Nelnet Reports Strong Third Quarter Results; Provides Update on Warehouse Facility and Line of Credit

Oct 29, 2008

- Base net income of $0.47 per share
- Other fee-based income increased to $45.9 million
- Core student loan spread of 1.02
- Operating expenses decreased by $56.4 million

LINCOLN, Neb., Oct 29, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the third quarter of 2008 of $23.8 million, or $0.48 per share, compared with a GAAP net loss of $15.7 million, or $0.32 per share, for the third quarter of 2007. Base net income excluding discontinued operations and legislative and restructuring related charges for the third quarter of 2008 was $23.4 million, or $0.47 per share, compared with $22.2 million, or $0.45 per share, for the same period a year ago.

The company also reported that it has provided additional equity support for its $2.5 billion federal student loan warehouse facility. All of the student loans held in this facility are guaranteed by the federal government. According to the terms of the facility and the valuation formula contained therein, the company has increased the equity support to a total of $374.6 million by drawing on its unsecured line of credit. Currently the company has $691.5 million outstanding on its $750 million unsecured line of credit. The company continues to generate positive cash flow from operations and currently maintains cash and cash equivalents of approximately $80 million. In addition, the company has approximately $90 million of unencumbered private loan assets.

"Due to this unprecedented period of market disruption, the mark-to-market formula specified under the terms of the facility produces an unreasonably low value for these federally guaranteed student loans," said Mike Dunlap, Chairman and Chief Executive Officer. "These loans are guaranteed by the federal government and have almost no default risk. However, we appreciate that we are truly in unprecedented times, and we are engaged in discussions with our lenders to reach amicable terms on these financings.

"Importantly, the fundamentals of our core businesses are strong and we have additional sources of liquidity. The company has diversified its revenue with fee-based businesses that have significant growth opportunities and operating margins. We are pleased with our strong performance and earnings in the third quarter."

GAAP net loss for the first nine months of 2008 was $2.3 million, or $0.05 per share, compared with GAAP net income of $13.8 million, or $0.28 per share, for the first nine months of 2007. Base net income excluding discontinued operations, legislative and restructuring related charges, and the loss on the sale of certain loans for the first nine months of 2008 was $65.2 million, or $1.33 per share, compared with $68.6 million, or $1.38 per share, for the first nine months of 2007.

Fee-based Revenue

In the third quarter of 2008, other fee-based income increased to $45.9 million, up from $38.0 million in the same period a year ago. Other fee-based income increased to $132.6 million for the first nine months of 2008 compared with $116.3 million for the first nine months of 2007. Other fee-based income includes Nelnet's list management, direct marketing, tuition payment plan, and enrollment services businesses.

In the third quarter of 2008, loan and guaranty servicing income was $30.6 million compared with $33.0 million in the third quarter of 2007. Income from loan and guaranty servicing was $81.7 million for the first nine months of 2008 compared with $95.1 million in the first nine months of 2007.

Operating Expenses

Operating expenses were $103.7 million in the third quarter of 2008 compared with $173.4 million for the same period a year ago. For the first nine months of 2008, the company reported operating expenses of $330.4 million compared with $415.3 million for the first nine months of 2007. Excluding restructuring and impairment charges, operating expenses decreased by $15.3 million and $56.4 million for the three and nine months ended September 30, 2008, compared with the same periods in 2007, respectively.

Net Interest Margin

For the third quarter of 2008, Nelnet reported net interest income of $59.6 million compared with $64.4 million for the third quarter of 2007. Net interest income for the first nine months of 2008 was $149.4 million compared with $200.4 million for the first nine months of 2007. Net interest income includes variable-rate floor income and excludes settlements on the company's derivative portfolio.

For the third quarter of 2008, Nelnet reported core student loan spread of 1.02 percent compared with 1.05 percent in the same period of 2007 and 1.07 percent for the second quarter of 2008.

Student Loan Assets and Liquidity

Nelnet reported net student loan assets of $26.4 billion at September 30, 2008. Approximately 90 percent of these student loans are life-of-loan financed at rates that the company believes will generate cash flow in excess of $1.4 billion.

The company has liquidity for new loan originations through the Department of Education's loan participation and put programs. This will allow Nelnet to make loans to all eligible students for the 2008-2009 and 2009-2010 academic years.

In addition, the company believes it has met the annual requirement to remove 75% of loans from its federal student loan warehouse facility for the annual period ending in May 2009. Under the current terms of the facility, the remaining collateral will need to be removed or refinanced by May 2010.

Non-GAAP Performance Measures

A description of base net income and a reconciliation of GAAP net income to base net income can be found in supplemental financial information to this earnings release that is available online at http://www.nelnetinvestors.com/releases.cfm?reltype=Financial.

Conference Call

Nelnet will host a conference call to discuss earnings at 3:00 p.m. (Eastern) Wednesday, November 12, 2008. To access the call live, participants in the United States and Canada should dial 877.723.9521, and international callers should dial 719.325.4804 at least 15 minutes prior to the call. A live audio Web cast of the call will also be available at http://www.nelnetinvestors.com under the conference calls and Web casts menu. A replay of the conference call will be available between 6:00 p.m. (Eastern) November 12, 2008, and 11:59 p.m. (Eastern) November 22, 2008. 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 7046007. A replay of the audio Web cast will also be available at http://www.nelnetinvestors.com.

