Exhibit 99.2
FOR RELEASE: 7/28/05
MEDIA CONTACT: Sheila Odom, 402.458.2329
INVESTOR CONTACT: Cheryl Watson, 317.469.2064
NELNET, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOR THE SECOND QUARTER 2005
The following supplemental information should be read in connection with the
second-quarter 2005 earnings press release of Nelnet, Inc. (the "Company"),
dated July 28, 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 OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interest income:
Loan interest, excluding variable-rate floor income $ 223,691 $ 239,436 $ 423,798 $ 347,632
Variable-rate floor income - - - 348
Amortization of loan premiums and deferred
origination costs (16,547) (15,037) (32,329) (34,854)
Investment interest 8,150 3,181 15,152 6,832
------------ ------------- ------------ ------------
Total interest income 215,294 227,580 406,621 319,958
Interest expense:
Interest on bonds and notes payable 133,277 52,352 237,802 101,395
------------ ------------- ------------ ------------
Net interest income 82,017 175,228 168,819 218,563
Less provision (recovery) for loan losses 2,124 (6,421) 4,155 (3,306)
------------ ------------- ------------ ------------
Net interest income after provision (recovery)
for loan losses 79,893 181,649 164,664 221,869
------------ ------------- ------------ ------------
Other income:
Loan and guarantee servicing income 34,678 22,846 71,854 48,909
Other fee-based income 9,027 1,630 12,383 3,519
Software services income 2,602 1,780 4,808 3,672
Other income 1,524 1,285 2,924 2,728
Derivative market value adjustments (51,372) 3,075 8,918 548
Derivative settlements, net (6,001) (1,718) (16,087) (2,932)
------------ ------------- ------------ ------------
Total other income (loss) (9,542) 28,898 84,800 56,444
------------ ------------- ------------ ------------
Operating expenses:
Salaries and benefits 39,977 49,036 79,304 76,805
Other expenses 32,343 25,081 63,231 48,446
Amortization of intangible assets 1,559 2,079 2,732 4,157
------------ ------------- ------------ ------------
Total operating expenses 73,879 76,196 145,267 129,408
------------ ------------- ------------ ------------
Income (loss) before income taxes (3,528) 134,351 104,197 148,905
Income tax expense (benefit) (1,755) 49,098 37,883 54,531
------------ ------------- ------------ ------------
Net income (loss) $ (1,773) $ 85,253 $ 66,314 $ 94,374
============ ============= ============ ============
Earnings (loss) per share, basic and diluted $ (0.03) $ 1.59 $ 1.23 $ 1.76
============ ============= ============ ============
Weighted average shares outstanding 53,712,048 53,647,697 53,697,390 53,641,664
CONDENSED CONSOLIDATED BALANCE SHEETS AND FINANCIAL DATA
AS OF AS OF AS OF
JUNE 30, DECEMBER 31, JUNE 30,
2005 2004 2004
------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
Assets:
Student loans receivable, net $ 15,661,315 $ 13,461,814 $12,194,097
Cash, cash equivalents, and investments 1,110,109 1,302,954 899,987
Other assets 537,479 395,237 365,495
------------- -------------- -------------
Total assets $ 17,308,903 $ 15,160,005 $13,459,579
============= ============== =============
Liabilities:
Bonds and notes payable $ 16,580,078 $ 14,300,606 $12,844,539
Other liabilities 205,155 403,224 214,058
------------- -------------- -------------
Total liabilities 16,785,233 14,703,830 13,058,597
------------- -------------- -------------
Shareholders' equity 523,670 456,175 400,982
------------- -------------- -------------
Total liabilities and shareholders'
equity $ 17,308,903 $ 15,160,005 $13,459,579
============= ============== =============
Return on average total assets 0.82% 1.11% 1.50%
Return on average equity 26.0% 39.7% 57.1%
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 also evaluates 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 (loss) to base
net income.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GAAP net income (loss) $ (1,773) $ 85,253 $ 66,314 $ 94,374
Base adjustments:
Derivative market value adjustments 51,372 (3,075) (8,918) (548)
Amortization of intangible assets 1,559 2,079 2,732 4,157
Variable-rate floor income - - - (348)
---------- ---------- ---------- ----------
Total base adjustments before income taxes 52,931 (996) (6,186) 3,261
Net tax effect (a) (20,114) 379 2,351 (1,239)
---------- ---------- ---------- ----------
Total base adjustments 32,817 (617) (3,835) 2,022
---------- ---------- ---------- ----------
Base net income $ 31,044 $ 84,636 $ 62,479 $ 96,396
========== ========== ========== ==========
Base earnings per share, basic and diluted $ 0.58 $ 1.58 $ 1.16 $ 1.80
========== ========== ========== ==========
- --------------------------------------------
(a) Tax effect computed at 38%.
