Business Context and Reporting Period
Nelnet, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Its principal businesses are loan servicing and systems, education technology and payment processing, asset generation and management, and Nelnet Bank. The company also invests in communications, renewable energy, real estate, venture capital, and other assets.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total interest income | $125.2 million | $129.1 million | Down $3.9 million |
| Net interest income | $77.1 million | $101.3 million | Down $24.2 million |
| Net interest income after loan-loss provision | $77.6 million | $118.4 million | Down $40.8 million |
| Loan servicing and systems revenue | $136.4 million | $111.5 million | Up $24.9 million |
| Education technology, services, and payment processing revenue | $112.3 million | $95.3 million | Up $17.0 million |
| Derivative market value adjustments and settlements, net | $142.9 million | $34.5 million | Up $108.4 million |
| Income before taxes | $240.6 million | $157.8 million | Up $82.8 million |
| Net income attributable to Nelnet | $186.6 million | $123.6 million | Up $63.0 million |
| Basic and diluted EPS | $4.91 | $3.20 | Up $1.71 |
| Operating cash flow | $185.5 million | $48.7 million | Up $136.8 million |
GAAP earnings benefited substantially from derivative fair-value gains. Net income attributable to Nelnet excluding derivative market value adjustments was $75.9 million, or $1.99 per share, versus $94.1 million, or $2.44 per share, in Q1 2021.
Total assets were $21.0 billion at March 31, 2022, including $17.6 billion of net loans and accrued interest receivable, $1.65 billion of investments, and $162.8 million of cash and cash equivalents. Total liabilities were $17.9 billion, including $16.7 billion of bonds and notes payable. Shareholders’ equity was $3.09 billion.
Cash, cash equivalents, and restricted cash totaled $1.18 billion at March 31, 2022, compared with $1.19 billion at December 31, 2021. Investing activities provided $603.1 million, while financing activities used $805.2 million, principally reflecting debt repayments of $918.3 million. The company had a $495.0 million unsecured line of credit available and no borrowings outstanding under it.
Material Changes Versus the Prior Comparable Period
- Net interest income declined primarily because of a smaller loan portfolio, lower fixed-rate floor income, and the absence of the $23.8 million accrued-interest reversal that reduced Q1 2021 interest expense. The decline was partly offset by higher investment interest income and lower debt balances.
- Derivative market-value gains increased to $145.7 million from $38.8 million. These non-hedge-accounted gains materially increased GAAP earnings but are expected to create period-to-period volatility.
- Loan servicing revenue increased 22%, supported by higher government-servicing volumes, transferred PHEAA borrowers, contractual rate increases, and temporary revenue from borrower outreach and total-and-permanent-disability discharges. LSS pre-tax operating margin declined to 8.3% from 13.3% due to higher staffing and preparation costs.
- Education technology and payment-processing revenue increased 18%. Net revenue after service costs rose to $76.7 million from $68.2 million, while the segment’s pre-tax operating margin declined to 43.1% from 45.4% because of investments in technology, services, and customer experience.
- The AGM loan portfolio declined to $16.6 billion from $17.4 billion at December 31, 2021. The allowance for loan losses declined to $117.8 million from $127.1 million, with a negative provision of $0.4 million in Q1 2022 versus $17.0 million in Q1 2021.
- Nelnet Bank’s loan portfolio increased to $368.3 million from $257.9 million at December 31, 2021. The bank generated $0.7 million of net income compared with a $1.0 million net loss in Q1 2021.
- The company repurchased 380,053 Class A shares for $32.9 million, paid a $0.24 per-share dividend, and contributed an additional $34.7 million to ALLO.
Guidance, Outlook, Risks, and Unusual Items
- Management expects a 2022 effective tax rate of approximately 22% to 24%.
- The federal student-loan payment pause was extended through August 31, 2022. Management expected higher staffing and related costs throughout 2022 in preparation for the resumption of payments.
- The Department of Education’s current servicing contracts with Nelnet Servicing and Great Lakes are scheduled to expire December 14, 2023. The timing and outcome of the NextGen procurement process remain uncertain.
- Department of Education and FSA announcements regarding income-driven repayment adjustments and forgiveness could materially increase FFELP loan prepayments. Management warned that this could reduce future net interest income, FFELP servicing revenue, investment advisory revenue, and interest income on FFELP asset-backed securities.
- The company’s cash-flow forecast for asset-backed securitizations was approximately $1.83 billion, including approximately $1.11 billion of overcollateralization and estimated future net interest income of approximately $0.72 billion before tax. The forecast is sensitive to prepayments, interest rates, defaults, and LIBOR replacement assumptions.
- Interest-rate and basis risk remain significant. At March 31, 2022, approximately $15.2 billion of FFELP loan assets and $15.1 billion of FFELP debt were indexed to LIBOR-related rates. The transition to SOFR and related changes to contracts and derivatives may affect earnings and cash flows.
- On April 28, 2022, the company terminated $1.25 billion of interest-rate derivatives. On May 9, 2022, the board authorized a new three-year program for up to five million Class A share repurchases, including shares remaining under the prior authorization.
- Nelnet Bank had a 17.2% leverage ratio at March 31, 2022, above the FDIC-required 12% level. Management stated that additional capital contributions may be required during the fourth quarter of 2022 and/or 2023.
- ALLO continues to require substantial investment and generated a $13.1 million pre-tax loss for Nelnet in Q1 2022. The company’s preferred ALLO investment was $137.3 million and earned a 6.25% preferred return.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $145.7 million derivative fair-value gain and review the company’s non-GAAP earnings reconciliation.
- Assess the potential effect of FFELP prepayments, federal loan forgiveness, income-driven repayment changes, and the end of the payment pause on loan earnings and servicing revenue.
- Review debt maturities, repurchase-agreement collateral requirements, warehouse-facility liquidity provisions, and the availability of the unsecured credit line.
- Evaluate exposure to LIBOR-to-SOFR transition risk, basis risk, interest-rate movements, and derivative margin requirements.
- Monitor Nelnet Bank’s growth, regulatory capital requirements, expected capital contributions, and deposit funding.
- Review the assumptions supporting the $1.83 billion asset-backed securitization cash-flow forecast, particularly prepayment rates and interest-rate assumptions.
- Consider the sustainability of ALLO and solar investment results, including future capital commitments and HLBV-related earnings volatility.