Nelnet Reports Adjusted Base Net Income for the First Six Months Up 21 percent to $0.82 Per Share

Jul 28, 2006

* Net student loan assets up $1.1 billion to $22.4 billion for second quarter * Adjusted base net income for the second quarter $0.37 per share * Fee-based revenue represents 43 percent of total revenue

 

LINCOLN, Neb., July 28, 2006 /PRNewswire-FirstCall via COMTEX News Network/ -- Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the first six months of 2006 of $97.8 million, or $1.80 per share, compared with $66.3 million, or $1.23 per share, for the first six months of 2005. Base net income for the first six months of 2006 was $62.6 million, or $1.15 per share, compared with $62.5 million, or $1.16 per share, for the first six months of 2005.

GAAP net income for the second-quarter 2006 was $45.8 million, or $0.84 per share, compared with a net loss of $(1.8) million, or $(0.03) per share, for the second-quarter 2005. Base net income for the second-quarter 2006 was $31.7 million, or $0.58 per share, compared with $31.0 million, or $0.58 per share, in the second-quarter 2005.

Adjusted base net income, which is base net income excluding certain special allowance yield adjustments and related derivative settlements, was $0.74 per share for the first six months of 2006 and $0.37 per share for the second quarter of 2006, compared with $0.68 per share for the first six months of 2005 and $0.34 per share for the second quarter of 2005. Excluding a legislative-driven expense of $6.9 million, $4.3 million after tax, for loan loss reserves in the first-quarter 2006 due to a provision in the Deficit Reduction Act of 2005 that increased risk sharing for student loan holders by one percent on Federal Family Education Loan Program loans, adjusted base net income for the first six months of 2006 was up 21 percent to $0.82 per share compared with the same period a year ago.

Base net income as defined by Nelnet is GAAP net income excluding derivative market value and foreign currency adjustments, the amortization of intangible assets, and variable-rate floor income. A description of base and adjusted base net income and reconciliation of GAAP net income to base and adjusted base net income is included in this release.

GAAP net income includes an unrealized gain in the fair-market value of derivative instruments and foreign currency adjustments of $68.7 million for the first six months of 2006 and $28.9 million for the second quarter of 2006. Nelnet's derivatives do not qualify for hedge accounting under FASB 133. As such, the mark-to-market gains or losses of derivatives in each reporting period are included in the statement of operations, but removed from GAAP net income in the calculation of base net income. In addition, base net income excludes the foreign currency transaction gain caused by the re-measurement of the company's Euro-denominated bonds to U.S. dollars.

Since December 31, 2005, net student loan assets have increased 11 percent, or $2.1 billion, from $20.3 billion to $22.4 billion at June 30, 2006. Since March 31, 2006, net student loan assets have increased 5 percent, or $1.1 billion.

The company reported net consolidation loan originations of $1.1 billion and $477.8 million and a loss of $581.2 million and $310.8 million through the consolidation of the company's portfolio by third parties for the first six months of 2006 and the second quarter of 2006, respectively. This resulted in net new consolidation loan originations of $487.5 million for the first six months of 2006 and $167.0 million for the second quarter of 2006.

"We are pleased with our strong results for the quarter, in particular solid student loan growth, consolidation application activity that will primarily fund in the third and fourth quarters, and diversification of our revenue streams," said Steve Butterfield, Nelnet Vice Chairman and Co-Chief Executive Officer. "As expected, our results also reflect the seasonality of some of our fee-based businesses and the investment we made to bolster our direct-to-consumer marketing efforts. Quality student loan asset growth, combined with the diversification of revenues, will continue to be important to meeting our goal of long-term sustainable growth."

Margin Analysis

Net interest income for the first six months of 2006 was $172.5 million compared with $168.8 million for the first six months of 2005. For the second quarter of 2006, Nelnet reported net interest income of $86.2 million compared with $82.0 million for the second quarter of 2005. Net interest income for the first six months of 2006 includes a special allowance yield adjustment of $24.5 million, down from $55.7 million for the first six months of 2005. The second-quarter 2006 net interest income includes a special allowance yield adjustment of $10.6 million, down from $25.9 million in the same period a year ago. Excluding the impact of the special allowance yield adjustment, net interest income for the second-quarter 2006 increased $19.6 million, or 35 percent, compared to the same period a year ago.

The company reported core student loan spread of 1.51 percent for the first six months of 2006 compared with 1.58 percent in the same period in 2005. For the second quarter of 2006, Nelnet reported core student loan spread of 1.49 percent compared with 1.50 percent in the same period of 2005 and 1.54 percent for the first quarter of 2006.

Other Revenue

Fee-based revenue in the second quarter of 2006 represented 43 percent of Nelnet's total revenue for the quarter. This is an increase from the second quarter of 2005 when fee-based revenue represented 36 percent of total revenue.

