DBRS: Nelnet’s 1Q Results Lower QoQ; Mix Effect on Student Loan Spreads Offsets Higher Fee Income

Summary:
• Nelnet reported underlying net income of $63.4 million, a 15% reduction quarter-on-quarter (QoQ).
• Nelnet continues to capitalize on opportunities in the market to acquire student loans, purchasing $836.1 million of student loans in the quarter, including both private education loans and FFELP loans.
• 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 1Q15 financial results as acceptable with Nelnet reporting underlying net income, which excludes the impact of derivative market value and foreign currency adjustments, of $63.4 million, a 15% reduction over the prior quarter.

Compressed student loan margins and a lower average balances of student loans resulted in a 9% QoQ decline in net interest income to $102.6 million. Specifically, Nelnet’s core student loan spread contracted 8 basis points (bps) to 1.41% reflecting the mix effect of recent acquisitions of lower margin, but longer dated FFELP consolidation loans.

Noninterest revenue (DBRS-adjusted), a strategic focus of the Company that is progressing well to date, was up 4% QoQ to $116.8 million, primarily due to increasing ED servicing contract revenue and higher revenues from the Company’s Tuition Payment Processing and Campus Commerce segment partially offset by lower revenues from investment advisory fees. Meanwhile, operating expenses were slightly higher QoQ at $115.2 million.

Nelnet continues to proactively acquire student loan portfolios when opportunities present themselves. During 1Q15, Nelnet acquired a total of $836.1 million of student loans, including both private education and FFELP student loans. While private education loans held by Nelnet increased to $131.5 million at March 31, 2015 from $27.5 million at YE14, DBRS notes that private education loans remain very modest compared to the Company’s $28.0 billion portfolio of FFELP student loans.

DBRS rates Nelnet, Inc. Senior Unsecured Debt rating at BBB (low) with a Stable trend.

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