EXHIBIT 99.2
FOR RELEASE: 4/28/06
MEDIA CONTACT: Sheila Odom, 402.458.2329
INVESTOR CONTACT: Cheryl Watson, 317.469.2064
NELNET, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOR THE FIRST QUARTER 2006
The following supplemental information should be read in connection with the
first-quarter 2006 earnings press release of Nelnet, Inc. (the "Company"), dated
April 28, 2006.
Information contained in this earnings supplement, 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. Certain prior year
amounts have been reclassified to conform to the current period presentation.
For more information see our filings with the Securities and Exchange
Commission.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
----------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interest income:
Loan interest, excluding variable-rate
floor income $ 347,522 $ 309,890 $ 200,107
Amortization of loan premiums and deferred
origination costs (21,862) (24,160) (15,782)
Investment interest 19,541 17,616 7,002
----------- ------------ ------------
Total interest income 345,201 303,346 191,327
Interest expense:
Interest on bonds and notes payable 258,949 222,066 104,525
----------- ------------ ------------
Net interest income 86,252 81,280 86,802
Less provision for loan losses 9,618 1,473 2,031
----------- ------------ ------------
Net interest income after provision
for loan losses 76,634 79,807 84,771
----------- ------------ ------------
Other income:
Loan and guarantee servicing income 47,074 43,180 37,176
Other fee-based income 18,155 12,755 3,356
Software services income 3,409 2,410 2,206
Other income 1,455 2,650 1,400
Derivative market value and foreign
currency adjustments 39,795 21,554 60,290
Derivative settlements, net 4,744 2,041 (10,086)
----------- ------------ ------------
Total other income 114,632 84,590 94,342
----------- ------------ ------------
Operating expenses:
Salaries and benefits 57,684 49,117 39,327
Other expenses 44,930 44,156 30,888
Amortization of intangible assets 5,633 4,828 1,173
----------- ------------ ------------
Total operating expenses 108,247 98,101 71,388
----------- ------------ ------------
Income before income taxes 83,019 66,296 107,725
Income tax expense 30,711 23,246 39,638
----------- ------------ ------------
Net income before minority interest 52,308 43,050 68,087
Minority interest in net earnings of subsidiaries (242) (374) -
----------- ------------ ------------
Net income $ 52,066 $ 42,676 $ 68,087
=========== ============ ============
Earnings per share, basic and diluted $ 0.96 $ 0.79 $ 1.27
=========== ============ ============
Weighted average shares outstanding 54,241,341 53,915,812 53,682,569
CONDENSED CONSOLIDATED BALANCE SHEETS AND FINANCIAL DATA
AS OF AS OF AS OF
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
------------- -------------- ------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
Assets:
Student loans receivable, net $ 21,320,374 $ 20,260,807 $ 14,540,316
Cash, cash equivalents, and investments 1,456,181 1,645,797 993,894
Goodwill 132,389 99,535 18,632
Intangible assets, net 162,396 153,117 24,165
Other assets 732,416 639,366 454,544
------------- ------------- -------------
Total assets $ 23,803,756 $ 22,798,622 $ 16,031,551
============= ============= =============
Liabilities:
Bonds and notes payable $ 22,670,772 $ 21,673,620 $ 15,318,517
Other liabilities 415,778 474,884 187,723
------------- ------------- -------------
Total liabilities 23,086,550 22,148,504 15,506,240
------------- ------------- -------------
Minority interest in subsidiaries - 626 -
Shareholders' equity 717,206 649,492 525,311
------------- ------------- -------------
Total liabilities and shareholders' equity $ 23,803,756 $ 22,798,622 $ 16,031,551
============= ============= =============
Return on average total assets 0.90% 1.00% 1.73%
Return on average equity 30.4% 32.4% 54.4%
NON-GAAP PERFORMANCE MEASURES
We prepare 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 we refer to as base net income. While base net income
is not a substitute for reported results under GAAP, we provide base net income
as additional information regarding our financial results.
