Nelnet, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2021, compared with the same periods in 2020. Nelnet operates loan servicing and systems, education technology and payment processing, asset generation and management, and Nelnet Bank businesses. ALLO Communications was deconsolidated on December 21, 2020 and therefore contributed no 2021 operating revenue.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total interest income | $133.6 million | $151.9 million | $262.7 million | $341.1 million |
| Net interest income | $83.6 million | $66.6 million | $184.9 million | $121.7 million |
| Net interest income after loan-loss provision | $83.2 million | $63.6 million | $201.6 million | $42.4 million |
| Total other income/expense | $219.5 million | $251.0 million | $458.6 million | $441.7 million |
| Income before taxes | $109.3 million | $107.9 million | $267.0 million | $58.0 million |
| Net income attributable to Nelnet | $83.9 million | $86.5 million | $207.5 million | $46.0 million |
| Basic and diluted EPS | $2.16 | $2.21 | $5.36 | $1.16 |
Q2 2021 net margin attributable to Nelnet was approximately 27.7% of total reported income before cost of services and operating expenses, versus approximately 29.6% in Q2 2020; the filing does not present a consolidated revenue-based operating margin. The effective tax rate was 23.83% in Q2 2021 and 22.75% for the first six months, compared with 19.74% and 19.50%, respectively, in the prior-year periods.
- Operating cash flow was $187.6 million in the first six months of 2021 versus cash used of $105.6 million in the prior-year period.
- Cash, cash equivalents, and restricted cash totaled $1.077 billion at June 30, 2021, including $213.0 million of cash and cash equivalents.
- Loans and accrued interest receivable, net, totaled $20.188 billion; the allowance for loan losses was $145.7 million.
- Bonds and notes payable totaled $19.382 billion, compared with $19.321 billion at December 31, 2020. Fair value was $19.640 billion.
- Total equity was $2.829 billion, compared with $2.628 billion at year-end 2020.
- Nelnet had $455.0 million of unsecured line capacity, with $85.0 million outstanding and $370.0 million available. A secured line had $5.0 million outstanding and $17.0 million available.
Material changes versus the prior comparable period
- Six-month net income attributable to Nelnet increased $161.5 million, primarily because 2020 included COVID-19-related loan-loss, beneficial-interest, and investment impairment charges totaling approximately $97.1 million pre-tax, while 2021 included a $16.7 million negative loan-loss provision.
- Net interest income increased despite lower loan interest income, driven by lower funding costs, improved loan spreads, increased fixed-rate floor income, and a $23.8 million reversal of a historical accrued interest liability in Q1 2021.
- Q2 2021 GAAP earnings decreased modestly because Q2 2020 included a $51.0 million pre-tax gain from revaluing the Hudl investment. Q2 2021 included a $15.3 million pre-tax gain on the sale of $77.4 million of consumer loans.
- Six-month derivative market value adjustments were a $27.5 million gain in 2021 versus a $14.5 million loss in 2020. These non-hedge-accounting adjustments remain volatile and reduced comparability.
- Education technology, services, and payment processing revenue increased to $76.7 million in Q2 and $172.0 million for six months, helped by higher payment volumes and the HigherSchool and CD2 acquisitions. Six-month segment before-tax operating margin increased to 39.1% from 37.3%.
- Loan servicing and systems revenue was broadly stable in Q2 but decreased slightly for six months. Federal servicing revenue declined because of lower per-borrower fees and pandemic-related payment suspensions, while private-loan servicing increased following the conversion of former Wells Fargo borrowers.
- Nelnet Bank, launched in November 2020, had $190.6 million of loans and $299.4 million of deposits at June 30, 2021. It reported a six-month net loss of $1.2 million and a 26.4% community bank leverage ratio.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects a 2021 effective tax rate of approximately 22% to 24%.
- Federal student-loan servicing contracts for Nelnet Servicing and Great Lakes were extended through December 14, 2021, with potential extensions to December 14, 2023. The Department of Education cancelled its Interim Servicing Solution solicitation on June 25, 2021, and future servicing awards remain uncertain.
- PHEAA and Granite State announced plans to exit federal servicing after their contracts expire in December 2021. The Department had not specified how their approximately 9.8 million borrowers would be transitioned as of the filing date.
- COVID-19 borrower payment suspensions were scheduled to continue through at least September 30, 2021. Management expects servicing costs and operating expenses to rise, and servicing margins to decline, when relief provisions expire.
- The AGM loan portfolio was approximately $19.3 billion with a weighted-average remaining life of 9.5 years. Management forecast approximately $2.22 billion of future undiscounted cash flows from loans in asset-backed securitizations, but the forecast is sensitive to prepayments, defaults, interest rates, and LIBOR transition assumptions.
- LIBOR discontinuation creates basis, repricing, derivative, financing, and cash-flow risks. Approximately $17.7 billion of AGM student-loan assets and $17.0 billion of related asset-backed debt were indexed to LIBOR at June 30, 2021.
- The Company retained approximately $307.3 million of private education loan asset-backed securities for risk retention and had $255.3 million outstanding under related repurchase agreements. These arrangements may require additional cash if collateral values decline.
- Nelnet corrected an immaterial prior-period error in the ALLO HLBV accounting method, increasing the ALLO investment and pre-tax income by $14.0 million, or after-tax net income by $10.6 million and EPS by $0.27.
- The Company expects ALLO losses in the second half of 2021 to approximate first-half losses. Remaining ALLO preferred interests were $129.7 million plus $3.6 million of accrued preferred return and earn a 6.25% annual return.
- The Board declared a third-quarter dividend of $0.22 per share. The company had 3,246,732 shares remaining under its repurchase authorization at June 30, 2021.
Most important facts for investors to verify
- Whether federal servicing contracts are extended and how borrower volumes from departing servicers are allocated.
- The sustainability of earnings after excluding the 2021 negative loan-loss provision, ALLO accounting correction, consumer-loan sale gain, derivative valuation gains, and other investment gains.
- The effect of COVID-19 payment relief expiration on servicing revenue, staffing, postage, delinquencies, and loan-loss reserves.
- Progress in replacing LIBOR across loans, debt, derivatives, and securitization agreements.
- Liquidity and collateral requirements associated with warehouse facilities, repurchase agreements, derivatives, and Nelnet Bank support obligations.
- Actual performance of the Wells Fargo private education loan servicing and joint-venture investment arrangements, including required risk retention.