Edgar Filing: NELNET INC

NNI-3.31.14-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

COMMISSION FILE NUMBER 001-31924

NELNET, INC.

(Exact name of registrant as specified in its charter)



NEBRASKA (State or other jurisdiction of incorporation or organization)	84-0748903 (I.R.S. Employer Identification No.)

121 SOUTH 13TH STREET LINCOLN, NEBRASKA (Address of principal executive offices)	68508 (Zip Code)

(402) 458-2370

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[ ] No[X]

As of April 30, 2014, there were 35,018,015 and 11,491,932 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,317,364 shares of Class A Common Stock held by wholly owned subsidiaries).

NELNET, INC.

FORM 10-Q

INDEX

March 31, 2014



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
	Item 4.	Controls and Procedures	46

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	46
	Item 1A.	Risk Factors	46
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
	Item 6.	Exhibits	49

Signatures			50

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(unaudited)

	As of			As of
	March 31, 2014			December 31, 2013
Assets:
Student loans receivable (net of allowance for loan losses of $54,628 and $55,122, respectively)	$	25,607,143		25,907,589
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	18,374			8,537
Cash and cash equivalents - held at a related party	88,728			54,730
Total cash and cash equivalents	107,102			63,267
Investments	166,201			192,040
Restricted cash and investments	705,889			735,123
Restricted cash - due to customers	180,469			167,576
Accrued interest receivable	305,672			314,553
Accounts receivable (net of allowance for doubtful accounts of $2,556 and $3,845, respectively)	62,423			56,072
Goodwill	117,118			117,118
Intangible assets, net	9,089			6,132
Property and equipment, net	33,302			33,829
Other assets	128,597			115,043
Fair value of derivative instruments	64,002			62,507
Total assets	$	27,487,007		27,770,849
Liabilities:
Bonds and notes payable	$	25,589,287		25,955,289
Accrued interest payable	22,338			21,725
Other liabilities	164,692			164,300
Due to customers	180,469			167,576
Fair value of derivative instruments	16,547			17,969
Total liabilities	25,973,333			26,326,859
Commitments and contingencies
Equity:
Nelnet, Inc. shareholders' equity:
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding	—			—
Common stock:
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 35,019,924 shares and 34,881,338 shares, respectively	350			349
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,491,932 shares and 11,495,377 shares, respectively	115			115
Additional paid-in capital	27,138			24,887
Retained earnings	1,482,637			1,413,492
Accumulated other comprehensive earnings	2,679			4,819
Total Nelnet, Inc. shareholders' equity	1,512,919			1,443,662
Noncontrolling interest	755			328
Total equity	1,513,674			1,443,990
Total liabilities and equity	$	27,487,007		27,770,849

Supplemental information - assets and liabilities of consolidated variable interest entities:
Student loans receivable	$	25,716,871		26,020,629
Restricted cash and investments	704,370			732,771
Fair value of derivative instruments	36,795			36,834
Other assets	303,511			313,748
Bonds and notes payable	(25,909,892		)	(26,244,222	)
Other liabilities	(287,703		)	(303,142	)
Net assets of consolidated variable interest entities	$	563,952		556,618

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
	Three months
	ended March 31,
	2014			2013
Interest income:
Loan interest	$	156,896		155,539
Investment interest	1,979			1,617
Total interest income	158,875			157,156
Interest expense:
Interest on bonds and notes payable	60,004			58,358
Net interest income	98,871			98,798
Less provision for loan losses	2,500			5,000
Net interest income after provision for loan losses	96,371			93,798
Other income (expense):
Loan and guaranty servicing revenue	64,757			55,601
Tuition payment processing and campus commerce revenue	25,235			23,411
Enrollment services revenue	22,011			28,957
Other income	18,131			9,416
Gain on sale of loans and debt repurchases	39			1,407
Derivative market value and foreign currency adjustments and derivative settlements, net	(4,265		)	1,072
Total other income	125,908			119,864
Operating expenses:
Salaries and benefits	52,484			47,905
Cost to provide enrollment services	14,475			19,642
Depreciation and amortization	4,783			4,377
Other	35,627			34,941
Total operating expenses	107,369			106,865
Income before income taxes	114,910			106,797
Income tax expense	40,611			38,447
Net income	74,299			68,350
Net income attributable to noncontrolling interest	513			271
Net income attributable to Nelnet, Inc.	$	73,786		68,079
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.59		1.46
Weighted average common shares outstanding - basic and diluted	46,527,917			46,658,031

