EX-99.2 3 exhibit992-nnix8717x10qxsu.htm EXHIBIT 99.2 Exhibit


For Release: August 7, 2017
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the second quarter 2017
(All dollars are in thousands, except per share amounts, unless otherwise noted)
The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for second quarter 2017 earnings, dated August 7, 2017, and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.
Forward-looking and cautionary statements
This supplemental financial information contains forward-looking statements and information that are based on management's current expectations as of the date of this document.  Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements.  These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Annual Report"), and include such risks and uncertainties as:

•
student loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP student loans and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of student loan prepayment or default rates;
•
financing and liquidity risks, including risks of changes in the general interest rate environment and in the securitization and other financing markets for student loans, including adverse changes resulting from slower than expected payments on student loans in FFELP securitization trusts, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;
•
risks from changes in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, risks related to adverse changes in the Company's volumes allocated under the Company's loan servicing contract with the U.S. Department of Education (the "Department"), which accounted for approximately 20 percent of the Company's revenue in 2016, risks related to the Department's initiative to procure new contracts for federal student loan servicing, including the risk that the Company's joint venture with Great Lakes Educational Loan Services, Inc. ("Great Lakes") may not be awarded a contract, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of FFELP, Federal Direct Loan Program, and private education and consumer loans;
•
risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential student loan borrower and other customer information;
•
uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;
•
the uncertain nature of the expected benefits from the acquisition of Allo Communications LLC on December 31, 2015 and the ability to 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
•
risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs, resulting from the recent politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.
All forward-looking statements contained in this supplement are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements 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.

1



Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)
 
Three Months Ended
 
Six months ended
 
June 30,
2017
 
March 31,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Interest income:
 
 
 
 
 
 
 
 
 
Loan interest
$
189,488

 
181,207

 
184,067

 
370,695

 
374,055

Investment interest
3,589

 
2,617

 
2,185

 
6,206

 
4,214

Total interest income
193,077

 
183,824

 
186,252

 
376,901

 
378,269

Interest expense:
 
 
 
 
 
 
 
 
 
Interest on bonds and notes payable
113,236

 
106,899

 
94,052

 
220,135

 
184,460

Net interest income
79,841

 
76,925

 
92,200

 
156,766

 
193,809

Less provision for loan losses
2,000

 
1,000

 
2,000

 
3,000

 
4,500

Net interest income after provision for loan losses
77,841

 
75,925

 
90,200

 
153,766

 
189,309

Other income:
 
 
 
 
 
 
 
 
 
Loan systems and servicing revenue
56,899

 
54,229

 
54,402

 
111,128

 
106,732

Tuition payment processing, school information, and campus commerce revenue
34,224

 
43,620

 
30,483

 
77,844

 
69,140

Communications revenue
5,719

 
5,106

 
4,478

 
10,826

 
8,824

Enrollment services revenue
—

 
—

 
—

 
—

 
4,326

Other income
12,485

 
12,632

 
9,765

 
25,118

 
23,559

Gain from debt repurchases
442

 
4,980

 
—

 
5,421

 
101

Derivative settlements, net
(363
)
 
(1,378
)
 
(5,495
)
 
(1,741
)
 
(12,031
)
Derivative market value and foreign currency transaction adjustments, net
(27,547
)
 
(3,452
)
 
(35,207
)
 
(31,000
)
 
(57,361
)
Total other income
81,859

 
115,737

 
58,426

 
197,596

 
143,290

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
74,628

 
71,863

 
60,923

 
146,491

 
124,165

Depreciation and amortization
9,038

 
8,598

 
8,183

 
17,636

 
15,823

Loan servicing fees
5,620

 
6,025

 
7,216

 
11,645

 
14,144

Cost to provide communications services
2,203

 
1,954

 
1,681

 
4,157

 
3,384

Cost to provide enrollment services
—

 
—

 
—

 
—

 
3,623

Other expenses
27,528

 
26,547

 
29,409

 
54,075

 
57,783

Total operating expenses
119,017

 
114,987

 
107,412

 
234,004

 
218,922

Income before income taxes
40,683

 
76,675

 
41,214

 
117,358

 
113,677

Income tax expense
16,032

 
28,755

 
15,036

 
44,787

 
39,469

Net income
24,651

 
47,920

 
26,178

 
72,571

 
74,208

Net loss (income) attributable to noncontrolling interests
4,086

 
2,106

 
(28
)
 
6,192

 
(97
)
Net income attributable to Nelnet, Inc.
$
28,737

 
50,026

 
26,150

 
78,763

 
74,111

Earnings per common share:
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
0.68

 
1.18

 
0.61

 
1.86

 
1.73

 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic and diluted
42,326,540

 
42,291,857

 
42,635,700

 
42,309,295

 
42,861,896



2


Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
 
As of
 
As of
 
As of
 
June 30, 2017
 
December 31, 2016
 
June 30, 2016
Assets:
 
 
 
 
 
Student loans receivable, net
$
23,202,294

 
24,903,724

 
26,539,604

Cash, cash equivalents, investments, and notes receivable
359,543

 
323,798

 
345,249

Restricted cash
917,041

 
1,100,663

 
1,096,817

Goodwill and intangible assets, net
190,389

 
195,125

 
201,453

Other assets
653,820

 
656,798

 
532,675

Total assets
$
25,323,087

 
27,180,108

 
28,715,798

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
22,790,780

 
24,668,490

 
26,399,686

Other liabilities
401,898

 
440,693

 
409,896

Total liabilities
23,192,678

 
25,109,183

 
26,809,582

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
2,115,194

 
2,061,655

 
1,897,300

Noncontrolling interest
15,215

 
9,270

 
8,916

Total equity
2,130,409

 
2,070,925

 
1,906,216

Total liabilities and equity
$
25,323,087

 
27,180,108

 
28,715,798




3


Overview

The Company is a diverse company with a focus on delivering education-related products and services and student loan asset management. The largest operating businesses engage in student loan servicing, tuition payment processing and school information systems, and communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate and start-up ventures.

GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments

The Company prepares its financial statements and presents its financial results in accordance with 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. A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency transaction adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.
 
