DBRS: Nelnet’s 4Q Results Solid Reflecting Benefits of Low Rate Environment and Growth in Servicing

Summary:
• Nelnet reported underlying net income of $74.3 million, an 11% expansion QoQ.
• Adjusted revenues slightly lower QoQ on a core student loan spread compression offset by growth in servicing related revenue while cost discipline remains sound.
• DBRS rates Nelnet, Inc. Senior Unsecured Debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) views Nelnet, Inc.’s (Nelnet or the Company) underlying 4Q14 financial results as solid with Nelnet reporting underlying net income, which excludes the impact of derivative market value and foreign currency adjustments, of $74.3 million, an 11% improvement over the prior quarter.

DBRS-calculated adjusted revenues were modestly lower sequentially at $224 million. Net interest income was 4% lower quarter-on-quarter (QoQ) reflecting lower average earning assets and a 4 basis point reduction in the core student loan spread to 1.49%. Specifically, a higher mix of lower yielding FFELP consolidation loans in the student loan portfolio was the primary driver of the lower margin. Nelnet continues to benefit from the low rate environment. Indeed, fixed rate floor income, on a net basis, totaled $49.2 million in the quarter, stable from the prior quarter, but 27% higher year-on-year (YoY) reflecting the recent purchase of student loans earning fixed rate floor income. DBRS expects rates to rise over the medium-term, which would reduce floor income and potentially impact earnings in the short-term. Nonetheless, DBRS notes that Nelnet’s student loan portfolio will gradually convert to a variable rate as interest rates rise and therefore the impact on results should be manageable over the long-term.

Nelnet continues to make progress in expanding its fee generation business lines. For the quarter, adjusted noninterest revenue was up modestly to $112 million, driven by higher ED servicing contract revenue, increased borrower late fees, and higher investment advisory fees.

Positively, total operating expenses were 2% lower QoQ at $114.9 million. Continuing cost reduction initiatives in the Enrollment Services business along with reduced employee compensation expense were main the contributors to the solid cost performance.

Nelnet continues to proactively acquire student loan portfolios when opportunities present themselves. During 2014, Nelnet acquired a total of $6.1 billion of FFELP student loans, including $543.5 million in 4Q14. DBRS notes subsequent to year-end 2014, Nelnet acquired an additional $582.8 million of FFELP student loans. During the quarter and subsequent to year-end, Nelnet entered into forward flow agreements with certain private loan lenders for the purchase of private education loans. DBRS notes that volumes are expected to remain modest compared to the Company’s $28.2 billion of FFELP student loans currently held by the Company. As such, DBRS sees no immediate impact to the low credit risk profile of Nelnet, which is a key factor in the rating.

DBRS’s Senior Unsecured Debt rating for Nelnet, Inc. is BBB (low) with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.