Exhibit 99.2
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NELNET 121 South 13th Street, Suite 400 P 402 458 2370 www.nelnet.net
Lincoln, NE 68506 F 402 458 2344 NELNET CORPORATE
SERVICES, INC.
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FOR RELEASE: 10/26/05
MEDIA CONTACT: Sheila Odom, 402.458.2329
INVESTOR CONTACT: Cheryl Watson, 317.469.2064
NELNET, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOR THE THIRD QUARTER 2005
The following supplemental information should be read in connection with the
third-quarter 2005 earnings press release of Nelnet, Inc. (the "Company"), dated
October 26, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2005 2004 2005 2004
----------- ---------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interest income:
Loan interest, excluding variable-rate
floor income $ 247,791 $ 171,427 $ 671,589 $ 519,059
Variable-rate floor income - - - 348
Amortization of loan premiums and deferred
origination costs (20,041) (18,395) (52,370) (53,249)
Investment interest 11,491 4,918 26,643 11,750
----------- ----------- ----------- -----------
Total interest income 239,241 157,950 645,862 477,908
Interest expense:
Interest on bonds and notes payable 160,243 68,545 398,045 169,940
----------- ----------- ----------- -----------
Net interest income 78,998 89,405 247,817 307,968
Less provision (recovery) for loan losses 1,402 2,300 5,557 (1,006)
----------- ----------- ----------- -----------
Net interest income after provision
(recovery) for loan losses 77,596 87,105 242,260 308,974
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Other income (loss):
Loan and guarantee servicing income 37,459 24,513 109,313 73,422
Other fee-based income 10,503 1,840 22,886 5,359
Software services income 1,951 1,849 6,759 5,521
Other income 2,458 4,356 5,382 7,084
Derivative market value adjustments 65,382 (39,757) 74,300 (39,209)
Derivative settlements, net (2,962) (16,457) (19,049) (19,389)
----------- ----------- ----------- -----------
Total other income (loss) 114,791 (23,656) 199,591 32,788
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Operating expenses:
Salaries and benefits 44,311 25,060 123,615 101,865
Other expenses 32,705 24,167 95,936 72,613
Amortization of intangible assets 1,919 2,275 4,651 6,432
----------- ----------- ----------- -----------
Total operating expenses 78,935 51,502 224,202 180,910
----------- ----------- ----------- -----------
Income before income taxes 113,452 11,947 217,649 160,852
Income tax expense 41,091 4,310 78,974 58,841
----------- ----------- ----------- -----------
Net income before minority interest 72,361 7,637 138,675 102,011
Minority interest in net earnings of subsidiaries (229) - (229) -
----------- ----------- ----------- -----------
Net income $ 72,132 $ 7,637 $ 138,446 $ 102,011
=========== =========== =========== ===========
Earnings per share, basic and diluted $ 1.34 $ 0.14 $ 2.58 $ 1.90
=========== =========== =========== ===========
Weighted average shares outstanding 53,734,218 53,648,788 53,709,801 53,644,056
CONDENSED CONSOLIDATED BALANCE SHEETS AND FINANCIAL DATA
AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004
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(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
Assets:
Student loans receivable, net $16,379,293 $13,461,814 $12,793,704
Cash, cash equivalents, and investments 1,304,261 1,302,954 933,271
Goodwill 67,942 8,522 8,522
Intangible assets, net 34,644 11,987 10,546
Other assets 525,185 374,728 368,753
------------ ------------ ------------
Total assets $18,311,325 $15,160,005 $14,114,796
============ ============ ============
Liabilities:
Bonds and notes payable $17,418,652 $14,300,606 $13,526,343
Other liabilities 295,582 403,224 179,838
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Total liabilities 17,714,234 14,703,830 13,706,181
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Minority interest in subsidiaries 274 - -
Shareholders' equity 596,817 456,175 408,615
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Total liabilities and shareholders' equity $18,311,325 $15,160,005 $14,114,796
============ ============ ============
Return on average total assets 1.10% 1.11% 1.04%
Return on average equity 34.9% 39.7% 38.3%
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 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.
Base and GAAP net income includes approximately $21.8 million and $43.6 million
of special allowance yield adjustments earned by the Company on a portion of its
9.5% floor loan portfolio for the three months ended September 30, 2005 and
September 30, 2004, respectively, and $77.4 million and $167.9 million for the
nine months ended September 30, 2005 and September 30, 2004, respectively. This
amount is offset by net settlements of approximately $2.6 million and $17.2
million on derivative products used to hedge the loan portfolio earning the
excess yield for the three months ended September 30, 2005 and September 30,
2004, respectively, and $17.0 million and $17.2 million for the nine months
ended September 30, 2005 and September 30, 2004, respectively.