Three months ended
 
Six months ended
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
GAAP net income attributable to Nelnet, Inc.
$
28,737

 
50,026

 
26,150

 
78,763

 
74,111

Realized and unrealized derivative market value adjustments
286

 
(1,238
)
 
44,975

 
(951
)
 
48,649

Unrealized foreign currency transaction adjustments
27,261

 
4,690

 
(9,768
)
 
31,951

 
8,712

Net tax effect (a)
(10,468
)
 
(1,312
)
 
(13,379
)
 
(11,780
)
 
(21,797
)
Net income, excluding derivative market value and foreign currency transaction adjustments (b)
$
45,816

 
52,166

 
47,978

 
97,983

 
109,675

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
GAAP net income attributable to Nelnet, Inc.
$
0.68

 
1.18

 
0.61

 
1.86

 
1.73

Realized and unrealized derivative market value adjustments
0.01

 
(0.03
)
 
1.05

 
(0.02
)
 
1.14

Unrealized foreign currency transaction adjustments
0.64

 
0.11

 
(0.22
)
 
0.76

 
0.20

Net tax effect (a)
(0.25
)
 
(0.03
)
 
(0.31
)
 
(0.28
)
 
(0.51
)
Net income, excluding derivative market value and foreign currency transaction adjustments (b)
$
1.08

 
1.23

 
1.13

 
2.32

 
2.56


(a)
The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments and unrealized foreign currency transaction adjustments by the applicable statutory income tax rate.

(b)
"Derivative market value and foreign currency transaction adjustments" include (i) both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse under new rules effective January 3, 2017) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the unrealized foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.  "Derivative market value and foreign currency transaction adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met.  Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting.  As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item.  Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period. In addition, the Company incurs unrealized foreign currency transaction adjustments for periodic fluctuations in currency exchange rates between the U.S. dollar and Euro in connection with its student loan asset-backed Euro-denominated bonds with an interest rate based on a spread to the EURIBOR index. The principal and accrued interest on these bonds are remeasured at each reporting period and recorded in the Company's consolidated balance sheet in U.S. dollars based on the foreign currency exchange rate on that date.

The Company believes these point-in-time estimates of asset and liability values related to its derivative instruments and Euro-denominated bonds 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.

4


The increase in GAAP net income for the three and six months ended June 30, 2017, as compared with the same periods in 2016, was due to a decrease in 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. In addition, the Company recognized more gains from the repurchase of its own debt in 2017 (most of which occurred in the first quarter) as compared to 2016. These factors were partially offset by the increase in expenses to accelerate the buildout of the Company's communications network in Lincoln, Nebraska, lower net interest income earned by the Company on its student loan portfolio due to expected portfolio runoff and lower student loan spread, and an increase in losses related to foreign currency transaction adjustments caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.

Operating Results

The Company earns net interest income on its FFELP student loan portfolio in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of June 30, 2017, the Company had a $23.2 billion student loan portfolio that management anticipates will amortize over the next approximately 25 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional FFELP loan portfolios to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

In addition, the Company earns fee-based revenue through the following reportable operating segments:
 
•
Loan Systems and Servicing ("LSS") - referred to as Nelnet Diversified Solutions ("NDS")
•
Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS")
•
Communications - referred to as Allo Communications ("Allo")

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.


5


The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the three and six months ended June 30, 2017 and 2016 (dollars in millions).

segopresults2017q2a02.jpg
(a)    Revenue includes intersegment revenue earned by LSS as a result of servicing loans for AGM.

(b)
Total revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives and foreign currency transaction adjustments, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.

A summary of the results and financial highlights for each reportable operating segment and a summary of the Company's liquidity and capital resources follows.

Loan Systems and Servicing

•
As of June 30, 2017, the Company was servicing $200.7 billion in FFELP, government owned, and private education and consumer loans, as compared with $183.6 billion of loans as of June 30, 2016.

•
Revenue increased in the three and six months ended June 30, 2017 compared to the same periods in 2016 due to an increase in revenue on the government servicing contract and from growth in private education and consumer loan servicing volume from existing and new clients. The increase was partially offset by the loss of guaranty servicing and collection revenue.

•
Revenue from the government servicing contract increased to $39.8 million for the three months ended June 30, 2017 compared to $37.1 million for the same period in 2016, and increased to $78.8 million for the six months ended June 30, 2017, compared to $72.3 million for the same period in 2016. This increase was due to an increase in application volume for the Company's administration of the Total and Permanent Disability and Direct Loan Consolidation programs, the transfer of borrowers to the Company from a not-for-profit servicer who exited the loan servicing business in August 2016, and the shift in the portfolio of loans serviced to a greater portion of loans in higher paying repayment statuses. As of June 30, 2017, the Company was servicing $167.6 billion of student loans for 5.8 million borrowers under this contract.

•
Revenue from private education and consumer loan servicing increased to $7.1 million for the three months ended June 30, 2017 compared to $3.4 million for the same period in 2016, and increased to $12.9 million for the six months ended June 30, 2017, compared to $6.6 million for the same period in 2016. As of June 30, 2017, the Company was servicing $10.2 billion of private education and consumer loans for approximately 454,000 borrowers, as compared to $5.7 billion of private education and consumer loans for approximately 267,000 borrowers as of June 30, 2016.


6


•
The Company's remaining guaranty servicing and collection client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. After this customer's exit from the FFELP guaranty business effective June 30, 2016, the Company has no remaining guaranty servicing and collection revenue. Guaranty servicing and collection revenue earned from this customer in the three and six months ended June 30, 2016 was $4.6 million and $9.6 million, respectively.

•
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 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 under the new contract in the event that the Department selects it to be awarded with the 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 currently one of four private sector companies (referred to as Title IV Additional Servicers, or "TIVAS") that has a student loan servicing contract with the Department to provide servicing for loans owned by the Department.

On June 30, 2016, the Department announced which entities were selected to respond to Phase II of the procurement selection process. GreatNet was one of three entities selected. 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 that it was withdrawing certain policy memos to FSA from the prior administration regarding factors to be considered in the procurement process. On May 19, 2017, the Department announced that it had amended the contract procurement process to provide that the single servicing platform to be acquired by the Department will be utilized by a single customer service provider to be selected by the Department to manage all student loans owned by the Department.  This amendment required another response by the Phase II participants, and on July 7, 2017, GreatNet submitted its response to the Department.

