions of students and their families and thousands of higher education and K-12 institutions with tuition payment plans, loan servicing, student loans, and numerous services and technology for administrations. This school year also brings with it the complexity and opportunity of assisting more than 15 million federal student loan borrowers return to making payments for the first time since March of 2020.”
Nelnet operates four primary business segments, earning interest income on loans in its Asset Generation and Management (AGM) and Nelnet Bank segments, and fee-based revenue in its Loan Servicing and Systems and Education Technology, Services, and Payment Processing segments. Other business activities and operating segments that are not reportable are combined and included in corporate activities. Corporate activities also includes income earned on the majority of the company's investments.
Asset Generation and Management
The AGM operating segment reported net interest income of $21.5 million during the second quarter of 2023. Net interest income for the period includes the $25.9 million expense recognized by the company as a result of redeeming bonds prior to their maturity. Excluding this expense, net interest income for the three months ended June 30, 2023, was $47.4 million, compared with $70.7 million for the same period a year ago. The decrease in 2023 was due to the expected runoff of the loan portfolio and a decrease in core loan spread. The average balance of loans outstanding decreased from $16.4 billion for the second quarter of 2022 to $13.6 billion for the same period in 2023.
Core loan spread2 decreased to 1.06% for the quarter ended June 30, 2023, compared with 1.61% for the same period in 2022. Core loan spread was impacted in the second quarter of 2023 by higher interest rates. The company has a portfolio of student loans that are earning interest at a fixed borrower rate and that are financed with variable rate debt. As a result, in a low interest rate environment, the company earns additional spread income that it refers to as floor income. Due to higher interest rates, floor income recognized by the company decreased to $0.5 million for the three months ended June 30, 2023, compared with $22.0 million for the same period in 2022.
AGM recognized net income after tax of $13.5 million for the three months ended June 30, 2023, compared with $75.5 million for the same period in 2022.
AGM recognized gains from the sale of loans in the second quarter of 2023 of $15.5 million ($11.8 million after tax). In addition, in the second quarter of 2023, AGM recognized income of $0.9 million ($0.7 million after tax) related to changes in the fair value of derivative instruments that do not qualify for hedge accounting, compared with income of $40.4 million ($30.7 million after tax) for the same period in 2022.
Nelnet Bank
As of June 30, 2023, Nelnet Bank had a $444.5 million loan portfolio and total deposits, including intercompany deposits, of $871.4 million. Nelnet Bank recognized net income after tax for the quarter ended June 30, 2023 of $1.3 million, compared with $0.4 million for the same period in 2022.
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.


Loan Servicing and Systems
Revenue from the Loan Servicing and Systems segment was $122.0 million for the second quarter of 2023, compared with $124.9 million for the same period in 2022.
As of June 30, 2023, the company was servicing $559.1 billion in government-owned, FFEL Program, private education, and consumer loans for 16.6 million borrowers, compared with $589.5 billion in servicing volume for 17.4 million borrowers as of June 30, 2022.
The Loan Servicing and Systems segment reported net income after tax of $12.9 million for the three months ended June 30, 2023, compared with $10.3 million for the same period in 2022. Operating margin improved in 2023 compared with 2022 due to a decrease in operating expenses, primarily salaries and benefits. The company reduced staff in the first and second quarters of 2023 to manage expenses due to the delays in the government's student debt relief and return to repayment programs and lower pricing and reduced servicing volume for the company's federal servicing contracts.
On April 24, 2023, the company received a contract award from the Department of Education (Department) to provide continued servicing functions for the Department. The Unified Servicing and Data Solution (USDS) contract will replace the existing legacy Department student loan servicing contracts that were scheduled to expire in December 2023. According to the Department, the legacy servicer contracts will be extended through December 2024 to help facilitate a smooth transition for borrowers. The USDS contract has a five-year base period, with five years of possible extensions.
Education Technology, Services, and Payment Processing
For the second quarter of 2023, revenue from the Education Technology, Services, and Payment Processing operating segment was $109.9 million, an increase from $91.0 million for the same period in 2022. Revenue less direct costs to provide services for the second quarter of 2023 was $69.5 million, compared with $60.2 million for the same period in 2022.
Net income after tax for the Education Technology, Services, and Payment Processing segment was $13.7 million for the three months ended June 30, 2023, compared with $11.2 million for the same period in 2022. Included in net income for the three months ended June 30, 2023 and 2022 was $5.3 million ($4.0 million after tax) and $0.9 million ($0.7 million after tax) of interest income, respectively. The increase in interest income was due to an increase in interest rates in 2023 compared with 2022.
Corporate Activities
During the second quarter of 2023, the company recognized a loss of $12.2 million ($9.3 million after tax) on its 45 percent voting membership interests in ALLO Holdings LLC, a holding company for ALLO Communications LLC (ALLO), compared with a loss of $16.9 million ($12.8 million after tax) for the same period in 2022.
In addition, the company recognized net investment losses of $1.6 million ($1.2 million after tax) for the three months ended June 30, 2023, compared with net investment income and gains of $18.3 million ($13.9 million after tax) for the same period in 2022.
Board of Directors Declares Third Quarter Dividend
The Nelnet Board of Directors declared a third quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.26 per share. The dividend will be paid on September 15, 2023, to shareholders of record at the close of business on September 1, 2023.
Forward-Looking and Cautionary Statements
This press release contains forward-looking statements within the meaning of federal securities laws. The words “anticipate,” “assume," "believe,” “continue,” “could,” "ensure," “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” "scheduled," “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the company under existing and future servicing contracts with the Department and risks related to the company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, FFEL Program, private education, and consumer loans; loan portfolio risks such as interest rate basis and repricing risk, the risk of loss of floor income on certain student loans originated


