Nelnet Reports Substantial Growth in Net Income and Student Loan Assets

Nov 05, 2004

LINCOLN, Neb., Nov 5, 2004 /PRNewswire-FirstCall via COMTEX/ -- Nelnet, Inc. (NYSE: NNI) today announced that base net income for the first nine months of 2004 was $130.1 million, or $2.43 per share, compared with $18.3 million, or $0.41 per share, in the prior year. For the first nine months of 2004, net income was $102.0 million, or $1.90 per share, compared with net income of $16.8 million, or $0.37 per share, for the same period a year ago.

Net income excluding derivative market value adjustments, amortization of intangible assets, and variable-rate floor income items, which the company defines as base net income, was $34.0 million, or $0.63 per share, for the third quarter of 2004 compared with $3.8 million, or $0.08 per share, in the prior year. Net income including these items was $7.6 million, or $0.14 per share for the third quarter of 2004, compared with a net loss of $1.1 million, or $0.03 per share, for the same period a year ago. A description of base net income and a reconciliation of GAAP net income to base net income are included later in the release.

"As we review the quarter, two things in particular stand out," said Steve Butterfield, Nelnet Vice Chairman and Co-CEO. "Net income and student loan assets were both up substantially, clearly demonstrating the strength of our core business."

Net student loan assets at September 30, 2004 were $12.8 billion, up 27 percent, or $2.7 billion, from $10.1 billion the year before. Since the beginning of 2004, Nelnet's net student loan assets increased 22 percent, or $2.3 billion.

"We continue to be excited about Nelnet's organic student loan asset growth," Butterfield said. "This is a key driver of future earnings and is the result of the success of our indirect and direct marketing strategies. Combined, our origination channels -- direct to consumer, brand, and forward flow -- have grown in line with our expectations."

"Our strong performance in the third quarter reflects the strength of our business and our focus on business-as-usual," Butterfield said. "In addition, last week we announced an agreement to acquire EDULINX Canada Corporation, the largest servicer of government sponsored student loans in Canada. While EDULINX is expected to make a positive, though not material, contribution to net income in 2005, it adds volume to our servicing and fee-based business and opens new market opportunities."

Nelnet prepares financial statements in accordance with generally accepted accounting principles ("GAAP"). In addition to evaluating the company's GAAP-based financial information, management and analysts also evaluate the company on certain non-GAAP performance measures that are referred to as base income adjustments. While base net income is not a substitute for reported results under GAAP, Nelnet provides this information as additional information regarding our financial results.

Nelnet's base net income is a non-GAAP financial measure and may not be comparable to similarly titled measures reported by other companies. Nelnet's base net income presentation does not represent another comprehensive basis of accounting.

The derivative market value adjustment on the company's consolidated statements of income represents unrealized losses in the fair value of derivative instruments of $39.2 million year-to-date 2004 and $40.2 million for the third quarter of 2004. While derivative gains or losses do not impact the base income of the company as they fluctuate, they will continue to be reflected in our operating results.

Amortization expense related to intangible assets amounted to $6.4 million and $2.3 million for the nine months and quarter ended September 30, 2004, respectively. In 2003, such amortization expense for the corresponding periods was $10.0 million and $2.8 million.

Net interest income includes variable-rate floor income, or floor income generated by the annual reset of borrower rates on July 1, of $348,000 for the nine months ended September 30, 2004 compared to $12.7 million for the same period a year ago. No variable-rate floor income was earned in the third quarters of 2004 and 2003.

The following table provides a reconciliation of GAAP net income (loss) to base net income.

                                   Three months ended    Nine months ended
                                      September 30,          September 30,
                                    2004       2003        2004       2003
                                                  (unaudited)
                                             (dollars in thousands,
                                                except share data)

     GAAP net income (loss)          $7,637   $(1,133)   $102,011   $16,771
     Base adjustments:
       Impact of derivative
        market value adjustments     40,183     5,131      39,209     5,131
       Amortization of intangible
        assets                        2,275     2,785       6,432     9,981
       Impact of variable-rate
        floor income                     --        --        (348)  (12,700)
     Total base adjustments
      before income taxes            42,458      7,916     45,293     2,412
     Net tax effect (a)             (16,134)    (3,008)   (17,211)     (917)
     Total base adjustments          26,324      4,908     28,082     1,495
       Base net income              $33,961     $3,775   $130,093   $18,266

       Base earnings per share,
        basic and diluted             $0.63      $0.08      $2.43     $0.41

     (a)  Tax effect computed at 38%.

Nelnet will host a conference call to discuss this earnings release at 11:00 a.m. (Eastern) today. To access the call live, participants in the United States and Canada should dial 800.289.0493 and international callers should dial 913.981.5510 at least 15 minutes prior to the call. A live audio Web cast of the call will also be available at www.nelnetinvestors.net under the conference calls and Web casts menu. A replay of the conference call will be available between 2:00 p.m. (Eastern) today and 11:59 p.m. (Eastern) November 12. To access the replay via telephone within the United States and Canada, callers should dial 888.203.1112. International callers should dial 719.457.0820. All callers accessing the replay will need to use the confirmation code 996876. A replay of the audio Web cast will also be available at www.nelnetinvestors.net.

