Nelnet Profit Falls, but Buys Back

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Student lender Nelnet Inc. (NNI) reported first-quarter 2012 earnings per share of $1.11, slightly missing the prior-year quarter’s earnings of $1.12 per share. While the company experienced a growth in its top line, a rise in expenses marred that benefit.

However, it is encouraging to note that the company has announced a new share buyback authorization for repurchase of up to 5 million shares over the next three years.

On a GAAP basis, Nelnet’s first-quarter net income stood at $43.1 million or 91 cents per share, down from $54.9 million or $1.13 per share in the comparable quarter last year.

Performance in Detail

Nelnet reported revenue of $193.1 million in the reported quarter, up 3.7% from the year-ago quarter. Net interest income fell 1.1% year over year to $84.9 million, reflecting a rise in interest expense, partially offset by an increase in loan interest income.

However, Nelnet is focused on increasing its earnings through diversification. Loan and guaranty servicing revenue jumped 22.5% year over year to $49.5 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. The company experienced an increase in loans servicing and consequently reported a growth in revenues from the servicing contract.

As of March 31, 2012, the company was servicing $51.8 billion of loans for 3.1 million borrowers on behalf of the DoE compared with $37.3 billion of loans for 2.8 million borrowers as of March 31, 2011. Revenue from this contract expanded to $14.8 million in the reported quarter from $12.3 million in the year-ago period.

Revenue from tuition payment processing and campus commerce business grew 13.1% year over year to $21.9 million. However, the company's enrollment services revenue fell 6.5% from the prior-year quarter to $31.7 million.

Provisions for loan losses fell to $6.0 million from $7.0 million in the prior quarter but climbed from $3.75 million in the prior-year quarter.

As of March 31, 2012, Nelnet’s net student loan assets were $23.8 billion. Historically low interest rates continue to help Nelnet generate significant near-term value and cash flow from its student loan portfolio.

Nelnet’s operating expenses for the reported quarter stood at $111.2 million, up 11.6% year over year. The company expects its operating expenses to increase over time to support revenue growth.

Capital Deployment Update

Nelnet has authorized a new share buyback program to repurchase up to a total of 5 million shares of its Class A common stock during the three-year period ending May 24, 2015. The current share repurchase program is set to expire on May 24, 2012. 

Moreover, Nelnet’s board of directors declared the second quarterly cash dividend on its outstanding shares of Class A common stock and Class B common stock of 10 cents per share. The dividend will be paid on June 15, 2012, to shareholders of record at the close of business on June 1, 2012.

Peer Performance

Notably, the other student lender, SLM Corp. (SLM) -- better known as Sallie Mae -- reported earnings of $284 million or 55 cents per share, improving from the prior-year quarter’s core earnings of $260 million or 48 cents per share. Results were aided by a fall in loan loss provisions and decrease in expenses.

The company’s private education loan origination advanced 23% year over year while loan charge-offs reached the lowest rate since the third quarter of 2008. However, the benefits were partly offset by a decline in net interest income and reduction in debt repurchase gains.

Our Take

In recent years, Nelnet has expanded in areas that are independent of the federal program. The company focuses on increasing its revenue through fee-based business and servicing of loans for the Education department, and these should drive its top-line growth. Capital deployment efforts of the company are also impressive.

Yet, we believe that the recent legislative developments and a protracted economic recovery will continue to linger. Also, expenses are likely to increase with the rise in volume of loan servicing.

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