Business Context and Reporting Period
Nelnet, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021. The company operates loan servicing and systems, education technology and payment processing, asset generation and management, and Nelnet Bank businesses, while maintaining investments in communications, venture capital, real estate, and renewable energy.
Nelnet remains substantially dependent on its legacy Federal Family Education Loan Program portfolio, although it is diversifying into private education and consumer lending, education technology, and banking. The FFELP portfolio was $17.2 billion at year-end and is expected to amortize over approximately 15 years, with a weighted average remaining life of approximately eight years.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net income attributable to Nelnet | $393.3 million | $352.4 million | +11.6% |
| Basic and diluted EPS | $10.20 | $9.02 | +13.1% |
| Income before income taxes | $502.1 million | $450.5 million | +11.5% |
| Total interest income | $523.8 million | $619.7 million | -15.5% |
| Net interest income | $347.6 million | $289.6 million | +20.0% |
| Loan Servicing and Systems revenue | $486.4 million | $451.6 million | +7.7% |
| Education Technology, Services, and Payment Processing revenue | $338.2 million | $282.2 million | +19.9% |
| Net cash provided by operating activities | $544.9 million | $212.8 million | +156.0% |
Net income benefited from lower funding costs, a $12.4 million negative provision for loan losses, investment gains, and a $92.8 million derivative market value gain. Excluding derivative market value adjustments, net income attributable to Nelnet was $322.7 million, or $8.37 per share, compared with $373.8 million, or $9.57 per share, in 2020.
- Core loan spread increased to 1.41% from 1.33%; loan spread including derivative settlements increased to 1.53% from 1.31%.
- Fixed-rate floor income, net of derivative settlements, was $122.9 million, compared with $116.8 million in 2020.
- Consolidated effective tax rate was 22.75%, compared with 22.25% in 2020.
- Year-end loans and accrued interest receivable, net of allowance, were $18.34 billion, compared with $20.19 billion.
- Total allowance for loan losses declined to $127.1 million from $175.7 million.
- Total assets were $21.68 billion and total shareholders’ equity was $2.95 billion at December 31, 2021.
Segment Results
| Segment pre-tax income | 2021 | 2020 |
|---|---|---|
| Loan Servicing and Systems | $62.4 million | $53.4 million |
| Education Technology, Services, and Payment Processing | $72.7 million | $66.2 million |
| Asset Generation and Management | $423.6 million | $162.7 million |
| Nelnet Bank | $(0.8) million | $(0.1) million |
| Corporate and Other | $(55.9) million | $201.5 million |
Loan Servicing and Systems serviced $529.0 billion for 16.4 million borrowers at year-end, up from $490.2 billion and 15.2 million borrowers. Education technology revenue growth reflected higher payment volumes and the full-year contribution of HigherSchool and CD2 acquisitions, while its pre-tax operating margin declined to 31.7% from 33.1% due to continued investment.
Liquidity, Debt, and Capital
- Cash and cash equivalents were $125.6 million, including $99.4 million outside Nelnet Bank. Cash held by Nelnet Bank is generally unavailable for non-bank activities.
- The company generated $544.9 million of operating cash flow and had $495.0 million available under an unsecured line of credit maturing September 22, 2026.
- Bonds and notes payable totaled $17.6 billion on the consolidated balance sheet; including debt before discounts and issuance costs, obligations totaled approximately $17.8 billion.
- Approximately 98.3% of the AGM loan portfolio was included in asset-backed securitizations. Management estimated future undiscounted cash flows from the securitization portfolio at approximately $1.88 billion, including approximately $1.29 billion over the next five years.
- Year-end warehouse borrowings included $5.0 million under a FFELP facility and $107.0 million under a private education loan facility. The company also had $483.8 million outstanding under repurchase agreements.
- Nelnet Bank had $257.9 million of loans and $425.4 million of deposits. Its regulatory leverage ratio was 22.4%, above the FDIC-required 12% level.
