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Nelnet Reports Third Quarter 2019 ResultsLINCOLN, Neb., Nov. 7, 2019 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of $33.2 million, or $0.83 per share, for the third quarter of 2019, compared with GAAP net income of $42.9 million, or $1.05 per share, for the same period a year ago. Net income, excluding derivative market value adjustments1, was $37.5 million, or $0.94 per share, for the third quarter of 2019, compared with $46.9 million, or $1.14 per share, for the same period in 2018. The decrease in net income for the three months ended September 30, 2019, as compared with the same period in 2018, was primarily due to:
These factors were partially offset by the contribution to net income from the company's Loan Servicing and Systems and Education Technology, Services, and Payment Processing operating segments. "Our Nelnet teams continue to produce consistent operating results and performance through the first three quarters of 2019," said Jeff Noordhoek, chief executive officer of Nelnet. "Extinguishing certain securitizations early has been a great decision, we were able to refinance the loans with more favorable terms, earn better returns on the freed up capital, and generate additional liquidity that can be used to invest in superior customer experiences and long-term growth and diversification." Nelnet operates four primary business segments, earning interest income on loans in its Asset Generation and Management segment and fee-based revenue in its Loan Servicing and Systems; Education Technology, Services, and Payment Processing; and Communications segments. Asset Generation and Management (AGM) Nelnet's average balance of loans in the third quarter of 2019 was $21.6 billion, compared with $23.0 billion for the same period in 2018. The company's AGM operating segment reported net interest income of $61.7 million for the three months ended September 30, 2019, compared with $59.2 million for the same period a year ago. Loan spread increased to 1.04 percent for the quarter ended September 30, 2019, compared with 0.90 percent for the same period in 2018. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The company's AGM operating segment recognized income from derivative settlements of $7.3 million during the third quarter of 2019, compared with income of $22.4 million for the same period in 2018. Derivative settlements for each applicable period should be evaluated with the company's net interest income. Net interest income and derivative settlements totaled $69.0 million and $81.6 million in the third quarter of 2019 and 2018, respectively. Core loan spread,2 which includes the impact of derivative settlements, decreased to 1.17 percent for the quarter ended September 30, 2019, compared with 1.30 percent for the same period in 2018. Provision for loan losses was $10.0 million and $10.5 million for the three months ended September 30, 2019 and 2018, respectively. For federally insured loans, the provision for loan losses was $2.0 million and $8.0 million for the three months ended September 30, 2019 and 2018, respectively. Provision for loan losses for consumer loans increased to $8.0 million for the three months ended September 30, 2019, compared with $2.5 million for the same period in 2018, as a result of consumer loan purchases. The company purchased $113.3 million of consumer loans in the third quarter of 2019, compared with $42.8 million in the same period of 2018. Subsequent to September 30, 2019, the company made the decision to sell $179.3 million (par value) of consumer loans and will recognize a gain in the fourth quarter of 2019 of $15.5 million ($11.8 million after tax, or $0.30 per share). Loan Servicing and Systems On February 7, 2018, the company acquired Great Lakes Educational Loan Services, Inc. (Great Lakes). The operating results of Great Lakes are included in the company's Loan Servicing and Systems segment from the date of acquisition. Revenue from the Loan Servicing and Systems segment was $113.3 million for the third quarter of 2019, compared with $112.6 million for the same period in 2018. As of September 30, 2019, the company was servicing $474.9 billion in government-owned, Federal Family Education Loan (FFEL) Program, private education, and consumer loans, compared with $464.9 billion of loans serviced by the company as of September 30, 2018. Net income for the Loan Servicing and Systems segment was $15.4 million for the three months ended September 30, 2019, compared with $10.0 million for the same period in 2018. For the three months ended September 30, 2019 and 2018, the before-tax operating margin (income before income taxes divided by revenue) from the Loan Servicing and Systems segment was 15.9 percent and 10.4 percent, respectively. The third quarter of 2018 included an impairment charge of $3.9 million ($3.0 million after tax). The remaining increase in operating margin was due primarily to efficiencies gained as a result of the completion of certain integration activities related to the Great Lakes acquisition. Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes are two companies that have student loan servicing contracts awarded by the U.S. Department of Education's Office of Federal Student Aid (the Department) in June 2009 to provide servicing for loans owned by the Department. As of September 30, 2019, Nelnet Servicing was servicing $184.4 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.3 billion of student loans for 7.4 million borrowers under its contract. The servicing contracts with the Department previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a Modification of Contract from the Department pursuant to which the Department extended the expiration date of the current contracts to December 15, 2019. The Department has a new federal student loan servicing contract procurement process in progress. On April 1, 2019 and October 4, 2019, the company responded to the transitional information technology platform component, and on August 1, 2019, the company responded to the business processing outsourcing component. In addition, the company is part of a team that has responded and intends to respond to various aspects of the third component (future state information technology platform). The company cannot predict the timing, nature, or outcome of these solicitations. Education Technology, Services, and Payment Processing On November 20, 2018, the company acquired Tuition Management Systems (TMS), a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions. The TMS acquisition added 380 higher education schools and 170 K-12 schools to the company's customer base. The results of TMS' operations are reported in the company's consolidated financial statements from the date of acquisition. For the third quarter of 2019, revenue from the Education Technology, Services, and Payment Processing operating segment was $74.3 million, an increase of $15.8 million, or 27 percent, from the same period in 2018. The increase in revenue was due to the acquisition of TMS; growth in managed tuition payment plans, campus commerce customer transactions, and payments volume; and an increase in the number of customers using the operating segment's education and technology services. Net income for the Education Technology, Services, and Payment Processing segment was $12.7 million for the three months ended September 30, 2019, compared with $7.6 million for the same period in 2018. For the three months ended September 30, 2019, before-tax operating margin (income before income taxes divided by net revenue) was 34.4 percent, compared with 25.4 percent for the same period of 2018. The increase in the before-tax operating margin was due to operating leverage and cost reductions resulting from the company's decision in October 2018 to terminate its investment in a proprietary payment processing platform. Communications Revenue from ALLO Communications was $16.5 million for the third quarter of 2019, compared with $11.8 million for the same period in 2018. The number of residential households served as of September 30, 2019, was 45,228, an increase of 12,699, or 39 percent, from the number of households served as of September 30, 2018. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest. During the second quarter of 2019, ALLO announced plans to expand its network to Breckenridge, Colorado, increasing households in current markets and newly announced markets to almost 160,000, of which over 137,000 are passed by ALLO's existing communications network as of September 30, 2019. ALLO incurred capital expenditures of $10.2 million during the three months ended September 30, 2019. The company currently anticipates total network expenditures during the fourth quarter of 2019 will be approximately $13 million; however, the amount of capital expenditures could change based on customer demand for ALLO's services. For the third quarter of 2019, ALLO recognized a net loss of $7.2 million, compared with a net loss of $7.7 million for the same period in 2018. The company anticipates this operating segment will be dilutive to consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs. ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA)3 to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the third quarter of 2019, ALLO reported positive EBITDA of $1.5 million, compared with $0.2 million for the same period in 2018. Liquidity and Capital Activities As of September 30, 2019, the company had $161.0 million in cash and cash equivalents and $52.6 million in available-for-sale investments, consisting primarily of student loan asset-backed securities. The company also has a $382.5 million unsecured line of credit. As of September 30, 2019, no amount was outstanding on the line of credit and $382.5 million was available for future use. During the third quarter of 2019, the company extinguished $675.6 million of notes payable in certain asset-backed securitizations prior to the notes' contractual maturities, resulting in the release of $996.4 million in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations. Upon extinguishment of the notes payable, the company refinanced the student loans, resulting in net cash proceeds of $311.5 million. The company used a portion of these proceeds to pay down the outstanding balance on its unsecured line of credit. To extinguish the notes, the company paid a premium of $12.6 million that was expensed by the company in the third quarter of 2019. In addition, the company wrote off $1.4 million of debt issuance costs. In total, the company recognized $14.0 million ($10.7 million after tax) in expenses in the third quarter of 2019 to extinguish these notes. The cash proceeds generated by the debt extinguishments provide the company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns. 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. Board of Directors Declares Fourth Quarter Dividend The Nelnet Board of Directors declared a fourth quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.20 per share. The dividend will be paid on December 13, 2019 to shareholders of record at the close of business on November 29, 2019. Forward-Looking and Cautionary Statements This press release contains forward-looking statements within the meaning of federal securities laws. The words "anticipate," "continue," "expect," "future," "intend," "may," "plan," "predict," "scheduled," "will," and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. 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 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 the expected benefits from the acquisitions of Great Lakes and TMS in 2018, and the ability to successfully integrate technology, shared services, and other activities and successfully maintain and increase allocated volumes of student loans serviced by Nelnet Servicing and Great Lakes under existing and any future servicing contracts with the Department, which current contracts accounted for 30 percent of the company's revenue in 2018; risks to the company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the risk that the company or company teams may not be successful in obtaining contracts; risks related to the development by the company of a new student loan servicing platform, including risks as to whether the expected benefits from the new platform will be realized; the uncertain nature of expected benefits from FFEL Program, private education, and consumer 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 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 FFEL Program loan originations in 2010 and the resulting initiatives by the company to adjust to a post-FFEL Program environment; risks and uncertainties related to the ability of ALLO to successfully expand its fiber network and market share 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, as well as other strategic initiatives; cybersecurity risks, including potential disruptions to systems, disclosure of confidential information, and/or damage to reputation resulting from cyber-breaches; and changes in general economic and credit market conditions, including the availability of any relevant money-market index rate such as LIBOR or the relationship between the relevant money-market index rate and the rate at which the company's assets and liabilities are priced. 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 third quarter ended September 30, 2019. 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. Non-GAAP Performance Measures The company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. Reconciliations of non-GAAP to GAAP financial information and a discussion of why the company believes providing this additional information is useful to investors, is provided in the "Non-GAAP Disclosures" section below.
Non-GAAP Disclosures Non-GAAP financial measures disclosed by management are meant to provide additional information and insight relative to business trends to investors and, in certain cases, to present financial information as measured by rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. 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.
Core loan spread The following table analyzes the loan spread on the company's portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the "Net interest income, net of settlements on derivatives" table on the following page, divided by the average balance of loans or debt outstanding.
Net interest income, net of settlements on derivatives The following table summarizes the components of "net interest income" and "derivative settlements, net" from the company's Asset Generation and Management segment statements of income.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) A reconciliation of ALLO's GAAP net loss to earnings before net interest expense, income taxes, depreciation, and amortization, is provided below.
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. (code #: nnif)
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