    Condensed Consolidated Statements of Operations

                              Three months ended          Nine months ended
                      September     June    September   September   September
                          30,        30,        30,        30,         30,
                         2008       2008       2007       2008        2007
                     (unaudited)(unaudited)(unaudited) (unaudited) (unaudited)
                                (dollars in thousands, except share data)

    Interest income:
      Loan interest    $304,226    297,601    460,103    938,399    1,317,936
      Variable-rate
       floor income       1,580     21,927        597     42,325          597
      Amortization of
       loan premiums
       and deferred
       origination
       costs            (21,338)   (22,842)   (23,449)   (69,584)     (67,142)
      Investment
       interest           9,118      9,116     21,023     29,914       61,231
         Total interest
          income        293,586    305,802    458,274    941,054    1,312,622

    Interest expense:
      Interest on bonds
       and notes
       payable          234,016    232,464    393,875    791,621    1,112,263

         Net interest
          income         59,570     73,338     64,399    149,433      200,359
    Less provision for
     loan losses          7,000      6,000     18,340     18,000       23,628

         Net interest
          income after
          provision for
          loan losses    52,570     67,338     46,059    131,433      176,731

    Other income:
      Loan and guaranty
       servicing income  30,633     24,904     33,040     81,650       95,116
      Other fee-based
       income            45,887     40,817     38,025    132,617      116,316
      Software services
       income             4,217      4,896      5,426     15,865       17,022
      Other income        1,242      1,646      7,028      4,298       14,048
      Gain (loss) on
       sale of loans          -         48        492    (47,426)       3,288
      Derivative market
       value, foreign
       currency, and
       put option
       adjustments        6,085     15,755     18,449    (35,521)      11,866
      Derivative
       settlements, net     789      4,437     (2,336)    45,989        7,100
         Total other
          income         88,853     92,503    100,124    197,472      264,756

    Operating expenses:
      Salaries and
       benefits          44,739     43,549     60,545    142,131      182,010
      Other expenses     52,332     47,812     52,511    149,744      159,792
      Amortization of
       intangible
       assets             6,598      6,561     10,885     19,719       24,014
      Impairment
       expense                -          -     49,504     18,834       49,504
         Total
          operating
          expenses      103,669     97,922    173,445    330,428      415,320

         Income (loss)
          before income
          taxes          37,754     61,919    (27,262)    (1,523)      26,167

    Income tax expense
     (benefit)           13,969     19,195    (10,664)     1,793        9,906

         Income (loss)
          from
          continuing
          operations     23,785     42,724    (16,598)    (3,316)      16,261

    Income (loss) from
     discontinued
     operations, net
     of tax                   -        981        909        981       (2,416)

         Net income
          (loss)        $23,785     43,705    (15,689)    (2,335)      13,845

    Earnings (loss)
     per share, basic
     and diluted:
         Income (loss)
          from
          continuing
          operations      $0.48       0.87      (0.34)     (0.07)        0.32
         Income (loss)
          from
          discontinued
          operations,
          net of tax          -       0.02       0.02       0.02        (0.04)
         Net income
          (loss)          $0.48       0.89      (0.32)     (0.05)        0.28

    Weighted average
     shares
     outstanding     49,176,436 49,095,153 49,018,091 49,109,340   49,810,552



    Condensed Consolidated Balance Sheets

                                           As of         As of        As of
                                     September 30,  December 31, September 30,
                                           2008          2007          2007
                                       (unaudited)                 (unaudited)
                                                (dollars in thousands)
    Assets:
      Student loans receivable, net    $26,376,269    26,736,122    26,596,123
      Cash, cash equivalents, and
       investments                       1,454,881     1,120,838     1,451,772
      Goodwill                             175,178       164,695       164,695
      Intangible assets, net                83,565       112,830       119,242
      Other assets                         880,122     1,028,298     1,010,632
        Total assets                   $28,970,015    29,162,783    29,342,464

    Liabilities:
      Bonds and notes payable          $28,004,835    28,115,829    28,234,147
      Other liabilities                    355,450       438,075       516,424
        Total liabilities               28,360,285    28,553,904    28,750,571

    Shareholders' equity                   609,730       608,879       591,893

        Total liabilities and
         shareholders' equity          $28,970,015    29,162,783    29,342,464


This press release contains forward-looking statements and information based on management's current expectations as of the date of this document. When used in this press release, the words "anticipate," "believe," "estimate," "expect," "intend," and "will" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the "Risk Factors" section of the company's Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent Quarterly Reports on Form 10-Q, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and costs of yields on student loans under the FFEL Program or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the company. In addition, a larger than expected increase in third party consolidations of the company's FFELP loans could materially adversely affect the company's results of operations. The company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; the company's ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the company's credit facilities to fulfill their lending commitments under those facilities; changes to the terms and conditions of the liquidity programs offered by the Department of Education; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase, or carry education loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; the uncertain nature of the expected benefits from acquisitions and the ability to successfully integrate operations; and the uncertain nature of estimated expenses that may be incurred and cost savings that may result from the company's strategic restructuring initiatives. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this press release. Additionally, financial projections may not prove to be accurate and may vary materially. Although the company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

(code #: nnif)

SOURCE Nelnet, Inc.

http://www.nelnet.com

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