LINCOLN, Neb., May 8, 2017
/PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net
income of $50.0 million, or
$1.18 per share, for the first
quarter of 2017, compared with GAAP net income of $48.0 million, or $1.11 per share, for the same period a year
ago.
Net income, excluding derivative market value and foreign
currency transaction adjustments and variation margin settlements
under new derivative clearing rules effective January 3, 2017, was $52.2
million, or $1.23 per share,
for the first quarter of 2017, compared with $61.7 million, or $1.43 per share, for the same period in 2016. For
additional information on these non-GAAP metrics, including
reconciliations to GAAP net income, see "Non-GAAP Performance
Measures" below.
The increase in GAAP net income for the three months ended
March 31, 2017, as compared with the
same period in 2016, was due to smaller losses recognized in 2017,
as compared to 2016, related to changes in fair values of
derivative instruments, which do not qualify for hedge accounting
under GAAP, and foreign currency transaction adjustments caused by
the re-measurement of the company's Euro-denominated bonds to U.S.
dollars. In addition, during the first quarter of 2017, the company
recognized a $5.0 million, or
$0.07 per share after tax, gain from
the repurchase of its own debt. These factors were partially offset
by the increase in expenses to accelerate the build out of the
company's communications network in Lincoln, Nebraska and lower net interest
income earned by the company on its student loan portfolio due to
expected portfolio runoff and lower student loan spread.
"For the first quarter, we reported solid revenue growth from
our loan servicing, payment processing, and communications
businesses," said Jeff Noordhoek,
Chief Executive Officer of Nelnet. "As our student loan portfolio
continues to run off, we are focused on providing superior customer
experiences and pursuing opportunities for revenue diversification
and growth that will result in long-term success."
Nelnet operates four primary business segments, earning interest
income on student loans in its Asset Generation and Management
segment, and fee-based revenue in its Loan Systems and Servicing,
Tuition Payment Processing and Campus Commerce, and Communications
segments.
Asset Generation and Management
For the first quarter of 2017, Nelnet reported net interest
income of $76.9 million, compared
with $101.6 million for the same
period a year ago. The company's average balance of student loans
decreased to $24.8 billion for the
first quarter of 2017, compared with $28.2
billion for the same period in 2016. As a result of a
widening in the basis between the indices in which the company
earns interest on its loans and funds such loans, and a decrease in
fixed rate floor income as a result of an increase in interest
rates, core student loan spread decreased to 1.23 percent for the
first quarter of 2017, compared with 1.34 percent for the same
period in 2016. Net interest income included $32.1 million and $45.9
million of fixed rate floor income in the first quarter of
2017 and 2016, respectively.
Loan Systems and Servicing
Revenue from the Loan Systems and Servicing segment was
$54.2 million for the first quarter
of 2017, compared with $52.3 million
for the same period in 2016. As of March 31,
2017, the company was servicing $200.3 billion in government-owned, Federal
Family Education Loan (FFEL) Program, and private education and
consumer loans.
As of March 31, 2017, the company
was servicing $167.6 billion of loans
for the U.S. Department of Education (Department), compared with
$153.1 billion of loans as of
March 31, 2016. Revenue from this
contract increased 11 percent to $39.0
million for the first quarter of 2017, up from $35.2 million for the same period a year
ago.
The company continues to experience growth in its private
education and consumer loan servicing portfolio. As of March 31, 2017, this portfolio was $9.0 billion, up from $5.2
billion as of March 31, 2016.
Revenue from this portfolio increased $2.7
million, or 85 percent, to $5.8
million for the three months ended March 31, 2017.
The growth in the government and private education and consumer
loan servicing revenue was partially offset by the loss of guaranty
servicing and collection revenue. The company's remaining guaranty
servicing and collection client exited the guaranty business at the
end of its contract term on June 30,
2016. As such, during the first quarter of 2017, the company
had no guaranty servicing and collection revenue. Revenue from this
client was $5.0 million in the first
quarter of 2016.
In April 2016, the Department's
Office of Federal Student Aid (FSA) released information regarding
a new contract procurement process for the Department to acquire a
single servicing system platform with multiple customer service
providers to manage all student loans owned by the Department. The
contract solicitation process was divided into two phases.
