Exhibit 99.2
FOR RELEASE: 2/9/07
MEDIA CONTACT: Ben Kiser, 402.458.3024
INVESTOR CONTACT: Cheryl Watson, 317.469.2064
NELNET, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOR THE FOURTH QUARTER 2006
The following supplemental information should be read in connection with the
fourth-quarter 2006 earnings press release of Nelnet, Inc. (the "Company"),
dated February 9, 2007.
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 the Company's
operating results, performance, or financial condition expressed or implied by
the forward-looking statements 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 OPERATIONS
THREE MONTHS ENDED YEAR ENDED
----------------------------------------- ----------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2006 2005 2006 2005
------------ ------------- ------------ -------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interest income:
Loan interest $ 410,015 $ 401,704 $ 309,890 $ 1,543,108 $ 981,479
Amortization of loan premiums and deferred
origination costs (22,838) (21,568) (24,160) (87,393) (76,530)
Investment interest 24,310 25,986 17,616 94,151 44,259
------------ ------------ ------------ ------------ ------------
Total interest income 411,487 406,122 303,346 1,549,866 949,208
Interest expense:
Interest on bonds and notes payable 347,615 333,766 222,066 1,241,174 620,111
------------ ------------ ------------ ------------ ------------
Net interest income 63,872 72,356 81,280 308,692 329,097
Less provision for loan losses 1,800 1,700 1,473 15,308 7,030
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 62,072 70,656 79,807 293,384 322,067
------------ ------------ ------------ ------------ ------------
Other income (expense):
Loan and guarantee servicing income 50,985 48,462 43,180 190,563 152,493
Other fee-based income 36,868 31,221 12,755 102,318 35,641
Software services income 4,064 4,399 2,410 15,890 9,169
Other income 4,850 13,617 2,277 23,360 7,659
Derivative market value, foreign currency,
and put option adjustments (19,510) (79,941) 21,927 (31,075) 96,227
Derivative settlements, net 7,013 4,973 2,041 23,432 (17,008)
------------ ------------ ------------ ------------ ------------
Total other income (expense) 84,270 22,731 84,590 324,488 284,181
------------ ------------ ------------ ------------ ------------
Operating expenses:
Salaries and benefits 60,842 65,383 49,117 246,116 172,732
Other expenses 60,916 56,925 44,156 208,675 140,092
Amortization of intangible assets 6,794 6,534 4,828 25,122 9,479
Impairment expense 31,090 - - 31,090 -
------------ ------------ ------------ ------------ ------------
Total operating expenses 159,642 128,842 98,101 511,003 322,303
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (13,300) (35,455) 66,296 106,869 283,945
Income tax expense (benefit) (5,990) (13,101) 23,246 38,472 102,220
------------ ------------ ------------ ------------ ------------
Net income (loss) before minority interest (7,310) (22,354) 43,050 68,397 181,725
Minority interest in net earnings of subsidiaries - - (374) (242) (603)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (7,310) $ (22,354) $ 42,676 $ 68,155 $ 181,122
============ ============ ============ ============ ============
Earnings (loss) per share, basic and diluted $ (0.14) $ (0.42) $ 0.79 $ 1.27 $ 3.37
============ ============ ============ ============ ============
Weighted average shares outstanding 52,506,936 53,348,466 53,915,812 53,593,056 53,761,727
CONDENSED CONSOLIDATED BALANCE SHEETS AND FINANCIAL DATA
AS OF DECEMBER 31,
---------------------------
2006 2005
------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Assets:
Student loans receivable, net $ 23,789,552 $ 20,260,807
Cash, cash equivalents, and investments 1,777,494 1,645,797
Goodwill 191,420 99,535
Intangible assets, net 162,994 153,117
Other assets 875,413 639,437
------------ ------------
Total assets $ 26,796,873 $ 22,798,693
============ ============
Liabilities:
Bonds and notes payable $ 25,562,119 $ 21,673,620
Other liabilities 562,904 474,955
------------ ------------
Total liabilities 26,125,023 22,148,575
------------ ------------
Minority interest in subsidiaries - 626
Shareholders' equity 671,850 649,492
------------ ------------
Total liabilities and shareholders' equity $ 26,796,873 $ 22,798,693
============ ============
Return on average total assets 0.27% 1.00%
Return on average equity 9.6% 32.4%
NON-GAAP PERFORMANCE MEASURES
In accordance with the Rules and Regulations of the Securities and Exchange
Commission ("SEC"), the Company 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 a non-GAAP performance measure referred to as base net income. While
base net income is not a substitute for reported results under GAAP, the Company
provides base net income as additional information regarding its financial
results.
