Nelnet Reports Fourth Quarter 2010 Results

Mar 03, 2011

- Base net income of $5.20 per share for 2010 and $1.66 per share for the fourth quarter
- Payment processing and enrollment services revenue increased 12 percent
- Servicing 2.8 million borrowers for the Department of Education
- Core student loan spread of 1.53 percent generated net interest income of $96.3 million

LINCOLN, Neb., March 3, 2011 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported base net income of $80.0 million, or $1.66 per share, for the fourth quarter of 2010, compared with $81.3 million, or $1.64 per share, for the same quarter a year ago. For the year-ended December 31, 2010, the company reported base net income of $255.2 million, or $5.20 per share, compared with $194.9 million, or $3.94 per share, for 2009. Base net income excludes litigation settlement, restructuring, and impairment charges.

Base net income in the fourth quarter of 2010 includes pre-tax gains of $33.8 million, or $0.44 per share after tax, on the sale of $2.1 billion of federal student loans to the Department of Education (Department) and $16.1 million, or $0.21 per share after tax, from the company's repurchase of $213.1 million of asset-backed securities debt.

Excluded from base net income in the fourth quarter of 2010 is a $26.6 million non-cash impairment charge related to goodwill of the company's interactive marketing and list management businesses. These businesses have been negatively affected by decreasing enrollments in for-profit colleges and the economic recession.

"In many ways, 2010 was the best year in Nelnet's history," said Mike Dunlap, Nelnet Chairman and Chief Executive Officer. "We are excited that we are increasing fee-based revenue; increasing the volume we service for the Department; and making ongoing investments in new products, services, and opportunities to add value to our customers. Our focus in 2011 will be providing the highest level of customer service and continuing to diversify our company."

Diversifying and increasing fee-based revenue

Total revenue from fee-based businesses for the fourth quarter of 2010 increased 13 percent to $87.5 million, or 48 percent of total revenue, when compared with $77.5 million for the same period a year ago.

Revenue from the company's Student Loan and Guaranty Servicing segment increased 14.9 percent, or $4.9 million, from $32.7 million for the fourth quarter of 2009 to $37.6 million for the fourth quarter of 2010.

In September 2009, Nelnet began servicing student loans for the Department under a contract that will increase the company's fee-based revenue as the servicing volume increases. As of December 31, 2010, the company was servicing $30.3 billion of loans for 2.8 million borrowers on behalf of the Department, or a 71 percent increase in the total number of Federal Family Education Loan (FFEL) Program and Department borrowers since December 31, 2009. In the fourth quarter of 2010, Nelnet reported revenue from this servicing contract of $11.6 million, compared with $8.7 million for the third quarter of 2010.

In addition, the company is offering a hosted servicing software solution to third parties that can be used by third parties to service various types of student loans including Federal Direct Program and FFEL Program loans.  Currently, Nelnet has agreements with third parties to add more than 12 million borrowers to its hosted servicing software solution by the end of 2011.

In the fourth quarter of 2010, Nelnet's fee-based revenue from the company's payment processing and enrollment services businesses increased $5.2 million, or 12 percent, to $49.9 million, compared with the same period in 2009.

Maximizing the value of existing portfolio

At December 31, 2010, net student loan assets were $24.0 billion. Substantially all of Nelnet's federal student loans are financed for the life of the loan at rates the company currently believes will generate significant future cash flow in excess of $1.6 billion.  

Narrower spreads and historically low interest rates are continuing to provide an opportunity for the company to generate substantial near-term value and cash flow from its student loan portfolio. For the fourth quarter of 2010, Nelnet reported net interest income of $96.3 million, compared with $80.5 million for the same period a year ago.

The company reported core student loan spread of 1.53 percent for the fourth quarter of 2010 compared with 1.44 percent for the same period of 2009 and 1.41 percent for the third quarter of 2010. Core student loan spread in the fourth quarter of 2010 benefited from the tightening between the three-month financial commercial paper rate (CP) and three-month LIBOR indices. Most of the company's federal student loans are indexed to CP, and the company's debt is indexed to LIBOR; therefore, disparity between these indices has a negative impact on the company's interest income.

Improving liquidity

In February 2011, the company used operating cash to repurchase $62.6 million (par value) of Junior Subordinated Hybrid Securities for $55.7 million. Nelnet recognized a pre-tax gain of $6.9 million as a result of this debt repurchase, which will be included in the company's operating results for the quarter ending March 31, 2011.

In addition, the company paid $325.0 million on its unsecured line of credit. After making these payments, the current outstanding balance on the company's unsecured line of credit is $125.0 million.

GAAP net income

Nelnet reported GAAP net income for the year-ended December 31, 2010, and the fourth quarter of 2010 of $189.0 million, or $3.81 per dilutive share, and $85.1 million, or $1.75 per dilutive share, respectively, and is compared with $139.1 million, or $2.78 per dilutive share, and $59.1 million, or $1.18 per dilutive share, for the same periods in 2009.

While base net income is not a substitute for reported results under GAAP, base net income is the primary financial performance measure used by management to develop financial plans, allocate resources, track results, evaluate performance, establish corporate performance targets, and determine incentive compensation. The company utilizes base net income in operating its business because base net income permits management to make meaningful period-to-period comparisons by eliminating the temporary volatility in the company's performance that arises from certain items that are primarily affected by factors beyond the control of management.