Adjusted base net income, which excludes certain special allowance yield
adjustments and related hedging activity on the Company's portfolio of student
loans earning a minimum special allowance payment of 9.5%, 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 to base and
adjusted base net income.
THREE MONTHS ENDED
-------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
----------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GAAP net income (a) $ 52,066 $ 42,676 $ 68,087
Base adjustments:
Derivative market value and foreign
currency adjustments (39,795) (21,554) (60,290)
Amortization of intangible assets 5,633 4,828 1,173
Variable-rate floor income - - -
---------- ----------- -----------
Total base adjustments before income taxes (34,162) (16,726) (59,117)
Net tax effect (b) 12,981 6,356 22,464
---------- ----------- -----------
Total base adjustments (21,181) (10,370) (36,653)
---------- ----------- -----------
Base net income (a) 30,885 32,306 31,434
Adjustments to base net income:
Special allowance yield adjustment (13,910) (17,228) (29,742)
Derivative settlements, net (4,164) (1,082) 8,863
---------- ----------- -----------
Total adjustments to base net income
before income taxes (18,074) (18,310) (20,879)
Net tax effect (b) 6,868 6,958 7,935
---------- ----------- -----------
Total adjustments to base net income (11,206) (11,352) (12,944)
---------- ----------- -----------
Adjusted base net income (a) $ 19,679 $ 20,954 $ 18,490
========== =========== ===========
Earnings per share, basic and diluted:
GAAP net income (a) $ 0.96 $ 0.79 $ 1.27
Total base adjustments (0.39) (0.19) (0.68)
---------- ----------- -----------
Base net income (a) 0.57 0.60 0.59
Total adjustments to base net income (0.21) (0.21) (0.24)
---------- ----------- -----------
Adjusted base net income (a) $ 0.36 $ 0.39 $ 0.35
========== =========== ===========
- ------------------------
(a) Includes expense of $6.9 million ($4.3 million after tax) for the three
months ended March 31, 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.
Excluding this one-time expense, GAAP net income, base net income, and
adjusted base net income would have been $1.04 per share, $0.65 per
share, and $0.44 per share, respectively.
(b) Tax effect computed at 38%.
Our base net income is a non-GAAP financial measure and may not be comparable to
similarly titled measures reported by other companies. The Company's base net
income presentation does not represent another comprehensive basis of
accounting. A more detailed discussion of the differences between GAAP and base
net income follows.
DERIVATIVE MARKET VALUE AND FOREIGN CURRENCY ADJUSTMENTS: Base net income
excludes the periodic unrealized gains and losses caused by the change in market
value on those derivatives in which the Company does not qualify for hedge
accounting. The Company maintains an overall interest rate risk management
strategy that incorporates the use of derivative instruments to reduce the
economic effect of interest rate volatility. Derivative instruments that are
primarily used as part of the Company's interest rate risk management strategy
include interest rate swaps and basis swaps. Management has structured all of
the Company's derivative transactions with the intent that each is economically
effective. However, the Company's derivative instruments do not qualify for
hedge accounting under Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and thus may
adversely impact earnings.
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.
AMORTIZATION OF INTANGIBLE ASSETS: We exclude amortization of acquired
intangibles in our base net income.
VARIABLE-RATE FLOOR INCOME: Loans that reset annually on July 1 can generate
excess spread income as compared to the rate based on the special allowance
payment formula in declining interest rate environments. We refer to this
additional income as variable-rate floor income. There was no variable-rate
floor income in the periods presented.
