EXHIBIT 99.2
FOR RELEASE: 4/29/05
MEDIA CONTACT: Sheila Odom, 402.458.2329
INVESTOR CONTACT: Cheryl Watson, 317.469.2064
NELNET, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOR THE FIRST QUARTER 2005
Thefollowing supplemental information should be read in connection with the
first-quarter 2005 earnings press release of Nelnet, Inc. (the "Company"), dated
April 29, 2005.
Statements in this supplemental financial information release, which refer to
expectations as to future developments, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements contemplate risks, uncertainties, and other factors
that may cause the actual results to differ materially from such forward-looking
statements. Such factors include among others, changes in, or arising from, the
implementation of applicable laws and regulations or changes in laws and
regulations affecting the education finance marketplace. Changes in the terms of
student loans and the educational credit marketplace arising from the
implementation of applicable laws and regulations and from changes in such laws
and regulations, changes in the demand for educational financing, or in
financing preferences of educational institutions, students and their families,
and changes in the general interest rate environments, could also have a
substantial impact on future results. 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,
---------------------------
2005 2004
------------- ------------
(unaudited) (unaudited)
(dollars in thousands,
except share data)
Interest income:
Loan interest, excluding variable-rate
floor income $ 200,107 $ 108,196
Variable-rate floor income - 348
Amortization of loan premiums and
deferred origination costs (15,782) (19,817)
Investment interest 7,002 3,651
------------ -----------
Total interest income 191,327 92,378
Interest expense:
Interest on bonds and notes payable 104,525 49,043
------------ -----------
Net interest income 86,802 43,335
Less provision for loan losses 2,031 3,115
------------ -----------
Net interest income after provision
for loan losses 84,771 40,220
------------ -----------
Other income:
Loan and guarantee servicing income 37,176 26,063
Other fee-based income 3,356 1,889
Software services income 2,206 1,892
Other income 1,400 1,443
Derivative market value adjustments 60,290 (2,527)
Derivative settlements, net (10,086) (1,214)
------------ -----------
Total other income 94,342 27,546
------------ -----------
Operating expenses:
Salaries and benefits 39,327 27,769
Other expenses 30,888 23,365
Amortization of intangible assets 1,173 2,078
------------ -----------
Total operating expenses 71,388 53,212
------------ -----------
Income before income taxes 107,725 14,554
Income tax expense 39,638 5,433
------------ -----------
Net income $ 68,087 $ 9,121
============ ===========
Earnings per share, basic and diluted $ 1.27 $ 0.17
============ =============
Weighted average shares outstanding 53,682,569 53,635,631
CONDENSED CONSOLIDATED BALANCE SHEETS AND FINANCIAL DATA
As of As of As of
March 31, December 31, March 31,
2005 2004 2004
-------------- ------------- --------------
(unaudited) (unaudited)
(dollars in thousands)
Assets:
Student loans receivable, net $ 14,540,316 $ 13,461,814 $ 11,206,609
Cash, cash equivalents, and investments 993,894 1,302,954 1,099,678
Other assets 497,341 395,237 326,307
-------------- ------------- --------------
Total assets $ 16,031,551 $ 15,160,005 $ 12,632,594
============== ============= ==============
Liabilities:
Bonds and notes payable $ 15,318,517 $ 14,300,606 $ 12,140,725
Other liabilities 187,723 403,224 177,232
-------------- ------------- --------------
Total liabilities 15,506,240 14,703,830 12,317,957
-------------- ------------- --------------
Shareholders' equity 525,311 456,175 314,637
-------------- ------------- --------------
Total liabilities and shareholders' equity $ 16,031,551 $ 15,160,005 $ 12,632,594
============== ============= ==============
Return on average total assets 1.73% 1.11% 0.30%
Return on average equity 54.4% 39.7% 11.7%
NON-GAAP BASE NET INCOME
We prepare financial statements in accordance with generally accepted accounting
principles ("GAAP"). In addition to evaluating the Company's GAAP-based
financial information, management and analysts also evaluate the Company on
certain non-GAAP performance measures that we refer to as base income
adjustments. 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.
The following table provides a reconciliation of GAAP net income to base net
income.
Three months ended
March 31,
-----------------------
2005 2004
----------- ----------
(dollars in thousands,
except share data)
GAAP net income $ 68,087 $ 9,121
Base adjustments:
Derivative market value adjustments (60,290) 2,527
Amortization of intangible assets 1,173 2,078
Variable-rate floor income - (348)
----------- -----------
Total base adjustments before income taxes (59,117) 4,257
Net tax effect (a) 22,464 (1,618)
----------- -----------
Total base adjustments (36,653) 2,639
----------- -----------
Base net income $ 31,434 $ 11,760
=========== ===========
Base earnings per share, basic and diluted $ 0.59 $ 0.22
=========== ===========
- ------------------------------------------
(a) Tax effect computed at 38%.
Base and GAAP net income included approximately $29.7 million of special
allowance yield adjustments for the quarter ended March 31, 2005. This amount is
offset by net settlements of approximately $8.9 million on derivative products
used to hedge the loan portfolio earning the excess yield. The earnings per
share effect of the excess yield, net of derivative settlements and taxes, is
$0.24 for the quarter ended March 31, 2005. There were no special allowance
yield adjustments for the quarter ended March 31, 2004.
