Nelnet Reports Second Quarter 2020 Results
Nelnet reported a significant increase in GAAP net income to $86.5 million or $2.21 per share for Q2 2020, up from $24.6 million or $0.61 per share in Q2 2019. This growth was largely influenced by a $51.0 million gain from its investment in Hudl and a decrease in net losses from derivative instruments. The company's Asset Generation and Management segment saw net interest income rise to $66.1 million. However, revenue from the Loan Servicing and Systems segment fell to $111.0 million, underscoring challenges amid the COVID-19 pandemic.
- GAAP net income increased to $86.5 million from $24.6 million YoY.
- Gain of $51.0 million from Hudl investment boosted income.
- Net interest income in AGM segment rose to $66.1 million.
- Core loan spread increased to 1.35% from 1.21% YoY.
- ALLO revenue grew by 24% to $19.0 million.
- Strong liquidity with $67.5 million in cash and $142.2 million in investments.
- Loan Servicing and Systems revenue decreased to $111.0 million from $114.0 million YoY.
- Net income for Loan Servicing fell to $11.1 million from $17.0 million YoY.
- Uncertainty about the pandemic's impact on higher education enrollment may reduce future revenues.
- ALLO segment reported a net loss of $5.4 million, worsening from a $4.9 million loss YoY.
LINCOLN, Neb., Aug. 6, 2020 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of
GAAP net income increased for the three months ended June 30, 2020, compared with the same period in 2019, primarily due to the recognition of a
Net income, excluding derivative market value adjustments1, was
"Nelnet reported strong second quarter results from its loan portfolio and core operating businesses during unprecedented times," said Jeff Noordhoek, Chief Executive Officer. "Through the challenges and uncertainty, I have been impressed by the resiliency and commitment of our associates to serve our customers at exceptionally high levels. Our results are also a testament to the value of our products and services and our ability to innovate quickly to meet the critical needs of our customers through the difficulties of the pandemic and resulting recession."
Nelnet 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; Education Technology, Services, and Payment Processing; and Communications segments.
Asset Generation and Management
The company's AGM operating segment reported net interest income of
The decrease in net interest income and derivative settlements for the three months ended June 30, 2020, as compared to the same period in 2019, was due to a decrease in the average balance of loans outstanding to
Core loan spread2, which includes the impact of derivative settlements, increased to 1.35 percent for the quarter ended June 30, 2020, compared with 1.21 percent for the same period in 2019. Core loan spread was positively impacted in the second quarter of 2020 due to lower interest rates. The company has a portfolio of student loans that are earning interest at a fixed borrower rate and that are financed with variable rate debt. As a result, in a low interest rate environment, the company earns additional spread income that it refers to as floor income. During the three months ended June 30, 2020, the company recognized
Provision for loan losses was
Subsequent to June 30, 2020, the company made the decision to sell
Loan Servicing and Systems
Revenue from the Loan Servicing and Systems segment was
Net income for the Loan Servicing and Systems segment was
Education Technology, Services, and Payment Processing
For the second quarter of 2020, revenue from the Education Technology, Services, and Payment Processing operating segment was
Net income for the Education Technology, Services, and Payment Processing segment was
The company is uncertain how the pandemic will affect higher education and K-12 enrollment in upcoming terms. A decrease in enrollment could continue to reduce the demand for certain of the company's products and services and decrease this segment's revenue and net income in future periods.
Communications
Revenue from ALLO was
For the second quarter of 2020, ALLO recognized a net loss of
ALLO's management uses earnings before interest, income taxes, depreciation, and amortization (EBITDA)3 to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the second quarter of 2020, ALLO reported EBITDA of
Investment in Hudl
In May 2020, the company made an additional equity investment in Hudl of approximately
Liquidity and Capital Activities
As of June 30, 2020, the company had
The company has a stock repurchase program to purchase up to a total of five million shares of the company's Class A common stock during the three-year period ending May 7, 2022. During the three months ended June 30, 2020, the company repurchased 1,473,049 shares of stock for
The company paid cash dividends of
The company intends to use its strong liquidity position to invest in market opportunities, including: federally insured, private education, and consumer loan acquisitions; strategic acquisitions and investments, including anticipated capital commitments to Nelnet Bank; expansion of ALLO's communications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the company's cash and investment balances.