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's board of directors utilizes base net income to set
performance targets and evaluate management's performance. The Company also
believes analysts, rating agencies, and creditors use base net income in their
evaluation of the Company's results of operations. While base net income is not
a substitute for reported results under GAAP, 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. Management
believes base net income provides additional insight into the financial
performance of the core business activities of the Company's operations.
The following table provides a reconciliation of GAAP net income (loss) to base
and adjusted base net income.
THREE MONTHS ENDED YEAR ENDED
---------------------------------------- -------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2006 2005 2006 2005
------------ ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GAAP net income (loss) (a) $ (7,310) $ (22,354) $ 42,676 $ 68,155 $ 181,122
Base adjustments:
Derivative market value, foreign currency,
and put option adjustments 19,510 79,941 (21,927) 31,075 (96,227)
Amortization of intangible assets 6,794 6,534 4,828 25,122 9,479
Non-cash stock based compensation
related to business combinations 476 476 - 1,747 -
Variable-rate floor income - - - - -
------------ ------------ ------------ ------------ -----------
Total base adjustments before income taxes 26,780 86,951 (17,099) 57,944 (86,748)
Net tax effect (c) (9,865) (31,698) 6,356 (20,256) 32,823
------------ ------------ ------------ ------------ -----------
Total base adjustments 16,915 55,253 (10,743) 37,688 (53,925)
------------ ------------ ------------ ------------ -----------
Base net income (a) 9,605 32,899 31,933 105,843 127,197
Adjustments to base net income:
Special allowance yield adjustment (b) - - (17,228) (24,460) (94,655)
Derivative settlements, net - (7,909) (1,082) (19,794) 15,879
------------ ------------ ------------ ------------ -----------
Total adjustments to base net income
before income taxes - (7,909) (18,310) (44,254) (78,776)
Net tax effect (c) - 3,006 6,958 16,817 29,935
------------ ------------ ------------ ------------ -----------
Total adjustments to base net income - (4,903) (11,352) (27,437) (48,841)
------------ ------------ ------------ ------------ -----------
Adjusted base net income (a) $ 9,605 $ 27,996 $ 20,581 $ 78,406 $ 78,356
============ ============ ============ ============ ===========
Earnings (loss) per share, basic and diluted:
GAAP net income (loss) (a) $ (0.14) $ (0.42) $ 0.79 $ 1.27 $ 3.37
Total base adjustments 0.32 1.04 (0.20) 0.70 (1.00)
------------ ------------ ------------ ------------ -----------
Base net income (a) 0.18 0.62 0.59 1.97 2.37
Total adjustments to base net income - (0.10) (0.21) (0.51) (0.91)
------------ ------------ ------------ ------------ -----------
Adjusted base net income (a) $ 0.18 $ 0.52 $ 0.38 $ 1.46 $ 1.46
============ ============ ============ ============ ===========
- ------------------------------------------------
(a) Includes expense of $6.9 million ($4.3 million or $0.08 per share after
tax) for the year ended December 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. This expense was recognized by the Company in the first
quarter 2006.
(b) As previously disclosed, on January 19, 2007, the Company entered into a
Settlement Agreement (the "Agreement") with the Department of Education
(the "Department") to resolve the audit by the Department's Office of
Inspector General (the "OIG") of the Company's portfolio of student loans
receiving 9.5% special allowance payments. Under the terms of the
Agreement, all 9.5% special allowance payments were eliminated for periods
on and after July 1, 2006. The Company had been deferring recognition of
9.5% special allowance payments related to those loans subject to the OIG
audit effective July 1, 2006 pending satisfactory resolution of this issue.
