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.
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.
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.
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.
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.
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.com 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.com.
Supplemental financial information to this earnings release is available online at www.nelnetinvestors.net/releases.cfm?reltype=Financial.
#
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.com.
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)
Return to News Page