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Nelnet Profit Moves Ahead

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Student lender, Nelnet Inc. , reported second-quarter 2012 earnings per share of $1.13, well ahead of the prior-year quarter’s earnings of 98 cents per share. The company experienced a growth in its top line mainly aided by its fee-based revenue business. Yet, a rise in expenses partially marred the benefit.

On a GAAP basis, its first-quarter net income stood at $41.4 million or 87 cents per share, up from $37.1 million or 76 cents per share in the comparable quarter last year.

Performance in Detail

Nelnet reported revenue of $184.2 million in the quarter under reveiw, up 5% from the year-ago quarter. Net interest income fell 5% year over year to $84.6 million, reflecting a rise in interest income, which was more than offset by an increase in interest on bonds and notes payable.

However, the company is focused on increasing its earnings through diversification. Student Loan and Guaranty Servicing segment revenue jumped 26% year over year to $52.4 million, reflecting growth in servicing volume for the Department of Education (DoE), remote hosting fees, as well as fee revenue from rehabilitated loans.

Nelnet started servicing federally owned student loans for the DoE in September 2009. It experienced an increase in loans servicing and consequently reported a growth in revenues from the servicing contract.

As of June 30, 2012, Nelnet was servicing $56.0 billion of loans for 3.1 million borrowers on behalf of the DoE, up from $38.8 billion of loans for 2.7 million borrowers as of June 30, 2011. This contract generated revenue of $16.1 million in the reported quarter, ahead of $11.9 million generated in the comparable period a year ago.

Nelnet’s revenue from tuition payment processing and campus commerce business grew 14% year over year to $16.8 million. However, the company's enrollment services revenue fell 8% from the prior-year quarter to $29.7 million.

Nelnet’s provisions for loan losses increased to $7.0 million from $6.0 million in the prior quarter and $5.3 million in the prior-year quarter.

As of June 30, 2012, Nelnet’s net student loan assets were $23.5 billion, slipping from $23.8 billion at the end of the prior quarter. Over the long term, Nelnet’s student loan portfolio will run-off due to the legislative move that led to the termination of federal student loans’ origination by the private student lenders.

Nelnet’s operating expenses for the reported quarter stood at $108.2 million, up 8% year over year.

Dividend Update

Nelnet’s Board of Directors declared a third quarter 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 is payable on September 15, 2012, to shareholders of record as of the close of business on September 1, 2012.

Peer Performance

Notably, the other student lender, SLM Corp. (SLM - Analyst Report) -- better known as Sallie Mae, reported its second-quarter 2012 core earnings of $243 million or 49 cents per share, lagging the Zacks Consensus Estimate by a nickel.

Sallie Mae’s results were adversely affected by non-cash loan premium amortization in the quarter. Higher funding costs as well as a slump in federally guaranteed student loan balances added fuel to the fire. However, lower loan loss provision, reduced operating expenses and higher debt repurchase gains were the upsides.

Our Take

In recent years, Nelnet has expanded in areas that are independent of the federal program. The company remained focused on increasing its revenue through fee-based business and servicing of loans for the Education department with the ambition of accelerating its top-line growth. Historically low interest rates continue to help it generate significant near-term value and cash flow from its student loan portfolio. Capital deployment efforts are also impressive.

Yet, the recent legislative developments and a protracted economic recovery are expected to continue to linger. Also, Nelnet’s expenses are likely to increase with the rise in volume of loan servicing.

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