Income from loan and guarantee servicing fees reached $91.1 million for the first six months of 2006, up from $71.9 million in the first six months of 2005. In the second quarter of 2006, loan and guarantee servicing income grew to $44.0 million from $34.7 million in the second quarter of 2005. This increase is attributable to the acquisition of Firstmark Services and the expansion of an outsourcing agreement with College Access Network both of which occurred during the fourth quarter of 2005.

Other fee-based income increased to $34.2 million for the first six months of 2006 compared with $12.4 million for the first six months of 2005. For the second quarter of 2006, other fee-based income increased to $16.1 million, up from $9.0 million in the same period a year ago. Other fee-based income includes Nelnet's list management, direct marketing, and tuition payment plan businesses.

Operating Expenses

For the first six months of 2006, the company reported operating expenses of $222.5 million compared with $145.3 million for the first six months of 2005. Operating expenses were $114.3 million in the second quarter of 2006 compared with $73.9 million for the same period a year ago. The increase in operating expenses is primarily attributable to recent acquisitions.

Non-GAAP performance measures

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

Adjusted base net income, which excludes certain special allowance yield adjustments and related hedging activity related to the company's portfolio of student loans earning a minimum special allowance payment of 9.5 percent, is used by management to develop the company's financial plans, track results, and establish corporate performance targets.

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

                                      Three months ended     Six months ended
                                 June 30, March 31, June 30, June 30, June 30,
                                   2006     2006     2005     2006     2005
                                   (dollars in thousands, except share data)


    GAAP net income (loss) (a)    $45,753  $52,066  $(1,773) $97,819  $66,314
    Base adjustments:
       Derivative market value
        and foreign currency
        adjustments               (28,865) (39,795)  51,372  (68,660)  (8,918)
       Amortization of intangible
        assets                      6,161    5,633    1,559   11,794    2,732
       Variable-rate floor income      --       --       --       --       --
    Total base adjustments before
     income taxes                 (22,704) (34,162)  52,931  (56,866)  (6,186)
    Net tax effect (b)              8,628   12,981  (20,114)  21,609    2,351
    Total base adjustments        (14,076) (21,181)  32,817  (35,257)  (3,835)

         Base net income (a)       31,677   30,885   31,044   62,562   62,479

    Adjustments to base net
     income:
       Special allowance yield
        adjustment                (10,550) (13,910) (25,919) (24,460) (55,661)
       Derivative settlements,
        net                        (7,721)  (4,164)   5,454  (11,885)  14,317
    Total adjustments to base net
     income before income taxes   (18,271) (18,074) (20,465) (36,345) (41,344)
    Net tax effect (b)              6,943    6,868    7,777   13,811   15,711
    Total adjustments to base net
     income                       (11,328) (11,206) (12,688) (22,534) (25,633)

       Adjusted base net
        income (a)                $20,349  $19,679  $18,356  $40,028  $36,846

    Earnings (loss) per share,
     basic and diluted:
       GAAP net income (loss) (a)   $0.84    $0.96   $(0.03)   $1.80    $1.23
       Total base adjustments       (0.26)   (0.39)    0.61    (0.65)   (0.07)

         Base net income (a)         0.58     0.57     0.58     1.15     1.16

       Total adjustments to base
        net income                  (0.21)   (0.21)   (0.24)   (0.41)   (0.48)

         Adjusted base net
          income (a)                $0.37    $0.36    $0.34    $0.74    $0.68


    (a)  Includes expense of $6.9 million ($4.3 million after tax) for the
         three months ended March 31, 2006 and six months ended June 30, 2006
         to increase the Company's allowance for loan losses due to a
         provision in the Deficit Reduction Act that increased risk sharing
         for student loan holders by one percent on FFELP loans.  Excluding
         this one-time expense, GAAP net income, base net income, and adjusted
         base net income would have been $1.04 per share, $0.65 per share, and
         $0.44 per share, respectively, for the three months ended
         March 31, 2006 and $1.88 per share, $1.23 per share, and $0.82 per
         share, respectively, for the six months ended June 30, 2006.

    (b)  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 877.704.5382 and international callers should dial 913.312.1296 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) August 4. 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 7132804. 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 www.nelnetinvestors.net/releases.cfm?reltype=Financial.

    Condensed Consolidated Statements of Operations

                                                 Three months ended
                                         June 30,      March 31,    June 30,
                                          2006          2006          2005
                                       (unaudited)   (unaudited)   (unaudited)
                                     (dollars in thousands, except share data)
    Interest income:
      Loan interest, excluding
      variable-rate floor income         $383,867     $347,522     $223,691
      Amortization of loan premiums
       and deferred origination costs     (21,125)     (21,862)     (16,547)
      Investment interest                  24,314       19,541        8,150
        Total interest income             387,056      345,201      215,294

    Interest expense:
      Interest on bonds and notes
       payable                            300,844      258,949      133,277
        Net interest income                86,212       86,252       82,017
    Less provision for loan losses          2,190        9,618        2,124
        Net interest income after
         provision for loan losses         84,022       76,634       79,893

