August 8, 2012

Nelnet Reports Second Quarter 2012 Results

- Net income $1.13 per share for the quarter, excluding derivative market value adjustments
- Loan and Guaranty Servicing revenue increased 26 percent
- Tuition Payment Processing and Campus Commerce revenue increased 14 percent

LINCOLN, Neb., Aug. 8, 2012 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported $53.5 million, or $1.13 per share, of net income, excluding derivative market value adjustments, for the second quarter of 2012, compared with $47.5 million, or $0.98 per share, for the same period a year ago. 

GAAP net income for the second quarter of 2012 and 2011 was $41.4 million, or $0.87 per share, and $37.1 million, or $0.76 per share, respectively.  Derivative market value adjustments were $12.1 million, or $0.26 per share after tax, for the second quarter of 2012, compared with $10.4 million, or $0.22 per share after tax, for the second quarter of 2011.      

"In the second quarter of 2012, we reported strong results and showed progress toward achieving our core objectives," said Mike Dunlap, Nelnet Chairman and Chief Executive Officer. "We continue to focus on growing our fee-based and asset management businesses, driving diversification around our core businesses, and improving our customers' experiences."

Nelnet operates four primary business segments, earning interest income on student loans in its Asset Generation and Management operating segment and fee-based revenue in its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments.  In the second quarter of 2012, the company increased its total revenue to $184.2 million, compared with $175.6 million in the second quarter of 2011.  Operating expenses for the second quarter of 2012 and 2011 were $108.2 million and $100.6 million, respectively.

Student Loan and Guaranty Servicing

Revenue from the company's Student Loan and Guaranty Servicing segment increased 26 percent, or $10.7 million, to $52.4 million for the second quarter of 2012 from $41.7 million for the second quarter of 2011. The increase in revenue is primarily the result of growth in servicing volume for the Department of Education (Department), remote hosting fees, and fee revenue from rehabilitated loans.  

As of June 30, 2012, the company was servicing $56.0 billion of loans for 3.1 million borrowers on behalf of the Department, compared with $38.8 billion of loans for 2.7 million borrowers as of June 30, 2011. Revenue from this contract increased to $16.1 million for the second quarter of 2012, up from $11.9 million for the same period a year ago.

The Student Loan and Guaranty Servicing segment also includes revenue from monthly fees earned from third parties using Nelnet's new hosted servicing software solution to service Federal Direct Loan Program and Federal Family Education Loan Program loans. As of June 30, 2012, 7.9 million borrowers were hosted on the company's solution.

Tuition Payment Processing and Campus Commerce

For the second quarter of 2012, revenue from the company's Tuition Payment Processing and Campus Commerce segment was $16.8 million, an increase of $2.0 million, or 14 percent, from the same period in 2011.

Asset Management

As of June 30, 2012, net student loan assets were $23.5 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 of $1.87 billion. On July 1, 2010, the company stopped originating federal student loans because legislation eliminated the Federal Family Education Loan Program.  As a result, the company's student loan portfolio will run off over a period of several years. 

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 second quarter of 2012, Nelnet reported net interest income of $84.6 million, compared with $88.7 million for the same period a year ago.  Net interest income includes $37.0 million and $32.8 million of fixed rate floor income in the second quarters of 2012 and 2011, respectively.   

Board of Directors Approves Dividend

The Nelnet Board of Directors declared a third 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 September 15, 2012, to shareholders of record at the close of business on September 1, 2012. Nelnet currently has 35.8 million shares of Class A common stock and 11.5 million shares of Class B common stock outstanding.

Non-GAAP Performance Measures

Information regarding the company's operating results has historically been provided using "base net income," which consisted of GAAP net income excluding the derivative market value and foreign currency adjustments, amortization of intangible assets, compensation related to business combinations, and variable rate floor income, net of settlements on derivatives.  Due to the decrease in the number and dollar amount of differences between "base net income" and GAAP net income, the company has discontinued utilizing "base net income" when evaluating the performance and profitability of the company and reporting its operating results.

The company will continue to provide additional information related to specific items management believes to be important in the evaluation of its financial position and performance, including specifically, but not limited to, the impact of the unrealized gains and losses resulting from the change in fair value of derivative instruments in which the company does not qualify for "hedge treatment" under GAAP, and the foreign currency transaction gains or losses resulting from the re-measurement of the company's Euro-denominated bonds to U.S. dollars.  The company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations affect the period-to-period comparability of the results of operations.

