Nelnet, Inc. 2022 Form 10-K Summary
Business Context and Reporting Period
Nelnet is a diversified education-focused company with businesses in student-loan servicing, education technology and payment processing, loan ownership and management, banking, renewable energy, investments, and communications. This Form 10-K covers the fiscal year ended December 31, 2022; the filing does not present a separate fourth-quarter-only income statement.
The company’s legacy FFELP portfolio remains a major earnings source but is in runoff because new FFELP originations ended in 2010. Nelnet serviced $587.5 billion of loans for 17.6 million borrowers at year-end, including $545.4 billion of Department of Education-owned loans.
Financial Performance and Position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net income attributable to Nelnet | $407.3 million | $393.3 million | Up 3.6% |
| Basic and diluted EPS | $10.83 | $10.20 | Up 6.2% |
| Total interest income | $742.8 million | $523.8 million | Up $219.0 million |
| Net interest income | $312.7 million | $347.6 million | Down $34.9 million |
| Provision for loan losses | $46.4 million | Negative provision of $12.4 million | Unfavorable $58.9 million swing |
| Income before taxes | $509.5 million | $502.1 million | Up 1.5% |
| Operating cash flow | $684.1 million | $480.3 million | Up 42.4% |
| Total assets | $19.4 billion | $21.7 billion | Down $2.3 billion |
| Total debt carrying amount | $14.6 billion | $17.6 billion | Down $3.0 billion |
| Shareholders’ equity | $3.2 billion | $3.0 billion | Up $247.8 million |
Loan servicing and systems revenue was $535.5 million, up from $486.4 million. Education technology, services, and payment processing revenue was $408.5 million, up from $338.2 million. Solar construction revenue contributed $24.5 million following the July 2022 acquisition of an 80% interest in GRNE Solar.
Derivative market value adjustments and settlements generated a net gain of $264.6 million in 2022, compared with $71.4 million in 2021. These gains materially affected GAAP earnings. Excluding derivative market value adjustments, non-GAAP net income attributable to Nelnet was $231.3 million, down from $322.7 million, and non-GAAP EPS was $6.15 versus $8.37.
AGM income before taxes increased to $454.7 million from $423.6 million, but net interest income after loan-loss provisions declined to $220.1 million from $347.2 million. Core loan spread increased to 1.58% from 1.41%, while the AGM loan portfolio declined to $14.2 billion from $17.4 billion. Nelnet Bank reported $3.3 million of net income compared with a $0.6 million net loss, with a $419.8 million loan portfolio and $789.6 million of deposits at year-end.
Liquidity included $108.1 million of net cash and cash equivalents available outside Nelnet Bank, $240.5 million of unencumbered available-for-sale debt securities, $298.5 million of unencumbered private, consumer, and other loans, $85.6 million of unencumbered repurchased Nelnet asset-backed securities, and $495.0 million of unused capacity under the unsecured line of credit. The company reported total sources of liquidity of approximately $1.23 billion.
The company paid $36.6 million of dividends and repurchased 1.16 million shares for $97.7 million during 2022. The annual dividend increased to $0.98 per share from $0.90 per share.
Material Changes Versus 2021
- Higher short-term interest rates increased loan and investment interest income, but also sharply increased funding costs.
- The FFELP portfolio decreased by approximately $3.5 billion, driven by repayments, consolidations into Federal Direct Loans, and other runoff.
- Government loan-servicing revenue increased 17.3% to $423.1 million, primarily due to additional borrowers transferred to Nelnet, contractual rate increases, CARES Act-related compensation, and other Department work.
- Loan servicing margins declined as salaries and operating expenses increased in preparation for the anticipated end of the federal student-loan payment pause.
- Education technology revenue increased 20.8%, but the segment’s pretax margin excluding net interest income declined to 24.9% from 31.2% because of investments in technology, services, and customer experience.
- The company recorded a $46.4 million loan-loss provision versus a $12.4 million negative provision in 2021, reflecting weaker economic assumptions and growth in newer loan portfolios.