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
	Three months
	ended March 31,
	2014			2013
Net income	$	74,299		68,350
Other comprehensive income:
Available-for-sale securities:
Unrealized holding gains arising during period, net of losses	3,675			4,520
Less reclassification adjustment for gains recognized in net income, net of losses	(7,073		)	(957	)
Income tax effect	1,258			(1,326	)
Total other comprehensive (loss) income	(2,140		)	2,237
Comprehensive income	72,159			70,587
Comprehensive income attributable to noncontrolling interest	513			271
Comprehensive income attributable to Nelnet, Inc.	$	71,646		70,316

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
(unaudited)
	Nelnet, Inc. Shareholders
	Preferred stock shares	Common stock shares				Preferred stock		Class A common stock		Class B common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive earnings		Noncontrolling interest		Total equity
	Preferred stock shares	Class A		Class B		Preferred stock		Class A common stock		Class B common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive earnings		Noncontrolling interest		Total equity
Balance as of December 31, 2012	—	35,116,913		11,495,377		$	—	351		115	32,540		1,129,389		2,813		5		1,165,213
Issuance of noncontrolling interest	—	—		—		—		—		—	—		—		—		5		5
Net income	—	—		—		—		—		—	—		68,079		—		271		68,350
Other comprehensive income	—	—		—		—		—		—	—		—		2,237		—		2,237
Cash dividends on Class A and Class B common stock - $0.10 per share	—	—		—		—		—		—	—		(4,646	)	—		—		(4,646	)
Issuance of common stock, net of forfeitures	—	125,963		—		—		1		—	1,272		—		—		—		1,273
Compensation expense for stock based awards	—	—		—		—		—		—	676		—		—		—		676
Repurchase of common stock	—	(213,535	)	—		—		(2	)	—	(6,702	)	—		—		—		(6,704	)
Balance as of March 31, 2013	—	35,029,341		11,495,377		$	—	350		115	27,786		1,192,822		5,050		281		1,226,404
Balance as of December 31, 2013	—	34,881,338		11,495,377		$	—	349		115	24,887		1,413,492		4,819		328		1,443,990
Issuance of noncontrolling interest	—	—		—		—		—		—	—		—		—		201		201
Net income	—	—		—		—		—		—	—		73,786		—		513		74,299
Other comprehensive loss	—	—		—		—		—		—	—		—		(2,140	)	—		(2,140	)
Distribution to noncontrolling interest	—	—		—		—		—		—	—		—		—		(287	)	(287	)
Cash dividends on Class A and Class B common stock - $0.10 per share	—	—		—		—		—		—	—		(4,641	)	—		—		(4,641	)
Issuance of common stock, net of forfeitures	—	155,705		—		—		2		—	2,244		—		—		—		2,246
Compensation expense for stock based awards	—	—		—		—		—		—	875		—		—		—		875
Repurchase of common stock	—	(20,564	)	—		—		(1	)	—	(868	)	—		—		—		(869	)
Conversion of common stock	—	3,445		(3,445	)	—		—		—	—		—		—		—		—
Balance as of March 31, 2014	—	35,019,924		11,491,932		$	—	350		115	27,138		1,482,637		2,679		755		1,513,674