On August, 1, 2017, the Department announced it was canceling the current procurement process for a single servicing platform and customer service provider and that it intends to develop a new contract procurement proposal. The Department indicated that its new approach is expected to require separate contract acquisitions for database housing, system processing, and customer account servicing.

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 noncontrolling interests. During the first quarter of 2017, Nelnet Servicing and Great Lakes each contributed capital to GreatNet and GreatNet began to incur certain operating costs.

Tuition Payment Processing and Campus Commerce

•
Revenue increased in the three and six months ended June 30, 2017 compared to the same periods in 2016 due to increases in the number of managed tuition payment plans, campus commerce customer transactions and payments volume, and new school customers.

•
Before tax operating margin for the three months ended June 30, 2017 and 2016 was 23.3 percent and 20.2 percent, respectively, and for the six months ended June 30, 2017 and 2016 was 32.8 percent and 32.5 percent, respectively. This segment is subject to seasonal fluctuations. Based on the timing of when revenue is recognized and when expenses are incurred, revenue and operating margin are higher in the first quarter as compared to the remainder of the year.

Communications

•
For the three months ended June 30, 2017 and 2016, Allo recorded net losses of $3.6 million and $0.7 million, respectively, and for the six months ended June 30, 2017 and 2016 recorded net losses of $6.5 million and $1.1 million, respectively. The Company anticipates this operating segment will be dilutive to consolidated earnings over the next several years as it continues to build its network in Lincoln, Nebraska, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.


7


•
Revenue from Allo for the three months ended June 30, 2017 and 2016 was $5.7 million and $4.5 million, respectively, and for the six months ended June 30, 2017 and 2016 revenue was $10.8 million and $8.8 million, respectively. The number of residential households served increased to 12,460 as of June 30, 2017 from 8,314 as of June 30, 2016.

•
For the three and six months ended June 30, 2017, Allo's capital expenditures were $32.3 million and $49.0 million, respectively. The Company anticipates total network capital expenditures of approximately $80 million in 2017; however, such amount could change based on customer demand for Allo's services. The number of residential households passed, which represents the estimated number of single residence homes, apartments, and condominiums that Allo already serves and those in which Allo has the capacity to connect to its network distribution system without further material extensions to the transmission lines (but have not been connected) increased to 45,880 as of June 30, 2017 as compared to 30,962 as of December 31, 2016.

Asset Generation and Management

•
During the three months ended June 30, 2017 compared to the same period in 2016, the average balance of student loans decreased $3.4 billion, to $23.9 billion, due primarily to the amortization of the student loan portfolio, and limited portfolio acquisitions from third parties. The Company acquired $52.7 million and $104.9 million of student loans during the three and six months ended June 30, 2017, respectively.

•
Core student loan spread was 1.27% for the three months ended June 30, 2017, compared to 1.29% for the same period in 2016. The decrease in core student loan spread for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was due to a decrease in fixed rate floor income, offset partially by a tightening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans.

•
Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the three months ended June 30, 2017 and 2016, and six months ended June 30, 2017 and 2016, the Company earned $27.7 million, $44.3 million, $59.8 million, and $90.2 million, respectively, of fixed rate floor income.

Liquidity and Capital Resources

•
As of June 30, 2017, the Company had cash and cash equivalents of $69.2 million. In addition, the Company had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of $117.2 million as of June 30, 2017.

•
For the six months ended June 30, 2017, the Company generated $132.1 million in net cash from operating activities.

•
Forecasted undiscounted future cash flows from the Company's student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.0 billion as of June 30, 2017.

•
As of June 30, 2017, there were no amounts outstanding on the Company's unsecured line of credit and $350.0 million was available for future use. The unsecured line of credit has a maturity date of December 12, 2021.

•
During the six months ended June 30, 2017, the Company repurchased a total of 415,777 shares of Class A common stock for $18.2 million ($43.76 per share), including a total of 384,061 shares of Class A common stock repurchased for $16.8 million ($43.81 per share) during the three months ended June 30, 2017. Subsequent to June 30, 2017, from July 1, 2017 through August 7, 2017, the Company has repurchased an additional 376,703 shares of Class A common stock for $18.1 million ($47.98 per share).

•
During the six months ended June 30, 2017, the Company paid cash dividends of $11.8 million ($0.28 per share), including $5.9 million ($0.14 per share) during the three months ended June 30, 2017. In addition, the Company's Board of Directors has declared a third quarter 2017 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.14 per share. The third quarter cash dividend will be paid on September 15, 2017 to shareholders of record at the close of business on September 1, 2017.

•
The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP and private education and consumer loan acquisitions; strategic acquisitions and investments; expansion of Allo's telecommunications 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.

8


Operating Segments

The Company has four reportable operating segments. The Company's reportable operating segments include:

• Loan Systems and Servicing
• Tuition Payment Processing and Campus Commerce
• Communications
• Asset Generation and Management

The Company earns fee-based revenue through its Loan Systems and Servicing, Tuition Payment Processing, and Communications operating segments. In addition, the Company earns interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. See note 1 of the notes to consolidated financial statements included in the 2016 Annual Report for a description of each operating segment, including the primary products and services offered.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources. Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments based on their financial results prepared in conformity with U.S. GAAP.  

Corporate and Other Activities

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities. Corporate and Other Activities includes the following items:

•
Income earned on certain investment activities
•
Interest expense incurred on unsecured debt transactions
•
Other product and service offerings that are not considered reportable operating segments including, but not limited to, Whitetail Rock Capital Management, LLC, the Company's SEC-registered investment advisory subsidiary

Corporate and Other Activities also include certain corporate activities and overhead functions related to executive management, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.

9


Segment Results of Operations

The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial
statements.
 
