NELNET INC. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for NELNET, INC., an education planning and financing company, for the period ended September 30, 2009. The company operates through five segments: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services, Software and Technical Services, and Asset Generation and Management. The reporting period reflects significant legislative uncertainty regarding the Federal Family Education Loan Program (FFELP) and the company's strategic shift toward fee-based revenue streams to mitigate political risk.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Income | $46.4 million | $80.1 million |
| Earnings Per Share (Diluted) | $0.93 | $1.60 |
| Total Interest Income | $145.2 million | $483.4 million |
| Net Interest Income | $69.2 million | $154.8 million |
| Provision for Loan Losses | $7.5 million | $23.0 million |
| Total Operating Expenses | $92.7 million | $282.6 million |
| Cash and Cash Equivalents | $334.3 million | (Balance Sheet Item) |
| Total Debt (Bonds and Notes Payable) | $26.6 billion | (Balance Sheet Item) |
| Student Loans Receivable (Net) | $23.8 billion | (Balance Sheet Item) |
Material Changes vs. Prior Period
- Profitability Surge: Net income for the three months ended September 30, 2009, more than doubled to $46.4 million compared to $23.8 million in the same period of 2008. For the nine-month period, the company reported a net income of $80.1 million, a significant turnaround from a net loss of $2.3 million in the prior year.
- Loan Sales Gains: A primary driver of the improvement was a net gain on the sale of loans of $8.8 million in Q3 2009, compared to zero in Q3 2008. This included a $9.7 million gain from selling $427.7 million of student loans to the Department of Education under the Purchase Program.
- Interest Rate Environment: Net interest income increased 16.1% year-over-year for the quarter, driven by a significant increase in "fixed rate floor income" ($39.3 million in Q3 2009 vs. $10.0 million in Q3 2008) due to lower market interest rates. However, total loan interest income decreased 49.6% due to a shrinking portfolio and lower yields.
- Cost Reduction: Operating expenses decreased 10.6% year-over-year for the quarter to $92.7 million, reflecting successful restructuring efforts and cost management initiatives.
- Derivative Volatility: The company recorded a net gain of $7.7 million from derivative market value adjustments and settlements in Q3 2009, compared to $6.9 million in Q3 2008. This line item remains highly volatile due to foreign currency re-measurement of Euro-denominated notes.
Guidance, Outlook, and Risks
- Legislative Risk (FFELP Elimination): The most significant risk is the potential elimination of the FFELP program under proposed federal budget legislation (SAFRA). If enacted, this would prevent the company from originating new FFELP loans, reducing interest revenue and servicing fees. The company is actively diversifying into fee-based businesses to mitigate this risk.
- Restructuring Plan: The company is executing a restructuring plan to streamline operations, impacting approximately 300 associates. Total estimated charges are $13.0 million, with $5.9 million recognized through Q3 2009 and the remainder expected in Q4 2009 and 2010.
- Liquidity and Funding: The company has secured funding for the 2009-2010 academic year through the Department of Education's Participation Program and a new $500 million FFELP warehouse facility. It also maintains a $750 million unsecured line of credit, though one lender (Lehman Brothers) is in bankruptcy and not expected to fund future requests.
- Legal Proceedings: The company is defending against two qui tam actions (Oberg and Vigil) alleging false claims for special allowance payments and prohibited inducements. Management believes these claims are frivolous and intends to vigorously defend them.
- Dividend Reinstatement: On November 5, 2009, the Board reinstated the quarterly dividend program at $0.07 per share, suspended since May 2008.
Key Facts for Investor Verification
- Portfolio Composition: Verify the percentage of the loan portfolio originated after October 1, 2007 (subject to lower yields under the College Cost Reduction Act), which stood at 10.6% as of September 30, 2009.
- Derivative Exposure: Review the fair value of cross-currency interest rate swaps ($196.2 million asset) used to hedge Euro-denominated debt, as fluctuations in the Euro/USD exchange rate significantly impact reported earnings.
- Loan Loss Allowance: Monitor the allowance for loan losses, which was $50.1 million (0.21% of total loans excluding held-for-sale) as of September 30, 2009, with a specific focus on the non-federally insured portion (12.63% allowance).
- Debt Maturities: Confirm the status of the $26.6 billion debt portfolio, particularly the $1.9 billion in DOE Participation debt maturing in late 2009/2010 and the $691.5 million outstanding on the unsecured line of credit.
- Fee-Based Revenue Growth: Track the growth of non-FFELP dependent revenue streams (Tuition Payment, Enrollment Services), which grew 17.3% year-over-year in Q3 2009, as a hedge against legislative changes.