Nelnet Reports Adjusted Base Net Income Increased 20 Percent for the First Nine Months 2006

LINCOLN, Neb., Oct. 27 /PRNewswire-FirstCall/ -- Nelnet, Inc. today reported GAAP net income for the first nine months of 2006 of $75.5 million, or $1.40 per share, compared with $138.4 million, or $2.58 per share, for the first nine months of 2005. Base net income for the first nine months of 2006 was $96.2 million, or $1.78 per share, compared with $95.3 million, or $1.77 per share, for the first nine months of 2005. Adjusted base net income for the nine months ended September 30, 2006 was $68.8 million, or $1.28 per share, compared with $57.8 million, or $1.07 per share, for the same period a year ago.

"We had a good quarter with solid growth. We were especially pleased with our strong fee income growth, continued diversification of revenue, and the outstanding performance of our asset generation channels," said Mike Dunlap, Nelnet Chairman and Co-Chief Executive Officer. "Although we were affected by margin compression in the quarter, we believe the results demonstrate that our strategy to grow our business while diversifying our revenue stream is working very well."

GAAP net loss for the third-quarter 2006 was $22.4 million, or $0.42 per share, compared with net income of $72.1 million, or $1.34 per share, for the third-quarter 2005. Base net income for the third-quarter 2006 was $32.9 million, or $0.62 per share, compared with $32.8 million, or $0.61 per share, in the third-quarter 2005. Adjusted base net income for the third-quarter 2006 was $28.0 million, or $0.52 per share, compared with $20.9 million, or $0.39 per share, for the same period a year ago. GAAP results were affected by an unrealized loss related to derivative market value, foreign currency, and put option adjustments of $11.6 million for the first nine months of 2006 and $79.9 million for the third quarter of 2006.

A legislative-driven expense of $6.9 million or $0.08 per share after tax for loan loss reserves recognized by the company in the first-quarter 2006 is included in the results for the first nine months of 2006. In addition, the company recognized a gain on the sale of a portfolio of loans in the third quarter of 2006. Net of additional compensation charges and the effect of not holding the loans throughout the third quarter had a net positive impact on the company's results of about $0.10 per share. The third quarter also includes certain non-recurring expenses of approximately $0.03 per share.

A description of base and adjusted base net income and reconciliation of GAAP net income to base and adjusted base net income is included in this release.

Fee-based Revenue

Fee-based revenue in the third quarter of 2006 represented 54 percent of Nelnet's total revenue. This is an increase from the third quarter of 2005 when fee-based revenue represented 39 percent of total revenue.

Income from loan and guarantee servicing fees reached $139.6 million for the first nine months of 2006, up from $109.3 million in the first nine months of 2005. In the third quarter of 2006, loan and guarantee servicing income grew to $48.5 million from $37.5 million in the third quarter of 2005.

Other fee-based income increased to $65.5 million for the first nine months of 2006 compared with $22.9 million for the first nine months of 2005. For the third quarter of 2006, other fee-based income increased to $31.2 million, up from $10.5 million in the same period a year ago. Other fee-based income includes Nelnet Business Solutions, which was formed earlier this year to pull together strategic businesses that offer additional products and services to the life cycle of the student while at the same time adding diversification and fee income to Nelnet. These businesses include enrollment management, tuition payment plans, payment processing, list management, and direct marketing, and are not dependent on the government sponsored programs and therefore do not expose the company to political risk.

Other income increased to $18.5 million for the first nine months of 2006 compared with $5.4 million in the same period a year ago. For the third-quarter 2006, other fee income increased to $13.6 million, up from $2.5 million in the third-quarter 2005. Other income in the third quarter and first nine months of 2006 includes an $11.7 million gain on the sale of student loans to an unrelated party. The portfolio of loans was not serviced by Nelnet and as such was at greater risk of being consolidated away from the company by third parties.

Student Loan Assets

Net student loan assets increased by $6.6 billion, or 40 percent, year over year to $22.9 billion at September 30, 2006. Since December 31, 2005, net student loan assets have increased 13 percent, or $2.7 billion, and have increased 2 percent, or $529.2 million, since June 30, 2006.

The company reported net new consolidation loan originations of $912.4 million and $424.9 million and net consolidation loan originations of $1.8 billion and $767.3 million for the first nine months of 2006 and the third quarter of 2006, respectively.

Margin Analysis

Net interest income for the first nine months of 2006 was $244.8 million compared with $247.8 million for the first nine months of 2005. For the third quarter of 2006, Nelnet reported net interest income of $72.4 million compared with $79.0 million for the third quarter of 2005. Net interest income for the first nine months of 2006 includes a special allowance yield adjustment of $24.5 million compared with $77.4 million for the first nine months of 2005. Excluding the special allowance yield adjustment, net interest income increased $50.0 million or 29 percent for the first nine months of 2006.