- Nelnet acquired an additional 30% of NextGen, obtaining control and recording a $15.2 million remeasurement gain, and acquired 80% of GRNE Solar for $33.9 million.
- Corporate results worsened, including a $68.0 million loss on the ALLO voting investment versus a $42.1 million loss in 2021, partly offset by investment and real-estate gains.
- The company recorded $15.5 million of impairment expense, including venture-capital, software, lease, and building impairments.
Guidance, Outlook, Risks, and Unusual Items
Management expects the effective tax rate in future periods to generally range from 22% to 24%. The company expects continued cash generation as the FFELP portfolio amortizes, but also expects FFELP interest income and related servicing revenue to decline over time. Management plans to diversify through private education and consumer lending, Nelnet Bank, education technology, renewable energy, strategic investments, and acquisitions.
The Department of Education servicing contracts for Nelnet Servicing and Great Lakes were scheduled to expire on December 14, 2023. Nelnet responded to the Department’s Unified Servicing and Data Solution solicitation, but the company could not predict the procurement outcome. The Department notified Nelnet in February 2023 of its intention to transfer up to one million existing borrowers to another servicer. Remote-hosted Department servicing customers were also expected to transfer volume in 2023, eliminating active Department remote-hosted customers on Nelnet’s platform after completion.
The CARES Act payment pause continued to reduce servicing revenue per borrower and accelerate FFELP consolidations. The Department’s broad-based student-debt relief plan was blocked by court decisions and remained subject to Supreme Court review as of the filing date. Management estimated that broad forgiveness of $10,000 or $20,000 per borrower could reduce serviced borrowers by approximately 4.3 million or 7.5 million, respectively, although actual effects were uncertain.
LIBOR-based assets, debt, and derivatives were exposed to the transition to SOFR, expected to occur for relevant FFELP special allowance calculations on July 1, 2023. The transition could create basis risk, contract disputes, valuation changes, higher funding costs, and operational expenses.
Other significant risks include interest-rate and derivative valuation volatility, accelerated loan prepayments, unsecured private and consumer-loan credit losses, warehouse-facility refinancing, collateral and margin requirements, cybersecurity and privacy incidents, regulatory investigations, government-contract changes, renewable-energy tax-credit recapture, and continued funding needs at Nelnet Bank and ALLO.
In July 2022, a cybersecurity incident affected a customer portal used by remote-hosted servicing clients. The company reported exposure of certain federal borrower names, addresses, email addresses, phone numbers, and Social Security numbers; Nelnet-serviced loans and financial-account or payment information were not affected according to the filing.
ALLO preferred interests held by Nelnet totaled $145.9 million and earned a 6.25% preferred return. The interests were expected to be redeemed by April 2024; otherwise, the preferred return would increase to 10%. Nelnet also contributed $48.3 million of additional equity to ALLO in 2022 and may make further contributions.
Investor Verification Checklist
- Verify the status, economics, and renewal or replacement arrangements for the Department of Education servicing contracts and the impact of borrower transfers.
- Reconcile GAAP earnings with results excluding derivative market value adjustments and assess the sustainability of reported derivative gains.
- Monitor FFELP runoff, prepayment rates, consolidation activity, and the resulting effect on AGM cash flows and servicing revenue.
- Review LIBOR-to-SOFR transition provisions for loan assets, securitization debt, and derivatives.
- Evaluate credit performance and allowance adequacy for unsecured private education, consumer, and Nelnet Bank loans.
- Review near-term maturities and refinancing requirements for warehouse facilities, participation agreements, and repurchase agreements.
- Assess the liquidity restrictions and capital requirements applicable to Nelnet Bank, including the 12% FDIC-required leverage ratio and future parent-company contributions.
- Track the ALLO redemption obligation, ongoing equity contributions, and the continuing HLBV losses recognized on the ALLO investment.
- Review cybersecurity remediation, regulatory responses, litigation, and potential privacy-related costs.
- Assess the valuation, tax-credit recapture exposure, unfunded commitments, and operating losses associated with solar investments and other private investments.