Nelnet Reports Third Quarter 2021 Results

Rhea-AI Summary

Nelnet (NNI) reported a GAAP net income of $53.1 million or $1.38 per share for Q3 2021, down from $71.5 million or $1.86 per share in Q3 2020. Excluding adjustments, net income was $47.6 million, a decline from $68.9 million. The Q3 results included a $14.2 million impairment of real estate assets. The AGM segment saw net interest income rise to $83.1 million, while the Loan Servicing segment reported a $2.3 million net loss. Nelnet Bank's loan portfolio reached $192.3 million. A fourth quarter dividend of $0.24 per share was declared.

Positive

• Net interest income in the AGM segment increased to $83.1 million from $80.2 million year-on-year.
• Revenue from the Education Technology segment rose to $85.3 million, up from $74.1 million in Q3 2020.
• A dividend of $0.24 per share was declared for Q4 2021.

Negative

• GAAP net income decreased to $53.1 million from $71.5 million year-on-year.
• Loan Servicing and Systems segment reported a $2.3 million net loss.
• The AGM segment's net income fell to $45.7 million from $68.3 million year-on-year.
• Included in Q3 results was a $14.2 million impairment of real estate assets.

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

 

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

SOURCE Nelnet, Inc.

FAQ

What was Nelnet's net income for Q3 2021?

Nelnet reported a GAAP net income of $53.1 million, or $1.38 per share, for Q3 2021.

How did Nelnet's Q3 2021 results compare to Q3 2020?

Net income decreased from $71.5 million in Q3 2020 to $53.1 million in Q3 2021.

What is the dividend declared by Nelnet for Q4 2021?

Nelnet declared a fourth quarter dividend of $0.24 per share.

What was the Loan Servicing and Systems segment's performance in Q3 2021?

The Loan Servicing and Systems segment reported a $2.3 million net loss for Q3 2021.

How much did Nelnet Bank's loan portfolio total as of September 30, 2021?

Nelnet Bank's loan portfolio totaled $192.3 million as of September 30, 2021.