(c) Tax effect computed at 38%. The change in the value of the put option is
not tax effected as this is not deductible for income tax purposes.
LIMITATIONS OF BASE NET INCOME
While GAAP provides a uniform, comprehensive basis of accounting, for the
reasons discussed above, management believes that base net income is an
important additional tool for providing a more complete understanding of the
Company's results of operations. Nevertheless, base net income is subject to
certain general and specific limitations that investors should carefully
consider. For example, unlike financial statements prepared in accordance with
GAAP, the Company's base net income presentation does not represent a
comprehensive basis of accounting. In addition, the Company's base net income is
not a defined term within GAAP and may not be comparable to similarly titled
measures reported by other companies. Investors, therefore, may not be able to
compare our Company's performance with that of other companies based upon base
net income. Base net income results are only meant to supplement GAAP results by
providing additional information regarding the operational and performance
indicators that are most closely monitored and used by the Company's management
and board of directors to assess performance and information which the Company
believes is important to analysts, rating agencies, and creditors.
Other limitations of base net income arise from the specific adjustments that
management makes to GAAP results to derive base net income results. These
differences are described below.
DIFFERENCES BETWEEN GAAP AND BASE NET INCOME
Management's financial planning and evaluation of operating results does not
take into account the following items because their volatility and/or inherent
uncertainty affect the period-to-period comparability of the Company's results
of operations. A more detailed discussion of the differences between GAAP and
base net income follows.
DERIVATIVE MARKET VALUE, FOREIGN CURRENCY, AND PUT OPTION ADJUSTMENTS: Base net
income excludes the periodic unrealized gains and losses that are caused by the
change in fair value on derivatives in which the Company does not qualify for
"hedge treatment" under GAAP. Statement of Financial Accounting Standards No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No.
133"), requires that changes in fair value of derivative instruments be
recognized currently in earnings unless specific hedge accounting criteria, as
specified by SFAS No. 133, are met. 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 primarily used by the Company include interest rate
swaps, basis swaps, interest rate floor contracts, and cross-currency interest
rate swaps. Management has structured all of the Company's derivative
transactions with the intent that each is economically effective. However, the
Company does not qualify its derivatives for "hedge treatment" as defined by
SFAS No. 133, and the stand-alone derivative must be marked-to-market in the
income statement with no consideration for the corresponding change in fair
value of the hedged item. Since the Company plans to hold all derivative
instruments until their maturity, the Company believes these point-in-time
estimates of asset and liability values that are subject to interest rate
fluctuations make it difficult to evaluate the ongoing results of operations
against its business plan and affect the period-to-period comparability of the
results of operations. Included in base net income are the economic effects of
the Company's derivative instruments, which includes any cash paid or received
being recognized as an expense or revenue upon actual derivative settlements.
These settlements are included in "Derivative settlements, net" on the Company's
consolidated statements of operations.
Base net income excludes the foreign currency transaction gains or losses caused
by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.
In connection with the issuance of the Euro-denominated bonds, the Company has
entered into cross-currency interest rate swaps. Under the terms of these
agreements, the principal payments on the Euro-denominated notes will
effectively be paid at the exchange rate in effect at the issuance date of the
bonds. The cross-currency interest rate swaps also convert the floating rate
paid on the Euro-denominated bonds' (EURIBOR index) to an index based on LIBOR.
Included in base net income are the economic effects of any cash paid or
received being recognized as an expense or revenue upon actual settlements of
the cross-currency interest rate swaps. These settlements are included in
"Derivative settlements, net" on the Company's consolidated statements of
operations. However, the gains or losses caused by the re-measurement of the
Euro-denominated bonds to U.S. dollars and the change in market value of the
cross-currency interest rate swaps are excluded from base net income as the
Company believes the point-in-time estimates of value that are subject to
currency rate fluctuations related to these financial instruments make it
difficult to evaluate the ongoing results of operations against the Company's
business plan and affect the period-to-period comparability of the results of
operations. The re-measurement of the Euro-denominated bonds correlates with the
change in fair value of the cross-currency interest rate swaps. However, the
Company will experience unrealized gains or losses related to the cross-currency
interest rate swaps if the two underlying indices (and related forward curve) do
not move in parallel.