Base and GAAP net income (loss) includes approximately $25.9 million and $124.3
million of special allowance yield adjustments earned by the Company on its 9.5%
floor loan portfolio for the three months ended June 30, 2005 and June 30, 2004,
respectively, and $55.7 million and $124.3 million for the six months ended June
30, 2005 and June 30, 2004, respectively. This amount is offset by net
settlements of approximately $5.5 million and $14.3 million on derivative
products used to hedge the loan portfolio earning the excess yield for the three
and six months ended June 30, 2005. There were no derivative instruments used to
hedge the loan portfolio earning the excess yield for the three and six months
ended June 30, 2004. The earnings per share effect of the excess yield, net of
derivative settlements and taxes, is $0.24 and $1.44 for the three months ended
June 30, 2005 and June 30, 2004, respectively, and $0.48 and $1.44 for the six
months ended June 30, 2005 and June 30, 2004, respectively.
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
JUNE 30, DECEMBER 31, JUNE 30,
2005 2004 2004
------------------------ -------------------------- --------------------------
PERCENT OF PERCENT OF PERCENT OF
DOLLARS TOTAL DOLLARS TOTAL DOLLARS TOTAL
------------ ----------- -------------- ---------- ------------- ------------
(DOLLARS IN THOUSANDS)
Federally insured:
Stafford $ 5,815,389 37.1 % $ 5,047,487 37.5 % $ 5,319,123 43.6 %
PLUS/SLS 325,158 2.1 252,910 1.9 290,398 2.4
Consolidation 9,231,437 59.0 7,908,292 58.7 6,329,369 51.9
Non-federally insured 97,705 0.6 90,405 0.7 94,439 0.8
-------------- -------- -------------- -------- -------------- ---------
Total 15,469,689 98.8 13,299,094 98.8 12,033,329 98.7
Unamortized premiums and deferred
origination costs 202,315 1.3 169,992 1.3 168,890 1.4
Allowance for loan losses:
Allowance - federally insured (99) 0.0 (117) (0.0) (735) 0.0
Allowance - non-federally insured (10,590) (0.1) (7,155) (0.1) (7,387) (0.1)
-------------- -------- -------------- -------- -------------- ---------
Net $ 15,661,315 100.0 % $ 13,461,814 100.0 % $ 12,194,097 100.0 %
============== ======== ============== ======== ============== =========
The following table sets forth the loans originated or acquired through each of
our channels:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Beginning balance $14,357,207 $11,065,865 $13,299,094 $10,314,874
Direct channel:
Consolidation loan originations 781,580 505,353 1,526,670 1,311,918
Less consolidation of existing portfolio (377,300) (224,900) (714,400) (593,300)
------------ ------------ ------------ ------------
Net consolidation loan originations 404,280 280,453 812,270 718,618
Stafford/PLUS loan originations 172,599 27,385 327,622 120,312
Branding partner channel 409,013 360,704 1,082,854 715,207
Forward flow channel 453,950 362,888 641,113 448,092
Other channels 2,497 109,787 34,185 130,783
------------ ------------ ------------ ------------
Total channel acquisitions 1,442,339 1,141,217 2,898,044 2,133,012
Loans acquired in business acquisition - 136,138 - 136,138
Repayments, claims, capitalized
interest, and other (329,857) (309,891) (727,449) (550,695)
------------ ------------ ------------ ------------
Ending balance $15,469,689 $12,033,329 $15,469,689 $12,033,329
============ ============ ============ ============
