Nelnet Reports Adjusted Base Net Income Increased 20 Percent for the First Nine Months 2006

Oct 27, 2006

 

LINCOLN, Neb., Oct 27, 2006 /PRNewswire-FirstCall via COMTEX News Network/ -- Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the first nine months of 2006 of $75.5 million, or $1.40 per share, compared with $138.4 million, or $2.58 per share, for the first nine months of 2005. Base net income for the first nine months of 2006 was $96.2 million, or $1.78 per share, compared with $95.3 million, or $1.77 per share, for the first nine months of 2005. Adjusted base net income for the nine months ended September 30, 2006 was $68.8 million, or $1.28 per share, compared with $57.8 million, or $1.07 per share, for the same period a year ago.

"We had a good quarter with solid growth. We were especially pleased with our strong fee income growth, continued diversification of revenue, and the outstanding performance of our asset generation channels," said Mike Dunlap, Nelnet Chairman and Co-Chief Executive Officer. "Although we were affected by margin compression in the quarter, we believe the results demonstrate that our strategy to grow our business while diversifying our revenue stream is working very well."

GAAP net loss for the third-quarter 2006 was $22.4 million, or $0.42 per share, compared with net income of $72.1 million, or $1.34 per share, for the third-quarter 2005. Base net income for the third-quarter 2006 was $32.9 million, or $0.62 per share, compared with $32.8 million, or $0.61 per share, in the third-quarter 2005. Adjusted base net income for the third-quarter 2006 was $28.0 million, or $0.52 per share, compared with $20.9 million, or $0.39 per share, for the same period a year ago. GAAP results were affected by an unrealized loss related to derivative market value, foreign currency, and put option adjustments of $11.6 million for the first nine months of 2006 and $79.9 million for the third quarter of 2006.

A legislative-driven expense of $6.9 million or $0.08 per share after tax for loan loss reserves recognized by the company in the first-quarter 2006 is included in the results for the first nine months of 2006. In addition, the company recognized a gain on the sale of a portfolio of loans in the third quarter of 2006. Net of additional compensation charges and the effect of not holding the loans throughout the third quarter had a net positive impact on the company's results of about $0.10 per share. The third quarter also includes certain non-recurring expenses of approximately $0.03 per share.

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.

Fee-based Revenue

Fee-based revenue in the third quarter of 2006 represented 54 percent of Nelnet's total revenue. This is an increase from the third quarter of 2005 when fee-based revenue represented 39 percent of total revenue.

Income from loan and guarantee servicing fees reached $139.6 million for the first nine months of 2006, up from $109.3 million in the first nine months of 2005. In the third quarter of 2006, loan and guarantee servicing income grew to $48.5 million from $37.5 million in the third quarter of 2005.

Other fee-based income increased to $65.5 million for the first nine months of 2006 compared with $22.9 million for the first nine months of 2005. For the third quarter of 2006, other fee-based income increased to $31.2 million, up from $10.5 million in the same period a year ago. Other fee-based income includes Nelnet Business Solutions, which was formed earlier this year to pull together strategic businesses that offer additional products and services to the life cycle of the student while at the same time adding diversification and fee income to Nelnet. These businesses include enrollment management, tuition payment plans, payment processing, list management, and direct marketing, and are not dependent on the government sponsored programs and therefore do not expose the company to political risk.

Other income increased to $18.5 million for the first nine months of 2006 compared with $5.4 million in the same period a year ago. For the third-quarter 2006, other fee income increased to $13.6 million, up from $2.5 million in the third-quarter 2005. Other income in the third quarter and first nine months of 2006 includes an $11.7 million gain on the sale of student loans to an unrelated party. The portfolio of loans was not serviced by Nelnet and as such was at greater risk of being consolidated away from the company by third parties.

Student Loan Assets

Net student loan assets increased by $6.6 billion, or 40 percent, year over year to $22.9 billion at September 30, 2006. Since December 31, 2005, net student loan assets have increased 13 percent, or $2.7 billion, and have increased 2 percent, or $529.2 million, since June 30, 2006.

The company reported net new consolidation loan originations of $912.4 million and $424.9 million and net consolidation loan originations of $1.8 billion and $767.3 million for the first nine months of 2006 and the third quarter of 2006, respectively.

Margin Analysis

Net interest income for the first nine months of 2006 was $244.8 million compared with $247.8 million for the first nine months of 2005. For the third quarter of 2006, Nelnet reported net interest income of $72.4 million compared with $79.0 million for the third quarter of 2005. Net interest income for the first nine months of 2006 includes a special allowance yield adjustment of $24.5 million compared with $77.4 million for the first nine months of 2005. Excluding the special allowance yield adjustment, net interest income increased $50.0 million or 29 percent for the first nine months of 2006.