Base net income also excludes the change in fair value of put options issued by
the Company for certain business acquisitions. The put options are valued by the
Company each reporting period using a Black-Scholes pricing model. Therefore,
the fair value of these options is primarily affected by the strike price and
term of the underlying option, the Company's current stock price, and the
volatility of the Company's stock. The Company believes these point-in-time
estimates of value that are subject to fluctuations make it difficult to
evaluate the ongoing results of operations against the Company's business plans
and affects the period-to-period comparability of the results of operations.
The gains and/or losses included in "Derivative market value, foreign currency,
and put option adjustments" on the Company's consolidated statements of
operations are primarily caused by interest rate and currency volatility,
changes in the value of put options based on the inputs used in the
Black-Scholes pricing model, as well as the volume and terms of put options and
of derivatives not receiving hedge treatment. Base net income excludes these
unrealized gains and losses and isolates the effect of interest rate, currency,
and put option volatility on the fair value of such instruments during the
period. Under GAAP, the effects of these factors on the fair value of the put
options and the derivative instruments (but not the underlying hedged item) tend
to show more volatility in the short term.
AMORTIZATION OF INTANGIBLE ASSETS: Base net income excludes the amortization of
acquired intangibles, which arises primarily from the acquisition of definite
life intangible assets in connection with the Company's acquisitions, since the
Company feels that such charges do not drive the Company's operating performance
on a long-term basis and can affect the period-to-period comparability of the
results of operations.
NON-CASH STOCK BASED COMPENSATION RELATED TO BUSINESS COMBINATIONS: The Company
has structured certain business combinations in which the stock consideration
paid has been dependent on the sellers' continued employment with the Company.
As such, the value of the consideration paid is recognized as compensation
expense by the Company over the term of the applicable employment agreement.
Base net income excludes this expense because the Company believes such charges
do not drive its operating performance on a long-term basis and can affect the
period-to-period comparability of the results of operations. If the Company did
not enter into the employment agreements in connection with the acquisition, the
amount paid to these former shareholders of the acquired entity would have been
recorded by the Company as additional consideration of the acquired entity,
thus, not having an effect on the Company's results of operations.
VARIABLE-RATE FLOOR INCOME: Loans that reset annually on July 1 can generate
excess spread income compared with the rate based on the special allowance
payment formula in declining interest rate environments. The Company refers to
this additional income as variable-rate floor income. The Company excludes
variable rate floor income from its base net income since its timing and amount
(if any) is uncertain, it has been eliminated by legislation for all loans
originated on and after April 1, 2006, and it is in excess of expected spreads.
In addition, because variable rate floor income is subject to the underlying
rate for the subject loans being reset annually on July 1, it is a factor beyond
the Company's control which can affect the period-to-period comparability of
results of operations. There was no variable-rate floor income in the periods
presented.
SPECIAL ALLOWANCE YIELD ADJUSTMENT AND RELATED HEDGING ACTIVITY: The Company
excludes the special allowance yield adjustments and the net settlements
received or paid on those derivative instruments used to hedge the student loans
earning the 9.5% special allowance payments. Pursuant to the settlement
agreement entered into with the Department, effective July 1, 2006, the Company
no longer receives 9.5% special allowance payments. Prior to this agreement, the
Company excluded the special allowance yield adjustments from base net income
because the Company expected 9.5% special allowance payments to decline over
time due to the fact that in April 2004 it ceased adding loans receiving 9.5%
special allowance payments to its portfolio.
