Nelnet Inc. (NNI”>NNI) reported second quarter 2011 earnings per share of $1.04, two cents ahead of the Zacks Consensus Estimate but down from $1.17 per share recorded in the prior-year quarter.
Nelnet’s results reflected the benefits from the diversification of revenue through fee-based businesses. Provisions for loan losses as well as expenses also dropped during the quarter. However, a fall in interest income and other income was the downside.
On a GAAP basis, Nelnet’s second quarter net income stood at $37.1 million or 76 cents per share, down from $50.0 million or 99 cents per share in the comparable quarter last year.
Nelnet’s net interest income declined 8.9% year over year to $88.7 million in the second quarter, reflecting a drop in loan interest as well as investment interest income.
While other income plunged 22.4% year over year to $75.3 million, provisions for loan losses fell to $5.3 million from $6.2 million in the prior-year quarter.
As of June 30, 2011, Nelnet’s net student loan assets were $23.2 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 federal student loans from an affiliate of Greystone & Co., Inc., thus increasing its student loan asset book to more than $25.0 billion.
Nelnet is focused on increasing its earnings through diversification. Loan and guaranty servicing revenue inched up 2.0% year over year to $37.4 million. Revenue from tuition payment processing and campus commerce business increased 15% year over year to $14.8 million. However, the company's enrollment services revenue fell 9% from the prior-year quarter to $32.3 million. The deterioration reflects the current regulatory uncertainty shrouding the for-profit college industry that resulted in schools curtailing their expenses on marketing activities.
Nelnet started servicing federally-owned student loans for the Department of Education in September 2009. The company has experienced an increase in loans servicing and has consequently reported a growth in revenues from the servicing contract.
As of June 30, 2011, the company was servicing $38.8 billion of loans for 2.7 million borrowers on behalf of the Department, compared with $12.9 billion of loans for 1.5 million borrowers as of June 30, 2010. Revenue from this contract expanded to $11.9 million in the reported quarter from $6.1 million in the year-ago period.
Nelnet’s operating expenses for the second quarter stood at $100.6 million, down 7.1 % year over year. The company expects that operating expenses will increase over time to support revenue growth in its fee-based businesses.
Nelnet’s Board of Directors declared the third 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 September 15, 2011, to shareholders of record at the close of business on September 1, 2011. The company had hiked its dividend in the prior quarter by 43% to 10 cents from 7 cents paid earlier.
The other student lender, SLM Corp. (SLM”>SLM), better known as Sallie Mae, reported second quarter 2011 core earnings of $260 million or 48 cents per share, beating the Zacks Consensus Estimate by 6 cents. Favorable results at Sallie Mae were primarily driven by an increase in student loan originations, as well as improved credit quality with declines in student loan delinquencies and operating expenses. The positives were partially offset by lower debt repurchase gains.
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 its capital position is solid, we believe that concerns over the implementation of the recent financial reform act and a protracted economic recovery continue to linger. Also, expenses are expected to increase with the rise in the volume of loan servicing. Yet, capital deployment efforts are encouraging and inspire investors’ confidence in the stock.
Nelnet shares currently have a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
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