Nov 08, 2021

Nelnet Reports Third Quarter 2021 Results

LINCOLN, Neb., Nov. 8, 2021 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of $53.1 million, or $1.38 per share, for the third quarter of 2021, compared with GAAP net income of $71.5 million, or $1.86 per share, for the same period a year ago.

Net income, excluding derivative market value adjustments1, was $47.6 million, or $1.23 per share, for the third quarter of 2021, compared with $68.9 million, or $1.79 per share, for the same period in 2020.

Included in the operating results for the third quarter of 2021 was impairment of certain real estate assets of $14.2 million ($10.8 million after tax, or $0.28 per share) as employees continue working remotely.

"Nelnet's core businesses delivered solid operating results in the third quarter," said Jeff Noordhoek, Chief Executive Officer of Nelnet. "We look forward to a strong finish to the year as we continue to focus on providing superior customer experiences, pursue investment opportunities for diversification and growth, and recruit and retain talented team members."

Nelnet currently operates four primary business segments, earning interest income on loans in its Asset Generation and Management (AGM) segment and fee-based revenue in its Loan Servicing and Systems segment and Education Technology, Services, and Payment Processing segment. On November 2, 2020, Nelnet Bank launched operations and its financial results are presented by the company as a reportable segment.

Asset Generation and Management

The AGM operating segment reported net interest income of $83.1 million during the third quarter of 2021, compared with $80.2 million for the same period a year ago. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The company recognized expense from derivative settlements of $5.9 million and $2.4 million during the third quarter of 2021 and 2020, respectively. Derivative settlements for each applicable period should be evaluated with the company's net interest income. Net interest income less derivative settlements was $77.2 million in the third quarter of 2021, compared with $77.8 million in the third quarter of 2020.

AGM recognized a provision for loan losses in the third quarter of 2021 of $5.9 million ($4.5 million after tax), compared to a negative provision for loan losses of $5.8 million ($4.4 million after tax) in the third quarter of 2020.

Net income for the AGM segment was $45.7 million for the three months ended September 30, 2021, compared with $68.3 million for the same period in 2020.  AGM recognized a $14.8 million ($11.3 million after tax) gain from the sale of consumer loans in the third quarter of 2020.

Loan Servicing and Systems

Revenue from the Loan Servicing and Systems segment was $112.4 million for the third quarter of 2021, compared with $113.8 million for the same period in 2020. As of September 30, 2021, the company was servicing $513.5 billion in government-owned, Federal Family Education Loan (FFEL) Program, private education, and consumer loans for 15.8 million borrowers.

In September 2021, Nelnet Servicing and Great Lakes each entered into contract amendments with the U.S. Department of Education (Department), pursuant to which the student loan servicing contracts with the Department were extended from December 14, 2021 through December 14, 2023.

The Loan Servicing and Systems segment reported a $2.3 million net loss for the three months ended September 30, 2021. Included in the third quarter results was a $13.2 million ($10.1 million after tax) non-cash impairment charge on certain segment owned buildings due to decreased office space use as employees continue to work remotely. Excluding this impairment expense, net income would have been $7.8 million for the three months ended September 30, 2021, compared with net income of $10.1 million for the same period in 2020. The expected remaining decrease in net income was due to the continued hiring of contact center operations and support associates in preparation for the expiration of the federal student loan payment suspension provisions under the Coronavirus Aid, Relief, and Economic Security Act on January 31, 2022, at which time the Department borrowers will move from a non-paying forbearance to repayment status.  

Education Technology, Services, and Payment Processing

For the third quarter of 2021, revenue from the Education Technology, Services, and Payment Processing operating segment was $85.3 million, an increase from $74.1 million for the same period in 2020. Revenue less direct costs to provide education technology, services, and payment processing services for the third quarter of 2021 was $54.0 million, as compared to $48.9 million during 2020.

Operating expenses increased for the third quarter of 2021 as compared to the same period in 2020 due to increased costs to support growth of the customer base, continued investments in new technologies, and an increase in travel and conference expenses.

Net income for the Education Technology, Services, and Payment Processing segment was $10.6 million for the three months ended September 30, 2021, compared with $11.4 million for the same period in 2020.

