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Welcome to the
Nelnet, Inc.
2004 annual shareholders meeting
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[GRAPHIC OMITTED] Safe harbor statement
We would like to remind you that there will be forward looking statements
made during the presentation. The forward looking statements may differ
materially from actual results and are subject to certain risks and
uncertainties. The company does not intend to update any forward looking
statements made during today's presentation.
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[GRAPHIC OMITTED] Agenda
o Call to order
o Announcements and introductions
o Notice and presence of quorum
o Election of Directors
o Ratification and appointment of auditors
o Remarks by Vice Chairman and Co-CEO
o Remarks by Chairman and Co-CEO
o Remarks by the CFO
o Results of balloting
o Questions and answers
o Adjournment
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Our story
Remarks by Vice Chairman and Co-CEO
Steve Butterfield
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[GRAPHIC OMITTED] At our core...
Vision and values
Vision
o Making educational dreams possible.
Core values
o Customers are number one.
o We will create an environment in which employees can succeed
and are treated with dignity and respect.
o Truth, honesty, integrity, and clear, open communication are
fundamental to our success.
o Our goal is to create a diversified educational services
company that preserves intellectual capital.
o We believe in conservative and transparent accounting
policies.
o We will not lose sight of our fundamental value.
Mission
o Nelnet, a diversified educational services company, will
consistently deliver premier solutions and quality services.
Schools and their students are our primary focus.
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[GRAPHIC OMITTED] At our core...
Backed by a powerful business strategy and unique competitive strengths
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We offer a full range of services to manage the student
VERTICAL loan life cycle and provide school financial aid offices
INTEGRATION ---> and students with a comprehensive, full-service student
lending package, student loan and guarantee servicing,
and loan servicing software.
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We have established a high quality loan portfolio
LONG TERM ---> through our concentration on FFELP loans and remain
FOCUS strategically focused on long term return rather than
short term gains.
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We are run by a management team with significant
EXPERIENCED ---> operating and acquisition experience. We also have 26
years in the market as a national student loan servicer.
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We enjoy strong relationships with student loan market
CO-BRANDED ---> constituents and have leveraged recognized and respected
STRATEGY brand names in regional markets to support loan
origination volume.
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We have built a leading, cost-competitive servicing
SUPERIOR platform with a focus on asset protection. Our
TECHNOLOGY ---> comprehensive suite of software products enables us to
carry our brand and partners forward to the key
constituents of the student loan market.
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INDUSTRY We are a focused industry leader with a vertically
LEADER ---> integrated platform for originating, holding, and
servicing student loans.
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[GRAPHIC OMITTED] Rapid industry growth
Higher education enrollment (millions)
[GRAPH OMITTED]
'00 15.3
'01 15.4
'02 15.6
'03E 15.8
'04E 15.9
'05E 16.1
'06E 16.3
'07E 16.5
'08E 16.7
'09E 17.0
Annual cost of education(1) ($000)
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'93 $10.4
'94 $11.0
'95 $11.7
'96 $12.2
'97 $13.0
'98 $13.8
'99 $14.7
'00 $15.5
'01 $16.2
'02 $17.3
'03 $18.3
Source: ED, National Center for Education Statistics
(1) Annual average tuition at private, four-year institutions using constant
2002 dollars
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[GRAPHIC OMITTED] Rapid industry growth
Education costs are projected to increase at double the rate of inflation.
State budget cuts have put more pressure on schools to increase tuition.
Average student loan balance ($)
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'97 $ 8500
'02 $16250
'07E $26000
Student loan origination volume ($ in billions)
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FFELP & FDLP
'00 $ 37.37448705
'01 $ 39.7080803
'02 $ 45.41659436
'03E $ 49.96398274
'04E $ 53.68997169
'05E $ 56.81499995
'06E $ 60.16664914
'07E $ 63.76566971
'08E $ 67.63529208
'09E $ 71.80161655
Source: ED, Octameron Associates
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[GRAPHIC OMITTED] Reauthorization of the Higher Education Act
o Expected 2005 completion
o Proposed legislation: College Access and Opportunities Act
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The Nelnet difference
Remarks by Chairman and Co-CEO
Mike Dunlap
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[GRAPHIC OMITTED] The Nelnet difference
A culture devoted to
making educational
dreams possible...