Board of Directors Declares Third Quarter Dividend
The Nelnet Board of Directors declared a third quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of
Forward-Looking and Cautionary Statements
This press release contains forward-looking statements within the meaning of federal securities laws. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "intend," "may," "plan," "potential," "predict," "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 slow the spread of 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 30 percent of the company's revenue in 2019; 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, the uncertain timing and nature of the outcome of the company's protest of the reported decision by the Department as to the company's proposal for the business processing outsourcing component of the Department's procurement, the possibility that awards or other evaluations of proposals may be challenged by various interested parties and may not be finalized or implemented within the currently anticipated time frame or at all, 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; 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 and fee-based revenues 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; risks and uncertainties related to the ability of ALLO to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks; risks that the conditions to the reported approval of federal deposit insurance and an industrial bank charter for Nelnet Bank may not be satisfied within a reasonable timeframe or at all, thus delaying or preventing Nelnet Bank from commencing operations, and the uncertain nature of the expected benefits from obtaining an industrial bank charter, including the ability to successfully launch banking operations and achieve expected market penetration; risks and uncertainties related to other initiatives to pursue additional strategic investments, 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 second quarter ended June 30, 2020. 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 securities laws.
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. | |
2 | Core loan spread 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. | |
3 | EBITDA 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 Operations | |||||||||||||||
(Dollars in thousands, except share data) | |||||||||||||||
(unaudited) | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
June 30, 2020 | March 31, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||
Interest income: | |||||||||||||||
Loan interest | $ | 146,140 | 181,793 | 238,222 | 327,933 | 480,555 | |||||||||
Investment interest | 5,743 | 7,398 | 8,566 | 13,141 | 16,819 | ||||||||||
Total interest income | 151,883 | 189,191 | 246,788 | 341,074 | 497,374 | ||||||||||
Interest expense: | |||||||||||||||
Interest on bonds and notes payable | 85,248 | 134,118 | 186,963 | 219,366 | 378,733 | ||||||||||
Net interest income | 66,635 | 55,073 | 59,825 | 121,708 | 118,641 | ||||||||||
Less provision for loan losses | 2,999 | 76,299 | 9,000 | 79,297 | 16,000 | ||||||||||
Net interest income after provision for loan losses | 63,636 | (21,226) | 50,825 | 42,411 | 102,641 | ||||||||||
Other income/expense: | |||||||||||||||
Loan servicing and systems revenue | 111,042 | 112,735 | 113,985 | 223,778 | 228,883 | ||||||||||
Education technology, services, and payment processing revenue | 59,304 | 83,675 | 60,342 | 142,979 | 139,502 | ||||||||||
Communications revenue | 18,998 | 18,181 | 15,758 | 37,179 | 30,300 | ||||||||||
Gain on sale of loans | — | 18,206 | 1,712 | 18,206 | 1,712 | ||||||||||
Other income | 60,127 | 8,281 | 14,440 | 68,408 | 23,507 | ||||||||||
Impairment expense | (332) | (34,087) | — | (34,419) | — | ||||||||||
Derivative market value adjustments and derivative settlements, net | 1,910 | (16,365) | (24,088) | (14,455) | (35,628) | ||||||||||
