Nelnet, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Nelnet reported results for the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Its principal businesses are loan servicing and systems, education technology and payment processing, and asset generation and management, which earns interest on a primarily federally insured student-loan portfolio. Nelnet Bank began operations on November 2, 2020. ALLO Communications was deconsolidated on December 21, 2020 and therefore generated no consolidated communications revenue in Q1 2021.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total interest income | $129.1 million | $189.2 million | Down $60.1 million |
| Net interest income | $101.3 million | $55.1 million | Up $46.3 million |
| Provision for loan losses | Negative provision of $17.0 million | $76.3 million provision | Improved $93.3 million |
| Loan servicing and systems revenue | $111.5 million | $112.7 million | Down $1.2 million |
| Education technology, services, and payment processing revenue | $95.3 million | $83.7 million | Up $11.6 million |
| Total other income/expense | $239.1 million | $190.6 million | Up $48.5 million |
| Income before taxes | $157.8 million | $(49.9) million | Improved $207.7 million |
| Net income attributable to Nelnet | $123.6 million | $(40.5) million | Improved $164.1 million |
| Basic and diluted EPS | $3.20 | $(1.01) | Improved $4.21 |
The effective tax rate was 22.0%, compared with 20.0% in Q1 2020. Management expects a 2021 effective tax rate between 21% and 23%. Net income attributable to Nelnet represented approximately 10.2% of total interest income plus reported fee and other revenue before eliminations; a consolidated revenue-based margin is not clearly presented in the filing.
- Core loan spread increased to 1.45% from 1.02%; loan spread including derivative settlements increased to 1.54% from 0.94%.
- Education technology segment before-tax operating margin increased to 45.4% from 44.9%. Loan servicing and systems before-tax operating margin increased to 13.3% from 10.8%.
- Cash flow from operating activities was $48.7 million, compared with $(144.5) million in Q1 2020. Investing activities provided $468.4 million, while financing activities used $528.1 million.
- Total cash, cash equivalents, and restricted cash were $947.2 million at March 31, 2021, down from $958.4 million at December 31, 2020. Cash and cash equivalents were $144.2 million.
- Total assets were $22.2 billion and shareholders’ equity was $2.75 billion at March 31, 2021.
- Loans and accrued interest receivable, net, were $19.7 billion, down from $20.2 billion at year-end 2020. The allowance for loan losses declined to $157.4 million from $175.7 million.
- Bonds and notes payable were $18.75 billion, down from $19.32 billion at December 31, 2020. The filing reports total debt obligations of approximately $18.86 billion secured by loan assets and related collateral.
Material changes versus the prior comparable period
- Q1 2021 benefited from a $38.8 million derivative fair-value gain, compared with a $20.6 million loss in Q1 2020. Excluding derivative market-value adjustments, net income attributable to Nelnet was $94.1 million, or $2.44 per share, versus a loss of $24.9 million, or $0.62 per share, in Q1 2020.
- Interest expense declined by $106.3 million, primarily because of lower funding costs, lower average debt, and a $23.8 million reversal of a historical accrued interest liability on certain bonds.
- Q1 2020 included substantial COVID-19-related charges, including a $63.0 million incremental loan-loss provision, a $26.3 million provision related to consumer-loan securitization interests, and $7.8 million of venture-investment impairment expense.
- Education technology revenue increased primarily from acquisitions completed in December 2020 and growth in education technology and payment-processing activities. The acquisitions contributed $8.0 million of Q1 2021 revenue.
- Loan servicing revenue was broadly stable, while outsourced-services revenue increased due to state-agency contracts for unemployment claims and health-tracing support. Government servicing revenue declined due to CARES Act-related borrower relief and lower fees.
- ALLO-related results shifted from consolidated operating losses in Q1 2020 to equity-method investment losses of $22.2 million in Q1 2021. Nelnet also recognized $2.3 million of preferred return income from ALLO.
- Nelnet Bank’s private education loan portfolio grew to $79.2 million from $17.5 million at December 31, 2020. The bank reported a $1.0 million net loss for the quarter and a 38.6% community bank leverage ratio, above the FDIC-required 12% minimum.
- Servicing volume increased to $505.2 billion from $490.2 billion at December 31, 2020, including the conversion of approximately 261,000 Wells Fargo private-education-loan borrowers during March 2021.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects the FFELP loan portfolio to amortize over approximately 20 years; the portfolio was approximately $19.0 billion at March 31, 2021, with a weighted-average remaining life of 9.5 years. Management expects earnings from the asset-generation segment to decline over time as the portfolio pays down.
- Federal student-loan servicing contracts were scheduled to expire June 14, 2021, with a possible extension through December 14, 2021 and potential statutory extensions through December 14, 2023. The Department of Education’s NextGen and Interim Servicing Solution procurement processes remained uncertain.
- COVID-19 borrower payment suspensions were scheduled to continue through September 30, 2021. Management expects servicing salaries, printing, postage, and related costs to increase when relief provisions expire.
- LIBOR discontinuation creates basis, repricing, derivative, financing, and cash-flow risks. Approximately $17.3 billion of FFELP assets and $16.7 billion of related debt were indexed to one- or three-month LIBOR at March 31, 2021.
- The company had $455.0 million available under its unsecured line of credit and $17.0 million available under a secured line of credit. FFELP warehouse facilities had $63.0 million of availability, and the private-education warehouse facility had $16.8 million available.
- The company forecast approximately $2.17 billion of future undiscounted cash flows from loans in asset-backed securitizations. The forecast is sensitive to prepayment rates, interest-rate assumptions, defaults, forbearance, and LIBOR transition. The filing states that doubling the assumed prepayment rate could reduce the forecast by approximately $140 million to $175 million.
- Nelnet invested approximately $70 million for an approximate 8% interest in a joint venture acquiring the Wells Fargo private education loan portfolio during March and April 2021. Additional funding and risk-retention obligations may arise as the loans are securitized.
- ALLO’s remaining preferred membership interests and accrued preferred return totaled $131.2 million at March 31, 2021 and are subject to commercially reasonable efforts for redemption by April 2024. Nelnet also committed an additional $42.8 million to solar investments.
- Management identified risks from federal servicing-contract procurement, loan portfolio amortization and credit performance, interest-rate and derivative volatility, financing and liquidity, cybersecurity, regulatory requirements, litigation, COVID-19, LIBOR replacement, and potential student-loan policy changes.
Most important facts for investors to verify
- Whether the Department of Education extends or replaces Nelnet’s federal servicing contracts and how borrower-account allocations under future programs affect servicing volume and revenue.
- The sustainability of earnings excluding the $38.8 million derivative fair-value gain and the $23.8 million one-time accrued-interest reversal.
- Future loan-loss provisions as COVID-19 relief expires, forbearance changes, and economic assumptions normalize.
- The effect of FFELP portfolio amortization, consolidation activity, prepayments, and the limited availability of comparable reinvestment opportunities.
- LIBOR transition outcomes for $17.3 billion of indexed assets, $16.7 billion of indexed debt, and related derivatives.
- Liquidity and refinancing requirements for warehouse facilities, asset-backed securitizations, and other secured borrowings.
- Nelnet Bank’s growth, profitability, deposit funding, regulatory capital, and the parent company’s continuing capital and liquidity support obligations.
- ALLO’s operating performance and ability to redeem the remaining preferred interests, as well as the potential for continued HLBV-method losses.