customer-centric focus
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/ \
/ \
Asset quality
/ \
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/ \
Open system philosophy
/ \
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/ \
Long-term strategic focus
/ \
-----------------------------------
/ \
Vertical integration
/ \
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11
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[GRAPHIC OMITTED] The Nelnet difference
We begin with a high quality, diversified revenue stream internally
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neltnet
|
|
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| | | |
| | | |
- --------------------- -------------------- ---------------------- ---------------------
Loan Originations Loan Servicing Servicing Software Guarantee
& Acquisitions Servicing
- --------------------- -------------------- ---------------------- ---------------------
o $2.8 billion annual o Almost $19 billion o $50 billion serviced o Provides servicing
originations serviced using our software support and
software to
o $11.2 billion in o Over 1.7 million guaranty agencies
student loans borrowers
o Over $20 billion in
loan guarantees
serviced
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40% fee based revenue
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[GRAPHIC OMITTED] The Nelnet difference
Paired with key external strategic partners
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Schools
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400 schools in 2003 -------> 500 schools in 2004
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Branding Partners
Regional banks for whom Nelnet markets student loans
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Forward Flow Partners
Regional and national banks, who market their own student loans, but originate
and service on Nelnet's platform, and commit to sell this volume to Nelnet
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Servicing Clients
Third parties, consisting of major student loan players, including major
for-profit companies and not-for-profit state agencies
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[GRAPHIC OMITTED] The Nelnet difference
And solidified by geographic breadth to expand our national footprint
[MAP OMITTED]
* Corporate locations
* Loan servicing centers
Loan servicing centers
Denver, Colorado
Claims / appeals / recalls / cures
Transfers / acquisitions / repurchases
Secondary customer contact center
Jacksonville, Florida
Remittance processing
Portfolio reconciliation / 799 reporting
Secondary customer contact center
Indianapolis, Indiana
Primary customer contact center
Loan consolidation
College planning center
Lincoln, Nebraska
Processing
Skip tracing
Loan consolidation
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The result
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[GRAPHIC OMITTED] The result
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2001
Nelnet brands & consolidation $0.3
Branding & forward flow partners $1.0
Spot acquisitions $0.1
Total $1.4
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2002
Nelnet brands & consolidation $0.5
Branding & forward flow partners $1.1
Spot acquisitions $0.5
Total $2.1
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2003*
Nelnet brands & consolidation $0.3
Branding & forward flow partners $1.4
Spot acquisitions $1.4
$3.1
Note: Direct channel excludes consolidation of existing assets. Information
presented for 2002 and prior has been adjusted for estimated consolidations of
our existing portfolio.
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[GRAPHIC OMITTED] The result
We are in a unique position as one of only two vertically integrated
participants in the education finance industry.
Top FFELP loan servicers(1)
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Rank Manager Outstanding ($bn)
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1 Sallie Mae $87.9
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2 Nelnet 18.9
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3 AES (PHEAA) 16.9
4 ACS (formerly reported under AFSA) 15.7
5 Great Lakes Education Loan Services 15.6
6 CitiBank 14.2
Others 44.6
Industry Total $213.8
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Top loan holders(2)
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Rank Manager Outstanding ($bn)
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1 Sallie Mae $75.6
2 Citibank 20.0
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3 Nelnet 9.9 $11.2 billion
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4 First Union 9.7
5 Wells Fargo 7.6
6 Brazos 5.5
