November 8, 2011

Nelnet Reports Third Quarter 2011 Results

- Base net income of $1.22 per share for the quarter
- Tuition payment processing and campus commerce revenue increased 15 percent
- Revenue from government servicing contract increased $4.1 million to $12.8 million
- Repurchased 1.1 million shares of common stock in the quarter
- Declared fourth quarter dividend of $0.10 per share

LINCOLN, Neb., Nov. 8, 2011 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported base net income of $58.8 million, or $1.22 per share, for the third quarter of 2011, compared with $60.3 million, or $1.23 per share, for the same quarter a year ago. For the nine months ended September 30, 2011, the company reported base net income of $165.5 million, or $3.43 per share, compared with $175.3 million, or $3.54 per share, for the same period in 2010. Base net income in 2010 excludes litigation settlement and restructuring charges.

Nelnet reported a gain from the repurchase of outstanding debt of $9.9 million before tax, or $0.12 per share after tax, and $28.8 million before tax, or $0.36 per share after tax, for the three and nine months ended September 30, 2010, respectively. In the third quarter of 2011, Nelnet had no gains from the repurchase of outstanding debt. For the first nine months of 2011, Nelnet reported a gain of $8.3 million before tax, or $0.11 per share after tax, from the repurchase of outstanding debt.

"In the third quarter of 2011, we continued to report strong results and generate significant cash flow from our operations and our student loan portfolio," said Mike Dunlap, Nelnet Chairman and Chief Executive Officer. "We made investments to grow our core businesses and enhance our customers' experience, and also repurchased more than one million shares of common stock. Evaluating opportunities to make investments and deploying capital with a long term focus will continue to be a priority."  

Growing our core and driving diversification

During the third quarter of 2011, revenue from Nelnet's tuition payment processing and campus commerce business increased $2.2 million compared with the third quarter of 2010, or 15 percent, to $16.8 million.

In September 2009, Nelnet began servicing student loans for the Department of Education (Department) under a contract that will increase the company's fee-based revenue as the servicing volume increases. At September 30, 2011, the company was servicing $44.6 billion of loans for 3 million borrowers on behalf of the Department, compared with $21.8 billion of loans for 2.5 million borrowers on September 30, 2010. Revenue from this contract increased to $12.8 million for the third quarter of 2011, up from $8.7 million for the same period a year ago.  

The company's enrollment services revenue was $35.5 million in the third quarter of 2011, compared with $36.4 million in the third quarter of 2010. Enrollment services revenue is being affected by the current regulatory uncertainty in the for-profit college industry, which has caused schools to decrease their marketing spending.

Maximizing the value of existing portfolio

In July 2011, the company repurchased the residual interest in $1.9 billion of securitized Federal Family Education Loan Program consolidation loans. Including these loans, at September 30, 2011, net student loan assets were $24.6 billion. The majority of Nelnet's federal student loans are financed for the life of the loan at rates the company believes will generate significant future cash flow in excess of $1.8 billion.

Historically low interest rates are continuing to provide the company opportunities to generate substantial near-term value and cash flow from its student loan portfolio. For the third quarter of 2011, Nelnet reported net interest income of $96.8 million, compared with $92.2 million for the same period a year ago.

Operating with financial discipline

Nelnet reported operating expenses of $104.8 million in the third quarter of 2011, compared with $100.5 million, excluding a $55 million litigation settlement and $4.8 million of restructuring expenses, in the third quarter of 2010. Over time, the company anticipates increasing operating expenses with discipline to support revenue growth in its fee-based businesses.

Repurchasing common stock

During the three-month period ended September 30, 2011, Nelnet repurchased and retired 1,097,441 shares of Class A common stock, under the company's stock repurchase program, for $20.6 million, or an average price of $18.77 per share. Year to date through November 8, 2011, the company has repurchased 1,433,409 shares of Class A common stock for $27.1 million, or an average price of $18.88 per share.

GAAP net income

Nelnet reported GAAP net income for the third quarter of 2011 of $47.5 million, or $0.98 per diluted share, compared with a net loss of $0.4 million, or $0.01 loss per diluted share, for the third quarter of 2010. For the first nine months of 2011, the company reported GAAP net income of $139.5 million, or $2.87 per diluted share, compared with $103.9 million, or $2.08 per diluted share for the same period in 2010.  The company recognized a $55.0 million litigation settlement charge in the third quarter of 2010.

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 financial information supplemental to this earnings release online at www.nelnetinvestors.com/results.cfm.

