LINCOLN, Neb., Oct. 29 /PRNewswire-FirstCall/ -- Nelnet, Inc. today reported GAAP net income for the third quarter of 2008 of $23.8 million, or $0.48 per share, compared with a GAAP net loss of $15.7 million, or $0.32 per share, for the third quarter of 2007. Base net income excluding discontinued operations and legislative and restructuring related charges for the third quarter of 2008 was $23.4 million, or $0.47 per share, compared with $22.2 million, or $0.45 per share, for the same period a year ago.
The company also reported that it has provided additional equity support for its $2.5 billion federal student loan warehouse facility. All of the student loans held in this facility are guaranteed by the federal government. According to the terms of the facility and the valuation formula contained therein, the company has increased the equity support to a total of $374.6 million by drawing on its unsecured line of credit. Currently the company has $691.5 million outstanding on its $750 million unsecured line of credit. The company continues to generate positive cash flow from operations and currently maintains cash and cash equivalents of approximately $80 million. In addition, the company has approximately $90 million of unencumbered private loan assets.
"Due to this unprecedented period of market disruption, the mark-to-market formula specified under the terms of the facility produces an unreasonably low value for these federally guaranteed student loans," said Mike Dunlap, Chairman and Chief Executive Officer. "These loans are guaranteed by the federal government and have almost no default risk. However, we appreciate that we are truly in unprecedented times, and we are engaged in discussions with our lenders to reach amicable terms on these financings.
"Importantly, the fundamentals of our core businesses are strong and we have additional sources of liquidity. The company has diversified its revenue with fee-based businesses that have significant growth opportunities and operating margins. We are pleased with our strong performance and earnings in the third quarter."
GAAP net loss for the first nine months of 2008 was $2.3 million, or $0.05 per share, compared with GAAP net income of $13.8 million, or $0.28 per share, for the first nine months of 2007. Base net income excluding discontinued operations, legislative and restructuring related charges, and the loss on the sale of certain loans for the first nine months of 2008 was $65.2 million, or $1.33 per share, compared with $68.6 million, or $1.38 per share, for the first nine months of 2007.
Fee-based Revenue
In the third quarter of 2008, other fee-based income increased to $45.9 million, up from $38.0 million in the same period a year ago. Other fee-based income increased to $132.6 million for the first nine months of 2008 compared with $116.3 million for the first nine months of 2007. Other fee-based income includes Nelnet's list management, direct marketing, tuition payment plan, and enrollment services businesses.
In the third quarter of 2008, loan and guaranty servicing income was $30.6 million compared with $33.0 million in the third quarter of 2007. Income from loan and guaranty servicing was $81.7 million for the first nine months of 2008 compared with $95.1 million in the first nine months of 2007.
Operating Expenses
Operating expenses were $103.7 million in the third quarter of 2008 compared with $173.4 million for the same period a year ago. For the first nine months of 2008, the company reported operating expenses of $330.4 million compared with $415.3 million for the first nine months of 2007. Excluding restructuring and impairment charges, operating expenses decreased by $15.3 million and $56.4 million for the three and nine months ended September 30, 2008, compared with the same periods in 2007, respectively.
Net Interest Margin
For the third quarter of 2008, Nelnet reported net interest income of $59.6 million compared with $64.4 million for the third quarter of 2007. Net interest income for the first nine months of 2008 was $149.4 million compared with $200.4 million for the first nine months of 2007. Net interest income includes variable-rate floor income and excludes settlements on the company's derivative portfolio.
For the third quarter of 2008, Nelnet reported core student loan spread of 1.02 percent compared with 1.05 percent in the same period of 2007 and 1.07 percent for the second quarter of 2008.
Student Loan Assets and Liquidity
Nelnet reported net student loan assets of $26.4 billion at September 30, 2008. Approximately 90 percent of these student loans are life-of-loan financed at rates that the company believes will generate cash flow in excess of $1.4 billion.
The company has liquidity for new loan originations through the Department of Education's loan participation and put programs. This will allow Nelnet to make loans to all eligible students for the 2008-2009 and 2009-2010 academic years.
In addition, the company believes it has met the annual requirement to remove 75% of loans from its federal student loan warehouse facility for the annual period ending in May 2009. Under the current terms of the facility, the remaining collateral will need to be removed or refinanced by May 2010.
Non-GAAP Performance Measures
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 that is available online at http://www.nelnetinvestors.com/releases.cfm?reltype=Financial.
Conference Call
Nelnet will host a conference call to discuss earnings at 3:00 p.m. (Eastern) Wednesday, November 12, 2008. To access the call live, participants in the United States and Canada should dial 877.723.9521, and international callers should dial 719.325.4804 at least 15 minutes prior to the call. A live audio Web cast of the call will also be available at http://www.nelnetinvestors.com/ under the conference calls and Web casts menu. A replay of the conference call will be available between 6:00 p.m. (Eastern) November 12, 2008, and 11:59 p.m. (Eastern) November 22, 2008. 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 7046007. A replay of the audio Web cast will also be available at http://www.nelnetinvestors.com/.
