Nelnet, Inc. Form 10-Q Summary
Business context and reporting period
Nelnet is a diversified education-focused financial and services company with businesses in loan servicing and systems, education technology and payment processing, asset generation and management, and Nelnet Bank. The filing covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. Financial statements are unaudited and prepared under U.S. GAAP.
- The Asset Generation and Management portfolio was primarily composed of federally insured student loans and totaled approximately $18.4 billion at September 30, 2021.
- Nelnet Servicing and Great Lakes serviced approximately 5.8 million and 7.8 million Department of Education borrowers, respectively.
- Nelnet Bank, launched in November 2020, had $192.3 million of loans and $302.2 million of deposits at September 30, 2021.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total interest income | $136.7 million | $139.7 million | $399.3 million | $480.8 million |
| Net interest income | $86.5 million | $81.3 million | $271.4 million | $203.0 million |
| Provision/(negative provision) for loan losses | $5.8 million | $(5.8) million | $(10.8) million | $73.5 million |
| Loan servicing and systems revenue | $112.4 million | $113.8 million | $336.0 million | $337.6 million |
| Education technology and payment processing revenue | $85.3 million | $74.1 million | $257.3 million | $217.1 million |
| Income before income taxes | $66.9 million | $90.3 million | $333.9 million | $148.3 million |
| Net income attributable to Nelnet | $53.1 million | $71.5 million | $260.6 million | $117.5 million |
| Basic and diluted EPS | $1.38 | $1.86 | $6.74 | $2.99 |
- Q3 2021 core loan spread was 1.42%, compared with 1.46% in Q3 2020; nine-month core loan spread increased to 1.43% from 1.28%.
- Loan spread including derivative settlements was 1.55% in Q3 2021 and 1.54% for the first nine months of 2021.
- Education technology and payment processing net revenue was $54.0 million in Q3 and $177.2 million for nine months. The segment’s pretax operating margin was 25.9% in Q3 and 35.1% for nine months.
- Net income excluding derivative market value adjustments was $47.6 million, or $1.23 per share, in Q3 2021 and $226.8 million, or $5.87 per share, for nine months.
- Total assets were $22.4 billion and total equity was $2.9 billion at September 30, 2021.
Cash flow, debt and liquidity
- Operating cash flow was $389.7 million for the first nine months of 2021, compared with $173.0 million in the prior-year period.
- Investing activities provided $543.4 million, while financing activities used $640.3 million.
- Cash, cash equivalents and restricted cash totaled $1.25 billion at September 30, 2021, including $191.9 million of cash and cash equivalents. Excluding Nelnet Bank, cash and cash equivalents were $170.9 million.
- Bonds and notes payable declined to $18.6 billion from $19.3 billion at December 31, 2020. The fair value of this debt was $18.9 billion.
- The unsecured credit facility was increased to $495.0 million, extended to September 2026, and was undrawn at quarter-end. A $22.0 million secured line had $5.0 million outstanding and $17.0 million available.
- Repurchase agreements totaled $334.5 million and were collateralized by private education loan asset-backed securities.
- Nelnet Bank reported a 25.5% community bank leverage ratio, above the FDIC-required minimum of 12%.
Material changes versus the prior comparable period
- Q3 net income attributable to Nelnet declined 26% year over year, primarily because the prior-year period included a $14.8 million consumer-loan sale gain, while 2021 included a $14.2 million non-cash office-space impairment, an $8.5 million net loss related to ALLO investments, and a $5.8 million loan-loss provision versus a $5.8 million negative provision in 2020.
- Nine-month net income attributable to Nelnet increased to $260.6 million from $117.5 million. The increase reflected lower loan-loss provisions, favorable derivative market value adjustments, lower interest expense, investment gains, and the absence of significant COVID-19-related provisions recorded in early 2020.
- Loan servicing revenue was broadly stable for the quarter but declined slightly for nine months as federal borrower relief reduced revenue per borrower and the FFELP portfolio continued to amortize.
- Education technology and payment processing revenue increased 15% in Q3 and 19% for nine months, supported by payment volume, customer growth, and the HigherSchool and CD2 acquisitions.
- ALLO was deconsolidated in December 2020. Communications revenue therefore totaled zero in 2021 comparable periods, while Nelnet continued to recognize income on ALLO preferred interests and losses on its voting interest.
- Loans and accrued interest receivable declined to $19.3 billion from $20.2 billion at year-end 2020, while investments increased to $1.4 billion from $993.0 million.
Guidance, outlook, risks and unusual items
- Management expected the effective tax rate for 2021 to range from 22% to 24%.
- Federal student-loan payments were scheduled to resume February 1, 2022. Management expected higher servicing revenue per borrower and additional transition-related servicing revenue, but also expected salaries, intersegment costs, printing, postage, and other operating costs to increase.
- Nelnet anticipated that up to 1 million borrowers from PHEAA could transition to its platform before January 31, 2022, with additional transfers expected during the second quarter of 2022. Existing Department of Education servicing contracts were extended through December 14, 2023, but the NextGen procurement process remains uncertain.
- On October 15, 2021, an investment entity completed an equity raise. Nelnet anticipated recognizing fourth-quarter pretax income of $10 million to $15 million, subject to final valuation.
- On October 27, 2021, the Wells Fargo private education loan joint venture completed a final $1.2 billion securitization. Nelnet expected derecognition of all or part of a negative investment balance and positive pretax income of up to approximately $36 million when its funding commitment was reduced or terminated.
- Key risks include COVID-19 effects, student-loan policy and cancellation or forgiveness programs, higher prepayments and consolidations, Department of Education contract allocations, credit losses, interest-rate and basis risk, derivative margin requirements, the transition away from LIBOR, financing-market access, cybersecurity, regulatory compliance, and the performance of ALLO, solar, venture, and other investments.
- As of September 30, 2021, approximately $16.9 billion of AGM assets and $16.8 billion of related debt were indexed to one- or three-month LIBOR. LIBOR discontinuation could materially affect asset yields, funding costs, derivatives, and forecast cash flows.
- The company repurchased $27.5 million of common stock during the first nine months and paid $25.3 million of dividends. A fourth-quarter dividend of $0.24 per share was declared.
Most important facts for investors to verify
- Whether borrower payment resumption and expected PHEAA transfers occur on schedule and produce the anticipated servicing revenue and cost profile.
- The ultimate Department of Education NextGen contract structure, servicing allocations, and effects on Nelnet’s borrower volumes and revenue.
- The effect of LIBOR replacement, interest-rate movements, prepayments, and derivative settlements on loan spreads and liquidity.
- Whether the projected fourth-quarter investment gains from the October 2021 equity raise and Wells Fargo joint venture are ultimately recognized and at what amounts.
- The sustainability of earnings excluding unusual items, including derivative fair-value adjustments, investment gains, debt-liability reversals, loan-sale gains, and impairments.
- Credit performance and delinquency trends, particularly the elevated federally insured loan charge-offs following the expiration of COVID-19 forbearance.
- Restrictions on subsidiary cash transfers, debt covenants, Nelnet Bank capital requirements, and collateral or margin calls under repurchase agreements and derivatives.