Three months ended June 30, 2017
 
Loan Systems and Servicing
 
Tuition Payment Processing and Campus Commerce
 
Communications
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
120

 
3

 
1

 
191,367

 
3,362

 
(1,776
)
 
193,077

Interest expense
—

 
—

 
1,104

 
113,073

 
835

 
(1,776
)
 
113,236

Net interest income
120

 
3

 
(1,103
)
 
78,294

 
2,527

 
—

 
79,841

Less provision for loan losses
—

 
—

 
—

 
2,000

 
—

 
—

 
2,000

Net interest income (loss) after provision for loan losses
120

 
3

 
(1,103
)
 
76,294

 
2,527

 
—

 
77,841

Other income:
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan systems and servicing revenue
56,899

 
—

 
—

 
—

 
—

 
—

 
56,899

Intersegment servicing revenue
9,952

 
—

 
—

 
—

 
—

 
(9,952
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
34,224

 
—

 
—

 
—

 
—

 
34,224

Communications revenue
—

 
—

 
5,719

 
—

 
—

 
—

 
5,719

Other income
—

 
—

 
—

 
3,057

 
9,429

 
—

 
12,485

Gain from debt repurchases
—

 
—

 
—

 
442

 
—

 
—

 
442

Derivative settlements, net
—

 
—

 
—

 
(165
)
 
(198
)
 
—

 
(363
)
Derivative market value and foreign currency transaction adjustments, net
—

 
—

 
—

 
(27,412
)
 
(135
)
 
—

 
(27,547
)
Total other income
66,851

 
34,224

 
5,719

 
(24,078
)
 
9,096

 
(9,952
)
 
81,859

Operating expenses:
 

 
 

 
 
 
 
 
 

 
 
 
 

Salaries and benefits
40,506

 
16,901

 
3,411

 
363

 
13,447

 
—

 
74,628

Depreciation and amortization
546

 
2,346

 
2,600

 
—

 
3,547

 
—

 
9,038

Loan servicing fees
—

 
—

 
—

 
5,620

 
—

 
—

 
5,620

Cost to provide communications services
—

 
—

 
2,203

 
—

 
—

 
—

 
2,203

Other expenses
8,879

 
4,853

 
1,772

 
1,827

 
10,195

 
—

 
27,528

Intersegment expenses, net
8,324

 
2,136

 
496

 
10,043

 
(11,046
)
 
(9,952
)
 
—

Total operating expenses
58,255

 
26,236

 
10,482

 
17,853

 
16,143

 
(9,952
)
 
119,017

Income (loss) before income taxes
8,716

 
7,991

 
(5,866
)
 
34,363

 
(4,520
)
 
—

 
40,683

Income tax (expense) benefit
(4,918
)
 
(3,037
)
 
2,229

 
(13,057
)
 
2,751

 
—

 
(16,032
)
Net income (loss)
3,798

 
4,954

 
(3,637
)
 
21,306

 
(1,769
)
 
—

 
24,651

  Net loss (income) attributable to noncontrolling interests
4,226

 
—

 
—

 
—

 
(141
)
 
—

 
4,086

Net income (loss) attributable to Nelnet, Inc.
$
8,024

 
4,954

 
(3,637
)
 
21,306

 
(1,910
)
 
—

 
28,737


10


 
Three months ended March 31, 2017
 
Loan Systems and Servicing
 
Tuition Payment Processing and Campus Commerce
 
Communications
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
94

 
2

 
1

 
182,326

 
2,761

 
(1,359
)
 
183,824

Interest expense
—

 
—

 
712

 
106,751

 
795

 
(1,359
)
 
106,899

Net interest income
94

 
2

 
(711
)
 
75,575

 
1,966

 
—

 
76,925

Less provision for loan losses
—

 
—

 
—

 
1,000

 
—

 
—

 
1,000

Net interest income (loss) after provision for loan losses
94

 
2

 
(711
)
 
74,575

 
1,966

 
—

 
75,925

Other income:
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan systems and servicing revenue
54,229

 
—

 
—

 
—

 
—

 
—

 
54,229

Intersegment servicing revenue
10,323

 
—

 
—

 
—

 
—

 
(10,323
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
43,620

 
—

 
—

 
—

 
—

 
43,620

Communications revenue
—

 
—

 
5,106

 
—

 
—

 
—

 
5,106

Other income
—

 
—

 
—

 
3,342

 
9,290

 
—

 
12,632

Gain from debt repurchases
—

 
—

 
—

 
540

 
4,440

 
—

 
4,980

Derivative settlements, net
—

 
—

 
—

 
(1,173
)
 
(205
)
 
—

 
(1,378
)
Derivative market value and foreign currency transaction adjustments, net
—

 
—

 
—

 
(3,410
)
 
(42
)
 
—

 
(3,452
)
Total other income
64,552

 
43,620


5,106

 
(701
)
 
13,483

 
(10,323
)
 
115,737

Operating expenses:
 

 
 

 
 
 
 

 
 

 
 

 
 

Salaries and benefits
37,992

 
16,652

 
2,979

 
400

 
13,839

 
—

 
71,863

Depreciation and amortization
549

 
2,391

 
2,135

 
—

 
3,523

 
—

 
8,598

Loan servicing fees
—

 
—

 
—

 
6,025

 
—

 
—

 
6,025

Cost to provide communications services
—

 
—

 
1,954

 
—

 
—

 
—

 
1,954

Other expenses
9,136

 
4,995

 
1,372

 
991

 
10,054

 
—

 
26,547

Intersegment expenses, net
7,398

 
2,075

 
506

 
10,412

 
(10,068
)
 
(10,323
)
 
—

Total operating expenses
55,075

 
26,113


8,946

 
17,828

 
17,348

 
(10,323
)
 
114,987

Income (loss) before income taxes
9,571

 
17,509


(4,551
)
 
56,046

 
(1,899
)
 
—

 
76,675

Income tax (expense) benefit
(4,555
)
 
(6,653
)
 
1,730

 
(21,297
)
 
2,021

 
—

 
(28,755
)
Net income (loss)
5,016

 
10,856


(2,821
)
 
34,749

 
122

 
—

 
47,920

  Net loss (income) attributable to noncontrolling interest
2,415

 
—

 
—

 
—

 
(309
)
 
—

 
2,106

Net income (loss) attributable to Nelnet, Inc.
$
7,431

 
10,856

 
(2,821
)
 