Forward-looking and Cautionary Statements  

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 portfolios such as interest rate basis and repricing risk and the use of derivatives to manage exposure to interest rate fluctuations; the company's funding 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; 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 second quarter ended June 30, 2012.  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 Income (unaudited)

(Dollars in thousands, except share data)

 

 


Three months ended


Six months ended


June 30, 2012


March 31, 2012


June 30, 2011


June 30, 2012


June 30, 2011

Interest Income:










Loan interest

$

151,675



154,118



146,827



305,793



294,174


Amortization/accretion of loan premiums/discounts and deferred origination costs, net

(687)



(1,060)



(7,893)



(1,747)



(17,882)


Investment interest

1,055



1,095



856



2,150



1,582


Total interest income

152,043



154,153



139,790



306,196



277,874


Interest expense:










Interest on bonds and notes payable

67,476



69,297



51,054



136,773



103,361


Net interest income

84,567



84,856



88,736



169,423



174,513


Less provision for loan losses

7,000



6,000



5,250



13,000



9,000


Net interest income after provision for loan losses

77,567



78,856



83,486



156,423



165,513


Other income (expense):










Loan and guaranty servicing revenue

52,391



49,488



41,735



101,879



82,148


Tuition payment processing and campus commerce revenue

16,834



21,913



14,761



38,747



34,130


Enrollment services revenue

29,710



31,664



32,315



61,374



66,183


Other income

8,800



10,954



6,826



19,754



13,318


Gain on sale of loans and debt repurchases

935







935



8,307


Derivative market value and foreign currency adjustments, net

(19,532)



(15,407)



(16,813)



(34,939)



(15,697)


Derivative settlements, net

(2,086)



227



(3,522)



(1,859)



(7,674)


Total other income

87,052



98,839



75,302



185,891



180,715


Operating expenses:










Salaries and benefits

48,703



49,095



42,881



97,798



86,793


Cost to provide enrollment services

20,374



21,678



22,140



42,052



44,979


Depreciation and amortization

8,226



8,136



6,769



16,362



13,545


Other

30,908



32,263



28,767



63,171



54,872


Total operating expenses

108,211



111,172



100,557



219,383



200,189


Income before income taxes

56,408



66,523



58,231



122,931



146,039


Income tax expense

(14,878)



(23,230)



(21,106)



(38,108)



(54,034)


Net income

41,530



43,293



37,125



84,823



92,005


Net income attributable to noncontrolling interest

136



152





288




Net income attributable to Nelnet, Inc.

$

41,394



43,141



37,125



84,535



92,005


Earnings per common share:










Net income attributable to Nelnet, Inc.    shareholders - basic

$

0.87



0.91



0.76



1.78



1.90


Net income attributable to Nelnet, Inc.    shareholders - diluted

$

0.87



0.91



0.76



1.78



1.89


Weighted average common shares outstanding:










Basic

47,049,055



46,989,773



48,302,779



47,020,811



48,237,411


Diluted

47,292,147



47,184,079



48,488,046



47,240,659



48,425,886


 

Condensed Consolidated Balance Sheets

(Dollars in thousands)

 


As of


As of


As of


June 30, 2012


December 31, 2011


June 30, 2011


(unaudited)




(unaudited)

Assets:






Student loans receivable, net

$

23,501,382



24,297,876



23,228,778


Cash, cash equivalents, and investments

130,310



93,350



148,005


Restricted cash and investments

976,708



724,131



675,182


Goodwill

117,118



117,118



117,118


Intangible assets, net

19,006



28,374



37,564


Other assets

524,618



591,368



664,864


Total assets

$

25,269,142



25,852,217



24,871,511


Liabilities:






Bonds and notes payable

$

23,836,250



24,434,540



23,605,413


Other liabilities

287,994



351,472



277,314


Total liabilities

24,124,244



24,786,012



23,882,727


Equity:






Total Nelnet, Inc. shareholders' equity

1,144,605



1,066,205



988,784


Noncontrolling interest

293






Total equity

1,144,898



1,066,205



988,784


Total liabilities and equity

$

25,269,142



25,852,217



24,871,511


(Code #: nnif)

 

 

SOURCE Nelnet

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