Total other income/expense | 251,049 | 190,626 | 182,149 | 441,676 | 388,276 | ||||||||||
Cost of services: | |||||||||||||||
Cost to provide education technology, services, and payment processing services | 15,376 | 22,806 | 15,871 | 38,181 | 36,930 | ||||||||||
Cost to provide communications services | 5,743 | 5,582 | 5,101 | 11,325 | 9,860 | ||||||||||
Total cost of services | 21,119 | 28,388 | 20,972 | 49,506 | 46,790 | ||||||||||
Operating expenses: | |||||||||||||||
Salaries and benefits | 119,247 | 119,878 | 111,214 | 239,125 | 222,272 | ||||||||||
Depreciation and amortization | 29,393 | 27,648 | 24,484 | 57,041 | 48,697 | ||||||||||
Other expenses | 37,052 | 43,384 | 45,417 | 80,439 | 89,233 | ||||||||||
Total operating expenses | 185,692 | 190,910 | 181,115 | 376,605 | 360,202 | ||||||||||
Income (loss) before income taxes | 107,874 | (49,898) | 30,887 | 57,976 | 83,925 | ||||||||||
Income tax (expense) benefit | (21,264) | 10,133 | (6,209) | (11,131) | (17,600) | ||||||||||
Net income (loss) | 86,610 | (39,765) | 24,678 | 46,845 | 66,325 | ||||||||||
Net income attributable to noncontrolling interests | (128) | (767) | (59) | (895) | (115) | ||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 86,482 | (40,532) | 24,619 | 45,950 | 66,210 | |||||||||
Earnings per common share: | |||||||||||||||
Net income (loss) attributable to Nelnet, Inc. shareholders - basic and diluted | $ | 2.21 | (1.01) | 0.61 | 1.16 | 1.65 | |||||||||
Weighted average common shares outstanding -basic and diluted | 39,203,404 | 39,955,514 | 40,050,065 | 39,579,459 | 40,210,787 | ||||||||||
Condensed Consolidated Balance Sheets | |||||||||
(Dollars in thousands) | |||||||||
(unaudited) | |||||||||
As of | As of | As of | |||||||
June 30, 2020 | December 31, 2019 | June 30, 2019 | |||||||
Assets: | |||||||||
Loans and accrued interest receivable, net | $ | 20,460,873 | 21,402,868 | 22,179,604 | |||||
Cash, cash equivalents, and investments | 517,240 | 381,005 | 306,501 | ||||||
Restricted cash | 853,775 | 1,088,695 | 969,597 | ||||||
Goodwill and intangible assets, net | 223,645 | 238,444 | 254,389 | ||||||
Other assets | 555,675 | 597,958 | 509,709 | ||||||
Total assets | $ | 22,611,208 | 23,708,970 | 24,219,800 | |||||
Liabilities: | |||||||||
Bonds and notes payable | $ | 19,726,158 | 20,529,054 | 21,294,192 | |||||
Other liabilities | 544,264 | 788,822 | 598,990 | ||||||
Total liabilities | 20,270,422 | 21,317,876 | 21,893,182 | ||||||
Equity: | |||||||||
Total Nelnet, Inc. shareholders' equity | 2,336,796 | 2,386,712 | 2,322,326 | ||||||
Noncontrolling interests | 3,990 | 4,382 | 4,292 | ||||||
Total equity | 2,340,786 | 2,391,094 | 2,326,618 | ||||||
Total liabilities and equity | $ | 22,611,208 | 23,708,970 | 24,219,800 | |||||
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 June 30, | ||||||
2020 | 2019 | |||||
GAAP net income attributable to Nelnet, Inc. | $ | 86,482 | 24,619 | |||
Realized and unrealized derivative market value adjustments (a) | 3,911 | 37,060 | ||||
Tax effect (b) | (939) | (8,894) | ||||
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments | $ | 89,454 | 52,785 | |||
Earnings per share: | ||||||
GAAP net income attributable to Nelnet, Inc. | $ | 2.21 | 0.61 | |||
Realized and unrealized derivative market value adjustments (a) | 0.10 | 0.93 | ||||
Tax effect (b) | (0.03) | (0.22) | ||||
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments | $ | 2.28 | 1.32 | |||
(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 that 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. |
(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 the company'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 June 30, | ||||||
2020 | 2019 | |||||
Variable loan yield, gross | 3.09 | % | 5.00 | % | ||
Consolidation rebate fees | (0.84) | (0.84) | ||||