On May 6, 2016, Nelnet Servicing,
LLC (Nelnet Servicing), a subsidiary of the company, and Great
Lakes Educational Loan Services, Inc. (Great Lakes) submitted a
joint response to Phase I as part of a newly created joint venture
to respond to the contract solicitation process and to provide
services in the event that the Department selects it to be awarded
with the new contract. The joint venture operates as a new legal
entity called GreatNet Solutions, LLC (GreatNet). Nelnet Servicing
and Great Lakes each own 50 percent of the ownership interests of
GreatNet. In addition to Nelnet Servicing, Great Lakes is one of
four private sector companies (referred to as Title IV Additional
Servicers, or TIVAS) that currently has a student loan servicing
contract with the Department to provide servicing for loans owned
by the Department.
GreatNet was one of three entities selected to respond to Phase
II of the procurement selection process. Navient Corporation and
FedLoan Servicing (Pennsylvania Higher Education Assistance Agency
(PHEAA)), the other two TIVAS, were also selected to respond to
Phase II. On January 6, 2017,
GreatNet submitted its Phase II response to the Department. On
April 11, 2017, the Department
announced it was withdrawing certain policy memos to FSA from the
prior administration regarding factors to be considered in the
procurement process. GreatNet is currently awaiting announcement
from the new administration on the next steps in the procurement
process.
During the three months ended March 31,
2017, Nelnet Servicing and Great Lakes each contributed
capital to GreatNet and GreatNet began to incur certain operating
costs. For financial reporting purposes, the operating results of
GreatNet are included in the company's consolidated financial
statements. The proportionate share of membership interest (equity)
and net loss of GreatNet that is attributable to Great Lakes is
reflected as minority interest.
Tuition Payment Processing and Campus Commerce
For the first quarter of 2017, revenue from the Tuition Payment
Processing and Campus Commerce segment was $43.6 million, an increase of $5.0 million, or 13 percent, from the same period
in 2016. The increase in revenue was primarily driven by growth in
managed tuition payment plans, campus commerce customer
transactions and payments volume, and new school customers. This
operating segment serves 10 million students and families at nearly
13,500 K-12 schools and 970 colleges and universities.
Communications
For the first quarter of 2017, ALLO recognized a net loss of
$2.8 million as compared to a net
loss of $0.4 million for the same
period in 2016. The company anticipates this operating segment will
be dilutive to consolidated earnings as it continues to build its
network in Lincoln, Nebraska, due
to large upfront capital expenditures and associated depreciation
and upfront customer acquisition costs. ALLO's management uses
earnings before interest, income taxes, depreciation, and
amortization (EBITDA) to eliminate certain non-cash and
non-operating items in order to consistently measure performance
from period to period. For the first quarter of 2017, ALLO had
negative EBITDA of $1.7 million as
compared with EBITDA of $0.7 million
for the same period in 2016. For additional information on this
non-GAAP metric, including a reconciliation to ALLO's GAAP net
income or loss, see "Non-GAAP Performance Measures"
below.
The company incurred capital expenditures of $16.7 million in the three months ended
March 31, 2017, and currently
anticipates total network expenditures of approximately
$80 million for 2017; however, the
amount of capital expenditures could change based on customer
demand for ALLO's services.
Liquidity and Capital Activities
For the three months ended March 31, 2017, the company
generated $73.8 million in net cash
from operating activities. In addition, as of March 31, 2017,
the company had $108.2 million in
cash and cash equivalents and a portfolio of available-for-sale and
trading investments, consisting primarily of student loan
asset-backed securities, with a fair value of $123.6 million.
The company intends to use its liquidity position to capitalize
on market opportunities, including FFEL Program, private education,
and consumer loan acquisitions; strategic acquisitions and
investments; expansion of ALLO's communications network; and
capital management initiatives, including stock repurchases, debt
repurchases, and dividend distributions. The timing and size of
these opportunities will vary and will have a direct impact on the
company's cash and investment balances.
During the three months ended March 31, 2017, the company
initiated a cash tender offer to purchase any and all of its
outstanding unsecured hybrid securities and paid $25.3 million to redeem $29.7 million of these notes, resulting in a gain
of $4.4 million recognized in the
first quarter of 2017.
The company paid cash dividends of $5.9
million, or $0.14 per share,
during the three months ended March 31,
2017.