Board of Directors approves dividend

The Nelnet Board of Directors declared a fourth quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.10 per share. The dividend will be paid on December 15, 2011, to shareholders of record at the close of business on December 1, 2011. Nelnet currently has 35.6 million shares of Class A common stock and 11.5 million shares of Class B common stock outstanding.

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 and services marketplace resulting from the implementation of or changes in applicable laws, regulations, and government programs, including the uncertain nature of the potential impact of the Department's new loan consolidation program; 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 third quarter of 2011.  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


Nine months ended






September 30,


June 30,


September 30,


September 30,


September 30,






2011


2011


2010


2011


2010






(unaudited)


(unaudited)


(unaudited)


(unaudited)


(unaudited)















Interest income: 












Loan interest  

$

158,809


146,827


171,208


452,983


490,158


Amortization/accretion of loan premiums and












    deferred origination costs, net


(1,854)


(7,893)


(11,921)


(19,736)


(40,551)


Investment interest


672


856


1,169


2,254


3,474



Total interest income


157,627


139,790


160,456


435,501


453,081















Interest expense:












Interest on bonds and notes payable


60,866


51,054


68,243


164,227


178,345

















Net interest income


96,761


88,736


92,213


271,274


274,736

Less provision for loan losses


5,250


5,250


5,500


14,250


16,700

















Net interest income after provision for loan losses


91,511


83,486


86,713


257,024


258,036















Other income (expense):












Loan and guaranty servicing revenue


37,927


37,389


33,464


110,952


106,510


Tuition payment processing and campus commerce revenue

16,774


14,761


14,527


50,904


44,704


Enrollment services revenue


35,505


32,315


36,439


101,688


105,113


Software services revenue


4,622


4,346


4,624


13,745


14,467


Other income


3,931


6,826


9,432


17,249


25,188


Gain on sale of loans and debt repurchases




9,885


8,307


28,821


Derivative market value and foreign currency adjustments


(13,888)


(16,813)


(32,805)


(29,585)


(35,931)


Derivative settlements, net


257


(3,522)


(2,586)


(7,417)


(8,386)



Total other income


85,128


75,302


72,980


265,843


280,486















Operating expenses:












Salaries and benefits


44,132


42,881


41,085


130,925


122,691


Litigation settlement




55,000



55,000


Cost to provide enrollment services


23,825


22,140


23,709


68,804


69,845


Depreciation and amortization


7,917


6,769


9,025


21,462


29,536


Restructure expense




4,751



6,020


Other expenses


28,904


28,767


26,717


83,776


89,120



Total operating expenses


104,778


100,557


160,287


304,967


372,212


















Income (loss) before income taxes


71,861


58,231


(594)


217,900


166,310















Income tax (expense) benefit


(24,410)


(21,106)


226


(78,444)


(62,363)


















Net income (loss)

$

47,451


37,125


(368)


139,456


103,947















Earnings (loss) per common share:


























Net earnings (loss) - basic

$

0.98


0.76


(0.01)


2.88


2.09
















Net earnings (loss) - diluted

$

0.98


0.76


(0.01)


2.87


2.08















Weighted average shares outstanding:


























Basic



48,059,747


48,302,779


48,938,333


48,177,539


49,460,625
















Diluted



48,253,888


48,488,046


48,938,333


48,367,923


49,663,505































Condensed Consolidated Balance Sheets

(Dollars in thousands)



As of


As of


As of



September 30,
2011


December 31,
2010


September 30,
2010



(unaudited)




(unaudited)

Assets:







Student loans receivable, net

$

24,641,614


23,948,014


24,436,162

Student loans receivable - held for sale



84,987


2,109,440

Cash, cash equivalents, and investments (trading securities)


141,928


327,037


349,443

Restricted cash and investments


653,518


757,285


747,234

Goodwill


117,118


117,118


143,717

Intangible assets, net


33,074


38,712


43,352

Other assets


648,975


620,739


757,231

Total assets

$

26,236,227


25,893,892


28,586,579








Liabilities:







Bonds and notes payable

$

24,926,512


24,672,472


27,391,188

Other liabilities


298,232


314,787


350,777

Total liabilities


25,224,744


24,987,259


27,741,965








Shareholders' equity


1,011,483


906,633


844,614

Total liabilities and shareholders' equity

$

26,236,227


25,893,892


28,586,579










(Code #: nnif)

SOURCE Nelnet

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