34,749

 
(187
)
 
—

 
50,026



11


 
Three months ended June 30, 2016
 
Loan Systems and Servicing
 
Tuition Payment Processing and Campus Commerce
 
Communications
 
Asset
Generation and
Management
 
Corporate and Other
Activities
 
Eliminations
 
Total
Total interest income
$
22

 
3

 
—

 
184,966

 
2,064

 
(802
)
 
186,252

Interest expense
—

 
—

 
205

 
92,769

 
1,881

 
(802
)
 
94,052

Net interest income
22

 
3

 
(205
)
 
92,197

 
183

 
—

 
92,200

Less provision for loan losses
—

 
—

 
—

 
2,000

 
—

 
—

 
2,000

Net interest income (loss) after provision for loan losses
22

 
3

 
(205
)
 
90,197

 
183

 
—

 
90,200

Other income:
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan systems and servicing revenue
54,402

 
—

 
—

 
—

 
—

 
—

 
54,402

Intersegment servicing revenue
11,408

 
—

 
—

 
—

 
—

 
(11,408
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
30,483

 
—

 
—

 
—

 
—

 
30,483

Communications revenue
—

 
—

 
4,478

 
—

 
—

 
—

 
4,478

Enrollment services revenue
—

 
—

 
—

 
—

 
—

 
—

 
—

Other income
—

 
—

 
—

 
3,834

 
5,931

 
—

 
9,765

Gain from debt repurchases
—

 
—

 
—

 
—

 
—

 
—

 
—

Derivative settlements, net
—

 
—

 
—

 
(5,264
)
 
(231
)
 
—

 
(5,495
)
Derivative market value and foreign currency transaction adjustments, net
—

 
—

 
—

 
(31,411
)
 
(3,797
)
 
—

 
(35,207
)
Total other income
65,810

 
30,483

 
4,478

 
(32,841
)
 
1,903

 
(11,408
)
 
58,426

Operating expenses:
 

 
 

 
 
 
 

 
 

 
 

 
 

Salaries and benefits
31,380

 
15,444

 
1,377

 
499

 
12,222

 
—

 
60,923

Depreciation and amortization
445

 
2,511

 
1,378

 
—

 
3,848

 
—

 
8,183

Loan servicing fees
—

 
—

 
—

 
7,216

 
—

 
—

 
7,216

Cost to provide communication services
—

 
—

 
1,681

 
—

 
—

 
—

 
1,681

Cost to provide enrollment services
—

 
—

 
—

 
—

 
—

 
—

 
—

Other expenses
11,380

 
4,815

 
813

 
1,481

 
10,920

 
—

 
29,409

Intersegment expenses, net
6,102

 
1,562

 
187

 
11,539

 
(7,981
)
 
(11,408
)
 
—

Total operating expenses
49,307

 
24,332

 
5,436

 
20,735

 
19,009

 
(11,408
)
 
107,412

Income (loss) before income taxes
16,525

 
6,154

 
(1,163
)
 
36,621

 
(16,923
)
 
—

 
41,214

Income tax (expense) benefit
(6,280
)
 
(2,338
)
 
442

 
(13,916
)
 
7,057

 
—

 
(15,036
)
Net income (loss)
10,245

 
3,816

 
(721
)
 
22,705

 
(9,866
)
 
—

 
26,178

  Net loss (income) attributable to noncontrolling interests
—

 
—

 
—

 
—

 
(28
)
 
—

 
(28
)
Net income (loss) attributable to Nelnet, Inc.
$
10,245

 
3,816

 
(721
)
 
22,705

 
(9,894
)
 
—

 
26,150





12


 
Six months ended June 30, 2017
 
Loan Systems and Servicing
 
Tuition Payment Processing and Campus Commerce
 
Communications
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
214

 
5

 
1

 
373,692

 
6,123

 
(3,135
)
 
376,901

Interest expense
—

 
—

 
1,816

 
219,824

 
1,630

 
(3,135
)
 
220,135

Net interest income
214

 
5

 
(1,815
)
 
153,868

 
4,493

 
—

 
156,766

Less provision for loan losses
—

 
—

 
—

 
3,000

 
—

 
—

 
3,000

Net interest income (loss) after provision for loan losses
214

 
5

 
(1,815
)
 
150,868

 
4,493

 
—

 
153,766

Other income:
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan systems and servicing revenue
111,128

 
—

 
—

 
—

 
—

 
—

 
111,128

Intersegment servicing revenue
20,275

 
—

 
—

 
—

 
—

 
(20,275
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
77,844

 
—

 
—

 
—

 
—

 
77,844

Communications revenue
—

 
—

 
10,826

 
—

 
—

 
—

 
10,826

Other income
—

 
—

 
—

 
6,399

 
18,719

 
—

 
25,118

Gain from debt repurchases
—

 
—

 
—

 
981

 
4,440

 
—

 
5,421

Derivative settlements, net
—

 
—

 
—

 
(1,339
)
 
(402
)
 
—

 
(1,741
)
Derivative market value and foreign currency transaction adjustments, net
—

 
—

 
—

 
(30,823
)
 
(177
)
 
—

 
(31,000
)
Total other income
131,403

 
77,844

 
10,826

 
(24,782
)
 
22,580

 
(20,275
)
 
197,596

Operating expenses:
 

 
 

 
 
 
 
 
 

 
 
 
 

Salaries and benefits
78,497

 
33,553

 
6,390

 
763

 
27,287

 
—

 
146,491

Depreciation and amortization
1,095

 
4,737

 
4,735

 
—

 
7,069

 
—

 
17,636

Loan servicing fees
—

 
—

 
—

 
11,645

 
—

 
—

 
11,645

Cost to provide communications services
—

 
—

 
4,157

 
—

 
—

 
—

 
4,157

Other expenses
18,015

 
9,847

 
3,144

 
2,819

 
20,249

 
—

 
54,075

Intersegment expenses, net
15,722

 
4,210

 
1,002

 
20,455

 
(21,114
)
 
(20,275
)
 
—

Total operating expenses
113,329

 
52,347

 
19,428

 
35,682

 
33,491

 
(20,275
)
 