Board Declares Dividend
The Nelnet Board of Directors declared a second quarter cash
dividend on the company's outstanding shares of Class A common
stock and Class B common stock of $0.14 per share. The dividend will be paid on
June 15, 2017, to shareholders of
record at the close of business on June 1,
2017.
Non-GAAP Performance Measures
A reconciliation of the company's GAAP net income to net income,
excluding derivative market value and foreign currency transactions
adjustments and variation margin settlements, is provided
below.
|
Three months ended
March 31,
|
|
2017
|
|
2016
|
|
(dollars in
thousands, except share data)
|
GAAP net income
attributable to Nelnet, Inc.
|
$
|
50,026
|
|
|
47,961
|
|
Derivative market
value adjustments
|
49,163
|
|
|
3,674
|
|
Foreign currency
transaction adjustments
|
4,690
|
|
|
18,480
|
|
Centrally cleared
variation margin settlements
|
(50,401)
|
|
|
—
|
|
Net tax
effect
|
(1,312)
|
|
|
(8,418)
|
|
Net income, excluding
derivative market value and foreign currency transaction
adjustments and variation margin settlements
|
$
|
52,166
|
|
|
61,697
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
GAAP net income
attributable to Nelnet, Inc.
|
$
|
1.18
|
|
|
1.11
|
|
Derivative market
value adjustments
|
1.16
|
|
|
0.09
|
|
Foreign currency
transaction adjustments
|
0.11
|
|
|
0.43
|
|
Centrally cleared
variation margin settlements
|
(1.19)
|
|
|
—
|
|
Net tax
effect
|
(0.03)
|
|
|
(0.20)
|
|
Net income, excluding
derivative market value and foreign currency transaction
adjustments and variation margin settlements
|
$
|
1.23
|
|
|
1.43
|
|
The company provides additional non-GAAP financial information
related to specific items management believes to be important in
the evaluation of its operating results and performance, including
specifically, the impact of unrealized gains and losses resulting
from changes in fair values of derivative instruments that do not
qualify for "hedge treatment" under GAAP, foreign currency
transaction gains or losses resulting from the re-measurement of
the company's Euro-denominated bonds to U.S. dollars, and the
variation margin settlements on derivative instruments that are
settled daily at a central clearinghouse, which based on new
derivative clearing rules effective January
3, 2017 are accounted for as derivative settlements and
represent the changes in fair values of the underlying derivative
instruments. The company believes these point-in-time estimates of
asset and liability values related to these financial instruments
that are subject to interest and currency rate fluctuations are
subject to volatility, mostly due to timing and market factors
beyond the control of management, and affect the period-to-period
comparability of the results of operations. Accordingly, the
company's management utilizes operating results excluding these
items for comparability purposes when making decisions regarding
the company's performance and in presentations with credit rating
agencies, lenders, and investors. Consequently, the company
reports this non-GAAP information because the company believes that
it provides additional information regarding operational and
performance indicators that are closely assessed by management.
There is no comprehensive, authoritative guidance for the
presentation of such non-GAAP information, which is only meant to
supplement GAAP results by providing additional information that
management utilizes to assess performance. The tax effects of the
derivative market value adjustments, foreign currency transaction
adjustments, and centrally cleared variation margin settlements are
calculated by multiplying those adjustments by the applicable
statutory income tax rate.
A reconciliation of ALLO's GAAP net loss to earnings (loss)
before net interest expense, income taxes, depreciation, and
amortization (EBITDA), is provided below.
|
Three months ended
March 31,
|
|
2017
|
|
2016
|
|
(dollars in
thousands)
|
Net loss
|
$
|
(2,821)
|
|
|
(384)
|
|
Net interest
expense
|
711
|
|
|
147
|
|
Income tax
benefit
|
(1,730)
|
|
|
(235)
|
|
Depreciation and
amortization
|
2,135
|
|
|
1,129
|
|
Earnings (loss)
before interest, income taxes, depreciation, and amortization
(EBITDA)
|
$
|
(1,705)
|
|
|
657
|
|
EBITDA is a supplemental non-GAAP performance measure that is
frequently used in capital-intensive industries such as
telecommunications. ALLO's management uses EBITDA to compare ALLO's
performance to that of its competitors and to eliminate certain
non-cash and non-operating items in order to consistently measure
performance from period to period. EBITDA excludes interest and
income taxes because these items are associated with a company's
particular capitalization and tax structures. EBITDA also excludes
depreciation and amortization expense because these non-cash
expenses primarily reflect the impact of historical capital
investments, as opposed to the cash impacts of capital expenditures
made in recent periods, which may be evaluated through cash flow
measures. The company reports EBITDA for ALLO because the company
believes that it provides useful additional information for
investors regarding a key metric used by management to assess
ALLO's performance. There are limitations to using EBITDA as a
performance measure, including the difficulty associated with
comparing companies that use similar performance measures whose
calculations may differ from ALLO's calculations. In addition,
EBITDA should not be considered a substitute for other measures of
financial performance, such as net income or any other performance
measures derived in accordance with GAAP.