Condensed Consolidated Statements of Operations Three months ended Nine months ended September June September September September 30, 30, 30, 30, 30, 2008 2008 2007 2008 2007 (unaudited)(unaudited)(unaudited) (unaudited) (unaudited) (dollars in thousands, except share data) Interest income: Loan interest $304,226 297,601 460,103 938,399 1,317,936 Variable-rate floor income 1,580 21,927 597 42,325 597 Amortization of loan premiums and deferred origination costs (21,338) (22,842) (23,449) (69,584) (67,142) Investment interest 9,118 9,116 21,023 29,914 61,231 Total interest income 293,586 305,802 458,274 941,054 1,312,622 Interest expense: Interest on bonds and notes payable 234,016 232,464 393,875 791,621 1,112,263 Net interest income 59,570 73,338 64,399 149,433 200,359 Less provision for loan losses 7,000 6,000 18,340 18,000 23,628 Net interest income after provision for loan losses 52,570 67,338 46,059 131,433 176,731 Other income: Loan and guaranty servicing income 30,633 24,904 33,040 81,650 95,116 Other fee-based income 45,887 40,817 38,025 132,617 116,316 Software services income 4,217 4,896 5,426 15,865 17,022 Other income 1,242 1,646 7,028 4,298 14,048 Gain (loss) on sale of loans - 48 492 (47,426) 3,288 Derivative market value, foreign currency, and put option adjustments 6,085 15,755 18,449 (35,521) 11,866 Derivative settlements, net 789 4,437 (2,336) 45,989 7,100 Total other income 88,853 92,503 100,124 197,472 264,756 Operating expenses: Salaries and benefits 44,739 43,549 60,545 142,131 182,010 Other expenses 52,332 47,812 52,511 149,744 159,792 Amortization of intangible assets 6,598 6,561 10,885 19,719 24,014 Impairment expense - - 49,504 18,834 49,504 Total operating expenses 103,669 97,922 173,445 330,428 415,320 Income (loss) before income taxes 37,754 61,919 (27,262) (1,523) 26,167 Income tax expense (benefit) 13,969 19,195 (10,664) 1,793 9,906 Income (loss) from continuing operations 23,785 42,724 (16,598) (3,316) 16,261 Income (loss) from discontinued operations, net of tax - 981 909 981 (2,416) Net income (loss) $23,785 43,705 (15,689) (2,335) 13,845 Earnings (loss) per share, basic and diluted: Income (loss) from continuing operations $0.48 0.87 (0.34) (0.07) 0.32 Income (loss) from discontinued operations, net of tax - 0.02 0.02 0.02 (0.04) Net income (loss) $0.48 0.89 (0.32) (0.05) 0.28 Weighted average shares outstanding 49,176,436 49,095,153 49,018,091 49,109,340 49,810,552 Condensed Consolidated Balance Sheets As of As of As of September 30, December 31, September 30, 2008 2007 2007 (unaudited) (unaudited) (dollars in thousands) Assets: Student loans receivable, net $26,376,269 26,736,122 26,596,123 Cash, cash equivalents, and investments 1,454,881 1,120,838 1,451,772 Goodwill 175,178 164,695 164,695 Intangible assets, net 83,565 112,830 119,242 Other assets 880,122 1,028,298 1,010,632 Total assets $28,970,015 29,162,783 29,342,464 Liabilities: Bonds and notes payable $28,004,835 28,115,829 28,234,147 Other liabilities 355,450 438,075 516,424 Total liabilities 28,360,285 28,553,904 28,750,571 Shareholders' equity 609,730 608,879 591,893 Total liabilities and shareholders' equity $28,970,015 29,162,783 29,342,464
This press release contains forward-looking statements and information based on management's current expectations as of the date of this document. When used in this press release, the words "anticipate," "believe," "estimate," "expect," "intend," and "will" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the "Risk Factors" section of the company's Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent Quarterly Reports on Form 10-Q, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and costs of yields on student loans under the FFEL Program or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the company. In addition, a larger than expected increase in third party consolidations of the company's FFELP loans could materially adversely affect the company's results of operations. The company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; the company's ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the company's credit facilities to fulfill their lending commitments under those facilities; changes to the terms and conditions of the liquidity programs offered by the Department of Education; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase, or carry education loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; the uncertain nature of the expected benefits from acquisitions and the ability to successfully integrate operations; and the uncertain nature of estimated expenses that may be incurred and cost savings that may result from the company's strategic restructuring initiatives. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this press release. Additionally, financial projections may not prove to be accurate and may vary materially. Although the company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.
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