As previously announced, Nelnet has determined to defer recognition of the 9.5 percent special allowance payment being withheld by the Department of Education, therefore, net interest income for the third-quarter 2006 does not include a special allowance yield adjustment. Income from these special allowance payments would have been $8.9 million for the third quarter of 2006. The same period a year ago includes a $21.8 million special allowance yield adjustment in net interest income. Excluding the impact of the special allowance yield adjustment, net interest income for the third-quarter 2006 increased $15.1 million, or 26 percent, compared to the third-quarter 2005.

The company reported core student loan spread of 1.45 percent for the first nine months of 2006 compared with 1.54 percent in the same period in 2005. For the third quarter of 2006, Nelnet reported core student loan spread of 1.34 percent compared with 1.46 percent in the same period of 2005 and 1.49 percent for the second quarter of 2006. The core student loan spread contraction was accelerated due to the mismatch of the reset frequency between the floating rate assets and floating rate liabilities. During a rising interest rate environment, Nelnet's core student loan spread benefited from the mismatch, however, since interest rates did not rise in the third quarter, the company did not benefit from the mismatch. In addition, the increase in the percentage of consolidation loans in the company's student loan portfolio negatively impacted the spread.

Operating Expenses

For the first nine months of 2006, the company reported operating expenses of $351.4 million compared with $224.2 million for the first nine months of 2005. Operating expenses were $128.8 million in the third quarter of 2006 compared with $78.9 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 management refers 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.

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 or loss caused by the re-measurement of the company's Euro-denominated bonds to U.S. dollars, the change in market value of put options issued by the company for certain business acquisitions, the amortization of intangible assets, non-cash stock based compensation related to business combinations, and variable-rate floor income.

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       Nine months ended
                            Sept. 30, June 30,   Sept. 30, Sept. 30, Sept. 30,
                              2006     2006       2005       2006      2005
                                  (dollars in thousands, except share data)

    GAAP net income
     (loss) (a)            $(22,354)  $45,753   $72,132    $75,465   $138,446
    Base adjustments:
      Derivative market
      value, foreign
      currency, and put
      option adjustments     79,941   (29,113)  (65,382)    11,565    (74,300)
      Amortization of
       intangible assets      6,534     6,161     1,919     18,328      4,651
      Non-cash stock based
       compensation related
       to business
       combinations             476       477        --      1,271         --
      Variable-rate floor
       income                    --        --        --         --         --
    Total base adjustments
     before income taxes     86,951   (22,475)  (63,463)    31,164    (69,649)
    Net tax effect (c)      (31,698)    8,446    24,116    (10,391)    26,467
    Total base adjustments   55,253   (14,029)  (39,347)    20,773    (43,182)

      Base net income (a)    32,899    31,724    32,785     96,238     95,264

    Adjustments to base net
     income:
      Special allowance
       yield adjustment (b)      --   (10,550)  (21,766)   (24,460)   (77,427)
      Derivative
       settlements, net      (7,909)   (7,721)    2,644    (19,794)    16,961
    Total adjustments to
     base net income before
     income taxes            (7,909)  (18,271)  (19,122)   (44,254)   (60,466)
    Net tax effect (c)        3,006     6,943     7,266     16,817     22,977
    Total adjustments to
     base net income         (4,903)  (11,328)  (11,856)   (27,437)   (37,489)

      Adjusted base net
       income (a)           $27,996   $20,396   $20,929    $68,801    $57,775

    Earnings (loss) per
     share, basic and
     diluted:
      GAAP net income
       (loss)(a)             $(0.42)    $0.84     $1.34      $1.40      $2.58
      Total base adjustments   1.04     (0.25)    (0.73)      0.38      (0.81)

        Base net income (a)    0.62      0.59      0.61       1.78       1.77

      Total adjustments to
       base net income        (0.10)    (0.21)    (0.22)     (0.50)     (0.70)

        Adjusted base net
         income (a)           $0.52     $0.38     $0.39      $1.28      $1.07

    (a)  Includes expense of $6.9 million ($4.3 million or $0.08 per share
         after tax) for the nine months ended September 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.  This expense was recognized
         by the Company in the first quarter 2006.

    (b)  As previously disclosed, pending satisfactory resolution of the
         October 6, 2006 letter from the Department of Education (the
         "Department") related to the audit report by the Department's Office
         of Inspector General regarding certain loans receiving 9.5% special
         allowance payments, the Company has determined to defer recognition
         of the 9.5% special allowance payments which the Department is
         currently withholding payment.  Income from these 9.5% special
         allowance payments would have been $8.9 million ($5.5 million or
         $0.10 per share after tax) for the three months ended
         September 30, 2006.

    (c)  Tax effect computed at 38%.  The change in the value of the put
         option is not tax effected as this is not deductible for income tax
         purposes.