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Three months
	ended March 31,
	2014			2013
Net income attributable to Nelnet, Inc.	$	73,786		68,079
Net income attributable to noncontrolling interest	513			271
Net income	74,299			68,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including debt discounts and student loan premiums and deferred origination costs	21,999			20,079
Student loan discount accretion	(10,023		)	(9,075	)
Provision for loan losses	2,500			5,000
Derivative market value adjustment	(2,916		)	19,507
Foreign currency transaction adjustment	952			(28,763	)
Gain on sale of loans	—			(33	)
Gain from debt repurchases	(39		)	(1,374	)
Gain from sales of available-for-sale securities, net	(7,073		)	(957	)
Deferred income tax expense	2,497			4,874
Purchases of trading investments, net	(731		)	—
Other	2,285			(355	)
Decrease in accrued interest receivable	8,881			2,341
Increase in accounts receivable	(5,758		)	(9,601	)
Decrease in other assets	1,303			293
Increase in accrued interest payable	613			1,091
(Decrease) increase in other liabilities	(185		)	13,614
Net cash provided by operating activities	88,604			84,991
Cash flows from investing activities:
Purchases of student loans	(385,963		)	(758,508	)
Purchase of student loans from a related party	(137		)	—
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	686,908			688,387
Proceeds from sale of student loans	—			11,284
Purchases of available-for-sale securities	(69,930		)	(86,776	)
Proceeds from sales of available-for-sale securities	99,799			13,405
Purchases of other investments, net	(14,467		)	—
Purchases of property and equipment, net	(3,146		)	(2,778	)
Decrease in restricted cash and investments, net	29,356			695
Business acquisition, net of cash acquired	(1,909		)	—
Net cash provided by (used in) investing activities	340,511			(134,291	)
Cash flows from financing activities:
Payments on bonds and notes payable	(1,347,517		)	(2,244,266	)
Proceeds from issuance of bonds and notes payable	972,384			2,295,865
Payments of debt issuance costs	(4,700		)	(7,093	)
Dividends paid	(4,641		)	(4,646	)
Repurchases of common stock	(869		)	(6,704	)
Proceeds from issuance of common stock	149			174
Issuance of noncontrolling interest	201			5
Distribution to noncontrolling interest	(287		)	—
Net cash (used in) provided by financing activities	(385,280		)	33,335
Net increase (decrease) in cash and cash equivalents	43,835			(15,965	)
Cash and cash equivalents, beginning of period	63,267			66,031
Cash and cash equivalents, end of period	$	107,102		50,066
Cash disbursements made for:
Interest	$	48,750		48,696
Income taxes, net of refunds	$	13,378		5,489

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of March 31, 2014 and for the three months ended

March 31, 2014 and 2013 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2013 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report").

2. Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:



	As of			As of
	March 31, 2014			December 31, 2013
Federally insured loans
Stafford and other	$	6,606,814		6,686,626
Consolidation	19,138,841			19,363,577
Total	25,745,655			26,050,203
Non-federally insured loans	68,540			71,103
	25,814,195			26,121,306
Loan discount, net of unamortized loan premiums and deferred origination costs (a)	(152,424		)	(158,595	)
Allowance for loan losses – federally insured loans	(42,909		)	(43,440	)
Allowance for loan losses – non-federally insured loans	(11,719		)	(11,682	)
	$	25,607,143		25,907,589

(a)

For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. Remaining discounts and premiums for purchased loans are recognized in interest income over the remaining estimated lives of the loans. The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses. At March 31, 2014 and December 31, 2013, "loan discount, net of unamortized loan premiums and deferred origination costs" included $20.0 million and $20.2 million, respectively, of non-accretable discount associated with purchased loans.

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance appropriate to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.



	Three months ended March 31,
	2014			2013
Balance at beginning of period	$	55,122		51,902
Provision for loan losses:
Federally insured loans	3,000			6,000
Non-federally insured loans	(500		)	(1,000	)
Total provision for loan losses	2,500			5,000
Charge-offs:
Federally insured loans	(3,631		)	(5,990	)
Non-federally insured loans	(421		)	(772	)
Total charge-offs	(4,052		)	(6,762	)
Recoveries - non-federally insured loans	371			368
Purchase (sale) of federally insured loans, net	100			(2,218	)
Transfer from repurchase obligation related to non-federally insured loans repurchased, net	587			1,119
Balance at end of period	$	54,628		49,409

Allocation of the allowance for loan losses:
Federally insured loans	$	42,909		37,913
Non-federally insured loans	11,719			11,496
Total allowance for loan losses	$	54,628		49,409

Repurchase Obligations

As of March 31, 2014, the Company had participated a cumulative amount of $119.6 million (par value) of non-federally insured loans to third parties. Loans participated under these agreements have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included in the Company’s consolidated balance sheets. Per the terms of the servicing agreements, the Company’s servicing operations are obligated to repurchase loans subject to the participation interests in the event such loans become 60 or 90 days delinquent.

In addition, in 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% of par value). The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent. As of March 31, 2014, the balance of this portfolio was $61.1 million (par value).

The Company’s estimate related to its obligation to repurchase these loans is included in “other liabilities” in the Company’s consolidated balance sheets. The activity related to this accrual is detailed below.