As previously announced, Nelnet has determined to defer recognition of the 9.5 percent special allowance payment being withheld by the Department of Education, therefore, net interest income for the third-quarter 2006 does not include a special allowance yield adjustment. Income from these special allowance payments would have been $8.9 million for the third quarter of 2006. The same period a year ago includes a $21.8 million special allowance yield adjustment in net interest income. Excluding the impact of the special allowance yield adjustment, net interest income for the third-quarter 2006 increased $15.1 million, or 26 percent, compared to the third-quarter 2005.

The company reported core student loan spread of 1.45 percent for the first nine months of 2006 compared with 1.54 percent in the same period in 2005. For the third quarter of 2006, Nelnet reported core student loan spread of 1.34 percent compared with 1.46 percent in the same period of 2005 and 1.49 percent for the second quarter of 2006. The core student loan spread contraction was accelerated due to the mismatch of the reset frequency between the floating rate assets and floating rate liabilities. During a rising interest rate environment, Nelnet's core student loan spread benefited from the mismatch, however, since interest rates did not rise in the third quarter, the company did not benefit from the mismatch. In addition, the increase in the percentage of consolidation loans in the company's student loan portfolio negatively impacted the spread.

Operating Expenses

For the first nine months of 2006, the company reported operating expenses of $351.4 million compared with $224.2 million for the first nine months of 2005. Operating expenses were $128.8 million in the third quarter of 2006 compared with $78.9 million for the same period a year ago. The increase in operating expenses is primarily attributable to recent acquisitions.

Non-GAAP performance measures

Nelnet 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 certain non-GAAP performance measures that management refers to as base net income. While base net income is not a substitute for reported results under GAAP, Nelnet provides base net income as additional information regarding financial results.

Nelnet's derivatives do not qualify for hedge accounting under FASB 133. As such, the mark-to-market gains or losses of derivatives in each reporting period are included in the statement of operations, but removed from GAAP net income in the calculation of base net income. 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, the change in market value of put options issued by the company for certain business acquisitions, the amortization of intangible assets, non-cash stock based compensation related to business combinations, and variable-rate floor income.

Adjusted base net income, which excludes certain special allowance yield adjustments and related hedging activity related to the company's portfolio of student loans earning a minimum special allowance payment of 9.5 percent, 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 (loss) to base and adjusted base net income.

Three months ended Nine months ended Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30, 2006 2006 2005 2006 2005 (dollars in thousands, except share data) GAAP net income (loss) (a) $(22,354) $45,753 $72,132 $75,465 $138,446 Base adjustments: Derivative market value, foreign currency, and put option adjustments 79,941 (29,113) (65,382) 11,565 (74,300) Amortization of intangible assets 6,534 6,161 1,919 18,328 4,651 Non-cash stock based compensation related to business combinations 476 477 -- 1,271 -- Variable-rate floor income -- -- -- -- -- Total base adjustments before income taxes 86,951 (22,475) (63,463) 31,164 (69,649) Net tax effect (c) (31,698) 8,446 24,116 (10,391) 26,467 Total base adjustments 55,253 (14,029) (39,347) 20,773 (43,182) Base net income (a) 32,899 31,724 32,785 96,238 95,264 Adjustments to base net income: Special allowance yield adjustment (b) -- (10,550) (21,766) (24,460) (77,427) Derivative settlements, net (7,909) (7,721) 2,644 (19,794) 16,961 Total adjustments to base net income before income taxes (7,909) (18,271) (19,122) (44,254) (60,466) Net tax effect (c) 3,006 6,943 7,266 16,817 22,977 Total adjustments to base net income (4,903) (11,328) (11,856) (27,437) (37,489) Adjusted base net income (a) $27,996 $20,396 $20,929 $68,801 $57,775 Earnings (loss) per share, basic and diluted: GAAP net income (loss)(a) $(0.42) $0.84 $1.34 $1.40 $2.58 Total base adjustments 1.04 (0.25) (0.73) 0.38 (0.81) Base net income (a) 0.62 0.59 0.61 1.78 1.77 Total adjustments to base net income (0.10) (0.21) (0.22) (0.50) (0.70) Adjusted base net income (a) $0.52 $0.38 $0.39 $1.28 $1.07 (a) Includes expense of $6.9 million ($4.3 million or $0.08 per share after tax) for the nine months ended September 30, 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, pending satisfactory resolution of the October 6, 2006 letter from the Department of Education (the "Department") related to the audit report by the Department's Office of Inspector General regarding certain loans receiving 9.5% special allowance payments, the Company has determined to defer recognition of the 9.5% special allowance payments which the Department is currently withholding payment. Income from these 9.5% special allowance payments would have been $8.9 million ($5.5 million or $0.10 per share after tax) for the three months ended September 30, 2006. (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.

