Slump in Nelnet Profit

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Student lender Nelnet Inc. (NNI) reported earnings per share of $1.12 for third-quarter 2012, 4 cents below the prior-year quarter’s earnings of $1.16. The downturn primarily reflected its student loan portfolio run off resulting from the elimination of the Federal Family Education Loan (:FFEL) Program in 2010, partly mitigated by its fee-based business growth.

On a GAAP basis, its third-quarter 2012 net income stood at $36.8 million, or 78 cents per share, down from $47.5 million or 98 cents per share in the comparable quarter last year.

Performance in Detail

Nelnet’s net interest income waned 11.9% year over year to $85.3 million, reflecting a fall in interest income as well as an increase in interest on bonds and notes payable. However, total revenue from its fee-based segments in the reported quarter expanded 7.5% year over year to $101.9 million.

Student Loan and Guaranty Servicing segment revenue increased 25% from the prior year quarter to $53.3 million, mainly due to growth in servicing volume under the company's contract with the Department of Education (DoE), remote hosting fees and fee revenue from rehabilitated loans.

Revenue from the company's Tuition Payment Processing and Campus Commerce segment grew 7% from the year-ago quarter to $17.9 million. However, the company's enrollment services revenue dwindled 13.6% from the prior-year quarter to $30.7 million.

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

As of September 30, 2012, Nelnet was servicing $63.6 billion of loans for 3.6 million borrowers on behalf of the DoE, up from $44.6 billion of loans for 3.0 million borrowers as of September 30, 2011. This contract generated revenue of $19.1 million in the reported quarter, ahead of $12.8 million generated in the year-ago period.

Nelnet’s provisions for loan losses decreased to $5.0 million from $7.0 million in the prior quarter and $5.3 million in the prior-year quarter.

As of September 30, 2012, Nelnet’s net student loan assets were $22.6 billion, slipping from $23.5 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 $104.9 million, up slightly by 0.2% year over year.

Dividend Update

Concurrent with its third quarter 2012 earnings release, Nelnet's Board of Directors declared a cash dividend of $1.10 per share on its outstanding shares of Class A and Class B common stock.

This comprised a regular quarterly dividend of 10 cents per share as well as a special cash dividend of $1.00 per share. The company will pay both dividends on November 27, 2012, to shareholders of record at the close of business on November 19, 2012.

Peer Performance

Notably, the other student lender, SLM Corp. (SLM), better known as Sallie Mae, reported its third-quarter 2012 core earnings of $277 million or 58 cents per share, beating the Zacks Consensus Estimate of 54 cents.  Results also compared favorably with the prior-year quarter’s core earnings of $188 million or 36 cents per share.

Lower loan loss provision, reduced operating expenses and higher debt repurchase gains helped achieve better-than-expected results at Sallie Mae. However, the positives were partly offset by a decrease in net interest income with the company experiencing higher funding costs and a decline in federally guaranteed student loan balances. This remains a cause of concern.

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.

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

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