under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFEL Program, private education, consumer, and other loans, or investment interests therein, and initiatives to purchase additional FFEL Program, private education, consumer, and other loans, and risks from changes in levels of loan prepayment or default rates; financing and liquidity risks, including risks of changes in the interest rate environment; risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets; risks related to a breach of or failure in the company's operational or information systems or infrastructure, or those of third-party vendors, including disclosure of confidential or personal information and/or damage to reputation resulting from cyber-breaches; uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; risks related to the expected benefits to the company from its continuing investment in ALLO, and risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, including activities that are intended to diversify the company both within and outside of its historical core education-related businesses; risks and uncertainties associated with climate change; risks from changes in economic conditions and consumer behavior; risks related to the company's ability to adapt to technological change; risks related to the exclusive forum provisions in the company's articles of incorporation; risks related to the company's executive chairman's ability to control matters related to the company through voting rights; risks related to related party transactions; concerns about the downgrade of the U.S. credit rating; risks related to natural disasters, terrorist activities, or international hostilities; and risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the company's businesses.
For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission. All forward-looking statements in this release are as of the date of this release. Although the company may voluntarily update or revise its forward-looking statements from time to time to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by law.
Non-GAAP Performance Measures
The company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. Reconciliations of GAAP to non-GAAP financial information, and a discussion of why the company believes providing this additional information is useful to investors, is provided in the "Non-GAAP Disclosures" section below.



Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)
Three months endedSix months ended
June 30, 2023March 31, 2023June 30, 2022June 30, 2023June 30, 2022
Interest income:
Loan interest$243,045 225,243 134,706 468,288 246,083 
Investment interest40,982 40,725 16,881 81,707 30,700 
Total interest income284,027 265,968 151,587 549,995 276,783 
Interest expense on bonds and notes payable and bank deposits233,148 199,449 73,642 432,597 121,721 
Net interest income50,879 66,519 77,945 117,398 155,062 
Less provision for loan losses9,592 34,275 9,409 43,867 8,974 
Net interest income after provision for loan losses41,287 32,244 68,536 73,531 146,088 
Other income (expense):
Loan servicing and systems revenue122,020 139,227 124,873 261,247 261,241 
Education technology, services, and payment processing revenue109,858 133,603 91,031 243,462 203,317 
Solar construction revenue4,735 8,651 — 13,386 — 
Other, net(7,011)(14,071)12,647 (21,083)22,524 
Gain on sale of loans, net15,511 11,812 — 27,323 2,989 
Impairment expense— — (6,284)— (6,284)
Derivative market value adjustments and derivative settlements, net2,070 (14,074)45,024 (12,005)187,949 
Total other income (expense), net247,183 265,148 267,291 512,330 671,736 
Cost of services:
Cost to provide education technology, services, and payment processing services40,407 47,704 30,852 88,110 66,397 
Cost to provide solar construction services9,122 8,299 — 17,422 — 
Total cost of services49,529 56,003 30,852 105,532 66,397 
Operating expenses:
Salaries and benefits144,706 152,710 141,398 297,416 290,813 
Depreciation and amortization18,652 16,627 18,250 35,279 35,206 
Other expenses45,997 40,785 36,940 86,781 76,439 
Total operating expenses209,355 210,122 196,588 419,476 402,458 
Income before income taxes29,586 31,267 108,387 60,853 348,969 
Income tax expense(10,491)(8,250)(25,483)(18,741)(81,180)
Net income19,095 23,017 82,904 42,112 267,789 
Net loss attributable to noncontrolling interests9,172 3,470 2,225 12,642 3,987 
Net income attributable to Nelnet, Inc.$28,267 26,487 85,129 54,754 271,776 
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted$0.75 0.71 2.26 1.46 7.18 
Weighted average common shares outstanding - basic and diluted37,468,397 37,344,604 37,710,214 37,406,843 37,875,108 



Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
As ofAs ofAs of
June 30, 2023December 31, 2022June 30, 2022
Assets:
Loans and accrued interest receivable, net$14,360,612 15,243,889 16,916,344 
Cash, cash equivalents, and investments2,128,075 2,230,063 2,116,949 
Restricted cash692,256 1,239,470 1,045,543 
Goodwill and intangible assets, net234,195 240,403 219,203 
Other assets392,494 420,219 325,974 
Total assets$17,807,632 19,374,044 20,624,013 
Liabilities:
Bonds and notes payable$13,070,140 14,637,195 16,115,269 
Bank deposits731,046 691,322 588,474 
Other liabilities758,932 845,625 829,125 
Total liabilities14,560,118 16,174,142 17,532,868 
Equity:
Total Nelnet, Inc. shareholders' equity3,259,279 3,198,959 3,097,382 
Noncontrolling interests(11,765)943 (6,237)
Total equity3,247,514 3,199,902 3,091,145 
Total liabilities and equity$17,807,632 19,374,044 20,624,013 
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 June 30,
20232022
GAAP net income attributable to Nelnet, Inc.$28,267 85,129 
Realized and unrealized derivative market value adjustments (a)(2,005)(40,401)
Tax effect (b)481 9,696 
Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $26,743 54,424 
Earnings per share:
GAAP net income attributable to Nelnet, Inc.$0.75 2.26 
Realized and unrealized derivative market value adjustments (a)(0.05)(1.07)
Tax effect (b)0.01 0.25 
Non-GAAP net income attributable to Nelnet, Inc., excluding derivative market value adjustments $0.71 1.44 

(a)    "Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms.
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the company’s derivative transactions with the intent that each is economically effective; however, the company’s derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period.
The company believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the company’s performance and in presentations with credit rating agencies, lenders, and investors.
(b)    The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.



Core loan spread
The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the "Net interest income, net of settlements on derivatives" table on the following page, divided by the average balance of loans or debt outstanding.
 Three months ended June 30,
20232022
Variable loan yield, gross7.73 %3.59 %
Consolidation rebate fees(0.80)(0.85)
Discount accretion, net of premium and deferred origination costs amortization0.06 0.03 
Variable loan yield, net6.99 2.77 
Loan cost of funds - interest expense (a)(5.94)(1.73)
Loan cost of funds - derivative settlements (b) (c)(0.00 )0.02 
Variable loan spread1.05 1.06 
Fixed rate floor income, gross0.01 0.46 
Fixed rate floor income - derivative settlements (b) (d)0.00 0.09 
Fixed rate floor income, net of settlements on derivatives0.01 0.55 
Core loan spread1.06 %1.61 %
Average balance of AGM's loans$13,616,889 16,437,861 
Average balance of AGM's debt outstanding13,011,224 15,923,648 
(a)    In the second quarter of 2023, the company redeemed certain asset-backed debt securities prior to their maturity, resulting in the recognition of $25.9 million in interest expense from the write-off of the remaining unamortized debt discount associated with these bonds at the time of redemption. 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 June 30,
20232022
Core loan spread1.06 %1.61 %
Derivative settlements (1:3 basis swaps)0.00 (0.02)
Derivative settlements (fixed rate floor income)(0.00 )(0.09)
Loan spread1.06 %1.50 %
(c)    Derivative settlements consist of net settlements (paid) received related to the company’s 1:3 basis swaps.
(d)    Derivative settlements consist of net settlements received related to the company’s floor income interest rate swaps.



Net interest income, net of settlements on derivatives
The following table summarizes the components of "net interest income" and "derivative settlements, net" from the AGM segment statements of income.
 Three months ended June 30,
 20232022
Variable interest income, gross$262,771 146,911 
Consolidation rebate fees(27,211)(34,952)
Discount accretion, net of premium and deferred origination costs amortization1,890 1,474 
Variable interest income, net237,450 113,433 
Interest on bonds and notes payable (218,602)(68,616)
Derivative settlements (basis swaps), net (a)(65)931 
Variable loan interest margin, net of settlements on derivatives (a)18,783 45,748 
Fixed rate floor income, gross456 18,292 
Derivative settlements (interest rate swaps), net (a)47 3,692 
Fixed rate floor income, net of settlements on derivatives (a)503 21,984 
Core loan interest income (a)19,286 67,732 
Investment interest15,857 8,671 
Intercompany interest(13,711)(1,092)
Net interest income (net of settlements on derivatives) (a)$21,432 75,311 
(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 June 30,
20232022
Net interest income (net of settlements on derivatives)$21,432 75,311 
Derivative settlements (1:3 basis swaps)65 (931)
Derivative settlements (fixed rate floor income)(47)(3,692)
Net interest income$21,450 70,688