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 800.817.4887 and international callers should dial 913.981.4913 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) November 3, 2006. 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 5344287. 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            Nine months ended
                     Sept. 30,   June 30,    Sept. 30,   Sept. 30,   Sept. 30,
                       2006        2006        2005        2006        2005
                   (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
                            (dollars in thousands, except share data)

    Interest income:
      Loan interest  $401,704    $383,867    $247,791  $1,133,093   $671,589
      Amortization
       of loan
       premiums and
       deferred
       origination
       costs          (21,568)    (21,125)    (20,041)    (64,555)   (52,370)
      Investment
       interest        25,986      24,314      11,491      69,841     26,643

       Total
        interest
        income        406,122     387,056     239,241   1,138,379    645,862

    Interest
     expense:
      Interest on
       bonds and
       notes payable  333,766     300,844     160,243     893,559    398,045

       Net interest
        income         72,356      86,212      78,998     244,820    247,817

    Less provision
     for loan losses    1,700       2,190       1,402      13,508      5,557

       Net interest
        income after
        provision for
        loan losses    70,656      84,022      77,596     231,312    242,260

    Other income
     (expense):
      Loan and
       guarantee
       servicing
       income          48,462      44,042      37,459     139,578    109,313
      Other
       fee-based
       income          31,221      16,074      10,503      65,450     22,886
      Software
       services
       income           4,399       4,018       1,951      11,826      6,759
      Other income     13,617       2,906       2,458      18,510      5,382
      Derivative
       market value,
       foreign
       currency,
       and put
       option
       adjustments    (79,941)     29,113      65,382     (11,565)    74,300
      Derivative
       settlements,
       net              4,973       6,702      (2,962)     16,419    (19,049)

       Total other
        income
        (expense)      22,731     102,855     114,791     240,218    199,591

    Operating
     expenses:
      Salaries and
       benefits        65,383      62,207      44,311     185,274    123,615
      Other expenses   56,925      45,904      32,705     147,759     95,936
      Amortization
       of intangible
       assets           6,534       6,161       1,919      18,328      4,651

       Total
        operating
        expenses      128,842     114,272      78,935     351,361    224,202

       Income
        (loss)
        before
        income
        taxes         (35,455)     72,605     113,452     120,169    217,649

    Income tax
     expense
     (benefit)        (13,101)     26,852      41,091      44,462     78,974

       Net income
        (loss)
        before
        minority
        interest      (22,354)     45,753      72,361      75,707    138,675

    Minority interest
     in net earnings
     of subsidiaries       --          --        (229)       (242)      (229)

       Net income
        (loss)       $(22,354)    $45,753     $72,132     $75,465   $138,446

       Earnings
        (loss)
        per share,
        basic and
        diluted        $(0.42)      $0.84       $1.34       $1.40      $2.58

    Weighted
     average
     shares
     outstanding   53,348,466  54,297,230  53,734,218  53,959,075  53,709,801



    Condensed Consolidated Balance Sheets and Financial Data

                                         Sept. 30,    Dec. 31,     Sept. 30,
                                           2006         2005         2005
                                        (unaudited)               (unaudited)
                                               (dollars in thousands)
    Assets:
      Student loans receivable, net     $22,933,718  $20,260,807  $16,379,293
      Cash, cash equivalents, and
       investments                        1,810,839    1,645,797    1,304,261
      Goodwill                              188,603       99,535       67,942
      Intangible assets, net                169,824      153,117       34,644
      Other assets                          788,336      639,366      525,185
        Total assets                    $25,891,320  $22,798,622  $18,311,325

    Liabilities:
      Bonds and notes payable           $24,690,245  $21,673,620  $17,418,652
      Other liabilities                     519,814      474,884      295,582
        Total liabilities                25,210,059   22,148,504   17,714,234

    Minority interest in subsidiaries            --          626          274

    Shareholders' equity                    681,261      649,492      596,817

        Total liabilities and
         shareholders' equity           $25,891,320  $22,798,622  $18,311,325

    Return on average total assets             0.41%        1.00%        1.10%
    Return on average equity                   14.1%        32.4%        34.9%



For 28 years, Nelnet has been helping the education-seeking family plan for their education, pay for their education, and prepare for their careers. The company has invested hundreds of millions of dollars in products, services, and technology improvements for students and the educational institutions they attend. These services include live counseling to help families through all aspects of the financial aid process, benefits for borrowers, including tens of millions of dollars in fee reductions, and Nelnet sponsored scholarships. Nelnet serves students in 50 states, employs approximately 3,700 associates, and has $22.9 billion in net student loan assets.

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, Ben Kiser, +1-402-458-3024, or Investors, Cheryl Watson, +1-317-469-2064, both
of Nelnet, Inc.
http://www.nelnetinvestors.net