7 College Loan Corp 4.5
8 PHEAA 4.1
9 Southwest Student Svcs 3.2
10 MOHELA 2.8
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Top loan originators(3)
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Rank Manager ($bn)
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1 Bank One $3.32
2 Sallie Mae 3.16
3 Citibank 3.00
4 JP Morgan Chase 2.47
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5 Nelnet 2.34
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6 Bank of America 2.16
7 Wells Fargo 2.04
8 Wachovia Bank 1.78
9 National City Bank 1.38
10 U.S. Bank 1.03
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(1) Source: SLSA Servicing Volume Survey, December 31, 2003
(2) Source: Nelnet and DOE as of September 30, 2003
(3) Source: Nelnet and DOE as of September 30, 2003; Includes Nelnet franchise
affiliated partners
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Fundamental value
Remarks by Chief Financial Officer
Terry Heimes
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Condensed consolidated balance sheets
December 31, 2001, 2002, and 2003
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(Dollars in thousands)
2001 2002 2003
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Assets:
Student loans receivable, net $ 7,423,872 $ 8,559,420 $10,455,442
Cash, cash equivalents, and investments 371,704 784,197 1,013,374
Other assets 338,984 422,966 462,693
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Total assets 8,134,560 9,766,583 $11,931,509
=========================================
Liabilities:
Bonds and notes payable 7,926,362 9,447,682 $11,366,458
Other liabilities 145,012 209,779 259,562
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Total liabilities 8,071,374 9,657,461 11,626,020
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Shareholders' equity:
Common stock:
Class A 309 309 396
Class B 140 140 140
Additional paid-in capital 37,499 37,891 206,831
Retained earnings 25,238 70,782 97,885
Accumulated other comprehensive income -- -- 237
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Total shareholders' equity 63,186 109,122 305,489
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Total liabilities and shareholders' equity $ 8,134,560 $ 9,766,583 $11,931,509
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Condensed consolidated balance sheets
December 31, 2001, 2002, and 2003
2001 2002 2003 March-04
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Student loans receivable, net $ 7,423,872 $ 8,559,420 $ 10,455,442 $ 11,206,609
Year or year growth % 15.30% 22.15% 7.18%
Total assets $ 8,134,560 $ 9,766,583 $ 11,931,509 $ 12,628,567
Year or year growth % 20.06% 22.17% 5.84%
Equity $ 63,186 $ 109,122 $ 305,489 $ 314,637
Equity as % of total assets 0.78% 1.12% 2.56% 2.49%
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[GRAPHIC OMITTED]
2001 2002 2003
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Interest income:
Loan interest, excluding variable-rate floor income $ 303,122 $ 410,414 $ 416,587
Variable-rate floor income 29,900 49,800 12,830
Amortization of loan premiums (14,569) (55,065) (69,316)
Investment interest 16,794 20,759 15,203
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Total interest income 335,247 425,908 375,304
Interest expense:
Interest on bonds and notes payable 220,682 235,008 196,692
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Net interest income 114,565 190,900 178,612
Less provision for loan losses 3,925 5,587 11,475
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Net interest income after provision
for loan losses 110,640 185,313 167,137
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Other income:
Loan servicing and other fee income 93,172 103,899 99,294
Software services and other income 7,713 21,909 19,398
Derivative market value adjustment (2,962) (579) (1,170)
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Total other income 97,923 125,229 117,522
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Operating expenses:
Salaries and benefits 77,370 106,874 124,273
Other expenses 99,897 105,234 101,222
Amortization of intangible assets 18,769 22,217 12,766
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Total operating expenses 196,036 234,325 238,261
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Net income before taxes 12,527 76,217 46,398
Income tax expense 5,380 27,679 19,295
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Net income $ 7,147 $ 48,538 $ 27,103
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[GRAPHIC OMITTED] Fundamental value
Is the concept by which we will encourage our shareholders to evaluate
their investment in Nelnet over the long-term.