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 June 30, 2005, the Company had fixed-rate debt
of $610 million (excluding the Company's unsecured debt of $275 million) and
interest rate swaps with a net notional amount of $3.8 billion (excluding those
interest rate swaps that expired on June 30, 2005 and July 1, 2005) which mature
in varying amounts through 2013. The following table shows the Company's student
loan assets currently earning at a fixed rate as of June 30, 2005:
BORROWER
FIXED LENDER ESTIMATED CURRENT
INTEREST WEIGHTED VARIABLE BALANCE
RATE AVERAGE CONVERSION OF FIXED
RANGE YIELD RATE (A) RATE ASSETS
--------- ------------- -------------- --------------
(IN THOUSANDS)
6.0 - 6.5% 6.21 % 3.57 % $ 301,896
6.5 - 7.0 6.71 4.07 358,384
7.0 - 8.0 7.51 4.87 319,006
> 8.0 8.55 5.91 958,382
9.5 floor yield 9.50 6.86 3,213,538
-------------
$ 5,151,206
=============
-----------------------
(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 JUNE 30,
---------------------------------------------------------------------------------------------------
2005 2004
-------------------------------------------------- -----------------------------------------------
COMPANY % THIRD PARTY % TOTAL COMPANY % THIRD PARTY % TOTAL
----------- ------ ------------ ------ ---------- ---------- ------- ----------- ------ ---------
(DOLLARS IN MILLIONS)
FFELP and private loans $ 14,038 63% $ 8,319 37% $ 22,357 $ 10,679 54% $ 8,956 46% $ 19,635
Canadian loans (in U.S. $) - - 7,034 100% 7,034 - - - - -
----------- ------------ ---------- ---------- ---------- ----------
Total $ 14,038 48% $ 15,353 52% $ 29,391 $ 10,679 54% $ 8,956 46% $ 19,635
=========== ============ ========== ========== ========== ==========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------ --------------
Student loan yield 6.64 % 9.06 % 6.60 % 6.96 %
Consolidation rebate fees (0.63) (0.57) (0.64) (0.56)
Premium and deferred origination
costs amortization (0.44) (0.53) (0.45) (0.64)
------------- ------------- ------------ --------------
Student loan net yield 5.57 7.96 5.51 5.76
Student loan cost of funds (a) (3.52) (1.76) (3.35) (1.74)
------------- ------------- ------------ --------------
Student loan spread 2.05 6.20 2.16 4.02
Variable-rate floor income - - - (0.01)
Special allowance yield adjustment,
net of settlements
on derivatives (b) (0.55) (4.41) (0.58) (2.29)
------------- ------------- ------------ --------------
Core student loan spread 1.50 % 1.79 % 1.58 % 1.72 %
============= ============= ============ ==============
Average balance of student
loans (in thousands) $14,927,290 $ 11,284,876 $14,334,826 $ 10,869,351
Average balance of debt
outstanding (in thousands) 15,746,521 12,418,733 15,214,821 12,026,697
- ---------------------------------------------------
(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 adjustment of $25.9 million and $124.3
million for the three months ended June 30, 2005 and June 30, 2004,
respectively, and $55.7 million and $124.3 million for the six months
ended June 30, 2005 and June 30, 2004, respectively, 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 $5.5
million for the three months ended June 30, 2005 and $14.3 million for
the six months ended June 30, 2005. There were no derivative instruments
used to hedge the loan portfolio earning the excess yield for the three
and six months ended June 30, 2004.