Forward-Looking and Cautionary Statements
This press release contains forward-looking statements within
the meaning of federal securities laws. These statements are based
on management's current expectations as of the date of this release
and are subject to known and unknown risks and uncertainties that
may cause actual results or performance to differ materially from
those expressed or implied by the forward-looking statements. Such
risks include, but are not limited to: risks related to the
company's student loan portfolio, such as interest rate basis and
repricing risk and changes in levels of student loan repayment or
default rates; the use of derivatives to manage exposure to
interest rate fluctuations; the uncertain nature of expected
benefits from FFEL Program and private education loan purchases and
initiatives to purchase additional FFEL Program, private education,
and consumer loans; financing and liquidity risks, including risks
of changes in the securitization and other financing markets for
student loans; risks related to adverse changes in the company's
volumes under the company's loan servicing contract with the
Department to service federally owned student loans; risks related
to the Department's initiative to procure a new contract for
federal student loan servicing to acquire a single servicing
platform to service all loans owned by the Department, including
the risk that the company's joint venture with Great Lakes may not
be awarded the contract; risks and uncertainties from changes in
the educational credit and services marketplace resulting from
changes in applicable laws, regulations, and government programs
and budgets, such as the expected decline over time in FFEL Program
loan interest income and fee-based revenues due to the
discontinuation of new FFEL Program loan originations in 2010 and
the resulting initiatives by the company to adjust to a post-FFEL
Program environment; the uncertain nature of the expected benefits
from the acquisition of ALLO on December 31,
2015 and the ability to successfully integrate its
communications operations and successfully expand its fiber network
in existing service areas and additional communities and manage
related construction risks; risks and uncertainties related to
initiatives to pursue additional strategic investments and
acquisitions, including investments and acquisitions that are
intended to diversify the company both within and outside of its
historical core education-related businesses; and changes in
general economic and credit market conditions.
For more information, see the "Risk Factors" sections and other
cautionary discussions of risks and uncertainties included in
documents filed or furnished by the company with the Securities and
Exchange Commission, including the cautionary information about
forward-looking statements contained in the company's supplemental
financial information for the first quarter ended March 31,
2017. All forward-looking statements in this release are as of the
date of this release. Although the company may voluntarily update
or revise its forward-looking statements from time to time to
reflect actual results or changes in the company's expectations,
the company disclaims any commitment to do so except as required by
securities laws.
