Nelnet Reports Net Student Loan Assets Up 28 Percent Year-Over-Year

Oct 26, 2005

* Student loan assets up more than $2.9 billion, or 22 percent, from year-end * Net consolidation originations for the third quarter $537.7 million * Base net income $95.3 million for the first nine months of 2005

LINCOLN, Neb., Oct 26, 2005 /PRNewswire-FirstCall via COMTEX News Network/ -- Nelnet, Inc. (NYSE: NNI) today reported GAAP net income for the first nine months of 2005 of $138.4 million, or $2.58 per share, compared with $102.0 million, or $1.90 per share, for the first nine months of 2004. GAAP net income for the third quarter of 2005 was $72.1 million, or $1.34 per share, compared with $7.6 million, or $0.14 per share, for the third quarter of 2004.

Base net income for the first nine months of 2005 was $95.3 million, or $1.77 per share, compared with $130.1 million, or $2.43 per share, in the first nine months of 2004. Base net income for the third quarter of 2005 was $32.8 million, or $0.61 per share, compared with $33.7 million, or $0.63 per share, in the third quarter of 2004.

Base net income as defined by Nelnet is GAAP net income excluding derivative market value adjustments, amortization of intangible assets, and variable-rate floor income. A description of base net income and reconciliation of GAAP net income to base net income is included in this release.

Base net income excluding certain special allowance yield adjustments and related derivative settlements for the first nine months of 2005 was $1.07 per share, up from $0.69 per share for the first nine months of 2004. Base net income excluding certain special allowance yield adjustments and related derivative settlements was $0.39 per share for the third quarter of 2005, up 22 percent from $0.32 per share for the third quarter of 2004.

For the third-quarter 2005, GAAP net income includes an unrealized gain in the fair-market value of derivative instruments of $65.4 million. Nelnet's derivatives do not qualify for hedge accounting under FASB 133. As such, the mark-to-market gains or losses of derivatives each reporting period are included in the statement of operations, but removed from GAAP net income during the calculation of base net income.

Net student loan assets at September 30, 2005 were $16.4 billion, up 28 percent, or $3.6 billion, from $12.8 billion at September 30, 2004. Since December 31, 2004, net student loan assets have increased 22 percent, or $2.9 billion, from $13.5 billion.

The company reported net consolidation loan originations of $537.7 million for the third quarter of 2005 after receiving a record level of consolidation applications in the second quarter of 2005 before the interest rate increase on July 1. The majority of these applications funded in the third quarter. For the third quarter, Nelnet reported a loss of $240.4 million of student loans through the consolidation of the company's portfolio by third parties.

"We are excited by the results of the third quarter that provided strong student loan asset growth driven by record consolidation volume," said Steve Butterfield, Nelnet Vice Chairman and Co-Chief Executive Officer. "In addition, Nelnet announced two acquisitions that will enhance our presence in key markets in the Sun Belt and on the West Coast."

Nelnet completed the acquisitions of LoanSTAR Funding Group, Inc. and the assets of Chela Education Finance, Inc. on October 24, 2005 and October 25, 2005, respectively. These acquisitions were originally announced in the third quarter.

Margin analysis

Net interest income for the first nine months of 2005 was $247.8 million compared to $308.0 million for the first nine months of 2004. For the third quarter of 2005, Nelnet reported net interest income of $79.0 million compared to $89.4 million for the third quarter of 2004. Net interest income for the first nine months of 2005 includes a special allowance yield adjustment of $77.4 million, down from $167.9 million in the same period a year ago. The third-quarter 2005 net interest income includes a special allowance yield adjustment of $21.8 million, down from $43.6 million in the same period a year ago. Excluding the impact of the special allowance yield adjustments, net interest income for the third-quarter 2005 increased $11.4 million, or 25 percent, compared to the same period a year ago.

The company reported core student loan spread of 1.54 percent for the first nine months of 2005 compared with 1.71 percent in the same period in 2004 and 1.46 percent for the third quarter of 2005 compared with 1.65 percent in the same period of 2004. The tightening was primarily attributable to an increase in lower-yield consolidation loans in the company's student loan portfolio. At September 30, 2005, consolidation loans comprised more than 62 percent of Nelnet's student loan portfolio.

Other revenue

Income from loan and guarantee servicing fees reached $109.3 million for the first nine months of 2005, up from $73.4 million in the first nine months of 2004. In the third quarter of 2005 income from loan and guarantee servicing grew to $37.5 million from $24.5 million in the third quarter of 2004. The increase is attributable to the acquisition of EDULINX in December 2004 and is partially offset by reductions in other third-party servicing-related revenue.

Other fee-based income increased to $22.9 million for the first nine months of 2005 compared to $5.4 million for the first nine months of 2004. For the third quarter of 2005 other fee-based income increased to $10.5 million, up from $1.8 million in the same period a year ago. The integration of recent acquisitions contributed to the increase.

Operating expenses

For the first nine months of 2005 the company reported operating expenses of $224.2 million compared to $180.9 million for the first nine months of 2004. Operating expenses increased to $78.9 million in the third quarter of 2005 from $51.5 million for the same period a year ago. The increase in operating expenses is primarily attributable to the integration of recent acquisitions.

Reconciliation of GAAP Net Income to Base Net Income

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.

Base net income, excluding 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%, 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 the special
allowance yield adjustments and related hedging activity related to the
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)
     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)
       Base net income, excluding the
        special allowance
         yield adjustments (b)             $0.39    $0.32     $1.07     $0.69


     (a)  Tax effect computed at 38%.
     (b)  The special allowance yield adjustments are net of derivative
          settlements and taxes.

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 800.309.1331 and international callers should dial 719.785.9442 at least 15 minutes prior to the call. A live audio Web cast of the call will also be available at 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 2. 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 3047267. A replay of the audio Web cast will also be available at 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 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

     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

     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
                                   (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
          Total liabilities       17,714,234      14,703,830     13,706,181

     Minority interest
      in subsidiaries                    274              --             --

     Shareholders' equity            596,817         456,175        408,615

          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%

Nelnet is one of the leading education finance companies in the United States and is focused on providing quality products and services to students and schools nationwide. Nelnet ranks among the nation's leaders in terms of total net student loan assets with $16.4 billion as of September 30, 2005. Headquartered in Lincoln, Nebraska, Nelnet originates, consolidates, securitizes, holds, and services student loans, principally loans originated under the Federal Family Education Loan Program of the U.S. Department of Education.

Additional information is available at 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.

(code #: nnif)

SOURCE Nelnet, Inc.

Media, Sheila Odom, +1-402-458-2329, or Investors, Cheryl Watson, +1-317-469-2064,
both of Nelnet, Inc.
http://www.prnewswire.com

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