	Three months ended March 31,
	2014			2013
Beginning balance	$	16,143		16,130
Loans repurchased	(730		)	(1,119	)
Ending balance	$	15,413		15,011

Student Loan Status and Delinquencies

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. The percent of non-federally insured loans that were delinquent 31 days or greater as of March 31, 2014, December 31, 2013, and March 31, 2013 was 12.8 percent, 12.7 percent, and 20.5 percent, respectively. The table below shows the Company’s federally insured student loan delinquency amounts.

Rehabilitation Loans and Delinquent Loans Funded in FFELP Warehouse Facilities

Rehabilitation loans are student loans that have previously defaulted, but for which the borrower has made a specified number of on-time payments. Although rehabilitation loans benefit from the same guarantees as other federally insured student loans, rehabilitation loans have generally experienced re-default rates that are higher than default rates for federally insured student loans that have not previously defaulted. The Company has purchased a significant amount of rehabilitation loans. Upon purchase, these loans are recorded at fair value, which generally approximates the federal guarantee rate under the Federal Family Education Loan Program (the "FFEL Program" or "FFELP"). As such, there is minimal credit risk related to rehabilitation loans purchased; therefore, these loans are presented separately in the following delinquency tables.

In addition, the Company has purchased delinquent federally insured loans that are funded in the Company's FFELP warehouse facilities. Upon purchase, these loans are recorded at fair value, which generally approximates the federal guarantee rate. As such, there is minimal credit risk related to these loans. Loans delinquent 121 days or greater and funded in the Company's FFELP warehouse facilities are included with rehabilitation loans purchased in the following delinquency tables.



	As of March 31, 2014				As of December 31, 2013				As of March 31, 2013
Federally insured loans, excluding rehabilitation loans:
Loans in-school/grace/deferment	$	2,617,628			$	2,618,390			$	2,933,416
Loans in forbearance	2,797,432				2,954,495				2,890,574
Loans in repayment status:
Loans current	15,293,299		87.2	%	15,251,869		86.1	%	14,501,802		87.8	%
Loans delinquent 31-60 days	669,238		3.8		768,600		4.3		621,296		3.8
Loans delinquent 61-90 days	407,779		2.3		426,089		2.5		409,209		2.5
Loans delinquent 91-120 days	252,413		1.4		281,991		1.6		241,113		1.5
Loans delinquent 121-270 days	640,214		3.7		712,204		4.0		512,875		3.1
Loans delinquent 271 days or greater	272,159		1.6		269,066		1.5		211,461		1.3
Total loans in repayment	17,535,102		100.0	%	17,709,819		100.0	%	16,497,756		100.0	%
Total federally insured loans, excluding rehabilitation loans	$	22,950,162			$	23,282,704			$	22,321,746

Rehabilitation loans:
Loans in-school/grace/deferment	$	261,754			$	254,115			$	213,101
Loans in forbearance	416,206				415,530				394,733
Loans in repayment status:
Loans current	1,205,261		56.9	%	1,086,053		51.8	%	877,800		42.4	%
Loans delinquent 31-60 days	163,143		7.7		198,718		9.5		138,249		6.7
Loans delinquent 61-90 days	114,920		5.4		124,244		5.9		109,129		5.3
Loans delinquent 91-120 days	91,730		4.3		108,800		5.2		121,468		5.9
Loans delinquent 121-270 days	344,434		16.3		405,732		19.3		573,054		27.7
Loans delinquent 271 days or greater	198,045		9.4		174,307		8.3		249,011		12.0
Total loans in repayment	2,117,533		100.0	%	2,097,854		100.0	%	2,068,711		100.0	%
Total rehabilitation loans	2,795,493				2,767,499				2,676,545
Total federally insured loans	$	25,745,655			$	26,050,203			$	24,998,291

3. Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:



	As of March 31, 2014
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
Bonds and notes based on indices	$	23,780,072		0.24% - 6.90%	5/25/18 - 8/26/52
Bonds and notes based on auction or remarketing	1,132,900			0.07% - 2.18%	5/1/28 - 11/26/46
Total variable-rate bonds and notes	24,912,972
FFELP warehouse facilities	772,435			0.16% - 0.24%	1/17/16 - 9/30/16
Unsecured line of credit	—			—	3/28/18
Unsecured debt - Junior Subordinated Hybrid Securities	96,457			3.61%	9/15/61
Other borrowings	61,374			1.65% - 5.10%	8/11/14 - 11/11/15
	25,843,238
Discount on bonds and notes payable	(253,951		)
Total	$	25,589,287



