Nelnet, Inc. Form 10-Q Summary
Business context and reporting period
Nelnet is an education services company providing student-loan financing and servicing, tuition payment processing and campus commerce, and enrollment services. It also earns net interest income from a federally insured student-loan portfolio. This unaudited Form 10-Q covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total interest income | $157.2 million | $154.2 million | 1.9% |
| Net interest income | $98.8 million | $84.9 million | 16.4% |
| Net interest income after loan-loss provision | $93.8 million | $78.9 million | 18.9% |
| Total other income | $119.9 million | $98.8 million | 21.3% |
| Operating expenses | $106.9 million | $111.2 million | (3.9%) |
| Income before income taxes | $106.8 million | $66.5 million | 60.5% |
| Net income attributable to Nelnet | $68.1 million | $43.1 million | 57.8% |
| Basic and diluted EPS | $1.46 | $0.91 | 54.9% |
| Operating cash flow | $85.0 million | $100.6 million | (15.5%) |
- The effective tax rate was 36.0%, compared with 35.0% in the prior-year quarter.
- Net interest income after provision for loan losses and derivative settlements was $85.6 million, up 8.3% year over year.
- Core student-loan spread increased to 1.50% from 1.43% in Q1 2012 and 1.44% in Q4 2012.
- Fixed-rate floor income, net of derivative settlements, was $35.7 million, down from $38.1 million.
- Cash and investments totaled $209.6 million. Cash and cash equivalents alone were $50.1 million at March 31, 2013.
- Student loans receivable totaled $24.9 billion, while bonds and notes payable totaled $25.1 billion. Total assets were $26.6 billion and total equity was $1.2 billion.
Material changes versus the prior comparable period
- Net income increased primarily because of higher student-loan net interest income, growth in fee-based businesses, favorable derivative and foreign-currency adjustments, and lower operating expenses.
- Derivative market value and foreign-currency adjustments contributed $9.3 million of income in Q1 2013 versus a $15.4 million expense in Q1 2012. Management reported after-tax earnings excluding these items of $62.3 million, or $1.34 per share, versus $52.7 million, or $1.11 per share.
- Loan and guaranty servicing revenue rose 12.4% to $55.6 million. Government servicing revenue increased to $20.3 million from $14.8 million, and the company serviced $84.6 billion of government loans for 4.3 million borrowers versus $51.8 billion for 3.1 million borrowers.
- Tuition payment processing and campus commerce revenue increased 6.8% to $23.4 million; the segment’s pretax operating margin rose to 37.9% from 31.5%.
- Enrollment services revenue declined 8.5% to $29.0 million because regulatory uncertainty reduced marketing spending by for-profit colleges. The segment improved from a $1.2 million pretax loss to $0.4 million of pretax income, helped by cost reductions.
- Operating expenses declined due to lower salaries and benefits, lower enrollment-service costs, and reduced amortization as intangible assets became fully amortized. Other expenses increased because of third-party servicing costs associated with recent loan purchases.
- The company acquired $743.8 million of FFELP student loans during the quarter, compared with $183.3 million in Q1 2012.
- Net cash used in investing activities was $134.3 million, versus $336.8 million of cash provided in the prior-year period, primarily reflecting increased student-loan purchases. Financing activities provided $33.3 million, compared with $419.3 million used in Q1 2012.
Debt, liquidity, outlook, and risks
- Total debt carrying value was $25.1 billion. Substantially all debt was variable rate, creating exposure to basis, repricing, interest-rate, and liquidity risk.
- Four FFELP warehouse facilities had $1.94 billion outstanding against $2.0 billion of maximum financing capacity, leaving $57.8 million available. Liquidity provisions expire between June 28, 2013 and February 28, 2014, and non-renewal could increase financing costs and require refinancing.
- The unsecured line of credit was amended to increase capacity from $250 million to $275 million and extend maturity to March 28, 2018. Drawn balance was $115 million, leaving $160 million available.
- The Department of Education conduit facility was fully repaid and expired for future use after loans were refinanced through the 2013-2 securitization and warehouse facilities.
- Q1 2013 securitizations totaled $1.56 billion. On April 30, 2013, after quarter-end, the company completed an additional $765 million asset-backed securities transaction.
- Management estimated approximately $2.11 billion of future undiscounted cash flows from loans funded in asset-backed securitizations. The forecast depends on prepayments, defaults, interest rates, and other assumptions; higher prepayments or a wider three-month versus one-month LIBOR spread would reduce the estimate.
- Management expected continued significant floor income if interest rates remained low, but rising rates could reduce floor income and compress margins. A 100-basis-point rate increase was estimated to increase pretax income by $0.8 million after derivative-settlement effects; a 10-basis-point asset/funding-index mismatch was estimated to reduce pretax income by $3.0 million.
- The Department servicing contract runs through June 2014, with a five-year renewal option. Management anticipated renewal but stated that no assurance could be given. A significant remote-hosted customer contract expires in December 2013.
- Non-federally insured loan delinquencies of 31 days or more declined to 20.5% from 29.5% a year earlier, but remain a credit risk. The allowance for loan losses was $49.4 million, and repurchase obligations were $15.0 million.
- A putative class-action lawsuit against Peterson’s Nelnet alleges violations of the Telephone Consumer Protection Act and claims potential statutory damages exceeding $5 million, or more than $15 million if trebled. The company stated that a reasonably possible loss cannot currently be estimated.
- The company repurchased 213,535 Class A shares for $6.7 million, repurchased $13.0 million of its own asset-backed debt for a $1.4 million gain, and paid a $0.10 per-share dividend. A second-quarter $0.10 dividend was declared.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes were reported to the risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- Whether the Department of Education exercises its servicing-contract renewal option in 2014 and how government servicing volumes develop.
- Renewal or refinancing of warehouse liquidity provisions, particularly the June 28, 2013 and October 2, 2013 expirations.
- The sustainability of floor income, core student-loan spreads, derivative-settlement costs, and sensitivity to LIBOR basis movements.
- Actual student-loan prepayments, delinquencies, defaults, repurchase obligations, and changes in the allowance for loan losses.
- Progress and profitability of enrollment services amid regulatory uncertainty and the December 2013 customer-contract expiration.
- Whether projected $2.11 billion securitization cash flows are realized under changing interest-rate and prepayment assumptions.
- Developments in the Peterson’s Nelnet TCPA litigation and any resulting loss exposure.