Nelnet, Inc. — Form 10-Q Summary
Business context and reporting period
Nelnet reported unaudited results for the three and nine months ended September 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 has investments in communications, renewable energy, real estate, and venture capital.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total interest income | $203.1 million | $136.7 million | $479.9 million | $399.3 million |
| Net interest income | $76.5 million | $86.5 million | $231.6 million | $271.4 million |
| Loan servicing and systems revenue | $134.2 million | $112.4 million | $395.4 million | $336.0 million |
| Education technology, services, and payment processing revenue | $106.9 million | $85.3 million | $310.2 million | $257.3 million |
| Income before taxes | $127.1 million | $66.9 million | $476.0 million | $333.9 million |
| Net income attributable to Nelnet | $104.8 million | $53.1 million | $376.6 million | $260.6 million |
| Basic and diluted EPS | $2.80 | $1.38 | $9.99 | $6.74 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $656.9 million | $336.5 million |
Q3 net income attributable to Nelnet increased approximately 97% year over year, while nine-month net income increased approximately 44%. The effective tax rate was 20.2% in Q3 and 22.2% for the nine-month period, compared with 22.7% in both comparable 2021 periods.
- Q3 net interest income declined 12% because higher funding costs and a smaller loan balance more than offset higher loan yields and interest income on investments.
- Loan servicing revenue increased 19% in Q3 and 18% year to date, primarily from higher government-servicing volumes, transferred borrowers, contractual rate increases, and CARES Act-related servicing work.
- Education technology and payment processing revenue increased 25% in Q3 and 21% year to date, driven by payment volumes, new customers, technology products, and instructional services.
- Derivative market value adjustments generated $53.0 million of Q3 income and $239.1 million of nine-month income, compared with $7.3 million and $44.5 million, respectively, in 2021. These non-cash and realized valuation effects materially benefited reported GAAP earnings.
- Excluding derivative market value adjustments, net income attributable to Nelnet was $64.5 million, or $1.73 per share, in Q3, and $194.8 million, or $5.17 per share, for nine months, compared with $47.6 million and $226.8 million, respectively, in 2021.
Financial position, liquidity, and debt
- Total assets were $19.56 billion at September 30, 2022, down from $21.68 billion at December 31, 2021.
- Net loans and accrued interest receivable were $15.88 billion, down from $18.34 billion, primarily reflecting accelerated FFELP portfolio runoff.
- Bonds and notes payable were $15.04 billion, down from $17.63 billion. The company made $3.04 billion of debt payments and issued $413.4 million of debt during the first nine months.
- Total equity was $3.17 billion, compared with $2.95 billion at year-end 2021.
- Cash, cash equivalents, and restricted cash totaled $1.04 billion at September 30, 2022, down from $1.19 billion at year-end.
- Management identified approximately $1.32 billion of liquidity sources, including unrestricted cash, eligible securities, unencumbered loans, repurchased debt securities, and $495.0 million of unused capacity under an unsecured line of credit.
- Operating cash flow was $656.9 million; investing activities provided $1.74 billion, while financing activities used $2.55 billion. The company repurchased $93.2 million of common stock and paid $27.0 million of dividends during the nine months.
- Nelnet Bank had $429.5 million of loans and $751.4 million of deposits at September 30, 2022. Its regulatory leverage ratio was 14.7%, above the FDIC-required 12% level.
Material changes and unusual items
- The AGM loan portfolio declined to $14.8 billion from $17.4 billion at year-end 2021. Loans lost to external parties totaled $1.61 billion during the first nine months, largely reflecting FFELP consolidation and runoff.
- Management recorded $18.6 million of loan-loss provision for the first nine months, compared with a $10.8 million negative provision in 2021, citing declining economic conditions and loan acquisitions and originations.
- Fixed-rate floor income declined to $54.9 million from $108.0 million for the nine-month period as higher interest rates reduced gross floor income; derivative settlements partially offset the decline.
- Nelnet acquired an additional 30% of NextGen for $9.2 million and acquired 80% of GRNE Solar for $30.4 million. The NextGen transaction produced a $15.2 million remeasurement gain.
- Q3 2022 included $9.4 million of solar construction revenue and $6.0 million of related service costs following the GRNE Solar acquisition.
- Corporate results included a $47.6 million nine-month loss from the ALLO voting investment and $7.1 million of solar investment losses. The company also recorded a $6.3 million impairment charge in Q2, primarily related to a venture capital investment and real estate leases.
- Stock repurchases totaled 1.11 million shares for $93.2 million through September 30, leaving 4.52 million shares authorized for repurchase. The board declared a fourth-quarter dividend of $0.26 per share.
Outlook, risks, and contingencies
The filing does not provide formal earnings or revenue guidance. Management expects continued FFELP portfolio runoff and states that future results will be affected by interest rates, prepayments, student-loan policy, servicing volumes, credit losses, and financing conditions.
- Department of Education servicing contracts expire December 14, 2023. Nelnet responded to the Department’s USDS solicitation, but the timing and outcome of future contract awards are uncertain.
- Nelnet serviced approximately 15.7 million government borrowers and $545.5 billion of government-owned student loans at September 30, 2022. Management estimated that broad forgiveness of $10,000 or $20,000 per borrower across government-owned loans could reduce serviced borrowers by approximately 4.4 million or 7.5 million, respectively, although actual effects would be lower based on eligibility.
- Higher FFELP prepayments and consolidations reduce future net interest income, FFELP servicing revenue, advisory fees, and investment income. Management expects limited additional consolidation specifically from the August 2022 broad debt-relief plan but continues to expect pressure from other policy changes.
- Interest-rate and basis risk remain significant. Approximately $13.3 billion of FFELP loan assets and $13.1 billion of related debt were indexed to LIBOR-based rates at September 30, 2022. The transition from LIBOR to alternative benchmarks could affect assets, funding, derivatives, and projected cash flows.
- Asset-backed securitization cash flow forecasts estimated approximately $1.66 billion of future undiscounted cash flows, including approximately $1.01 billion of overcollateralization. These estimates depend on prepayment, default, interest-rate, and other assumptions.
- In late July 2022, a cybersecurity incident affected a portal used by remote-hosted servicing clients. Unauthorized access to certain federal borrower names, addresses, email addresses, phone numbers, and Social Security numbers was confirmed; loans serviced directly by Nelnet and financial account or payment information were not impacted. Regulators and affected consumers were notified, and identity-monitoring services were offered.
- The company disclosed no material changes to previously reported legal proceedings. Disclosure controls and procedures were deemed effective as of September 30, 2022.
Important facts for investors to verify
- Whether Nelnet retains or expands Department of Education servicing contracts before the December 2023 expiration date.
- The actual borrower-volume and revenue effect of federal student-loan forgiveness, IDR changes, consolidations, and the resumption of payments.
- The sustainability of earnings excluding the $239.1 million year-to-date derivative market value gain.
- FFELP prepayment rates, loan portfolio runoff, fixed-rate floor income, credit-loss provisions, and future securitization cash flows.
- LIBOR transition terms for the company’s loan assets, debt, and derivatives.
- Liquidity requirements and collateral calls under warehouse facilities, repurchase agreements, derivatives, and the Union Bank participation agreement.
- Costs, liabilities, and reputational effects associated with the cybersecurity incident.