Nelnet Reports Second Quarter 2021 Results

LINCOLN, Neb., Aug. 5, 2021 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of $83.9 million, or $2.16 per share, for the second quarter of 2021, compared with GAAP net income of $86.5 million, or $2.21 per share, for the same period a year ago.

Net income, excluding derivative market value adjustments1, was $85.1 million, or $2.20 per share, for the second quarter of 2021, compared with $89.5 million, or $2.28 per share, for the same period in 2020.

Included in the operating results for the second quarter of 2020 was a gain of $51.0 million (or $38.8 million after tax, or $0.99 per share) to increase the carrying value of the company's investment in Hudl to fair value after Hudl's May 2020 equity raise.

"Nelnet delivered strong results across our core business segments," said Jeff Noordhoek, Chief Executive Officer of Nelnet. "In the second half of 2021, we will continue to focus on opportunities to improve our customer experiences, enhance our culture and work environment for our associates, and invest in and diversify our businesses."

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 and Education Technology, Services, and Payment Processing segments. 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 $81.3 million during the second quarter of 2021, compared with $66.1 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 $5.4 million during the second quarter of 2021, compared with income of $5.8 million for the same period in 2020. Derivative settlements for each applicable period should be evaluated with the company's net interest income. Net interest income and derivative settlements increased to a net of $75.9 million in the second quarter of 2021, up from a total of $71.9 million in the second quarter of 2020, due to an increase in core loan spread. The increase in spread was partially offset by the expected decrease in the average balance of loans outstanding from $20.2 billion in the second quarter of 2020 to $19.0 billion for the same period in  2021.

Core loan spread2, which includes the impact of derivative settlements, increased to 1.41 percent for the quarter ended June 30, 2021, compared with 1.35 percent for the same period in 2020. Core loan spread was positively impacted in the second quarter of 2021 by 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, 2021, the company recognized $31.5 million of floor income (net of $5.2 million in derivative settlements paid), compared with $30.6 million (net of $1.3 million in derivative settlements paid) for the comparable period in 2020.

Net income for the AGM segment was $60.0 million for the three months ended June 30, 2021, compared with $39.1 million for the same period in 2020. Included in the operating results for the second quarter of 2021 was a  gain of $15.3 million (or $11.6 million after tax, or $0.30 per share) from the sale of a portfolio of consumer loans.

Loan Servicing and Systems

Revenue from the Loan Servicing and Systems segment was $112.1 million for the second quarter of 2021, compared with $111.0 million for the same period in 2020. As of June 30, 2021, the company was servicing $506.6 billion in government-owned, Federal Family Education Loan (FFEL) Program, private education, and consumer loans for 15.5 million borrowers.

Net income for the Loan Servicing and Systems segment was $11.8 million for the three months ended June 30, 2021, compared with $11.1 million for the same period in 2020.

On June 9, 2021, Nelnet Servicing and Great Lakes Educational Loan Services each received modifications to extend their servicing contracts with the Department of Education (Department) from June 14, 2021 through December 14, 2021. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the contracts for up to two additional years to December 14, 2023.

Education Technology, Services, and Payment Processing

For the second quarter of 2021, revenue from the Education Technology, Services, and Payment Processing operating segment was $76.7 million, compared to $59.3 million for the same period in 2020. On December 31, 2020, the company acquired HigherSchool Instructional Services (HigherSchool), a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC (CD2), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool and CD2 are reported in the company's consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three months ended June 30, 2021 was $7.1 million.

Net income for the Education Technology, Services, and Payment Processing segment was $13.1 million for the three months ended June 30, 2021, compared with $8.9 million for the same period in 2020.

Nelnet Bank

On November 2, 2020, the company obtained final approval for federal deposit insurance from the Federal Deposit Insurance Corporation (FDIC) and for a bank charter from the Utah Department of Financial Institutions (UDFI) in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet Utah-chartered industrial bank franchise focused on the private education loan marketplace. As of June 30, 2021, Nelnet Bank had a $190.6 million loan portfolio, consisting of $97.2 million of FFEL Program loans and $93.4 million of private education loans, and had $299.4 million of deposits.  Nelnet Bank incurred a $0.2 million net loss for the quarter ended June 30, 2021.

Other Income

Included in other income for the three months ended June 30, 2021 is investment gains and income of $15.6 million (or $11.8 million, or $0.31 per share) related to certain venture capital and real estate investments. 

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 $0.22 per share. The dividend will be paid on September 15, 2021 to shareholders of record at the close of business on September 1, 2021.

Supplemental Financial Information

The company has provided supplemental financial information for the second quarter ended June 30, 2021 and certain other periods in a Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 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 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 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; 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; 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, 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, 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.

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.

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.

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

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.

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

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.

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SOURCE Nelnet, Inc.