Nelnet Bank

As of September 30, 2021, Nelnet Bank had a $192.3 million loan portfolio, consisting of $98.4 million of private education loans and $93.9 million of FFEL Program loans, and had $302.2 million of deposits. Nelnet Bank's net income for the quarter ended September 30, 2021 was $0.6 million.

Subsequent Events

On October 15, 2021, an entity in which the company has an equity investment completed an additional equity raise. As a result of this entity's equity raise, the company currently anticipates recognizing income in the fourth quarter of 2021 of $10 million to $15 million (pre-tax) to adjust its carrying value to reflect the October 15, 2021 transaction value, subject to final valuations of the equity classes.

On October 27, 2021, the joint venture that purchased the former Wells Fargo private education loan portfolio and in which the company has an approximate 8 percent interest completed a final securitization that permanently financed all remaining eligible private education loans purchased by the joint venture. Upon the removal of all or a portion of the company's financial commitment to the joint venture, currently expected by the company to occur during the fourth quarter of 2021, the company will record a derecognition of all or a portion of its negative investment balance (and record positive income up to $36 million (pre-tax)).

Board of Directors Declares Fourth Quarter Dividend

The Nelnet Board of Directors declared a fourth quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.24 per share. The dividend will be paid on December 15, 2021 to shareholders of record at the close of business on December 1, 2021.

Supplemental Financial Information

The company has provided supplemental financial information for the third quarter ended September 30, 2021 and certain other periods in a Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2021, and has made such information available on the company's website at nelnetinvestors.com.

Forward-Looking and Cautionary Statements

This press release contains forward-looking statements within the meaning of federal securities laws. The words "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "forecast," "future," "intend," "may," "plan," "potential," "predict," "scheduled," "should," "will," "would," and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: risks and uncertainties related to the severity, magnitude, and duration of the COVID-19 pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities intended to combat the pandemic, and volatility in market conditions resulting from the pandemic; risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the company under existing and any future servicing contracts with the Department, which current contracts accounted for 27 percent of the company's revenue in 2020; risks to the company related to the Department's initiatives to procure new contracts for federal student loan servicing and awards of contracts to other parties, including the pending and uncertain nature of the Department's procurement process, risks that the company may not be successful in obtaining any of such potential new contracts, and risks related to the company's ability to comply with agreements with third-party customers for the servicing of loans; risks related to the company's loan portfolio, such as interest rate basis and repricing risk and changes in levels of loan repayment or default rates; the use of derivatives to manage exposure to interest rate fluctuations; the uncertain nature of expected benefits from FFEL Program, private education, and consumer loan purchases and initiatives to purchase additional FFEL Program, private education, and consumer loans or interests therein, including expected income from the company's involvement in a joint venture that purchased private education loans sold by Wells Fargo; financing and liquidity risks, including risks of changes in the securitization and other financing markets for loans; risks and uncertainties from changes in terms of education loans and in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the Coronavirus Aid, Relief, and Economic Security Act and the expected decline over time in FFEL Program loan interest income due to the discontinuation of new FFEL Program loan originations in 2010 and the resulting initiatives by the company to adjust to a post-FFEL Program environment, as well as the possibility of new student loan forgiveness or broad debt cancellation programs by the government or other incentives to consolidate away from existing FFEL Program loans; risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, including activities that are intended to diversify the company both within and outside of its historical core education-related businesses; risks from changes in economic conditions and consumer behavior; cybersecurity risks, including potential disruptions to systems, disclosure of confidential information, and/or damage to reputation resulting from cyber-breaches; and changes in the general interest rate environment, including the availability of any relevant money-market index rate such as LIBOR or the relationship between the relevant money-market index rate and the rate at which the company's assets and liabilities are priced.

For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the third quarter ended September 30, 2021. All forward-looking statements in this release are as of the date of this release. Although the company may voluntarily update or revise its forward-looking statements from time to time to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by law.

Non-GAAP Performance Measures

The company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. Reconciliations of GAAP to non-GAAP financial information, and a discussion of why the company believes providing this additional information is useful to investors, is provided in the "Non-GAAP Disclosures" section below.

__________________________________

1

Net income, excluding derivative market value adjustments, is a non-GAAP measure. See "Non-GAAP Performance Measures" at the end of this press release and the "Non-GAAP Disclosures" section below for explanatory information and reconciliations of GAAP to non-GAAP financial information.