Base net income, excluding certain special allowance yield adjustments and
related hedging activity related to this 9.5% portfolio, 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 net
income and also reflects the earnings per share impact of certain special
allowance yield adjustments and related hedging activity related to this 9.5%
portfolio.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2005 2004 2005 2004
------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GAAP net income $ 72,132 $ 7,637 $ 138,446 $ 102,011
Base adjustments:
Derivative market value adjustments (65,382) 39,757 (74,300) 39,209
Amortization of intangible assets 1,919 2,275 4,651 6,432
Variable-rate floor income - - - (348)
--------- --------- --------- ----------
Total base adjustments before income taxes (63,463) 42,032 (69,649) 45,293
Net tax effect (a) 24,116 (15,972) 26,467 (17,211)
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Total base adjustments (39,347) 26,060 (43,182) 28,082
--------- --------- --------- ----------
Base net income $ 32,785 $ 33,697 $ 95,264 $ 130,093
========= ========= ========= ==========
Earnings per share, basic and diluted:
GAAP net income $ 1.34 $ 0.14 $ 2.58 $ 1.90
========= ========= ========= ==========
Base net income $ 0.61 $ 0.63 $ 1.77 $ 2.43
Special allowance yield adjustments (b) (0.22) (0.31) (0.70) (1.74)
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Base net income, excluding the special
allowance yield adjustments (b) $ 0.39 $ 0.32 $ 1.07 $ 0.69
========= ========= ========= ==========
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(a) Tax effect computed at 38%.
(b) The special allowance yield adjustments are net of derivative settlements
and taxes.
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
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
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004
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PERCENT PERCENT PERCENT
DOLLARS OF TOTAL DOLLARS OF TOTAL DOLLARS OF TOTAL
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(DOLLARS IN THOUSANDS)
Federally insured:
Stafford $ 5,623,229 34.3 % $ 5,047,487 37.5 % $ 5,218,535 40.8 %
PLUS/SLS 294,888 1.8 252,910 1.9 263,118 2.1
Consolidation 10,170,684 62.1 7,908,292 58.7 7,056,556 55.2
Non-federally insured 96,920 0.6 90,405 0.7 92,247 0.7
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Total 16,185,721 98.8 13,299,094 98.8 12,630,456 98.8
Unamortized premiums and deferred
origination costs 205,656 1.3 169,992 1.3 171,694 1.3
Allowance for loan losses:
Allowance - federally insured (98) 0.0 (117) 0.0 (706) 0.0
Allowance - non-federally insured (11,986) (0.1) (7,155) (0.1) (7,740) (0.1)
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Net $16,379,293 100.0 % $13,461,814 100.0 % $12,793,704 100.0 %
============ ========= ============ ======== ============ =========
The following table sets forth the loans originated or acquired through each of
our channels:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2005 2004 2005 2004
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(DOLLARS IN THOUSANDS)
Beginning balance $ 15,469,689 $ 12,033,329 $ 13,299,094 $ 10,314,874
Direct channel:
Consolidation loan originations 1,097,436 857,456 2,624,106 2,169,374
Less consolidation of existing portfolio (559,700) (404,500) (1,274,100) (997,800)
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Net consolidation loan originations 537,736 452,956 1,350,006 1,171,574
Stafford/PLUS loan originations 239,927 102,203 567,549 222,515
Branding partner channel 43,934 91,446 1,126,788 806,653
Forward flow channel 260,072 174,922 901,185 623,014
Other channels 5,015 73,279 39,200 204,062
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Total channel acquisitions 1,086,684 894,806 3,984,728 3,027,818
Loans acquired in business acquisition - - - 136,138
Repayments, claims, capitalized
interest, and other (370,652) (297,679) (1,098,101) (848,374)
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Ending balance $ 16,185,721 $ 12,630,456 $ 16,185,721 $ 12,630,456
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INTEREST RATE SENSITIVITY
The following table shows the Company's student loan assets currently earning at
a fixed rate as of September 30, 2005:
BORROWER/
FIXED LENDER ESTIMATED
INTEREST WEIGHTED VARIABLE BALANCE
RATE AVERAGE CONVERSION OF FIXED
RANGE YIELD RATE (A) RATE ASSETS
--------- --------------- --------------- --------------
(IN THOUSANDS)
6.5 - 7.0% 6.71 % 4.07 % $ 355,993
7.0 - 8.0 7.51 4.87 321,057
> 8.0 8.55 5.91 935,846
9.5 floor yield 9.50 6.86 3,101,140
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$ 4,714,036
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(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. As of September 30, 2005, the Company had fixed-rate
debt of $561 million (excluding the Company's unsecured debt of $275 million).