234,004

Income (loss) before income taxes
18,288

 
25,502

 
(10,417
)
 
90,404

 
(6,418
)
 
—

 
117,358

Income tax (expense) benefit
(9,473
)
 
(9,690
)
 
3,959

 
(34,354
)
 
4,772

 
—

 
(44,787
)
Net income (loss)
8,815

 
15,812

 
(6,458
)
 
56,050

 
(1,646
)
 
—

 
72,571

  Net loss (income) attributable to noncontrolling interests
6,641

 
—

 
—

 
—

 
(450
)
 
—

 
6,192

Net income (loss) attributable to Nelnet, Inc.
$
15,456

 
15,812

 
(6,458
)
 
56,050

 
(2,096
)
 
—

 
78,763



13


 
Six months ended June 30, 2016
 
Loan Systems and Servicing
 
Tuition Payment Processing and Campus Commerce
 
Communications
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
43

 
5

 
—

 
375,689

 
4,157

 
(1,625
)
 
378,269

Interest expense
—

 
—

 
352

 
182,647

 
3,087

 
(1,625
)
 
184,460

Net interest income
43

 
5

 
(352
)
 
193,042

 
1,070

 
—

 
193,809

Less provision for loan losses
—

 
—

 
—

 
4,500

 
—

 
—

 
4,500

Net interest income (loss) after provision for loan losses
43

 
5

 
(352
)
 
188,542

 
1,070

 
—

 
189,309

Other income:
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan systems and servicing revenue
106,732

 
—

 
—

 
—

 
—

 
—

 
106,732

Intersegment servicing revenue
23,415

 
—

 
—

 
—

 
—

 
(23,415
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
69,140

 
—

 
—

 
—

 
—

 
69,140

Communications revenue
—

 
—

 
8,824

 
—

 
—

 
—

 
8,824

Enrollment services revenue
—

 
—

 
—

 
—

 
4,326

 
—

 
4,326

Other income
—

 
—

 
—

 
8,097

 
15,462

 
—

 
23,559

Gain from debt repurchases
—

 
—

 
—

 
101

 
—

 
—

 
101

Derivative settlements, net
—

 
—

 
—

 
(11,568
)
 
(463
)
 
—

 
(12,031
)
Derivative market value and foreign currency transaction adjustments, net
—

 
—

 
—

 
(51,308
)
 
(6,053
)
 
—

 
(57,361
)
Total other income
130,147

 
69,140

 
8,824

 
(54,678
)
 
13,272

 
(23,415
)
 
143,290

Operating expenses:
 

 
 

 
 
 
 
 
 

 
 
 
 

Salaries and benefits
64,346

 
29,880

 
2,467

 
1,018

 
26,454

 
—

 
124,165

Depreciation and amortization
883

 
4,782

 
2,507

 
—

 
7,650

 
—

 
15,823

Loan servicing fees
—

 
—

 
—

 
14,144

 
—

 
—

 
14,144

Cost to provide communications services
—

 
—

 
3,384

 
—

 
—

 
—

 
3,384

Cost to provide enrollment services
—

 
—

 
—

 
—

 
3,623

 
—

 
3,623

Other expenses
22,850

 
8,973

 
1,566

 
2,997

 
21,397

 
—

 
57,783

Intersegment expenses, net
12,343

 
3,074

 
331

 
23,646

 
(15,978
)
 
(23,415
)
 
—

Total operating expenses
100,422

 
46,709

 
10,255

 
41,805

 
43,146

 
(23,415
)
 
218,922

Income (loss) before income taxes
29,768

 
22,436

 
(1,783
)
 
92,059

 
(28,804
)
 
—

 
113,677

Income tax (expense) benefit
(11,312
)
 
(8,526
)
 
678

 
(34,983
)
 
14,674

 
—

 
(39,469
)
Net income (loss)
18,456

 
13,910

 
(1,105
)
 
57,076

 
(14,130
)
 
—

 
74,208

  Net loss (income) attributable to noncontrolling interests
—

 
—

 
—

 
—

 
(97
)
 
—

 
(97
)
Net income (loss) attributable to Nelnet, Inc.
$
18,456

 
13,910

 
(1,105
)
 
57,076

 
(14,227
)
 
—

 
74,111



14



Net Interest Income, Net of Settlements on Derivatives
The following table summarizes the components of "net interest income" and "derivative settlements, net."

Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income.  The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.  As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in the table below.  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.  See "Derivative Settlements" included in this supplement for the net settlement activity recognized by the Company for each type of derivative for the periods presented in the table below. 
 
Three months ended
 
Six months ended
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Variable student loan interest margin, net of settlements on derivatives (a)
$
47,146

 
41,922

 
47,141

 
89,065

 
100,996

Fixed rate floor income, net of settlements on derivatives (b)
29,778

 
32,012

 
39,497

 
61,789

 
80,136

Investment interest
3,589

 
2,617

 
2,185

 
6,206

 
4,214

Non-portfolio related derivative settlements (c)
(198
)
 
(205
)
 
(231
)
 
(402
)
 
(463
)
Corporate debt interest expense
(837
)
 
(799
)
 
(1,887
)
 
(1,633
)
 
(3,105
)
Net interest income (net of settlements on derivatives)
$
79,478

 
75,547

 
86,705

 
155,025

 
181,778


(a)
Derivative settlements include the net settlements paid/received related to the Company’s 1:3 basis swaps and cross-currency interest rate swap.

(b)
Derivative settlements include the net settlements paid/received related to the Company’s floor income interest rate swaps.

(c)
Derivative settlements include the net settlements paid/received related to the Company’s hybrid debt hedges.