    Other income (expense):
      Loan and guarantee servicing
       income                              44,042       47,074       34,678
      Other fee-based income               16,074       18,155        9,027
      Software services income              4,018        3,409        2,602
      Other income                          3,154        1,455        1,524
      Derivative market value and
       foreign currency adjustments        28,865       39,795      (51,372)
      Derivative settlements, net           6,702        4,744       (6,001)
        Total other income (expense)      102,855      114,632       (9,542)

    Operating expenses:
      Salaries and benefits                62,207       57,684       39,977
      Other expenses                       45,904       44,930       32,343
      Amortization of intangible assets     6,161        5,633        1,559
        Total operating expenses          114,272      108,247       73,879

        Income (loss) before income
         taxes                             72,605       83,019       (3,528)
    Income tax expense (benefit)           26,852       30,711       (1,755)
        Net income (loss) before minority
         interest                          45,753       52,308       (1,773)
    Minority interest in net earnings
     of subsidiaries                           --         (242)          --
         Net income (loss)                $45,753      $52,066      $(1,773)
         Earnings (loss) per share,
          basic and diluted                 $0.84        $0.96       $(0.03)

    Weighted average shares
     outstanding                       54,297,230   54,241,341   53,712,048



                                          Six months ended
                                         June 30     June 30,
                                          2006         2005
                                       (unaudited)  (unaudited)
                             (dollars in thousands, except share data)

    Interest income:
      Loan interest, excluding
       variable-rate floor income        $731,389     $423,798
      Amortization of loan premiums
       and deferred origination costs     (42,987)     (32,329)
      Investment interest                  43,855       15,152
        Total interest income             732,257      406,621

    Interest expense:
      Interest on bonds and notes
       payable                            559,793      237,802
        Net interest income               172,464      168,819

    Less provision for loan losses         11,808        4,155
        Net interest income after
         provision for loan losses        160,656      164,664

    Other income (expense):
      Loan and guarantee servicing
       income                              91,116       71,854

      Other fee-based income               34,229       12,383
      Software services income              7,427        4,808
      Other income                          4,609        2,924
      Derivative market value and
       foreign currency adjustments        68,660        8,918
     Derivative settlements, net           11,446      (16,087)
        Total other income  (expense)     217,487       84,800

    Operating expenses:
      Salaries and benefits               119,891       79,304
      Other expenses                       90,834       63,231
      Amortization of intangible assets    11,794        2,732
        Total operating expenses          222,519      145,267
        Income (loss) before income
         taxes                            155,624      104,197
    Income tax expense (benefit)           57,563       37,883
        Net income (loss) before
         minority interest                 98,061       66,314
    Minority interest in net earnings
     of subsidiaries                         (242)          --
        Net income (loss)                 $97,819      $66,314
        Earnings (loss) per share,
         basic and diluted                  $1.80        $1.23

    Weighted average shares
     outstanding                       54,269,440   53,697,390



    Condensed Consolidated Balance Sheets and Financial Data

                                          As of        As of          As of
                                         June 30,    December 31,    June 30,
                                           2006         2005          2005
                                        (unaudited)                (unaudited)
                                               (dollars in thousands)
    Assets:
      Student loans receivable, net     $22,404,492  $20,260,807  $15,661,315
      Cash, cash equivalents, and
       investments                        1,974,310    1,645,797    1,110,109
      Goodwill                              128,236       99,535       65,839
      Intangible assets, net                159,918      153,117       34,357
      Other assets                          874,107      639,366      437,283
        Total assets                    $25,541,063  $22,798,622  $17,308,903

    Liabilities:
      Bonds and notes payable           $24,327,855  $21,673,620  $16,580,078
      Other liabilities                     461,019      474,884      205,155
        Total liabilities                24,788,874   22,148,504   16,785,233

    Minority interest in subsidiaries            --          626           --

    Shareholders' equity                    752,189      649,492      523,670

        Total liabilities and
         shareholders' equity           $25,541,063  $22,798,622  $17,308,903

    Return on average total assets             0.81%        1.00%        0.82%
    Return on average equity                   27.4%        32.4%        26.0%



Nelnet is one of the leading education finance companies in the United States and is focused on providing quality products and services to students and schools nationwide. Nelnet ranks among the nation's leaders in terms of total net student loan assets with $22.4 billion as of June 30, 2006. Headquartered in Lincoln, Nebraska, Nelnet originates, consolidates, securitizes, holds, and services student loans, principally loans originated under the Federal Family Education Loan Program of the U.S. Department of Education.

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. For more information see our filings with the Securities and Exchange Commission.

    (code #: nnif)


SOURCE Nelnet, Inc.

Media, Sheila Odom, +1-402-458-2329, or Investors, Cheryl Watson, +1-317-469-2064,
both of Nelnet, Inc.
http://www.prnewswire.com

 

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