	As of December 31, 2013
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
Bonds and notes based on indices	$	23,479,893		0.25% - 6.90%	5/25/18 - 8/26/52
Bonds and notes based on auction or remarketing	1,134,250			0.07% - 2.17%	5/1/28 - 11/26/46
Total variable-rate bonds and notes	24,614,143
FFELP warehouse facilities	1,396,344			0.17% - 0.25%	1/17/16 - 6/12/16
Unsecured line of credit	45,000			1.67%	3/28/18
Unsecured debt - Junior Subordinated Hybrid Securities	96,457			3.62%	9/15/61
Other borrowings	61,401			1.67% - 5.10%	4/11/14 - 11/11/15
	26,213,345
Discount on bonds and notes payable	(258,056		)
Total	$	25,955,289

FFELP Warehouse Facilities

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.

As of March 31, 2014, the Company had three FFELP warehouse facilities as summarized below.



	NHELP-III		NFSLW-I (a)	NHELP-II	Total
Maximum financing amount	$	750,000	500,000	500,000	1,750,000
Amount outstanding	377,995		276,915	117,525	772,435
Amount available	$	372,005	223,085	382,475	977,565
Expiration of liquidity provisions	February 5, 2015		June 12, 2014	September 30, 2014
Final maturity date	January 17, 2016		June 12, 2016	September 30, 2016
Maximum advance rates	92.2 - 95.0%		92.0 - 98.0%	84.5 - 94.5%
Minimum advance rates	92.2 - 95.0%		84.0 - 90.0%	84.5 - 94.5%
Advanced as equity support	$	22,912	16,847	11,745	51,504

(a) On April 15, 2014, the Company amended the agreement for this warehouse facility to temporarily increase the maximum financing amount to $1.0 billion, change the expiration date for the liquidity provisions to June 11, 2015, and change the maturity date to June 11, 2017. The maximum financing amount is scheduled to decrease $100.0 million a month beginning in June 2014 until it returns to $500.0 million in size.

Asset-backed Securitizations

The following table summarizes the asset-backed securitization transactions completed during the three months ended March 31, 2014.



	2014-1			2014-2								Total
				Class A-1 notes		Class A-2 notes		Class A-3 notes		2014-2 total
Date securities issued	2/6/14			3/12/14		3/12/14		3/12/14		3/12/14
Total original principal amount	$	458,500								509,000		$	967,500

Class A senior notes:
Total original principal amount	$	445,000		191,000		222,000		84,000		497,000		942,000
Bond discount	—			—		—		(535	)	(535	)	(535		)
Issue price	$	445,000		191,000		222,000		83,465		496,465		941,465
Cost of funds (1-month LIBOR plus:)	0.57		%	0.28	%	0.60	%	0.85	%
Final maturity date	9/25/41			6/25/21		3/25/30		7/27/37

Class B subordinated notes:
Total original principal amount	$	13,500								12,000		25,500
Bond discount	(1,132		)							(1,046	)	(2,178		)
Issue price	$	12,368								10,954		23,322
Cost of funds (1-month LIBOR plus:)	1.50		%							1.50	%
Final maturity date	10/25/47									6/25/41

Unsecured Line of Credit

The Company has a $275.0 million unsecured line of credit that matures on March 28, 2018. As of March 31, 2014, no amounts were outstanding on the unsecured line of credit and $275.0 million was available for future use.

Debt Repurchases

The Company repurchased $1.4 million (face amount) and $13.0 million (face amount) of its own asset-backed debt securities during the three months ended March 31, 2014 and 2013, respectively, and recognized gains on such purchases of approximately $39,000 and $1.4 million, respectively.

4. Derivative Financial Instruments

The Company uses derivative financial instruments primarily to manage interest rate risk and foreign currency exchange risk. Derivative instruments used as part of the Company's risk management strategy are further described in note 6 of the notes to consolidated financial statements included in the 2013 Annual Report. A tabular presentation of such derivatives outstanding as of March 31, 2014 and December 31, 2013 is presented below.

Basis Swaps

The following table summarizes the Company’s basis swaps outstanding as of March 31, 2014 and December 31, 2013 in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").