The following table summarizes the notional values and weighted average interest
rates of the Company's outstanding derivative instruments used to hedge the
fixed-rate student loan portfolio as of September 30, 2005 (dollars in
millions):
WEIGHTED WEIGHTED
FIXED/ AVERAGE FLOATING/ AVERAGE NET
FLOATING FIXED FIXED FIXED NOTIONAL
MATURITY SWAPS (a) RATE (a)(b) SWAPS RATE (c) AMOUNT
- -------------------- ---------- ----------- --------- ---------- ----------
2005 $ 600 2.23 % $ 800 3.58 % $ (200)
2006 613 2.99 - - 613
2007 512 3.42 - - 512
2008 463 3.76 - - 463
2009 312 4.01 - - 312
2010 and thereafter 1,938 4.29 - - 1,938
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Total $ 4,438 3.66 % $ 800 3.58 % $ 3,638
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(a) Includes an interest rate swap with a notional amount of $250 million
that expired on October 3, 2005 with a fixed rate of 1.75%.
(b) This amount represents the weighted average fixed interest rate paid by
the Company on these interest rate swaps.
(c) This amount represents the weighted average fixed interest rate received
by the Company on these interest rate swaps.
The following table shows the Company's pro forma student loan assets, including
the estimated effects of the acquisitions of LoanSTAR Funding Group and assets
from Chela Education Finance, currently earning at a fixed rate as of September
30, 2005:
BORROWER/
FIXED LENDER ESTIMATED PRO FORMA
INTEREST WEIGHTED VARIABLE BALANCE
RATE AVERAGE CONVERSION OF FIXED
RANGE YIELD RATE (A) RATE ASSETS
--------- --------------- -------------- --------------
(IN THOUSANDS)
6.5 - 7.0% 6.71 % 4.07 % $ 423,115
7.0 - 8.0 7.52 4.88 384,529
> 8.0 8.54 5.90 1,083,255
9.5 floor yield 9.50 6.86 3,512,936
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$ 5,403,835
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(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 SEPTEMBER 30,
-------------------------------------------------------------------------------------
2005 2004
----------------------------------------- ------------------------------------------
COMPANY % THIRD PARTY % TOTAL COMPANY % THIRD PARTY % TOTAL
--------- --- ----------- ---- --------- --------- ---- ----------- ---- --------
(DOLLARS IN MILLIONS)
FFELP and private loans $ 14,700 63% $8,458 37% $ 23,158 $ 11,260 55% $ 9,115 45% $20,375
Canadian loans (in U.S. $) - - 8,118 100% 8,118 - - - - -
--------- ----------- ---------- --------- ---------- --------
Total $ 14,700 47% $ 16,576 53% $ 31,276 $ 11,260 55% $ 9,115 45% $20,375
========= =========== ========== ========= ========== ========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2005 2004 2005 2004
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Student loan yield 6.94 % 6.25 % 6.72 % 6.71 %
Consolidation rebate fees (0.65) (0.59) (0.64) (0.57)
Premium and deferred origination costs amortization (0.51) (0.61) (0.47) (0.63)
------------ ------------ ------------ ------------
Student loan net yield 5.78 5.05 5.61 5.51
Student loan cost of funds (a) (3.83) (2.53) (3.52) (2.02)
------------ ------------ ------------ ------------
Student loan spread 1.95 2.52 2.09 3.49
Special allowance yield adjustments, net of
settlements on derivatives (b) (0.49) (0.87) (0.55) (1.78)
------------ ------------ ------------ ------------
Core student loan spread 1.46 % 1.65 % 1.54 % 1.71 %
============ ============ ============ ============
Average balance of student loans (in thousands) $15,628,420 $12,108,981 $14,766,024 $11,282,561
Average balance of debt outstanding (in thousands) 16,564,494 13,363,469 15,669,656 12,475,490
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(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.