We believe the following are critical to our value calculation:
o Variable rate floor income
o The amortization of premium and identifiable intangible assets
o Mark-to-market adjustments on derivatives
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[GRAPHIC OMITTED]
Condensed consolidated income statements
For the years ended December 31, 2001, 2002, and 2003
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(Dollars in thousands)
2001 2002 2003
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Net Income $ 7,147 $ 48,538 $ 27,103
==================================
EPS, (annualized for 04)
Other analysis data
Variable rate floor income (29,900) (49,800) (12,800)
Amortization of intangible assets 18,800 22,200 12,800
Derivative market value adjustment 3,000 600 1,200
Non-recurring costs (2,800) (5,100) 10,300
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Total other items (10,900) (32,100) 11,500
Tax effect 4,142 12,198 (4,370)
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Total other income (6,758) (19,902) 7,130
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Net income excluding other data items $ 389 $ 28,636 34,233
==================================
Year or year increase 19.55%
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Nelnet
Detail of student loans receivable
December 31, March 31
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2001 % 2002 % 2003 % 2004 %
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(dollars in thousands)
FFELP
Stafford $ 4,947,316 66.6% $ 4,983,021 58.2% $ 4,901,289 46.9% $ 4,821,308 43.0%
PLUS/SLS $ 335,083 4.5% $ 313,100 3.7% $ 249,217 2.4% $ 258,406 2.3%
Consolidation $ 1,923,896 25.9% $ 3,033,607 35.4% $ 5,073,081 48.5% $ 5,894,594 52.6%
Non-FFELP
Private Loans $ 60,760 0.8% $ 74,660 0.9% $ 91,287 0.9% $ 91,557 0.8%
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Total $ 7,267,055 97.9% $ 8,404,388 98.2% $ 10,314,874 98.7% $ 11,065,865 98.7%
Unamortized Premiums $ 167,059 2.3% $ 167,032 2.0% $ 156,594 1.5% $ 157,367 1.4%
Allowance - FFELP $ (9,278) -0.1% $ (9,970) -0.1% $ (10,795) -0.1% $ (11,225) -0.1%
Allowance - private $ (964) 0.0% $ (2,030) 0.0% $ (5,231) -0.1% $ (5,398) 0.0%
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Net $ 7,423,872 100.0% $ 8,559,420 100.0% $ 10,455,442 100.0% $ 11,206,609 100.0%
====================== ================================================================================
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Nelnet
Detail of student loans receivable
December 31, March 31
-------------
2001 2002 2003 2004
-------------------------------------------------------------------
Consolidation $ 1,923,896 $ 3,033,607 $ 5,073,081 $ 5,894,594
% of total portfolio 25.9% 35.4% 48.5% 52.6%
Unamortized premiums $ 167,059 $ 167,032 $ 156,594 $ 157,367
2.30% 2.00% 1.50% 1.40%
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Nelnet Inc.
Portfolio composition
Fixed borrower Borrower Variable Current
rate % bucket WAC trigger rate* balance
------------- --- ------------- -------
4.0 - 4.5 4.20% 1.55% $ 1,025,000
4.5 - 5.0 4.72% 2.10% 510,000
5.0 - 5.5 5.10% 2.50% 145,000
5.5 - 6.0 5.69% 3.05% 170,000
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6.0 - 6.5 6.21% 3.60% 300,000
6.5 - 7.0 6.71% 4.10% 375,000
7.0 - 8.0 7.52% 4.90% 330,000
Greater than 8 8.55% 5.90% 1,085,000
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$ 3,940,000
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* Variable trigger rate approximates the short-term rate at which the identified
pool of loans becomes variable
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Nelnet fixed rate assets summary by current curve projections
based on March 31, 2004 actuals
(dollars in thousands)
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Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05 Q4/05
Fixed Rate Debt/Derivatives 2,000,000 900,000 1,100,000 1,050,000 1,000,000 950,000 500,000
Expected Fixed Rate Portfolio 3,900,000 2,800,000 2,300,000 2,100,000 1,900,000 1,900,000 1,600,000
Expected Libor Curve 1.25% 1.69% 2.22% 2.68% 3.11% 3.49% 3.84%
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Nelnet Inc.
Portfolio composition
Fixed borrower Borrower Variable Current
rate % bucket WAC trigger rate* balance
------------- --- ------------- -------
4.0 - 4.5 4.20% 1.55% $ 1,025,000
4.5 - 5.0 4.72% 2.10% 510,000
5.0 - 5.5 5.10% 2.50% 145,000
5.5 - 6.0 5.69% 3.05% 170,000
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6.0 - 6.5 6.21% 3.60% 300,000
6.5 - 7.0 6.71% 4.10% 375,000
7.0 - 8.0 7.52% 4.90% 330,000
Greater than 8 8.55% 5.90% 1,085,000
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$ 3,940,000
===========
Nelnet fixed rate assets summary by current curve projections
based on March 31, 2004 actuals
(dollars in thousands)
Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05 Q4/05
Fixed Rate Debt/Derivatives 2,000,000 900,000 1,100,000 1,050,000 1,000,000 950,000 500,000
Expected Fixed Rate Portfolio 3,900,000 2,800,000 2,300,000 2,100,000 1,900,000 1,900,000 1,600,000
Expected Libor Curve 1.25% 1.69% 2.22% 2.68% 3.11% 3.49% 3.84%
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Questions and discussion
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