Maturity		Notional amount
2021		$	250,000
2022		1,900,000
2023		3,650,000
2024		250,000
2026		800,000
2028		100,000
2036		700,000
2039	(a)	150,000
2040	(b)	200,000
		$	8,000,000	(c)

(a)This derivative has a forward effective start date in 2015.

(b)This derivative has a forward effective start date in 2020.


(c)	The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2014 and December 31, 2013 was one-month LIBOR plus 3.5 basis points.

Interest Rate Swaps – Floor Income Hedges

The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income as of March 31, 2014 and December 31, 2013.



Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2014	$	1,750,000	0.71	%
2015	1,100,000		0.89
2016	750,000		0.85
2017	1,250,000		0.86
	$	4,850,000	0.81	%


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

Interest Rate Swaps – Unsecured Debt Hedges

The Company had the following derivatives outstanding as of March 31, 2014 and December 31, 2013 that are used to effectively convert the variable interest rate on a portion of the Junior Subordinated Hybrid Securities ("Hybrid Securities") to a fixed rate.



Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2036	$	25,000	4.28	%


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

Foreign Currency Exchange Risk

In 2006, the Company issued €352.7 million of student loan asset-backed Euro Notes (the "Euro Notes") with an interest rate based on a spread to the EURIBOR index. As a result of the Euro Notes, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes are re-measured 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 entered into a cross-currency interest rate swap in connection with the issuance of the Euro Notes. Under the terms of the cross-currency interest rate swap, the Company receives from the counterparty a spread to the EURIBOR index based on a notional amount of €352.7 million and pays a spread to the LIBOR index based on a notional amount of $450.0 million. In addition, under the terms of this agreement, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect between the U.S. dollar and Euro as of the issuance of the notes.

The following table shows the income statement impact as a result of the re-measurement of the Euro Notes and the change in the fair value of the related derivative instrument.



	Three months ended March 31,
	2014			2013 (b)
Re-measurement of Euro Notes	$	(952	)	28,763
Change in fair value of cross-currency interest rate swaps	(39		)	(34,844	)
Total impact to consolidated statements of income - income (expense) (a)	$	(991	)	(6,081	)


(a)	The financial statement impact of the above items is included in "Derivative market value and foreign currency adjustments and derivative settlements, net" in the Company's consolidated statements of income.


(b)	The 2013 operating results includes the re-measurement of €420.5 million of student loan asset-backed Euro notes and the change in fair value of a related cross-currency interest rate swap entered into in connection with the issuance of such notes. In November 2013, the notional amount outstanding on the notes was changed to U.S. dollars and the cross-currency interest swap was terminated.

The re-measurement of the Euro-denominated bonds generally correlates with the change in fair value of the cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying indices (and related forward curve) do not move in parallel.

Consolidated Financial Statement Impact Related to Derivatives

The following table summarizes the fair value of the Company’s derivatives as reflected in the consolidated balance sheets:



	Fair value of asset derivatives			Fair value of liability derivatives
	As of		As of	As of	As of
	March 31, 2014		December 31, 2013	March 31, 2014	December 31, 2013
1:3 basis swaps	$	19,600	18,490	—	—
Interest rate swaps - floor income hedges	7,607		7,183	12,915	15,849
Interest rate swaps - hybrid debt hedges	—		—	3,632	2,120
Cross-currency interest rate swaps	36,795		36,834	—	—
Total	$	64,002	62,507	16,547	17,969

During the three months ended March 31, 2013, the Company terminated certain derivatives for gross proceeds and payments of $2.7 million and $2.9 million, respectively. There were no derivative terminations during the first quarter of 2014.

Offsetting of Derivative Assets/Liabilities

The Company records derivative instruments in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain of the Company's derivative instruments are subject to right of offset provisions with counterparties. The following tables include the gross amounts related to the Company's derivative portfolio recognized in the consolidated balance sheets, reconciled to the net amount when excluding derivatives subject to enforceable master netting arrangements and cash collateral received/pledged:



			Gross amounts not offset in the consolidated balance sheets
Derivative assets	Gross amounts of recognized assets presented in the consolidated balance sheets		Derivatives subject to enforceable master netting arrangement		Cash collateral received		Net asset (liability)
Balance as of March 31, 2014	$	64,002	(15,313	)	(323	)	48,366
Balance as of December 31, 2013	62,507		(15,437	)	(15,959	)	31,111



				Gross amounts not offset in the consolidated balance sheets
Derivative liabilities	Gross amounts of recognized liabilities presented in the consolidated balance sheets			Derivatives subject to enforceable master netting arrangement	Cash collateral pledged	Net asset (liability)
Balance as of March 31, 2014	$	(16,547	)	15,313	3,140	1,906
Balance as of December 31, 2013	(17,969		)	15,437	3,630	1,098

The following table summarizes the effect of derivative instruments in the consolidated statements of income.



