Nelnet Inc. (NNI) reported fourth quarter 2010 earnings of $1.66 per share compared with $1.64 per share in the year-ago quarter. The results surpassed the Zacks Consensus Estimate of $1.47 per share.
Quarterly results reflect pre-tax gains of $33.8 million, or 44 cents per share after-tax, on the sale of $2.1 billion of federal student loans to the Department of Education (DOE) as well as $16.1 million, or 21 cents per share after-tax, from its repurchase of $213.1 million of asset-backed securities debt. The company also benefited from diversification of revenue through fee-based businesses.
Nelnet reported full year earnings of $255.2 million or $5.20 per share, up from $194.9 million or $3.94 per share for 2009. Results also came in favorably with the Zacks Consensus Estimate of $5.05 per share.
On a GAAP basis, Nelnet reported fourth quarter 2010 net income of $85.1 million or $1.75 per share compared with $59.1 million, or $1.18 per share in the prior-year quarter. Quarterly results included $26.6 million non-cash impairment charge related to goodwill of the company’s interactive marketing and list management businesses, stemming from the adverse impact of decreasing enrollments in for-profit colleges and the economic recession. For full year 2010, the company reported net income of $189.0 million or $3.81 per share compared with $139.1 million or $2.78 per share in 2009.
Nelnet reported a net interest income of $96.3 million in the fourth quarter, up 20% from $80.5 million in the prior-year quarter. The rise reflects an increase in loan interest income and a decrease in interest on bonds and notes payable.
Nelnet’s reported core student loan spread of 1.53% for the fourth quarter compared with 1.44% in the prior-year quarter and 1.41% in the prior quarter. The tightening between the three-month financial commercial paper rate and three-month LIBOR indices benefited the core student loan spread in the 2010 fourth quarter. Provisions for loan losses were flat year over year at $6.0 million but up from $5.5 million reported in the prior quarter.
Nelnet is focused on increasing its earnings through diversification. Total revenue from fee-based businesses in fourth quarter 2010 increased 13% year over year to $87.5 million and represented 48% of total revenue. Fee-based revenue from its payment processing and enrollment services businesses increased $5.2 million or 12% year over year to $49.9 million from the prior-year quarter. Revenue from its Student Loan and Guaranty Servicing segment increased $4.9 million or 14.9% year over year to $37.6 million.
Nelnet commenced servicing federally owned student loans for the DOE in September 2009. The company has experienced an increase in loans servicing and reported a growth in revenues from the servicing contract. As of December 31, 2010, the company was servicing $30.3 billion of loans for 2.8 million borrowers on behalf of the DOE compared with $21.8 billion of loans for 2.5 million borrowers as of September 30, 2010. Revenue from the servicing contract increased to $11.6 million, up from $8.7 million reported in the prior quarter. However, Nelnet’s net student loan assets were $24.0 billion as of December 31, 2010, slightly down from $24.4 billion as of September 30, 2010.
Operating expenses were $131.3 million, up 7% from $123.0 million in the prior-year quarter, reflecting an increase in salaries and benefits expenses, cost to provide enrollment services and other expenses. These were, however, partially offset by a fall in impairment expense.
In February 2011, Nelnet also declared a first-quarter cash dividend of 7 cents per share on its outstanding shares of both Class A and Class B common stock. The dividend is payable on March 15, 2011, to shareholders of record at the close of business on March 1, 2011. The company also repurchased 62.6 million (par value) of Junior Subordinated Hybrid Securities for $55.7 million with its operating cash and recognized a pre-tax gain of $6.9 million as a result of this debt repurchase. This gain will be included in the first quarter 2011 results of the company. Nelnet also paid $325.0 million on its unsecured line of credit. Following these payments, the current outstanding balance is $125.0 million on its unsecured line of credit.
In January, another student lender, SLM Corp. (SLM), commonly known as Sallie Mae, reported fourth quarter 2010 core earnings of $401 million or 75 cents per share, ahead of the Zacks Consensus Estimate of 72 cents. The results compare favorably with prior-year quarter’s core earnings of $268 million or 44 cents per share. Favorable results were primarily driven by a decrease in loan loss provisions and gains from repurchasing debt.
The student loan reform law barred companies such as Nelnet and Sallie Mae from originating federal student loans since July. But this should not affect Nelnet much as it has of late, expanded in areas that are independent of the federal program. Moreover, increasing revenues from its fee-based business and servicing of loans for the Education department along with restructuring initiatives should support Nelnet’s earnings. Though Nelnet’s capital position is solid, we believe that concerns over implementation of the recent financial reform act and a protracted economic recovery remain.
Nelnet shares currently have a Zacks #2 Rank, which translates into a short-term “Buy” recommendation.
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