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 the
Company's loan portfolio:
AS OF DECEMBER 31,
------------------------------------------------
2006 2005
---------------------- ---------------------
PERCENT PERCENT
DOLLARS OF TOTAL DOLLARS OF TOTAL
----------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Federally insured:
Stafford $ 5,724,586 24.1 % $ 6,434,655 31.8 %
PLUS/SLS 365,112 1.5 376,042 1.8
Consolidation 17,127,623 72.0 13,005,378 64.2
Non-federally insured 197,147 0.8 96,880 0.5
------------ --------- ------------ --------
Total 23,414,468 98.4 19,912,955 98.3
Unamortized premiums and deferred
origination costs 401,087 1.7 361,242 1.8
Allowance for loan losses:
Allowance - federally insured (7,601) 0.0 (98) 0.0
Allowance - non-federally insured (18,402) (0.1) (13,292) (0.1)
------------ --------- ------------ --------
Net $ 23,789,552 100.0 % $ 20,260,807 100.0 %
============ ========= ============ ========
The following table sets forth the loans originated or acquired through each of
the Company's channels:
THREE MONTHS ENDED YEAR ENDED
----------------------------------------- --------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2006 2005 2006 2005
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Beginning balance $ 22,534,661 $ 22,012,670 $ 16,185,721 $ 19,912,955 $ 13,299,094
Direct channel:
Consolidation loan originations 1,762,371 1,493,981 1,413,260 5,299,820 4,037,366
Less consolidation of existing portfolio (843,749) (726,700) (691,900) (2,643,880) (1,966,000)
------------ ------------ ------------ ------------ ------------
Net consolidation loan originations 918,622 767,281 721,360 2,655,940 2,071,366
Stafford/PLUS loan originations 192,533 385,997 152,996 1,035,695 720,545
Branding partner channel (a) 69,498 94,229 161,808 910,756 657,720
Forward flow channel 332,702 336,775 251,940 1,600,990 1,153,125
Other channels (a) 12,209 2,070 126,810 492,737 796,886
------------ ------------ ------------ ------------ ------------
Total channel acquisitions 1,525,564 1,586,352 1,414,914 6,696,118 5,399,642
Loans acquired in portfolio and
business acquisitions - - 3,071,479 - 3,071,479
Repayments, claims, capitalized
interest, and other (125,756) (368,789) (402,659) (1,332,086) (1,002,260)
Consolidation loans lost to external parties (307,649) (342,400) (356,500) (1,114,040) (855,000)
Loans sold (b) (212,352) (353,172) - (748,479) -
------------ ------------ ------------ ------------ ------------
Ending balance $ 23,414,468 $ 22,534,661 $ 19,912,955 $ 23,414,468 $ 19,912,955
============ ============ ============ ============ ============
(a) Included in "Other channels" for the year ended December 31, 2005 is $630.8
million of student loans purchased from Union Bank and Trust ("Union
Bank"), an entity under common control with the Company. The acquisition of
these loans was made by the Company as part of an agreement with Union Bank
entered into in February 2005. As part of this agreement, Union Bank also
committed to transfer to the Company substantially all of the remaining
balance of Union Bank's origination rights in guaranteed student loans. As
such, beginning in the second quarter of 2005, all loans originated by
Union Bank on behalf of the Company are presented in the table above as
direct channel originations. The spot purchase of this loan portfolio has
been reclassified from the branding partner channel from prior period
presentations.
(b) During the three months and year ended December 31, 2006, the Company
recorded gains of $2.4 million and $15.9 million, respectively, from the
sale of loans.
STUDENT LOAN SPREAD
The following table analyzes the student loan spread on the Company's 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 YEAR ENDED
---------------------------------------- ---------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2006 2005 2006 2005
------------ ------------ ------------ ------------ ------------
Student loan yield (a) 7.88 % 7.91 % 7.30 % 7.85 % 6.90 %
Consolidation rebate fees (0.76) (0.72) (0.68) (0.72) (0.65)
Premium and deferred origination costs amortization (b) (0.33) (0.39) (0.52) (0.39) (0.49)
------------ ------------ ------------ ------------ ------------
Student loan net yield 6.79 6.80 6.10 6.74 5.76
Student loan cost of funds (c) (5.48) (5.32) (4.27) (5.12) (3.75)
------------ ------------ ------------ ------------ ------------
Student loan spread 1.31 1.48 1.83 1.62 2.01
Special allowance yield adjustments, net of
settlements on derivatives (d) - (0.14) (0.39) (0.20) (0.50)
------------ ------------ ------------ ------------ ------------
Core student loan spread (e) 1.31 % 1.34 % 1.44 % 1.42 % 1.51 %
============ ============ ============ ============ ============
Average balance of student loans (in thousands) $22,978,951 $22,170,118 $18,567,481 $21,696,466 $15,716,388
Average balance of debt outstanding (in thousands) 24,552,113 23,881,928 19,993,539 23,379,258 16,759,511
- ---------------------------------------------------------
(a) The student loan yield for the three months and year ended December 31,
2006 does not include the $2.8 million charge to write off accounts
receivable from the Department related to third quarter 9.5% special
allowance payments that will not be received under the Company's previously
disclosed Settlement Agreement with the Department. The $2.8 million
relates to loans earning 9.5% special allowance payments that were not
subject to the OIG audit.