Discount accretion, net of premium and deferred origination costs amortization | 0.02 | 0.02 | ||||
Variable loan yield, net | 2.27 | 4.18 | ||||
Loan cost of funds - interest expense | (1.67) | (3.42) | ||||
Loan cost of funds - derivative settlements (a) (b) | 0.14 | 0.02 | ||||
Variable loan spread | 0.74 | 0.78 | ||||
Fixed rate floor income, gross | 0.63 | 0.20 | ||||
Fixed rate floor income - derivative settlements (a) (c) | (0.02) | 0.23 | ||||
Fixed rate floor income, net of settlements on derivatives | 0.61 | 0.43 | ||||
Core loan spread | 1.35 | % | 1.21 | % | ||
Average balance of loans | $ | 20,242,054 | 21,837,774 | |||
Average balance of debt outstanding | 20,217,401 | 21,536,878 | ||||
(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 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. |
Three months ended June 30, | |||||
2020 | 2019 | ||||
Core loan spread | 1.35 | % | 1.21 | % | |
Derivative settlements (1:3 basis swaps) | (0.14) | (0.02) | |||
Derivative settlements (fixed rate floor income) | 0.02 | (0.23) | |||
Loan spread | 1.23 | % | 0.96 | % | |
(b) | Derivative settlements include the net settlements received related to the company's 1:3 basis swaps. |
(c) | Derivative settlements include the net settlements received (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 company's Asset Generation and Management segment statements of income.
Three months ended June 30, | ||||||
2020 | 2019 | |||||
Variable interest income, gross | $ | 155,646 | 271,983 | |||
Consolidation rebate fees | (42,387) | (45,647) | ||||
Discount accretion, net of premium and deferred origination costs amortization | 1,015 | 1,046 | ||||
Variable interest income, net | 114,274 | 227,382 | ||||
Interest on bonds and notes payable | (84,141) | (183,072) | ||||
Derivative settlements (basis swaps), net (a) | 7,129 | 807 | ||||
Variable loan interest margin, net of settlements on derivatives (a) | 37,262 | 45,117 | ||||
Fixed rate floor income, gross | 31,866 | 10,840 | ||||
Derivative settlements (interest rate swaps), net (a) | (1,308) | 12,165 | ||||
Fixed rate floor income, net of settlements on derivatives (a) | 30,558 | 23,005 | ||||
Core loan interest income (a) | 67,820 | 68,122 | ||||
Investment interest | 4,443 | 5,073 | ||||
Intercompany interest | (348) | (963) | ||||
Net interest income (net of settlements on derivatives) (a) | $ | 71,915 | 72,232 | |||
(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. |
Three months ended June 30, | ||||||
2020 | 2019 | |||||
Net interest income (net of settlements on derivatives) | $ | 71,915 | 72,232 | |||
Derivative settlements (1:3 basis swaps) | (7,129) | (807) | ||||
Derivative settlements (fixed rate floor income) | 1,308 | (12,165) | ||||
Net interest income | $ | 66,094 | 59,260 | |||
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
A reconciliation of ALLO's GAAP net loss to earnings before net interest expense, income taxes, depreciation, and amortization (EBITDA), is provided below.
Three months ended June 30, | ||||||
2020 | 2019 | |||||
Net loss | $ | (5,363) | (4,932) | |||
Net interest income | — | (1) | ||||
Income tax benefit | (1,694) | (1,558) | ||||
Depreciation and amortization | 10,824 | 7,737 | ||||
Earnings before interest, income taxes depreciation, and amortization (EBITDA) | $ | 3,767 | 1,246 | |||
EBITDA is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. ALLO's management uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The company reports EBITDA for ALLO because the company believes that it provides useful additional information for investors regarding a key metric used by management to assess ALLO's performance. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from ALLO's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP.
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SOURCE Nelnet, Inc.
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