Nelnet Reports Fourth Quarter 2010 Results

- 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

Mar 03, 2011, 06:00 ET from Nelnet

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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