(b) Premium and deferred origination costs amortization for the three months
and year ended December 31, 2006 excludes premium amortization related to
the Company's portfolio of 9.5% loans purchased in October 2005 as part of
a business combination.
(c) The student loan cost of funds includes the effects of net settlement costs
on the Company's derivative instruments (excluding the $2.0 million
settlement related to the derivative instrument entered into in connection
with the issuance of the junior subordinated hybrid securities and the net
settlements of $7.0 million for the three months ended December 31, 2006 on
those derivatives no longer hedging student loan assets).
(d) 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 include net settlements on
derivative instruments that were used to hedge this loan portfolio earning
the excess yield. As previously disclosed, on January 19, 2007, the Company
entered into a Settlement Agreement with the Department to resolve the
audit by the OIG of the Company's portfolio of student loans receiving 9.5%
special allowance payments. Under the terms of the Agreement, all 9.5%
special allowance payments were eliminated for periods on and after July 1,
2006. The Company had been deferring recognition of 9.5% special allowance
payments related to those loans subject to the OIG audit effective July 1,
2006 pending satisfactory resolution of this issue.
(e) The core student loan spread for the three months ended September 30, 2006
would have been 1.32% had the Company not included the 9.5% special
allowance payments on those loans that were not subject to the OIG audit
and the related premium amortization on those loans purchased in October
2005 as part of a business combination in the calculation of student loan
spread.
INTEREST RATE SENSITIVITY
A portion of the Company's student loan assets earn a fixed rate. As a result,
management uses fixed-rate debt and interest rate swaps to reduce the economic
effect of interest rate volatility. The following table shows the Company's
student loan assets currently earning at a fixed rate as of December 31, 2006:
BORROWER/
FIXED LENDER ESTIMATED
INTEREST WEIGHTED VARIABLE BALANCE
RATE AVERAGE CONVERSION OF FIXED
RANGE YIELD RATE (A) RATE ASSETS
--------- ---------------- ------------- -----------
(DOLLARS IN
THOUSANDS)
8.0 - 9.0% 8.23 5.59 $ 377,489
> 9.0 9.05 6.41 409,889
-----------
$ 787,378
===========
------------------------
(a) The estimated variable conversion rate is the estimated short-term
interest rate at which loans would convert to variable rate.
The following table summarizes the outstanding derivative instruments as of
December 31, 2006 used by the Company to hedge the fixed-rate loan portfolio.
WEIGHTED
AVERAGE FIXED
NOTIONAL RATE PAID BY THE
MATURITY VALUES COMPANY
------------- ------------- ----------------
(DOLLARS IN
THOUSANDS)
2006 (a) $ 250,000 3.16 %
2008 462,500 3.76
2009 312,500 4.01
----------- -----------------
Total $ 1,025,000 3.69 %
=========== =================
(a) Expired on December 31, 2006.
In addition to the interest rate swaps with notional values of $1.0 billion
summarized above, as of December 31, 2006, the Company had $403.4 million of
fixed-rate debt (excluding the Company's fixed-rate unsecured debt of $475.0
million) that was used by the Company to hedge fixed-rate student loan assets.
As previously disclosed, on January 19, 2007, the Company reached a Settlement
Agreement with the Department to resolve the audit by the OIG of the Company's
portfolio of student loans receiving the 9.5% special allowance payments. Under
the terms of the Agreement, all 9.5% special allowance payments will no longer
be received by the Company.
