Nelnet Reports Profits, Lower Costs

Nelnet Inc. ( NNI ) reported fourth-quarter 2011 earnings per share of $1.29, surpassing the prior-year quarter’s earnings of $1.02 per share.

Nelnet’s results reflected the benefits from the diversification of revenue through fee-based businesses. Operating expenses of the company also dropped during the quarter. However, a fall in investment interest income and a rise in provision for loan losses was the downside.

On a GAAP basis, Nelnet’s fourth-quarter net income stood at $64.9 million or $1.37 per share, significantly down from $85.1 million or $1.75 per share in the comparable quarter last year.

For the full year, net income was $4.61 per share, up from $4.21 in the prior year. GAAP net income was $204.3 million or $4.23 per share compared with $189.0 million or $3.81 per share in 2010.

Performance in Detail

Nelnet’s net interest income decreased 3% year over year to $93.3 million in the fourth quarter, reflecting a rise in interest expense and a fall in investment interest income, partially offset by an increase in loan interest income.

Moreover, other income declined 32% year over year to $120.3 million, while provisions for loan losses climbed to $7 million from $6 million in the prior-year quarter.

As of December 31, 2011, Nelnet’s net student loan assets were $24.3 billion. Historically low interest rates continue to help Nelnet generate substantial near-term value and cash flow from its student loan portfolio. In July 2011, the company purchased the residual interest in $1.9 billion of securitized Federal Family Education Loan Program.

Nelnet is focused on increasing its earnings through diversification. Loan and guaranty servicing revenue jumped 36% year over year to $51 million. Revenue from tuition payment processing and campus commerce business grew 12% year over year to $16.9 million.

However, the company's enrollment services revenue fell 17.2% from the prior-year quarter to $28.8 million. The deterioration reflects the regulatory uncertainty shrouding the for-profit college industry, resulting in schools curtailing their expenses on marketing activities.

Nelnet started servicing federally-owned student loans for the Department of Education (DoE) in September 2009. The company experienced an increase in loans servicing and consequently reported a growth in revenues from the servicing contract.

As of December 31, 2011, the company was servicing $46.1 billion of loans for 3 million borrowers on behalf of the DoE compared with $30.3 billion of loans for 2.8 million borrowers as of December 31, 2010. Revenue from this contract expanded to $14.0 million in the reported quarter from $11.6 million in the year-ago period.

Nelnet’s operating expenses for the fourth quarter stood at $102.7 million, down 21.8% year over year. The company expects its operating expenses to increase over time to support revenue growth in its fee-based businesses.

The other student lender, SLM Corp. ( SLM - Analyst Report ) better known as Sallie Mae, reported fourth-quarter 2011 core earnings of $268 million or 51 cents per share, a penny above the Zacks Consensus Estimate. However, the results compare unfavorably with the prior-year quarter’s core earnings of $401 million or 75 cents per share.

Improvements in net interest income, loan loss provision, expenses and discontinued operations supported the core earnings figure. Yet, a decrease in gains on loan sales and debt repurchases from the prior-year period led to the drop in core earnings.

Capital Deployment Update

In the reported quarter, Nelnet repurchased 0.3 million shares of Class A common stock for $6 million, under the company's stock repurchase program at an average price of $19.09 per share. For full year, the company repurchased 1.4 million shares of Class A common stock for $27.1 million at an average price of $18.89 per share.

Nelnet’s Board of Directors declared the first quarterly cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of 10 cents per share. The dividend will be paid on March 15, 2012 to shareholders of record as of March 1, 2012.

Our Take

Although the student loan reform law has barred the company from originating federal student loans since July 2010, Nelnet has expanded in areas that are independent of the federal program. Increasing revenues from its fee-based business and servicing of loans for the Education department should bolster its earnings.

Though the company’s capital position is solid, we believe that the concerns over the implementation of the recent financial reform act and a protracted economic recovery continue to linger. Moreover, expenses are expected to increase with the rise in the volume of loan servicing. Yet, capital deployment efforts are encouraging and are capable of boosting investors’ confidence in the stock.