15


Student Loan Servicing Volumes (dollars in millions)
lnservvol2017q2a01.jpg
Company owned
 
$19,742
 
$18,886
 
$18,433
 
$18,079
 
$17,429
 
$16,962
 
$16,352
 
$15,789
% of total
 
12.2%
 
10.7%
 
10.1%
 
9.8%
 
9.0%
 
8.7%
 
8.2%
 
7.9%
Number of servicing borrowers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government servicing:
 
5,915,449

 
5,842,163

 
5,786,545

 
5,726,828

 
6,009,433

 
5,972,619

 
5,924,099

 
5,849,283

FFELP servicing:
 
1,397,295

 
1,335,538

 
1,298,407

 
1,296,198

 
1,357,412

 
1,312,192

 
1,263,785

 
1,218,706

Private education and consumer loan servicing:
 
202,529

 
245,737

 
250,666

 
267,073

 
292,989

 
355,096

 
389,010

 
454,182

Total:
 
7,515,273

 
7,423,438

 
7,335,618

 
7,290,099

 
7,659,834

 
7,639,907

 
7,576,894

 
7,522,171

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of remote hosted borrowers:
 
1,611,654

 
1,755,341

 
1,796,783

 
1,842,961

 
2,103,989

 
2,230,019

 
2,305,991

 
2,317,151



16


Communications Financial and Operating Data

Certain financial and operating data for Allo is summarized in the tables below.
 
Three months ended
 
Six months ended
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Residential revenue
$
3,740

 
3,272

 
2,528

 
7,014

 
5,052

Business revenue
1,695

 
1,780

 
1,584

 
3,290

 
3,212

Other revenue
284

 
54

 
366

 
522

 
560

Total revenue
$
5,719

 
5,106

 
4,478

 
10,826

 
8,824

 
 
 
 
 
 
 
 
 
 
Net loss
$
(3,637
)
 
(2,821
)
 
(721
)
 
(6,458
)
 
(1,105
)
EBITDA (a)
(2,163
)
 
(1,705
)
 
420

 
(3,867
)
 
1,076

 
 
 
 
 
 
 
 
 
 
Capital expenditures
32,344

 
16,669

 
9,160

 
49,013

 
12,037

 
 
 
 
 
 
 
 
 
 
Revenue contribution:
 
 
 
 
 
 
 
 
 
Internet
45.6
%
 
43.6
%
 
37.0
%
 
44.8
%
 
37.6
%
Telephone
23.4

 
24.3

 
26.6

 
23.8

 
27.2

Television
30.8

 
31.8

 
31.4

 
31.2

 
32.1

Other
0.2

 
0.3

 
5.0

 
0.2

 
3.1

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
As of
June 30, 2017
 
As of
March 31, 2017
 
As of
December 31, 2016
 
As of September 30, 2016
 
As of
June 30, 2016
 
As of
March 31, 2016
 
As of
December 31, 2015
Residential customer information:
 
 
 
 
 
 
 
 
 
 
 
 
 
Households served
12,460

 
10,524

 
9,814

 
8,745

 
8,314

 
7,909

 
7,600

Households passed (b)
45,880

 
34,925

 
30,962

 
22,977

 
22,977

 
21,274

 
21,274

Total households in current markets (c)
137,500

 
137,500

 
137,500

 
137,500

 
137,500

 
137,500

 
28,874


(a)
Earnings (loss) before interest, income taxes, depreciation, and amortization ("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. A reconciliation of EBITDA from Allo's net loss under GAAP is presented in the table immediately below:


17


 
Three months ended
 
Six months ended
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Net loss
$
(3,637
)
 
(2,821
)
 
(721
)
 
(6,548
)
 
(1,105
)
Net interest expense
1,103

 
711

 
205

 
1,815

 
352

Income tax benefit
(2,229
)
 
(1,730
)
 
(442
)
 
(3,959
)
 
(678
)
Depreciation and amortization
2,600

 
2,135

 
1,378

 
4,735

 
2,507

Earnings (loss) before interest expense, income taxes, depreciation, and amortization (EBITDA)
$
(2,163
)
 
(1,705
)
 
420

 
(3,867
)
 
1,076

(b)
Represents the number of single residence homes, apartments, and condominiums that Allo already serves and those in which Allo has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected.
(c)
During the first quarter of 2016, Allo announced plans to expand its network to make services available to substantially all commercial and residential premises in Lincoln, Nebraska, and currently plans to expand to additional communities in Nebraska and surrounding states over the next several years.

Other Income

The following table summarizes the components of "other income."
 
Three months ended
 
Six months ended
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Borrower late fee income
$
3,048

 
3,319

 
3,106

 
6,368

 
6,752

Peterson's revenue
3,043

 
2,836

 
3,246

 
5,880

 
6,527

Investment advisory fees
2,294

 
3,516

 
1,014

 
5,810

 
1,832

Realized and unrealized gains on investments classified as available-for-sale and trading, net
392

 
324

 
(112
)
 
716

 
1,028

Other
3,708

 
2,637

 
2,511

 
6,344

 
7,420

Other income
$
12,485

 
12,632

 
9,765

 
25,118

 
23,559


Derivative Settlements

The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
 
Three months ended
 
Six months ended
 
June 30,
2017
 
March 31,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
1:3 basis swaps
$
(362
)
 
698

 
743

 
336

 
414

Interest rate swaps - floor income hedges
2,114

 
(120
)
 
(4,841
)
 
1,994

 
(10,084
)
Interest rate swaps - hybrid debt hedges
(198
)
 
(205
)
 
(231
)
 
(402
)
 
(463
)
Cross-currency interest rate swap
(1,917
)
 
(1,751
)
 
(1,166
)
 
(3,669
)
 
(1,898
)
Total settlements - (expense) income
$
(363
)
 
(1,378
)
 
(5,495
)
 
(1,741
)
 
(12,031
)


18


Derivative Market Value and Foreign Currency Transaction Adjustments

"Derivative market value and foreign currency transaction adjustments" include (i) the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.

The following table summarizes the components of “derivative market value and foreign currency transaction adjustments” included in the attached consolidated statements of income.
 
