Nelnet, Inc. Form 10-Q Summary
Business context and reporting period
Nelnet reported results for the three and six months ended June 30, 2022. Its principal businesses are loan servicing and systems, education technology and payment processing, asset generation and management, and Nelnet Bank. The company also holds investments in communications, renewable energy, real estate, and venture capital.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $77.9 million | $83.6 million | $155.1 million | $184.9 million |
| Net interest income after loan-loss provision | $68.5 million | $83.2 million | $146.1 million | $201.6 million |
| Loan servicing and systems revenue | $124.9 million | $112.1 million | $261.2 million | $223.6 million |
| Education technology and payment processing revenue | $91.0 million | $76.7 million | $203.3 million | $172.0 million |
| Income before taxes | $108.4 million | $109.3 million | $349.0 million | $267.0 million |
| Net income attributable to Nelnet | $85.1 million | $83.9 million | $271.8 million | $207.5 million |
| Basic and diluted EPS | $2.26 | $2.16 | $7.18 | $5.36 |
| Operating cash flow | Not separately provided | Not separately provided | $483.7 million | $185.9 million |
Revenue growth in the fee-based businesses was partly offset by lower net interest income. Q2 derivative market value adjustments contributed $40.4 million of pre-tax income, compared with a $1.6 million loss in the prior-year quarter. Excluding derivative market value adjustments, Q2 net income attributable to Nelnet was $54.4 million, or $1.44 per share, versus $85.1 million, or $2.20 per share, in Q2 2021.
- Loan servicing and systems revenue increased 11.4% in Q2 and 16.8% for the six-month period, supported by higher government servicing volumes and additional borrowers transferred from PHEAA.
- Education technology, services, and payment processing revenue increased 18.7% in Q2 and 18.2% year to date, led by education technology, instructional services, and payment processing.
- Net interest income declined because higher funding costs and a smaller loan portfolio more than offset higher loan yields and wider core loan spreads.
- The loan-loss provision was $9.4 million in Q2 and $9.0 million year to date, compared with $0.4 million and a $16.7 million negative provision, respectively, in the comparable periods.
- Loan servicing and systems pre-tax operating margin declined to 10.1% in Q2 from 12.8%, and to 9.2% year to date from 13.0%.
- Education technology pre-tax operating margin declined to 24.4% in Q2 from 31.3%, and to 34.9% year to date from 39.1%, reflecting investments in technology, customer experience, and instructional services.
Financial position, debt, and liquidity
- Total assets were $20.6 billion at June 30, 2022, compared with $21.7 billion at December 31, 2021.
- Loans and accrued interest receivable were $16.9 billion, down from $18.3 billion at year-end. The AGM portfolio was approximately $15.9 billion, including primarily federally insured student loans.
- Bonds and notes payable were $16.1 billion, down from $17.6 billion at year-end. The company made $1.70 billion of debt repayments and issued $159.9 million of debt during the first six months.
- Cash, cash equivalents, and restricted cash totaled $1.17 billion at June 30, 2022. Reported cash and cash equivalents were $128.5 million.
- Management identified approximately $1.25 billion of liquidity sources, including unrestricted cash, unencumbered investments and loans, repurchased securities, and $495.0 million of unused capacity under an unsecured line of credit.
- Nelnet Bank had $423.6 million of loans and $751.3 million of deposits. Its June 30, 2022 community bank leverage ratio was 13.8%, above the FDIC-required 12% level.
- Shareholders’ equity was $3.10 billion. The company repurchased 938,310 Class A shares for $78.9 million during the first six months and paid $18.0 million of dividends. A third-quarter dividend of $0.24 per share was declared.
Material changes, outlook, risks, and unusual items
- Government servicing contracts are scheduled to expire December 14, 2023. Nelnet responded to the Department of Education’s Unified Servicing and Data Solution solicitation, but the timing and outcome remain uncertain.
- Government servicing volume increased to $542.4 billion, and total borrowers serviced under government contracts reached approximately 15.4 million at June 30, 2022. The company expects higher servicing costs while preparing for the end of the CARES Act payment pause, then scheduled for August 31, 2022.
- Department of Education initiatives involving income-driven repayment, loan forgiveness, discharge, and consolidation may accelerate FFELP loan prepayments. This could reduce net interest income, FFELP servicing revenue, investment advisory revenue, and related investment income.
- The company’s cash-flow forecast for securitized assets was approximately $1.72 billion, based on assumptions including 4% annual prepayments for consolidation loans and 5% for other loans. A tenfold increase in prepayment rates would reduce the forecast to approximately $1.14 billion.
- Derivative market value gains were unusually significant and are expected to create period-to-period earnings volatility. Management expects higher interest rates to reduce gross fixed-rate floor income.
- Corporate results included a $16.9 million Q2 loss and $30.1 million year-to-date loss from the ALLO voting investment, a $6.3 million impairment charge, and a $15.2 million gain from revaluing the previously held NextGen investment after acquiring an additional 30% interest.
- On July 1, 2022, the company acquired 80% of GRNE-Nelnet and ENRG-Nelnet for $29.7 million in cash. Their solar operations will be consolidated beginning July 1, 2022.
- Management expects a 2022 effective tax rate of approximately 22% to 24%. It expects education technology margins and loan servicing profitability to remain below prior-year levels while investments and payment-pause preparation continue.
- Management expected no additional Nelnet Bank capital contributions for the remainder of 2022, but indicated that additional ALLO contributions may be required during the fourth quarter of 2022 and in 2023 and 2024.
- In late July 2022, the company identified a cybersecurity incident involving the primary loan servicing platform used by remote-hosted servicing clients. The investigation was ongoing, and potential liability, expense, revenue effects, and reputational damage were not yet determinable.
Important facts for investors to verify
- Outcome and economics of the Department of Education’s USDS procurement and the December 2023 contract expiration.
- Actual FFELP prepayment, consolidation, forgiveness, and discharge rates versus management’s cash-flow assumptions.
- Sustainability of earnings after excluding volatile derivative fair-value adjustments and other nonrecurring investment gains or losses.
- Impact of rising interest rates, LIBOR-to-SOFR transition, funding costs, and fixed-rate floor-income compression.
- Progress of Nelnet Bank’s loan and deposit growth, capital requirements, and profitability.
- Financial, operational, and regulatory consequences of the July 2022 cybersecurity incident.
- Future capital requirements for ALLO, solar investments, and other strategic initiatives, as well as liquidity available for debt maturities and repurchases.