Supplemental financial information to this earnings release is available online at http://www.nelnetinvestors.net/releases.cfm?reltype=Financial.

Nelnet is one of the leading education finance companies in the United States and is focused on providing quality student loan products and services to students and schools nationwide. With over $14 billion in total assets, Nelnet originates in excess of $3 billion for itself and its service partners annually, and its servicing software is used by approximately 35 clients, including Nelnet, to service nearly $50 billion in student loans. Nelnet ranks among the nation's leaders in terms of total student loan assets.

Nelnet offers a broad range of student loan and financial services and technology-based products, including student loan origination and lending, guarantee servicing, and a suite of software solutions. Our products are designed to simplify the student loan process by automating financial aid delivery, loan processing, and funds disbursement. Our services help to facilitate and streamline education finance for all involved in the industry, including student and parent borrowers, lenders, financial aid officers, guaranty agencies, governmental agencies, servicers, and the capital markets.

    Additional information is available at www.nelnet.net.

Information contained in this press release, other than historical information, may be considered forward-looking in nature and is subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or expected. Among the key factors that may have a direct bearing on Nelnet's operating results, performance, or financial condition are changes in terms of student loans and the educational credit marketplace, changes in the demand for educational financing or in financing preferences of educational institutions, students and their families, or changes in the general interest rate environment and in the securitization markets for education loans.

    (code #: nnif)

    Condensed Consolidated Statements of Income

                                 Three months ended      Nine months ended
                                   September 30,           September 30,
                                  2004        2003        2004        2003
                                                (unaudited)
                                 (dollars in thousands, except share data)

    Interest income:
     Loan interest,
      excluding variable
       rate floor
         income               $171,427     $104,998     $519,059     $304,989
     Variable rate floor
      income                        --           --          348       12,700
     Amortization of loan
      premiums                 (18,395)     (19,424)     (53,249)     (49,760)
     Investment interest         4,918        2,716       11,750       11,984
      Total interest income    157,950       88,290      477,908      279,913

    Interest expense:
     Interest on bonds and
      notes payable             68,545       47,309      169,940      151,484

      Net interest income       89,405       40,981      307,968      128,429

    Less provision (recovery)
     for loan losses             2,300        4,015       (1,006)       8,875

      Net interest income
       after provision
       (recovery)
      for loan losses           87,105       36,966      308,974      119,554

    Other income (expense):
     Loan servicing and other
      fee income                24,167       27,087       72,388       77,324
     Software services and
      other income               8,391        4,565       18,998       13,676
     Derivative market value
      adjustments              (40,183)      (5,131)     (39,209)      (5,131)
     Derivative settlements,
      net                      (16,031)        (524)     (19,389)        (524)
      Total other income
       (expense)               (23,656)      25,997       32,788       85,345

    Operating expenses:
     Salaries and benefits      25,060       35,901      101,865       92,749
     Other expenses             24,167       23,583       72,613       72,109
     Amortization of
      intangible assets          2,275        2,785        6,432        9,981
      Total operating expenses  51,502       62,269      180,910      174,839

      Income before income
       taxes                    11,947          694      160,852       30,060

    Income tax expense           4,310        1,827       58,841       13,289

      Net income (loss)         $7,637      $(1,133)    $102,011      $16,771

      Earnings (loss) per
       share, basic and
       diluted                   $0.14       $(0.03)       $1.90        $0.37

    Weighted average
     shares outstanding     53,648,788   45,038,488   53,644,056   45,019,823


    Condensed Consolidated Balance Sheets and Financial Data

                                     As of          As of          As of
                                 September 30,   December 31,   September 30,
                                     2004            2003           2003
                                  (unaudited)                   (unaudited)
                                            (dollars in thousands)
                  Assets
    Student loans receivable,
     net                          $12,793,704    $10,455,442     $10,059,920
    Cash, cash equivalents,
     and investments                  933,271      1,155,215         774,667
    Other assets                      387,821        321,529         318,410
       Total assets               $14,114,796    $11,932,186     $11,152,997


      Liabilities and shareholders' equity
    Liabilities:
       Bonds and notes payable    $13,526,343    $11,366,458      $10,892,347
       Other liabilities              179,838        260,239          129,428
         Total liabilities         13,706,181     11,626,697       11,021,775

    Shareholders' equity              408,615        305,489          131,222

         Total liabilities and
          shareholders' equity    $14,114,796    $11,932,186      $11,152,997


    Average student loans         $11,282,561     $9,451,035       $8,891,773
    Return on average total
     assets                              1.04%          0.25%            0.21%
    Return on average equity             38.3%          19.4%            18.3%

SOURCE Nelnet, Inc.

Media, Sheila Odom, +1-402-458-2329, or Investors, Cheryl
Watson, +1-317-469-2064, both of Nelnet, Inc.
http://www.nelnetinvestors.net/releases.cfm?reltype=Financial

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