Consolidated
Statements of Income
|
(Dollars in
thousands, except share data)
|
(unaudited)
|
|
|
Three months
ended
|
|
March 31,
2017
|
|
December 31,
2016
|
|
March 31,
2016
|
Interest
income:
|
|
|
|
|
|
Loan
interest
|
$
|
181,207
|
|
|
183,505
|
|
|
189,988
|
|
Investment
interest
|
2,617
|
|
|
2,792
|
|
|
2,029
|
|
Total interest
income
|
183,824
|
|
|
186,297
|
|
|
192,017
|
|
Interest
expense:
|
|
|
|
|
|
Interest on bonds and
notes payable
|
106,899
|
|
|
107,337
|
|
|
90,408
|
|
Net interest
income
|
76,925
|
|
|
78,960
|
|
|
101,609
|
|
Less provision for
loan losses
|
1,000
|
|
|
3,000
|
|
|
2,500
|
|
Net interest
income after provision for loan losses
|
75,925
|
|
|
75,960
|
|
|
99,109
|
|
Other
income:
|
|
|
|
|
|
Loan systems and
servicing revenue
|
54,229
|
|
|
53,764
|
|
|
52,330
|
|
Tuition payment
processing, school information, and campus commerce
revenue
|
43,620
|
|
|
30,519
|
|
|
38,657
|
|
Communications
revenue
|
5,106
|
|
|
4,492
|
|
|
4,346
|
|
Enrollment services
revenue
|
—
|
|
|
—
|
|
|
4,326
|
|
Other
income
|
12,632
|
|
|
15,218
|
|
|
13,796
|
|
Gain from debt
repurchases
|
4,980
|
|
|
5,720
|
|
|
101
|
|
Derivative market
value and foreign currency transaction adjustments and derivative
settlements, net
|
(4,830)
|
|
|
83,187
|
|
|
(28,691)
|
|
Total other
income
|
115,737
|
|
|
192,900
|
|
|
84,865
|
|
Operating
expenses:
|
|
|
|
|
|
Salaries and
benefits
|
71,863
|
|
|
68,017
|
|
|
63,242
|
|
Depreciation and
amortization
|
8,598
|
|
|
9,116
|
|
|
7,640
|
|
Loan servicing
fees
|
6,025
|
|
|
5,726
|
|
|
6,928
|
|
Cost to provide
communications services
|
1,954
|
|
|
1,697
|
|
|
1,703
|
|
Cost to provide
enrollment services
|
—
|
|
|
—
|
|
|
3,623
|
|
Other
expenses
|
26,547
|
|
|
31,245
|
|
|
28,376
|
|
Total
operating expenses
|
114,987
|
|
|
115,801
|
|
|
111,512
|
|
Income before
income taxes
|
76,675
|
|
|
153,059
|
|
|
72,462
|
|
Income tax
expense
|
28,755
|
|
|
54,128
|
|
|
24,433
|
|
Net income
|
47,920
|
|
|
98,931
|
|
|
48,029
|
|
Net loss (income)
attributable to noncontrolling interests
|
2,106
|
|
|
(585)
|
|
|
(68)
|
|
Net income
attributable to Nelnet, Inc.
|
$
|
50,026
|
|
|
98,346
|
|
|
47,961
|
|
Earnings per common
share:
|
|
|
|
|
|
Net income
attributable to Nelnet, Inc. shareholders - basic and
diluted
|
$
|
1.18
|
|
|
2.32
|
|
|
1.11
|
|
Weighted average
common shares outstanding - basic and diluted
|
42,291,857
|
|
|
42,314,467
|
|
|
43,088,092
|
|
Condensed
Consolidated Balance Sheets
|
(Dollars in
thousands)
|
(unaudited)
|
|
|
As
of
|
|
As
of
|
|
As
of
|
|
March 31,
2017
|
|
December 31,
2016
|
|
March 31,
2016
|
Assets:
|
|
|
|
|
|
Student loans
receivable, net
|
$
|
24,003,386
|
|
|
24,903,724
|
|
|
27,519,052
|
|
Cash, cash
equivalents, investments, and notes receivable
|
381,978
|
|
|
323,798
|
|
|
324,485
|
|
Restricted
cash
|
881,334
|
|
|
1,100,663
|
|
|
1,010,730
|
|
Goodwill and
intangible assets, net
|
192,746
|
|
|
195,125
|
|
|
196,139
|
|
Other
assets
|
681,776
|
|
|
656,798
|
|
|
538,941
|
|
Total
assets
|
$
|
26,141,220
|
|
|
27,180,108
|
|
|
29,589,347
|
|
Liabilities:
|
|
|
|
|
|
Bonds and notes
payable
|
$
|
23,594,516
|
|
|
24,668,490
|
|
|
27,349,891
|
|
Other
liabilities
|
419,037
|
|
|
440,693
|
|
|
352,530
|
|
Total
liabilities
|
24,013,553
|
|
|
25,109,183
|
|
|
27,702,421
|
|
Equity:
|
|
|
|
|
|
Total Nelnet, Inc.
shareholders' equity
|
2,108,187
|
|
|
2,061,655
|
|
|
1,878,254
|
|
Noncontrolling
interests
|
19,480
|
|
|
9,270
|
|
|
8,672
|
|
Total
equity
|
2,127,667
|
|
|
2,070,925
|
|
|
1,886,926
|
|
Total liabilities and
equity
|
$
|
26,141,220
|
|
|
27,180,108
|
|
|
29,589,347
|
|
(code #: nnif)
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SOURCE Nelnet