Nelnet, Inc. 2014 Form 10-K Summary
Business context and reporting period
Nelnet provides student-loan servicing, tuition payment processing, campus commerce, education planning, asset management, and earns interest income from a predominantly federally guaranteed student-loan portfolio. The filing covers the fiscal year ended December 31, 2014; quarterly information identifies fourth-quarter 2014 results where relevant.
- Reportable segments: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Asset Generation and Management.
- At year-end, Nelnet serviced $161.6 billion of student loans for 7.5 million borrowers and held a $28.0 billion student-loan portfolio.
- The Department of Education servicing contract was extended through June 16, 2019. Department revenue was $124.4 million, approximately 10% of 2014 revenue.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|
| Net interest income | $436.6 million | $413.9 million | +5.5% |
| Net interest income after loan-loss provision | $427.1 million | $395.4 million | +8.0% |
| Loan and guaranty servicing revenue | $240.4 million | $243.4 million | -1.2% |
| Tuition payment and campus commerce revenue | $98.2 million | $80.7 million | +21.7% |
| Enrollment services revenue | $82.9 million | $98.1 million | -15.5% |
| Income before income taxes | $469.5 million | $465.5 million | +0.9% |
| Net income attributable to Nelnet | $307.6 million | $302.7 million | +1.6% |
| Basic and diluted EPS | $6.62 | $6.50 | +1.8% |
| Operating cash flow | $357.4 million | $387.2 million | -7.7% |
- Net income excluding derivative market-value and foreign-currency adjustments was $284.2 million, or $6.12 per share, compared with $272.5 million, or $5.85 per share, in 2013.
- Core student-loan spread declined to 1.48% from 1.54%. Net fixed-rate floor income increased to $179.9 million from $148.4 million, supported by low interest rates and additional loan acquisitions.
- Student-loan acquisitions totaled $6.1 billion, compared with $4.1 billion in 2013. Student loans receivable, net, increased to $28.0 billion from $25.9 billion.
- Student Loan and Guaranty Servicing net income declined to $38.9 million from $49.6 million; its pretax operating margin fell to 21.2% from 26.7%.
- Tuition Payment Processing and Campus Commerce revenue rose to $98.2 million, but net income decreased to $13.0 million from $13.3 million. Pretax operating margin declined to 21.0% from 26.6%, or 27.6% excluding intangible amortization.
- Asset Generation and Management net income increased to $229.2 million from $204.2 million.
Balance sheet, debt, and liquidity
| Metric at December 31 | 2014 | 2013 |
|---|
| Total assets | $30.1 billion | $27.8 billion |
| Bonds and notes payable | $28.0 billion | $26.0 billion |
| Cash and cash equivalents | $130.5 million | $63.3 million |
| Cash and investments | $279.6 million | Not clearly provided as a comparable combined figure |
| Nelnet shareholders’ equity | $1.725 billion | $1.444 billion |
| Student-loan allowance for losses | $48.9 million | $55.1 million |
- The $350.0 million unsecured line of credit was undrawn and fully available at year-end, with maturity on June 30, 2019.
- FFELP warehouse facilities had $1.242 billion outstanding, $508.3 million of remaining capacity, and $73.4 million of equity support. Their 364-day liquidity provisions required renewal during 2015; subsequent amendments extended or modified several facility dates.
- Asset-backed securitizations funded approximately $26.9 billion of loans, or 95.4% of the FFELP portfolio. Forecast undiscounted future cash flows from securitized FFELP loans were approximately $2.29 billion, subject to prepayment, interest-rate, default, and other assumptions.
- Debt repurchases totaled $54.0 million of par value and generated a $6.6 million gain. Stock repurchases totaled 381,689 shares for $15.7 million, and cash dividends totaled $18.5 million.
Material changes, outlook, risks, and unusual items
- The Department changed servicing pricing and allocation metrics effective September 1, 2014. New volume is allocated based on borrower satisfaction, Federal Student Aid personnel satisfaction, and repayment and delinquency performance. Not-for-profit servicers began receiving 25% of new borrower volume effective January 1, 2015, reducing potential allocations to private servicers.
- Federal budget changes effective July 1, 2014 reduced guaranty-agency retention on successfully rehabilitated FFELP loans from 37% to 16%. Nelnet’s rehabilitation collection revenue fell to $41.6 million from $54.2 million, including $10.9 million in the second half of 2014 versus $30.7 million in the first half.
- The Company purchased RenWeb on June 3, 2014 for initial consideration of $44.0 million, adding $8.8 million of 2014 revenue and $37.2 million of acquired intangible assets. Potential contingent consideration was estimated at up to $4.0 million.
- Nelnet exited the inquiry-generation business effective August 29, 2014 amid regulatory uncertainty affecting marketing to for-profit schools. Enrollment services revenue continued to decline.
- On December 22, 2014, Nelnet entered a private-education-loan arrangement with Union Bank and committed to purchase or arrange purchases of originated volume. In February 2015, it committed up to $150.0 million of CommonBond private education loans and later acquired $65.0 million of private education loans. Management planned a private-loan warehouse facility.
- Approximately 99.9% of the student-loan portfolio was federally insured, limiting credit exposure, while private education loans remain unsecured and carry greater loss risk. Private education loans delinquent 31 days or more represented 29.8% of that portfolio at year-end, compared with 12.7% in 2013.
- Interest-rate, basis, repricing, prepayment, derivative, and funding risks are material. A hypothetical 100-basis-point increase in interest rates was estimated to reduce pretax net income by $41.4 million after derivative-settlement effects; a 30-basis-point increase in the funding-index mismatch was estimated to reduce pretax net income by $28.7 million.
- The CFPB was conducting its initial supervisory examination of Nelnet. The filing states that any financial or other impact from potential adverse action could not be estimated.
- Litigation includes an appeal in the Keating TCPA matter; the district court granted summary judgment for Nelnet, no class had been certified, and a reasonably possible loss could not be estimated. Two other putative class matters were settled for immaterial amounts.
- Related-party transactions with Union Bank generated pretax income of $17.1 million in 2014. Union Bank is under common control involving Executive Chairman Michael Dunlap’s family interests, creating potential conflicts of interest.
- Management and KPMG reported effective internal control over financial reporting and unqualified audit opinions.
Most important facts to verify
- Whether Department of Education performance metrics and the 25% not-for-profit allocation materially reduce Nelnet’s future servicing volume and revenue.
- The sustainability of $179.9 million of fixed-rate floor income as interest rates rise and associated derivatives mature or reprice.
- Renewal, pricing, covenant compliance, and refinancing plans for the FFELP warehouse facilities and related 2015 liquidity provisions.
- Assumptions supporting the $2.29 billion securitized-portfolio cash-flow forecast, especially prepayment speeds, LIBOR spreads, and default rates.
- Future decline in FFELP-related interest, guaranty servicing, collection, and software revenue as legacy portfolios amortize.
- Credit performance and repurchase exposure for private education loans, including the $155.3 million subject to repurchase obligations and the $11.8 million reserve.
- Results and potential consequences of the CFPB examination and other regulatory or litigation matters.
- Terms and funding requirements of the Union Bank and CommonBond private-education-loan commitments, including the planned warehouse facility.
- Economic substance and governance safeguards for related-party transactions with Union Bank and affiliated entities.