Three months ended
 
Six months ended
 
June 30,
2017
 
March 31,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Change in fair value of derivatives - (expense) income
$
(286
)
 
1,238

 
(44,975
)
 
951

 
(48,649
)
Foreign currency transaction adjustments - (expense) income
(27,261
)
 
(4,690
)
 
9,768

 
(31,951
)
 
(8,712
)
Derivative market value and foreign currency transaction adjustments - (expense) income
$
(27,547
)
 
(3,452
)
 
(35,207
)
 
(31,000
)
 
(57,361
)

Student Loans Receivable

Student loans receivable consisted of the following:
 
As of
 
As of
 
As of
 
June 30,
2017
 
December 31,
2016
 
June 30,
2016
Federally insured loans:
 
 
 
 
 
Stafford and other
$
4,704,409

 
5,186,047

 
5,629,034

Consolidation
18,442,998

 
19,643,937

 
20,837,356

Total
23,147,407

 
24,829,984

 
26,466,390

Private education loans
242,893

 
273,659

 
288,170

 
23,390,300

 
25,103,643

 
26,754,560

Loan discount, net of unamortized loan premiums and deferred origination costs
(123,326
)
 
(129,507
)
 
(140,045
)
Non-accretable discount
(14,972
)
 
(18,570
)
 
(26,158
)
Allowance for loan losses – federally insured loans
(35,862
)
 
(37,268
)
 
(33,224
)
Allowance for loan losses – private education loans
(13,846
)
 
(14,574
)
 
(15,529
)
 
$
23,202,294

 
24,903,724

 
26,539,604


Loan Activity

The following table sets forth the activity of loans:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
24,196,909

 
27,743,818

 
25,103,643

 
28,555,749

Loan acquisitions
52,680

 
74,969

 
104,854

 
185,928

Repayments, claims, capitalized interest, and other
(548,546
)
 
(737,712
)
 
(1,196,461
)
 
(1,329,732
)
Consolidation loans lost to external parties
(310,743
)
 
(326,515
)
 
(621,736
)
 
(612,647
)
Loans sold
—

 
—

 
—

 
(44,738
)
Ending balance
$
23,390,300

 
26,754,560

 
23,390,300

 
26,754,560



19


Student Loan Spread

The following table analyzes the student loan spread on the Company’s portfolio of student loans, which represents the spread between the yield earned on student loan assets and the costs of the liabilities and derivative instruments used to fund the assets.
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Variable student loan yield, gross
3.49
 %
 
2.84
 %
 
3.36
 %
 
2.84
 %
Consolidation rebate fees
(0.84
)
 
(0.83
)
 
(0.84
)
 
(0.83
)
Discount accretion, net of premium and deferred origination costs amortization
0.07

 
0.06

 
0.07

 
0.06

Variable student loan yield, net
2.72

 
2.07

 
2.59

 
2.07

Student loan cost of funds - interest expense
(1.91
)
 
(1.35
)
 
(1.82
)
 
(1.32
)
Student loan cost of funds - derivative settlements (a) (b)
(0.04
)
 
(0.01
)
 
(0.03
)
 
(0.01
)
Variable student loan spread
0.77

 
0.71

 
0.74

 
0.74

Fixed rate floor income, net of settlements on derivatives (a) (c)
0.50

 
0.58

 
0.51

 
0.58

Core student loan spread
1.27
 %
 
1.29
 %
 
1.25
 %
 
1.32
 %
 
 
 
 
 
 
 
 
Average balance of student loans
$
23,900,296

 
27,314,389

 
24,327,874

 
27,773,439

Average balance of debt outstanding
23,644,793

 
27,240,061

 
24,090,788

 
27,669,813


(a)
Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income.  The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.  As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (student loan spread) as presented in this table.  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.  See "Derivative Settlements" included in this supplement for the net settlement activity recognized by the Company for each type of derivative for the periods presented in this table.

(b)
Derivative settlements include the net settlements paid/received related to the Company’s 1:3 basis swaps and cross-currency interest rate swap. 

(c)
Derivative settlements include the net settlements paid/received related to the Company’s floor income interest rate swaps.


20


A trend analysis of the Company's core and variable student loan spreads is summarized below.

slsgraph2017q2a02.jpg

(a)
The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.  The Company funds a majority of its assets with three-month LIBOR indexed floating rate securities.  The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread.  This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter.

Variable student loan spread increased during the three months ended June 30, 2017 as compared to the three months ended June 30, 2016 due to a tightening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the preceding table).

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income.  A summary of fixed rate floor income and its contribution to core student loan spread follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Fixed rate floor income, gross
$
27,664

 
44,338

 
59,795

 
90,220

Derivative settlements (a)
2,114

 
(4,841
)
 
1,994

 
(10,084
)
Fixed rate floor income, net
$
29,778

 
39,497

 
61,789

 
80,136

Fixed rate floor income contribution to spread, net
0.50
%
 
0.58
%
 
0.51
%
 
0.58
%

(a)
Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.


21


Fixed Rate Floor Income

The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 2017.
Fixed interest rate range
 
Borrower/lender weighted average yield
 
Estimated variable conversion rate (a)
 
Loan balance
3.5 - 3.99%
 
3.80
%
 
1.16
%
 
$
730,527

4.0 - 4.49%
 
4.20
%
 
1.56
%
 
1,451,101

4.5 - 4.99%
 
4.72
%
 
2.08
%
 
875,396

5.0 - 5.49%
 
5.22
%
 
2.58
%
 
553,166

5.5 - 5.99%
 
5.67
%
 
3.03
%
 
390,207

6.0 - 6.49%
 
6.19
%
 
3.55
%
 
449,443

6.5 - 6.99%
 
6.70
%
 
4.06
%
 
435,922

7.0 - 7.49%
 
7.17
%
 
4.53
%
 
154,379

7.5 - 7.99%
 
7.71
%
 
5.07
%
 
260,522

8.0 - 8.99%
 
8.18
%
 
5.54
%
 
602,413

> 9.0%
 
9.05
%
 
6.41
%
 
208,797

 
 
 
 
 
 
$
6,111,873


(a)
The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of June 30, 2017, the weighted average estimated variable conversion rate was 2.88% and the short-term interest rate was 107 basis points.

The following table summarizes the outstanding derivative instruments as of June 30, 2017 used by the Company to economically hedge loans earning fixed rate floor income.
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
2017
 
$
250,000

 
1.04
%
2018
 
1,350,000

 
1.07

2019
 
3,250,000

 
0.97

2020
 
1,500,000

 
1.01

2025
 
100,000

 
2.32

 
 
$
6,450,000

 
1.02
%
(a)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.

22