STUDENT LOANS RECEIVABLE
Student loans receivable includes all student loans owned by or on behalf of the
Company and includes the unamortized cost of acquisition or origination less an
allowance for loan losses. The following table describes the components of our
loan portfolio:
AS OF AS OF AS OF
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
---------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
DOLLARS OF TOTAL DOLLARS OF TOTAL DOLLARS OF TOTAL
------------ ---------- ----------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
Federally insured:
Stafford $ 6,541,680 30.7 % $ 6,434,655 31.8 % $ 5,340,328 36.7 %
PLUS/SLS 431,268 2.0 376,042 1.8 329,765 2.3
Consolidation 13,826,647 64.8 13,005,378 64.2 8,592,889 59.1
Non-federally insured 163,624 0.8 96,880 0.5 94,225 0.7
------------- -------- ------------- ------- ------------- ---------
Total 20,963,219 98.3 19,912,955 98.3 14,357,207 98.8
Unamortized premiums and deferred
origination costs 379,380 1.8 361,242 1.8 191,961 1.3
Allowance for loan losses:
Allowance - federally insured (7,075) 0.0 (98) 0.0 (99) 0.0
Allowance - non-federally insured (15,150) (0.1) (13,292) (0.1) (8,753) (0.1)
------------- -------- ------------- ------- ------------- ---------
Net $ 21,320,374 100.0 % $ 20,260,807 100.0 % $ 14,540,316 100.0 %
============= ======== ============= ======= ============= =========
The following table sets forth the loans originated or acquired through each of
our channels:
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Beginning balance $ 19,912,955 $ 16,185,721 $ 13,299,094
Direct channel:
Consolidation loan originations 1,024,835 1,413,260 745,090
Less consolidation of existing portfolio (433,900) (691,900) (337,100)
------------- ------------- --------------
Net consolidation loan originations 590,935 721,360 407,990
Stafford/PLUS loan originations 306,148 152,996 155,023
Branding partner channel 420,265 161,808 673,841
Forward flow channel 351,812 251,940 187,163
Other channels 53,838 126,810 31,688
------------- ------------- --------------
Total channel acquisitions 1,722,998 1,414,914 1,455,705
Loans acquired in portfolio and
business acquisitions - 3,071,479 -
Repayments, claims, capitalized
interest, and other (672,734) (759,159) (397,592)
------------- ------------- --------------
Ending balance $ 20,963,219 $ 19,912,955 $ 14,357,207
============= ============= ==============
INTEREST RATE SENSITIVITY
The following table shows the Company's student loan assets currently earning at
a fixed rate as of March 31, 2006:
BORROWER/
FIXED LENDER ESTIMATED
INTEREST WEIGHTED VARIABLE BALANCE
RATE AVERAGE CONVERSION OF FIXED
RANGE YIELD RATE (A) RATE ASSETS
--------- ------------- ------------ ------------
(DOLLARS IN
THOUSANDS)
7.5 - 8.0% 7.71 % 5.07 % $ 244,417
> 8.0 8.53 5.89 1,015,927
9.5 floor yield 9.50 6.86 3,405,255
------------
$ 4,665,599
============
-----------------------
(a) The estimated variable conversion rate is the estimated short-term
interest rate at which loans would convert to variable rate.
As a portion of the Company's student loan assets earn a fixed rate, management
uses fixed-rate debt and interest rate swaps to reduce the economic effect of
interest rate volatility. The total fixed-rate student loan assets of $4.7
billion held by the Company at March 31, 2006, includes $2.6 billion of loans
refinanced prior to September 30, 2004 with proceeds of tax-exempt obligations
originally issued prior to October 1, 1993 and then subsequently refinanced with
the proceeds of taxable obligations, without retiring the tax-exempt
obligations. Interest income that is generated from this $2.6 billion portfolio
in excess of income based upon standard special allowance rates is referred to
by the Company as the special allowance yield adjustment. The following table
summarizes the derivative instruments used by the Company as of March 31, 2006
to hedge this $2.6 billion loan portfolio. Since the $2.6 billion portfolio of
student loans will decrease as principal payments are made on these loans, the
Company has structured the related derivatives to expire or "amortize" in a
similar pattern.
WEIGHTED AVERAGE
NOTIONAL FIXED RATE PAID
MATURITY VALUES BY THE COMPANY
------------ ------------ ------------------
(DOLLARS IN
THOUSANDS)
2006 $ 493,750 3.02 %
2007 118,750 3.35
2008 293,750 3.78
2009 193,750 4.01
2010 1,137,500 4.25
2011 - -
2012 275,000 4.31
2013 525,000 4.36
------------ --------
Total $ 3,037,500 3.98 %
============ ========
The following table summarizes the outstanding derivative instruments as of
March 31, 2006 used by the Company to hedge the remaining fixed-rate loan
portfolio.
