Press Releases

For Release: 7/28/2006

Contact: Ben Kiser, 402.458.3024

• Net student loan assets up $1.1 billion to $22.4 billion for second quarter
• Adjusted base net income for the second quarter $0.37 per share
• Fee-based revenue represents 43 percent of total revenue

LINCOLN, Neb., July 28, 2006 – Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the first six months of 2006 of $97.8 million, or $1.80 per share, compared with $66.3 million, or $1.23 per share, for the first six months of 2005. Base net income for the first six months of 2006 was $62.6 million, or $1.15 per share, compared with $62.5 million, or $1.16 per share, for the first six months of 2005.

GAAP net income for the second-quarter 2006 was $45.8 million, or $0.84 per share, compared with a net loss of $(1.8) million, or $(0.03) per share, for the second-quarter 2005. Base net income for the second-quarter 2006 was $31.7 million, or $0.58 per share, compared with $31.0 million, or $0.58 per share, in the second-quarter 2005.

Adjusted base net income, which is base net income excluding certain special allowance yield adjustments and related derivative settlements, was $0.74 per share for the first six months of 2006 and $0.37 per share for the second quarter of 2006, compared with $0.68 per share for the first six months of 2005 and $0.34 per share for the second quarter of 2005. Excluding a legislative-driven expense of $6.9 million, $4.3 million after tax, for loan loss reserves in the first-quarter 2006 due to a provision in the Deficit Reduction Act of 2005 that increased risk sharing for student loan holders by one percent on Federal Family Education Loan Program loans, adjusted base net income for the first six months of 2006 was up 21 percent to $0.82 per share compared with the same period a year ago.

Base net income as defined by Nelnet is GAAP net income excluding derivative market value and foreign currency adjustments, the amortization of intangible assets, and variable-rate floor income. 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.

GAAP net income includes an unrealized gain in the fair-market value of derivative instruments and foreign currency adjustments of $68.7 million for the first six months of 2006 and $28.9 million for the second quarter of 2006. 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 caused by the re-measurement of the company’s Euro-denominated bonds to U.S. dollars.

Since December 31, 2005, net student loan assets have increased 11 percent, or $2.1 billion, from $20.3 billion to $22.4 billion at June 30, 2006. Since March 31, 2006, net student loan assets have increased 5 percent, or $1.1 billion.

The company reported net consolidation loan originations of $1.1 billion and $477.8 million and a loss of $581.2 million and $310.8 million through the consolidation of the company’s portfolio by third parties for the first six months of 2006 and the second quarter of 2006, respectively. This resulted in net new consolidation loan originations of $487.5 million for the first six months of 2006 and $167.0 million for the second quarter of 2006.

“We are pleased with our strong results for the quarter, in particular solid student loan growth, consolidation application activity that will primarily fund in the third and fourth quarters, and diversification of our revenue streams,” said Steve Butterfield, Nelnet Vice Chairman and Co-Chief Executive Officer. “As expected, our results also reflect the seasonality of some of our fee-based businesses and the investment we made to bolster our direct-to-consumer marketing efforts. Quality student loan asset growth, combined with the diversification of revenues, will continue to be important to meeting our goal of long-term sustainable growth.”

Margin Analysis

Net interest income for the first six months of 2006 was $172.5 million compared with $168.8 million for the first six months of 2005. For the second quarter of 2006, Nelnet reported net interest income of $86.2 million compared with $82.0 million for the second quarter of 2005. Net interest income for the first six months of 2006 includes a special allowance yield adjustment of $24.5 million, down from $55.7 million for the first six months of 2005. The second-quarter 2006 net interest income includes a special allowance yield adjustment of $10.6 million, down from $25.9 million in the same period a year ago. Excluding the impact of the special allowance yield adjustment, net interest income for the second-quarter 2006 increased $19.6 million, or 35 percent, compared to the same period a year ago.

The company reported core student loan spread of 1.51 percent for the first six months of 2006 compared with 1.58 percent in the same period in 2005. For the second quarter of 2006, Nelnet reported core student loan spread of 1.49 percent compared with 1.50 percent in the same period of 2005 and 1.54 percent for the first quarter of 2006.

Other Revenue

Fee-based revenue in the second quarter of 2006 represented 43 percent of Nelnet’s total revenue for the quarter. This is an increase from the second quarter of 2005 when fee-based revenue represented 36 percent of total revenue.

Income from loan and guarantee servicing fees reached $91.1 million for the first six months of 2006, up from $71.9 million in the first six months of 2005. In the second quarter of 2006, loan and guarantee servicing income grew to $44.0 million from $34.7 million in the second quarter of 2005. This increase is attributable to the acquisition of Firstmark Services and the expansion of an outsourcing agreement with College Access Network both of which occurred during the fourth quarter of 2005.

Other fee-based income increased to $34.2 million for the first six months of 2006 compared with $12.4 million for the first six months of 2005. For the second quarter of 2006, other fee-based income increased to $16.1 million, up from $9.0 million in the same period a year ago. Other fee-based income includes Nelnet’s list management, direct marketing, and tuition payment plan businesses.

Operating Expenses

For the first six months of 2006, the company reported operating expenses of $222.5 million compared with $145.3 million for the first six months of 2005. Operating expenses were $114.3 million in the second quarter of 2006 compared with $73.9 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 we refer 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.

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.