In consideration of not receiving the 9.5% special allowance payments on a
prospective basis, the Company entered into a series of off-setting interest
rate swaps that mirror the $2.45 billion in pre-existing interest rate swaps
that the Company had utilized to hedge its loan portfolio receiving 9.5% special
allowance payments against increases in interest rates. The net effect of the
new offsetting derivatives is to lock in a series of future income streams on
underlying trades through their respective maturity dates. A summary of these
derivatives is as follows (notional amounts in thousands):
WEIGHTED WEIGHTED
AVERAGE FIXED AVERAGE FIXED
NOTIONAL RATE PAID BY NOTIONAL RATE RECEIVED BY
MATURITY AMOUNT THE COMPANY AMOUNT THE COMPANY
- ---------- ------------ -------------- ------------ -----------------
2007 $ 512,500 3.42 % $ 512,500 5.25 % (a)
2010 1,137,500 4.25 1,137,500 4.75
2012 275,000 4.31 275,000 4.76
2013 525,000 4.36 525,000 4.80
------------ -------------- ------------ -----------------
$ 2,450,000 4.11 % $ 2,450,000 4.87 %
============ ============== ============ =================
(a) The effective date of the 2007 derivatives in which the Company will
receive a fixed rate is January 2, 2007.
DERIVATIVE SETTLEMENTS
The following table summarizes the components of derivative settlements.
THREE MONTHS ENDED YEAR ENDED
---------------------------------------- --------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2006 2005 2006 2005
------------ ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Interest rate and basis swap derivatives- loan portfolio $ 4,291 $ 4,172 $ 959 $ 12,992 $ (1,129)
Interest rate swap derivatives- other (a) 7,044 - - 7,044 -
Special allowance yield adjustment derivatives (a) - 7,909 1,082 19,794 (15,879)
Cross currency interest rate swaps (4,322) (5,115) - (14,405) -
Other (b) - (1,993) - (1,993) -
------------ ------------ ------------ ------------ ------------
Derivative settlements, net $ 7,013 $ 4,973 $ 2,041 $ 23,432 $ (17,008)
============ ============ ============ ============ ============
(a) Derivative settlements for interest rate swaps "other" include settlements
on the portfolio of derivatives that the Company had used to hedge 9.5%
special allowance payments and the portfolio of off-setting interest rate
swaps the Company entered into during the fourth quarter 2006. The new
derivatives mirror the 9.5% special allowance payment derivatives.
Settlements on the 9.5% special allowance derivatives were classified in
the special allowance yield adjustment derivatives line item through
September 30, 2006.
(b) During 2006, the Company issued junior subordinated hybrid securities and
entered into a derivative instrument to economically lock into a fixed
interest rate prior to the actual pricing of the transaction. Upon pricing
of these notes, the Company terminated this derivative instrument. The
consideration paid by the Company to terminate this derivative was $2.0
million.
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 DECEMBER 31,
-----------------------------------------------------------------------
2006 2005
---------------------------------- ---------------------------------
COMPANY THIRD PARTY TOTAL COMPANY THIRD PARTY TOTAL
---------- ----------- ---------- ---------- ----------- ----------
(DOLLARS IN MILLIONS)
FFELP and private loans $ 21,869 $ 8,725 $ 30,594 $ 16,969 $ 10,020 $ 26,989
Canadian loans (in U.S. $) - 9,043 9,043 (a) - 8,139 8,139
---------- ----------- ---------- ---------- ----------- ----------
Total $ 21,869 $ 17,768 $ 39,637 $ 16,969 $ 18,159 $ 35,128
========== =========== ========== ========== =========== ==========
(a) As previously disclosed, EDULINX Canada Corporation, a subsidiary of
Nelnet, TED] announced that the Government of Canada decided to award
a competitive contract to provide services in support of the Canada
and Integrated Student Loan Programs (CSLP) upon the expiration of the
current EDULINX contract for such services to another service
provider. The Government of Canada is EDULINX's largest customer. This
contract is scheduled to expire on March 31, 2008. As a result of this
decision, EDULINX will be required to transition the existing CSLP
portfolio it services to the selected service provider. As of December
31, 2006, the Company serviced $7.7 billion of CSLP loans.