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 online at www.nelnetinvestors.com/results.cfm.

Annual meeting of shareholders

The company has scheduled its 2011 Annual Meeting of Shareholders for May 26, 2011. The meeting will be held at 8:30 a.m. (Central) at the Embassy Suites Hotel in Lincoln, Nebraska.

The record date to determine shareholders entitled to vote at the meeting is March 30, 2011.

In conjunction with the annual meeting, Nelnet's Chairman and Chief Executive Officer has posted a letter to shareholders at www.nelnetinvestors.com.

This press release contains forward-looking statements within the meaning of federal securities laws.  These statements are based on management's current expectations as of the date of this release, and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements.  Such risks include, among others, risks related to the company's student loan portfolio such as interest rate basis and repricing risk and the use of derivatives to manage exposure to interest rate fluctuations; the company's funding and liquidity requirements to satisfy asset financing needs; the company's ability to maintain and increase volumes under its loan servicing contract with the Department to service federally owned student loans; changes in the student loan and educational credit marketplace resulting from the implementation of or changes in applicable laws and regulations; changes in the demand or preferences for educational financing and related services by educational institutions, students, and their families; uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; and changes in general economic and credit market conditions.  For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the fourth quarter of 2010.  All information in this release is as of the date of this release.  Although the company may from time to time voluntarily update or revise its forward-looking statements to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by securities laws.

Condensed Consolidated Statements of Operations

(dollars in thousands, except share data)







Three months ended


Year ended






December 31,


September 30,


December 31,


December 31,


December 31,






2010


2010


2009


2010


2009






(unaudited)


(unaudited)


(unaudited)



















Interest income:













Loan interest

$

159,248


171,208


153,891


649,406


683,449


Amortization of loan premiums and deferred













origination costs


(10,180)


(11,921)


(18,558)


(50,731)


(73,529)


Investment interest


1,782


1,169


1,477


5,256


10,287



Total interest income


150,850


160,456


136,810


603,931


620,207















Interest expense:












Interest on bonds and notes payable


54,515


68,243


56,262


232,860


384,862

















Net interest income


96,335


92,213


80,548


371,071


235,345

Less provision for loan losses


6,000


5,500


6,000


22,700


29,000

















Net interest income after provision














for loan losses


90,335


86,713


74,548


348,371


206,345















Other income (expense):












Loan and guaranty servicing revenue


33,126


33,464


27,467


139,636


108,747


Tuition payment processing and campus commerce revenue


15,120


14,527


13,521


59,824


53,894


Enrollment services revenue


34,784


36,439


31,209


139,897


119,397


Software services revenue


4,481


4,624


4,740


18,948


21,164


Other income


6,122


9,432


6,171


31,310


26,469


Gain on sale of loans and debt repurchases, net


49,810


9,885


49,260


78,631


76,831


Derivative market value and foreign currency adjustments


39,518


(32,805)


5,265


3,587


(30,802)


Derivative settlements, net


(5,878)


(2,586)


479


(14,264)


39,286



Total other income


177,083


72,980


138,112


457,569


414,986















Operating expenses:












Salaries and benefits


43,320


41,085


37,963


166,011


151,285


Litigation settlement



55,000



55,000



Cost to provide enrollment services


21,802


23,709


18,718


91,647


74,926


Impairment expense


26,599



32,728


26,599


32,728


Restructure expense



4,751


1,354


6,020


7,982


Other expenses


39,553


35,742


32,281


158,209


138,712



Total operating expenses


131,274


160,287


123,044


503,486


405,633

















Income (loss) before income taxes


136,144


(594)


89,616


302,454


215,698















Income tax (expense) benefit


(51,057)


226


(30,553)


(113,420)


(76,573)

















Net income (loss)

$

85,087


(368)


59,063


189,034


139,125















Earnings (loss) per common share:


























Net earnings (loss) - basic

$

1.76


(0.01)


1.18


3.82


2.79
















Net earnings (loss) - diluted

$

1.75


(0.01)


1.18


3.81


2.78















Dividends per common share

$

0.49


0.07


0.07


0.70


0.07















Weighted average shares outstanding - basic


48,118,000


48,938,333


49,639,329


49,127,934


49,484,816















Weighted average shares outstanding - diluted


48,318,807


48,938,333


49,838,374


49,326,686


49,685,143

















Condensed Consolidated Balance Sheets

(dollars in thousands)






As of


As of


As of





December 31,


September 30,


December 31,





2010


2010


2009







(unaudited)












Assets:








Student loans receivable, net

$

23,948,014


24,436,162


23,926,957


Student loans receivable - held for sale


84,987


2,109,440



Cash, cash equivalents, and








  investments (trading securities)


327,037


349,443


338,181


Restricted cash and investments


757,285


747,234


717,233


Goodwill


117,118


143,717


143,717


Intangible assets, net


38,712


43,352


53,538


Other assets


620,739


757,231


696,801



Total assets

$

25,893,892


28,586,579


25,876,427










Liabilities:








Bonds and notes payable

$

24,672,472


27,391,188


24,805,289


Other liabilities


314,787


350,777


286,575



Total liabilities


24,987,259


27,741,965


25,091,864










Shareholders' equity


906,633


844,614


784,563












Total liabilities and shareholders' equity

$

25,893,892


28,586,579


25,876,427












(code #: nnif)

SOURCE Nelnet

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