 

Consolidated Statements of Income

(Dollars in thousands, except share data)

(unaudited)



Three months ended


Nine months ended


September 30,
2021


June 30, 2021


September 30,
2020


September 30,
2021


September 30,
2020

Interest income:










Loan interest

$

124,096



122,005



134,507



370,219



462,439


Investment interest

12,558



11,578



5,238



29,122



18,379


Total interest income

136,654



133,583



139,745



399,341



480,818


Interest expense:










Interest on bonds and notes payable and bank deposits

50,176



49,991



58,423



127,939



277,788


Net interest income

86,478



83,592



81,322



271,402



203,030


Less provision (negative provision) for loan losses

5,827



374



(5,821)



(10,847)



73,476


Net interest income after provision for loan losses

80,651



83,218



87,143



282,249



129,554


Other income/expense:










Loan servicing and systems revenue

112,351



112,094



113,794



335,961



337,571


Education technology, services, and payment processing revenue

85,324



76,702



74,121



257,284



217,100


Communications revenue





20,211





57,390


Other

11,867



22,921



1,502



30,183



69,910


Gain on sale of loans

3,444



15,271



14,817



18,715



33,023


Impairment expense and provision for beneficial interests, net

(14,159)



(500)





(12,223)



(34,419)


Derivative market value adjustments and derivative settlements, net

1,351



(6,989)



1,049



28,868



(13,406)


Total other income/expense

200,178



219,499



225,494



658,788



667,169


Cost of services:










Cost to provide education technology, services, and payment processing services

31,335



21,676



25,243



80,063



63,424


Cost to provide communications services





5,914





17,240


Total cost of services

31,335



21,676



31,157



80,063



80,664


Operating expenses:










Salaries and benefits

128,592



118,968



126,096



363,351



365,220


Depreciation and amortization

15,710



20,236



30,308



56,129



87,349


Other expenses

38,324



32,587



34,744



107,611



115,184


Total operating expenses

182,626



171,791



191,148



527,091



567,753


Income before income taxes

66,868



109,250



90,332



333,883



148,306


Income tax expense

(15,649)



(26,237)



(19,156)



(76,747)



(30,286)


Net income

51,219



83,013



71,176



257,136



118,020


Net loss (income) attributable to noncontrolling interests

1,919



854



327



3,467



(568)


Net income attributable to Nelnet, Inc.

$

53,138



83,867



71,503



260,603



117,452


Earnings per common share:










Net income attributable to Nelnet, Inc. shareholders - basic and diluted

$

1.38



2.16



1.86



6.74



2.99


Weighted average common shares outstanding - basic and diluted

38,595,721



38,741,486



38,538,476



38,646,892



39,229,932


 

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(unaudited)



As of


As of


As of


September 30, 2021


December 31, 2020


September 30, 2020

Assets:






Loans and accrued interest receivable, net

$

19,304,203



20,185,656



20,076,542


Cash, cash equivalents, and investments

1,566,849



1,114,189



573,143


Restricted cash

1,059,142



837,146



805,225


Goodwill and intangible assets, net

197,268



217,162



215,613


Other assets

275,277



292,007



552,003


Total assets

$

22,402,739



22,646,160



22,222,526


Liabilities:






Bonds and notes payable

$

18,610,748



19,320,726



19,215,053


Bank deposits

200,651



54,633




Other liabilities

734,377



642,452



604,642


Total liabilities

19,545,776



20,017,811



19,819,695


Equity:






Total Nelnet, Inc. shareholders' equity

2,859,254



2,632,042



2,399,485


Noncontrolling interests

(2,291)



(3,693)



3,346


Total equity

2,856,963



2,628,349



2,402,831


Total liabilities and equity

$

22,402,739



22,646,160



22,222,526


Non-GAAP Disclosures
(Dollars in thousands, except share data)
(unaudited)

Non-GAAP financial measures disclosed by management are meant to provide additional information and insight relative to business trends to investors and, in certain cases, to present financial information as measured by rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. The company reports this non-GAAP information because the company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

Net income, excluding derivative market value adjustments


Three months ended September 30,


2021


2020

GAAP net income attributable to Nelnet, Inc.