Nelnet will host a conference call to discuss this earnings release at 11:00 a.m. (Eastern) today. To access the call live, participants in the United States and Canada should dial 800.817.4887 and international callers should dial 913.981.4913 at least 15 minutes prior to the call. A live audio Web cast of the call will also be available at http://www.nelnetinvestors.net/ under the conference calls and Web casts menu. A replay of the conference call will be available between 2:00 p.m. (Eastern) today and 11:59 p.m. (Eastern) November 3, 2006. To access the replay via telephone within the United States and Canada, callers should dial 888.203.1112. International callers should dial 719.457.0820. All callers accessing the replay will need to use the confirmation code 5344287. A replay of the audio Web cast will also be available at http://www.nelnetinvestors.net/.

Supplemental financial information to this earnings release is available online at http://www.nelnetinvestors.net/releases.cfm?reltype=Financial.

Condensed Consolidated Statements of Operations Three months ended Nine months ended Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30, 2006 2006 2005 2006 2005 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (dollars in thousands, except share data) Interest income: Loan interest $401,704 $383,867 $247,791 $1,133,093 $671,589 Amortization of loan premiums and deferred origination costs (21,568) (21,125) (20,041) (64,555) (52,370) Investment interest 25,986 24,314 11,491 69,841 26,643 Total interest income 406,122 387,056 239,241 1,138,379 645,862 Interest expense: Interest on bonds and notes payable 333,766 300,844 160,243 893,559 398,045 Net interest income 72,356 86,212 78,998 244,820 247,817 Less provision for loan losses 1,700 2,190 1,402 13,508 5,557 Net interest income after provision for loan losses 70,656 84,022 77,596 231,312 242,260 Other income (expense): Loan and guarantee servicing income 48,462 44,042 37,459 139,578 109,313 Other fee-based income 31,221 16,074 10,503 65,450 22,886 Software services income 4,399 4,018 1,951 11,826 6,759 Other income 13,617 2,906 2,458 18,510 5,382 Derivative market value, foreign currency, and put option adjustments (79,941) 29,113 65,382 (11,565) 74,300 Derivative settlements, net 4,973 6,702 (2,962) 16,419 (19,049) Total other income (expense) 22,731 102,855 114,791 240,218 199,591 Operating expenses: Salaries and benefits 65,383 62,207 44,311 185,274 123,615 Other expenses 56,925 45,904 32,705 147,759 95,936 Amortization of intangible assets 6,534 6,161 1,919 18,328 4,651 Total operating expenses 128,842 114,272 78,935 351,361 224,202 Income (loss) before income taxes (35,455) 72,605 113,452 120,169 217,649 Income tax expense (benefit) (13,101) 26,852 41,091 44,462 78,974 Net income (loss) before minority interest (22,354) 45,753 72,361 75,707 138,675 Minority interest in net earnings of subsidiaries -- -- (229) (242) (229) Net income (loss) $(22,354) $45,753 $72,132 $75,465 $138,446 Earnings (loss) per share, basic and diluted $(0.42) $0.84 $1.34 $1.40 $2.58 Weighted average shares outstanding 53,348,466 54,297,230 53,734,218 53,959,075 53,709,801 Condensed Consolidated Balance Sheets and Financial Data Sept. 30, Dec. 31, Sept. 30, 2006 2005 2005 (unaudited) (unaudited) (dollars in thousands) Assets: Student loans receivable, net $22,933,718 $20,260,807 $16,379,293 Cash, cash equivalents, and investments 1,810,839 1,645,797 1,304,261 Goodwill 188,603 99,535 67,942 Intangible assets, net 169,824 153,117 34,644 Other assets 788,336 639,366 525,185 Total assets $25,891,320 $22,798,622 $18,311,325 Liabilities: Bonds and notes payable $24,690,245 $21,673,620 $17,418,652 Other liabilities 519,814 474,884 295,582 Total liabilities 25,210,059 22,148,504 17,714,234 Minority interest in subsidiaries -- 626 274 Shareholders' equity 681,261 649,492 596,817 Total liabilities and shareholders' equity $25,891,320 $22,798,622 $18,311,325 Return on average total assets 0.41% 1.00% 1.10% Return on average equity 14.1% 32.4% 34.9%

For 28 years, Nelnet has been helping the education-seeking family plan for their education, pay for their education, and prepare for their careers. The company has invested hundreds of millions of dollars in products, services, and technology improvements for students and the educational institutions they attend. These services include live counseling to help families through all aspects of the financial aid process, benefits for borrowers, including tens of millions of dollars in fee reductions, and Nelnet sponsored scholarships. Nelnet serves students in 50 states, employs approximately 3,700 associates, and has $22.9 billion in net student loan assets.

Additional information is available at http://www.nelnet.net/.

Information contained in this press release, 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. For more information see our filings with the Securities and Exchange Commission.

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