- The company repurchased 713,274 shares for $58.1 million in 2021 and paid $34.5 million in dividends. The regular annual dividend increased to $0.90 per share from $0.82.
Material Changes Versus 2020
- Net income increased despite lower loan interest income, primarily because interest expense fell by $153.8 million, loan-loss expense reversed, and derivative fair values moved favorably.
- Loan interest income decreased to $482.3 million from $595.1 million because of lower yields and a smaller average loan balance.
- Interest expense declined to $176.2 million from $330.1 million, including a $23.8 million reversal of a historical accrued interest liability.
- ALLO was deconsolidated in December 2020. Consequently, 2021 included no consolidated communications revenue and did not include the $258.6 million ALLO deconsolidation gain recognized in 2020.
- Nelnet completed four securitizations that permanently financed $8.7 billion of the former Wells Fargo private education loan portfolio. The company became the servicer and recognized $32.9 million of related investment income, including income associated with terminating its joint-venture funding commitment.
- Government servicing volume increased following the transfer of approximately 603,000 PHEAA borrowers to Nelnet’s platform by year-end; approximately 850,000 had transferred by the filing date.
- The company recorded a $14.2 million non-cash impairment charge related primarily to office and lease assets as employees continued working remotely.
Guidance, Outlook, Risks, and Unusual Items
- No formal earnings or revenue guidance is provided. Management expects the effective tax rate to range from approximately 22% to 24%.
- The CARES Act suspension of federal student loan payments and interest accruals was scheduled to expire May 1, 2022. Management expected servicing revenue per borrower to return to pre-relief levels beginning May 2, 2022, while recognizing that related outreach revenue would be less significant after 2022.
- Nelnet Servicing and Great Lakes Department of Education contracts were scheduled to expire December 14, 2023. The uncertain NextGen procurement process and performance-based volume allocations create substantial revenue risk; Department revenue represented 29% of total 2021 revenue.
- Interest-rate exposure is significant. A 100-basis-point increase in rates was estimated to reduce 2021 pre-tax earnings by $12.9 million after derivative-settlement effects, while a 300-basis-point increase was estimated to increase pre-tax earnings by $25.4 million.
- LIBOR-based assets, debt, and derivatives are exposed to the transition away from LIBOR after June 30, 2023. Contractual fallback provisions and potential basis risk remain uncertain.
- Rising interest rates could reduce fixed-rate floor income, while higher prepayments, federal consolidation, loan forgiveness, or other policy changes could reduce FFELP interest income and servicing revenue.
- Other material risks include cybersecurity and system disruption, regulatory compliance and litigation, unsecured private and consumer loan credit losses, warehouse and repurchase-agreement refinancing, wage inflation, and tax-credit recapture on solar investments.
- Management recognized a $42.1 million loss on the ALLO voting interest and a $10.1 million loss from solar investments under the HLBV method. These accounting outcomes may create periodic earnings volatility that does not directly reflect expected long-term cash economics.
Important Facts for Investors to Verify
- Whether the Department of Education contracts will be renewed, replaced, or materially modified after December 2023, and how future borrower allocations will affect revenue.
- The timing and operational impact of the return of federal student loan payments, including borrower activity, staffing costs, and servicing volumes.
- The pace of FFELP portfolio runoff and the company’s ability to replace declining interest income with fee-based, private lending, and banking revenue.
- The sensitivity of loan spread, floor income, derivative collateral requirements, and cash flow forecasts to interest rates, prepayments, and LIBOR replacement.
- Refinancing and margin requirements for warehouse facilities and repurchase agreements maturing or subject to liquidity renewal beginning in 2022.
- Credit performance and allowance adequacy for unsecured private education and consumer loans as those portfolios grow.
- The realizability of solar tax credits and the valuation of ALLO, Hudl, venture capital, real estate, and other investments.
- The effects of related-party transactions, including Union Bank arrangements and the controlling shareholder’s approximately 81.8% voting power.