$

53,138



71,503


Realized and unrealized derivative market value adjustments (a)

(7,260)



(3,440)


Tax effect (b)

1,742



826


Net income attributable to Nelnet, Inc., excluding derivative market value adjustments

$

47,620



68,889






Earnings per share:




GAAP net income attributable to Nelnet, Inc.

$

1.38



1.86


Realized and unrealized derivative market value adjustments (a)

(0.19)



(0.09)


Tax effect (b)

0.04



0.02


Net income attributable to Nelnet, Inc., excluding derivative market value adjustments

$

1.23



1.79




(a)

"Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms.




The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the company's derivative transactions with the intent that each is economically effective; however, the company's derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period.




The company believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility, mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the company's management utilizes operating results excluding these items for comparability purposes when making decisions regarding the company's performance and in presentations with credit rating agencies, lenders, and investors.



(b)

The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.

Core loan spread

The following table analyzes the loan spread on AGM's portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the "Net interest income, net of settlements on derivatives" table on the following page, divided by the average balance of loans or debt outstanding.


Three months ended September 30,


2021


2020

Variable loan yield, gross

2.61

%


2.77

%

Consolidation rebate fees

(0.85)



(0.84)


Discount accretion, net of premium and deferred origination costs amortization

0.03



0.01


Variable loan yield, net

1.79



1.94


Loan cost of funds - interest expense (a)

(0.99)



(1.16)


Loan cost of funds - derivative settlements (b) (c)

(0.02)



0.02


Variable loan spread

0.78



0.80


Fixed rate floor income, gross

0.75



0.73


Fixed rate floor income - derivative settlements (b) (d)

(0.11)



(0.07)


Fixed rate floor income, net of settlements on derivatives

0.64



0.66


Core loan spread

1.42

%


1.46

%





Average balance of AGM's loans

$

19,084,320



19,866,040


Average balance of AGM's debt outstanding

18,863,730



19,632,675




(a)

In the third quarter of 2021, the company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of $1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense was excluded in the table above.



(b)

Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the company's net interest income (loan spread) as presented in this table.




A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows.

 


Three months ended September 30,


2021


2020

Core loan spread

1.42

%


1.46

%

Derivative settlements (1:3 basis swaps)

0.02



(0.02)


Derivative settlements (fixed rate floor income)

0.11



0.07


Loan spread

1.55

%


1.51

%



(c)

Derivative settlements consist of net settlements (paid) received related to the company's 1:3 basis swaps.



(d)

Derivative settlements consist of net settlements paid related to the company's floor income interest rate swaps.

Net interest income, net of settlements on derivatives

The following table summarizes the components of "net interest income" and "derivative settlements, net" from the AGM segment statements of income.


Three months ended September 30,


2021


2020

Variable interest income, gross

$

126,270



138,986


Consolidation rebate fees

(40,340)



(41,768)


Discount accretion, net of premium and deferred origination costs amortization

1,230



656


Variable interest income, net

87,160



97,874


Interest on bonds and notes payable

(48,549)



(57,510)


Derivative settlements (basis swaps), net (a)

(700)



1,197


Variable loan interest margin, net of settlements on derivatives (a)

37,911



41,561


Fixed rate floor income, gross

35,850



36,633


Derivative settlements (interest rate swaps), net (a)

(5,209)



(3,588)


Fixed rate floor income, net of settlements on derivatives (a)

30,641



33,045


Core loan interest income (a)

68,552



74,606


Investment interest

8,771



3,452


Intercompany interest

(113)



(245)


Net interest income (net of settlements on derivatives) (a)

$

77,210



77,813




(a)

Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the company's net interest income as presented in this table. Core loan interest income and net interest income (net of settlements on derivatives) are non-GAAP financial measures.




A reconciliation of net interest income (net of settlements on derivatives) to net interest income for the company's AGM segment follows.

 


Three months ended September 30,


2021


2020

Net interest income (net of settlements on derivatives)

$

77,210



77,813


Derivative settlements (1:3 basis swaps)

700



(1,197)


Derivative settlements (fixed rate floor income)

5,209



3,588


Net interest income

$

83,119



80,204


 

Cision View original content:https://www.prnewswire.com/news-releases/nelnet-reports-third-quarter-2021-results-301419059.html

SOURCE Nelnet, Inc.

View all Press Releases