WEIGHTED AVERAGE
NOTIONAL FIXED RATE PAID
MATURITY VALUES BY THE COMPANY
------------ ------------ ------------------
(DOLLARS IN
THOUSANDS)
2006 $ 118,750 2.87 %
2007 393,750 3.45
2008 168,750 3.72
2009 118,750 4.01
------------ -------
Total $ 800,000 3.50 %
============ =======
In addition to the interest rate swaps with notional values of $800 million
summarized above, as of March 31, 2006, the Company had $492 million of
fixed-rate debt (excluding the Company's fixed-rate unsecured debt of $275
million) that was used by the Company to hedge fixed-rate student loan assets.
DERIVATIVE SETTLEMENTS
The following table summarizes the components of derivative settlements.
THREE MONTHS ENDED
---------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Special allowance yield
adjustment derivatives $ 4,164 $ 1,082 $ (8,863)
Other fixed-rate portfolio derivatives 1,732 959 (1,223)
Foreign currency swap derivative (1,152) - -
----------- ----------- -----------
Derivative settlements, net $ 4,744 $ 2,041 $ (10,086)
=========== =========== ===========
STUDENT LOAN SERVICING
The Company performs servicing activities for its own portfolio and third
parties. The following table summarizes the Company's loan servicing volumes:
AS OF MARCH 31, AS OF DECEMBER 31, AS OF MARCH 31,
2006 2005 2005
-------------------------------- ------------------------------ ------------------------------
COMPANY THIRD PARTY TOTAL COMPANY THIRD PARTY TOTAL COMPANY THIRD PARTY TOTAL
---------- ----------- --------- --------- ----------- -------- ---------- ----------- -------
(DOLLARS IN MILLIONS)
FFELP and private loans $18,017 $10,626 $28,643 $16,969 $10,020 $26,989 $13,116 $ 8,868 $21,984
Canadian loans (in U.S. $) - 8,388 8,388 - 8,139 8,139 - 7,337 7,337
---------- ----------- --------- ---------- --------- --------- ---------- ---------- --------
Total $18,017 $19,014 $37,031 $16,969 $18,159 $35,128 $13,116 $16,205 $29,321
========== =========== ========= ========== ========= ========= ========== ========== ========
STUDENT LOAN SPREAD
The following table analyzes the student loan spread on our portfolio of student
loans. This table represents the spread on assets earned in conjunction with the
liabilities used to fund the assets, including the effects of net derivative
settlements.
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2006 2005 2005
-------------- -------------- -------------
Student loan yield 7.68 % 7.30 % 6.46 %
Consolidation rebate fees (0.71) (0.68) (0.63)
Premium and deferred origination costs amortization (0.44) (0.52) (0.46)
------------- -------------- -------------
Student loan net yield 6.53 6.10 5.37
Student loan cost of funds (a) (4.63) (4.27) (3.12)
------------- -------------- -------------
Student loan spread 1.90 1.83 2.25
Special allowance yield adjustments, net of
settlements on derivatives (b) (0.36) (0.39) (0.61)
------------- -------------- -------------
Core student loan spread 1.54 % 1.44 % 1.64 %
============= ============== =============
Average balance of student loans (in thousands) $ 20,237,068 $ 18,567,481 $13,742,362
Average balance of debt outstanding (in thousands) 21,796,549 19,993,539 14,677,213
- -----------------------------
(a) The student loan cost of funds includes the effects of the net
settlement costs on the Company's derivative instruments.
(b) The special allowance yield adjustments represent the impact on net
spread had loans earned at statutorily defined rates under a taxable
financing. The special allowance yield adjustments have been reduced by
net settlements on derivative instruments that were used to hedge this
loan portfolio earning the excess yield.