Nelnet, Inc. 2020 Form 10-K Summary
Business context and reporting period
Nelnet is a diversified education and financial-services company with businesses in student-loan servicing, education technology and payment processing, loan ownership and management, communications, and banking. The filing covers the fiscal year ended December 31, 2020; fourth-quarter information is presented where disclosed. Substantially all revenue and long-lived assets are in the United States.
- Serviced $490.2 billion of loans for 15.2 million borrowers at year-end.
- Held a $19.6 billion Asset Generation and Management loan portfolio, primarily federally insured FFELP loans, with a 9.8-year weighted-average remaining life.
- Department of Education servicing contracts represented 27% of 2020 revenue, or $326.7 million, and were scheduled to expire June 14, 2021, subject to potential extensions.
- Launched Nelnet Bank on November 2, 2020, focused initially on private education lending.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change/comment |
|---|---|---|---|
| Net interest income | $289.6 million | $249.4 million | Up 16.1% |
| Provision for loan losses | $63.4 million | $39.0 million | Higher, reflecting COVID-19 effects and CECL adoption |
| Loan servicing and systems revenue | $451.6 million | $455.3 million | Down 0.8% |
| Education technology, services, and payment processing revenue | $282.2 million | $277.3 million | Up 1.8% |
| Communications revenue | $76.6 million | $64.3 million | 2020 includes activity through December 21 only |
| Income before income taxes | $450.5 million | $176.7 million | Up 154.9% |
| Net income attributable to Nelnet | $352.4 million | $141.8 million | Up 148.5% |
| Basic and diluted EPS | $9.02 | $3.54 | Up $5.48 |
| Operating cash flow | $212.8 million | $298.9 million | Down $86.1 million |
| Cash and cash equivalents | $121.2 million | $133.9 million | Down $12.7 million |
| Total debt carrying amount | $19.3 billion | $20.5 billion | Down approximately $1.2 billion |
The filing does not provide a single consolidated revenue total suitable for calculating a consolidated revenue margin. The effective tax rate was 22.3%, compared with 20.0% in 2019. Management expects future effective tax rates generally between 21% and 24%.
- Core loan spread increased to 1.33% from 1.18%; loan spread including derivative settlements increased to 1.31% from 0.96%.
- Fixed-rate floor income, net of derivative settlements, increased to $116.8 million from $89.9 million.
- LSS net income declined to $40.6 million from $58.8 million, and its pretax operating margin declined to 10.7% from 15.1%.
- ETS&PP net income increased to $50.3 million from $47.3 million, with pretax operating margin increasing to 33.1% from 31.8%.
- AGM net income increased to $123.7 million from $88.0 million.
- ALLO reported a $25.2 million net loss through its December 21 deconsolidation date, compared with a $23.5 million loss in 2019.
Material changes versus the prior comparable period
- Nelnet recognized a $258.6 million pretax gain in the fourth quarter from deconsolidating ALLO after a recapitalization. Nelnet retained approximately 45% of ALLO’s voting interests and preferred interests recorded at fair value.
- ALLO received $197.0 million from SDC Allo Holdings and redeemed $160.0 million of Nelnet’s preferred units. In January 2021, ALLO obtained financing of up to $230.0 million and paid Nelnet $100.0 million to redeem part of its preferred units.
- Nelnet recognized a $51.0 million pretax gain from remeasuring its Hudl investment after Hudl’s May 2020 equity financing.
- On January 1, 2020, Nelnet adopted CECL, increasing its allowance for loan losses by $91.0 million and reducing retained earnings, net of tax, by $18.9 million. The filing cautions that 2020 and 2019 credit-loss results are not fully comparable.
- Solar investments produced a $37.4 million pretax loss under HLBV accounting, compared with a $2.2 million loss in 2019.
- COVID-19 reduced Department servicing rates, consolidation-loan origination revenue, private and FFELP servicing activity, late-fee income, and education payment-plan demand. Temporary state-agency outsourcing generated $21.9 million of 2020 revenue.
- Nelnet repurchased 1.59 million Class A shares for $73.4 million during 2020 and paid $31.8 million of dividends, or $0.82 per share.
- Nelnet acquired HigherSchool Instructional Services and CD2 on December 31, 2020; the filing states that their historical impact was not material.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects Department servicing revenue to remain below recent historical levels in 2021 while CARES Act payment and interest suspensions remain in effect through September 30, 2021. Revenue per borrower may return toward pre-COVID levels when borrowers re-enter repayment, currently expected in the fourth quarter of 2021.
- Management expects FFELP-related interest income and servicing revenue to decline over time as the portfolio amortizes. The portfolio is expected to run off over approximately 20 years.
- Nelnet expects to begin servicing Wells Fargo’s approximately $10 billion private education loan portfolio, representing approximately 475,000 borrowers, during the first half of 2021. It expects to invest approximately $100 million for an approximately 8% interest, subject to financing and closing conditions.
- The Department’s NextGen procurement remains uncertain. The ISS solicitation was suspended in January 2021, and the Company cannot predict whether its contracts will be extended or whether it will receive future Department contracts.
- Nelnet had $19.3 billion of debt at year-end, including $18.9 billion of asset-backed securitization debt and $428.4 million of warehouse facilities. Certain warehouse liquidity provisions were scheduled to expire in 2021, creating refinancing and renewal risk.
- Management forecast approximately $2.30 billion of future undiscounted cash flows from the securitized loan portfolio, but the estimate depends on prepayment rates, defaults, interest rates, and the continued availability or replacement of LIBOR. A prepayment assumption twice the forecast level would reduce projected cash flow by approximately $185 million to $215 million.
- As of year-end, $17.8 billion of FFELP assets and $17.1 billion of related debt were indexed to LIBOR or related LIBOR terms. Transition risk could affect funding costs, net interest income, asset values, derivatives, and securitization cash flows.
- The Company identified no material off-balance-sheet arrangements. Management and KPMG concluded that disclosure controls and internal control over financial reporting were effective.
- Material risks include COVID-19, borrower defaults and prepayments, interest-rate and basis risk, cybersecurity and privacy failures, regulatory compliance, litigation, loss of federal servicing contracts, tax-credit recapture on solar investments, and related-party transaction conflicts.
Most important facts for investors to verify
- Whether the Department of Education servicing contracts were extended and whether Nelnet or Great Lakes obtained replacement or future servicing awards.
- The actual timing, financing, servicing economics, and risk-retention requirements of the Wells Fargo private-loan transaction.
- Changes in federally insured loan balances, prepayments, forbearance levels, delinquencies, allowance coverage, and private-loan credit performance.
- The effect of the LIBOR transition and interest-rate movements on loan spread, derivative collateral requirements, and securitization cash flows.
- Whether ALLO’s retained investment and preferred units generate the expected redemptions and whether additional capital contributions are required.
- The sustainability of reported earnings excluding the $258.6 million ALLO deconsolidation gain, the $51.0 million Hudl remeasurement gain, derivative mark-to-market adjustments, and other HLBV-related investment volatility.
- Liquidity after dividends, share repurchases, Nelnet Bank funding commitments, loan acquisitions, warehouse maturities, and other strategic investments.