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 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
majority of 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.
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. Base net income excludes
variable-rate floor income.
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,
2005 2004 2004
---------------------- ---------------------- ---------------------
Percent Percent Percent
Dollars of total Dollars of total Dollars of total
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Federally insured:
Stafford $ 5,340,328 36.7 % $ 5,047,487 37.5 % $ 4,820,298 43.0 %
PLUS/SLS 329,765 2.3 252,910 1.9 258,406 2.3
Consolidation 8,592,889 59.1 7,908,292 58.7 5,894,594 52.6
Non-federally insured 94,225 0.7 90,405 0.7 92,567 0.8
------------ --------- ------------- -------- ------------ --------
Total 14,357,207 98.8 13,299,094 98.8 11,065,865 98.7
Unamortized premiums and deferred
origination costs 191,961 1.3 169,992 1.3 157,367 1.4
Allowance for loan losses:
Allowance - federally insured (99) (0.0) (117) (0.0) (10,215) (0.1)
Allowance - non-federally insured (8,753) (0.1) (7,155) (0.1) (6,408) (0.0)
------------ --------- ------------- -------- ------------ --------
Net $14,540,316 100.0 % $ 13,461,814 100.0 % $ 11,206,609 100.0 %
============ ========= ============= ======== ============ ========
The following table sets forth the loans originated or acquired through each of
our channels:
Three months ended
March 31,
---------------------------
2005 2004
------------ -------------
(dollars in thousands)
Beginning balance $ 13,299,094 $ 10,314,874
Direct channel:
Consolidation loan originations 745,090 806,565
Less consolidation of existing portfolio (337,100) (368,400)
------------ -------------
Net consolidation loan originations 407,990 438,165
Stafford/PLUS loan originations 155,023 92,927
Branding partner channel 673,841 354,503
Forward flow channel 187,163 85,204
Other channels 31,688 20,996
------------ -------------
Total channel acquisitions 1,455,705 991,795
Repayments, claims, capitalized
interest, and other (397,592) (240,804)
------------ -------------
Ending balance $ 14,357,207 $ 11,065,865
============= =============
INTEREST RATE SENSITIVITY
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. As of March 31, 2005, the Company had fixed-rate debt
of $661 million and interest rate swaps with a notional amount of $4.2 billion
which mature in varying amounts through 2010. The following table shows the
Company's student loan assets currently earning at a fixed rate as of March 31,
2005:
Borrower/
Fixed lender Estimated Current
interest weighted variable balance
rate average conversion of fixed
range yield rate (a) rate assets
------------- --------- -------- --------------
(in thousands)
5.5 - 6.0 % 5.69 % 3.05 % $ 160,003
6.0 - 6.5 6.21 3.57 299,487
6.5 - 7.0 6.71 4.07 359,426
7.0 - 8.0 7.52 4.88 315,462
> 8.0 8.56 5.92 977,817
9.5 floor yield 9.50 6.86 3,281,502
--------------
$ 5,393,697
==============
----------------------------
(a) The estimated variable conversion rate is the
estimated short-term interest rate at which loans
would convert to variable rate.
STUDENT LOAN SERVICING
The Company performs servicing activities for itself and third parties. The
following table summarizes the Company's loan servicing volumes:
As of March 31,
-----------------------------------------------------------------------------------------------------
2005 2004
--------------------------------------------------- -----------------------------------------------
Company % Third Party % Total Company % Third party % Total
---------- ------ ------------ -------- ----------- --------- ----- --------- ------ -----------
(dollars in millions)
FFELP and private loans $ 13,116 60% $ 8,868 40% $ 21,984 $ 9,947 51% $ 9,426 49% $ 19,373
Canadian loans (in U.S. $) - - 7,337 100% 7,337 - - - - -
---------- ------ ------------ -------- ----------- --------- ----- --------- ------ -----------
Total $ 13,116 45% $ 16,205 55% $ 29,321 $ 9,947 51% $ 9,426 49% $ 19,373
========== ====== ============ ======== =========== ========= ===== ========= ====== ===========
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,
---------------------------
2005 2004
------------ ------------
Student loan yield 6.46 % 4.71 %
Consolidation rebate fees (0.63) (0.55)
Premium and deferred origination costs amortization (0.46) (0.76)
------------ ------------
Student loan net yield 5.37 3.40
Student loan cost of funds (a) (3.12) (1.73)
------------ ------------
Student loan spread 2.25 1.67
Variable-rate floor income - (0.01)
Special allowance yield adjustment, net of settlements
on derivatives (b) (0.61) -
------------ ------------
Core student loan spread 1.64 % 1.66 %
============ ============
Average balance of student loans (in thousands) $13,742,362 $10,453,826
Average balance of debt outstanding (in thousands) 14,677,213 11,631,648
- ---------------------------------------------------------
(a) The student loan cost of funds includes the effects of the net settlement
costs on the Company's derivative instruments of $10.1 million and $1.2
million in 2005 and 2004, respectively.
(b) The special allowance yield adjustment in 2005, which was approximately
$29.7 million, represents the impact on net spread had loans earned at
statutorily defined rates under a taxable financing. This special
allowance yield adjustment has been reduced by net settlements on
derivative instruments that were used to hedge this loan portfolio
earning the excess yield, which was $8.9 million in 2005.