Nelnet Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2015, filed February 25, 2016. Nelnet operates student-loan servicing and asset-management businesses, tuition-payment and campus-commerce services, enrollment services, and, beginning in 2016, telecommunications through Allo Communications.
- Student loan portfolio: $28.3 billion at year-end, including 99.1% federally insured loans.
- Student loans serviced: $176.4 billion for 7.4 million borrowers; Department of Education-serviced volume was $147.3 billion for 5.8 million borrowers.
- FFELP originations ended in 2010; the existing portfolio is expected to amortize over approximately 25 years.
Financial results and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net interest income | $431.9 million | $436.6 million | Down 1.1% |
| Net interest income after loan-loss provision | $421.7 million | $427.1 million | Down 1.2% |
| Loan and guaranty servicing revenue | $239.9 million | $240.4 million | Down 0.2% |
| Tuition payment and campus-commerce revenue | $120.4 million | $98.2 million | Up 22.6% |
| Enrollment services revenue | $70.7 million | $82.9 million | Down 14.7% |
| Income before taxes | $420.6 million | $469.5 million | Down 10.4% |
| Net income attributable to Nelnet | $268.0 million | $307.6 million | Down 12.9% |
| Basic and diluted EPS | $5.89 | $6.62 | Down 11.0% |
| Operating cash flow | $391.4 million | $357.4 million | Up 9.5% |
| Core student loan spread | 1.43% | 1.48% | Down 5 basis points |
Fixed-rate floor income, net of derivative settlements, was $184.7 million, compared with $179.9 million in 2014. The effective tax rate increased to 36.25% from 34.25%. The filing does not present a single consolidated revenue total in the selected-data table; reported revenue and income components are shown separately.
Balance sheet, debt, and liquidity
- Total assets were $30.5 billion, compared with $30.1 billion at December 31, 2014.
- Student loans receivable, net, were $28.3 billion; the allowance for loan losses was $50.5 million.
- Bonds and notes payable were $28.2 billion, substantially supported by student-loan assets and securitizations.
- Cash and cash equivalents were $63.5 million; available-for-sale and trading investments were $155.4 million.
- The $350.0 million unsecured credit line had $100.0 million outstanding and $250.0 million available.
- FFELP warehouse facilities had $1.86 billion outstanding and $269.1 million available; $114.1 million of equity support had been advanced.
- The private education loan warehouse facility had $181.2 million outstanding and $93.8 million available, with liquidity provisions expiring June 24, 2016.
- Debt maturities included $256.2 million due in 2016 and $1.86 billion due in 2018, excluding interest.
- Forecast undiscounted future cash flows from FFELP loans financed in securitizations were estimated at approximately $2.31 billion, including $732.7 million of overcollateralization.
Material changes versus the prior comparable period
- Net income declined $39.6 million, primarily reflecting lower net interest income after provisions, lower enrollment-services and investment-advisory revenue, higher operating expenses, and a higher tax rate.
- Student loan net interest income was pressured by higher interest expense and a lower variable student-loan spread, partly offset by increased floor income and a larger average portfolio.
- Tuition payment and campus-commerce revenue grew $22.2 million, supported by higher payment-plan and transaction volumes, new school customers, and the RenWeb acquisition.
- Student Loan and Guaranty Servicing before-tax operating margin fell to 14.8% from 21.2%. Federal budget changes reduced guaranty-agency rehabilitation economics, while legacy commercial portfolios continued to run off.
- Government servicing revenue increased to $133.2 million from $124.4 million, but the Department allocated only 14% of new volume to Nelnet for March-August 2015 and 13% for September 2015-February 2016. Nonprofit servicers received 26% of new borrower volume beginning September 1, 2015.
- Nelnet acquired $4.0 billion of student loans in 2015, down from $6.1 billion in 2014.
- Stock repurchases increased substantially: 2.45 million shares for $96.2 million in 2015 versus 381,689 shares for $15.7 million in 2014.
Guidance, outlook, risks, and unusual items
- Management expected net income in 2016-2018 to be below 2015 levels because of continued FFELP portfolio amortization and anticipated higher interest rates. Management also expected that reinvested FFELP cash would initially earn lower returns than the historical portfolio.
- On December 31, 2015, Nelnet acquired 92.5% of Allo for $46.25 million. Allo contributed no 2015 income, but its assets, liabilities, goodwill of $19.8 million, and telecommunications operations were included beginning January 1, 2016. Management planned approximately $50 million of Allo network capital expenditures in 2016.
- On February 1, 2016, Nelnet sold Sparkroom, representing most of its inquiry-management business, for $3.0 million. Sparkroom generated $51.1 million of 2015 revenue and $9.3 million of gross margin; most of the gain was expected in first-quarter 2016.
- College Assist’s guaranty-servicing contract expired October 31, 2015 and was not renewed. TSAC intended to exit the FFELP guaranty business on June 30, 2016; thereafter, Nelnet expected to have only one guaranty-servicing customer.
- The Department of Education contract expires June 16, 2019 and represented approximately 15% of 2015 revenue. Volume allocations depend on comparative performance metrics.
- Interest-rate, basis, repricing, prepayment, derivative valuation, and securitization-market risks are material. A hypothetical 100-basis-point increase in rates was estimated to reduce 2015 pretax net income by $45.0 million after derivative-settlement effects.
- FFELP securitization tranches, including approximately $9 billion of prior Nelnet securitizations, were subject to potential rating downgrades because of slower-than-expected principal repayment and prepayments. Downgrades or weaker securitization liquidity could increase funding costs or limit refinancing access.
- Regulatory, litigation, privacy, cybersecurity, servicing-compliance, and consumer-protection risks remain significant. The CFPB supervised large nonbank student-loan servicers and conducted a 2015 industry inquiry.
- Management reported no material adverse effect expected from existing litigation and received unqualified audit opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether FFELP portfolio runoff and rising funding costs reduce net interest income and floor-income benefits faster than expected.
- Renewal or refinancing of warehouse liquidity provisions, particularly the private education facility expiring June 24, 2016 and FFELP facilities expiring during 2016.
- Future Department of Education servicing allocations, contract terms, and renewal prospects through June 2019.
- Revenue and margin deterioration following the loss of College Assist and TSAC guaranty-related business.
- Allo’s integration, network-expansion spending, customer growth, operating margins, and competitive position beginning in 2016.
- Effects of potential FFELP securitization downgrades, slower prepayments, collateral requirements, and access to asset-backed financing.
- Realization of the $2.31 billion projected securitization cash flow, which depends on prepayment, default, interest-rate, and basis-spread assumptions.
- Related-party transactions and governance concentration: Michael S. Dunlap controlled approximately 76.5% of voting rights.