	Three months ended March 31,
	2014			2013
Settlements:
1:3 basis swaps	$	881		911
Interest rate swaps - floor income hedges	(6,950		)	(8,304	)
Interest rate swaps - hybrid debt hedges	(252		)	(645	)
Cross-currency interest rate swaps	92			(146	)
Total settlements - expense	(6,229		)	(8,184	)
Change in fair value:
1:3 basis swaps	1,110			1,933
Interest rate swaps - floor income hedges	3,358			9,422
Interest rate swaps - hybrid debt hedges	(1,513		)	3,640
Cross-currency interest rate swaps	(39		)	(34,844	)
Other	—			342
Total change in fair value - income (expense)	2,916			(19,507	)
Re-measurement of Euro Notes (foreign currency transaction adjustment) - (expense) income	(952		)	28,763
Derivative market value and foreign currency adjustments and derivative settlements, net - (expense) income	$	(4,265	)	1,072

5. Investments

A summary of the Company's investments and restricted investments follows:



	As of March 31, 2014							As of December 31, 2013
	Amortized cost		Gross unrealized gains	Gross unrealized losses (a)		Fair value		Amortized cost	Gross unrealized gains	Gross unrealized losses		Fair value
	Amortized cost		Gross unrealized gains	Gross unrealized losses (a)		Fair value		Amortized cost	Gross unrealized gains	Gross unrealized losses		Fair value
Investments:
Available-for-sale investments:
Student loan asset-backed and other debt securities (b)	$	149,016	3,192	(824	)	151,384		171,931	7,111	(1,241	)	177,801
Equity securities	1,308		1,884	—		3,192		1,502	1,783	(3	)	3,282
Total available-for-sale investments	$	150,324	5,076	(824	)	154,576		173,433	8,894	(1,244	)	181,083
Trading investments:
Student loan asset-backed and other debt securities						11,625						10,957
Total available-for-sale and trading investments						$	166,201					192,040
Restricted Investments (c):
Guaranteed investment contracts - held-to-maturity						$	6,742					7,285


(a)	As of March 31, 2014, the Company considered the decline in market value of its available-for-sale investments to be temporary in nature and did not consider any of its investments other-than-temporarily impaired.


(b)	As of March 31, 2014, the stated maturities of the majority of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years.


(c)	Restricted investments are included in "restricted cash and investments" in the Company's consolidated balance sheets.

The amounts reclassified from accumulated other comprehensive income related to the realized gains and losses on available-for-sale-securities is summarized below.



	Three months ended March 31,
Affected line item in the consolidated statements of income - income (expense):	2014			2013
Other income	$	7,073		957
Income tax expense	(2,617		)	(354	)
Net	$	4,456		603

6. Earnings per Common Share

Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate earnings per share amounts for common stock and unvested share based awards. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock.



	Three months ended March 31,
	2014				2013
	Common shareholders		Unvested restricted stock shareholders	Total	Common shareholders	Unvested restricted stock shareholders	Total
Numerator:
Net income attributable to Nelnet, Inc.	$	73,125	661	73,786	67,517	562	68,079

Denominator:
Weighted-average common shares outstanding - basic and diluted	46,110,952		416,965	46,527,917	46,272,324	385,707	46,658,031
Earnings per share - basic and diluted	$	1.59	1.59	1.59	1.46	1.46	1.46

Unvested restricted stock awards are the Company's only potential common shares and, accordingly, there were no awards that were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation.

7. Segment Reporting

See note 13 of the notes to consolidated financial statements included in the 2013 Annual Report for a description of the Company's operating segments. The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.



	Three months ended March 31, 2014
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based	Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	11		—		—		11	157,003		2,658		(797	)	158,875
Interest expense	—			—		—		—	59,476		1,325		(797	)	60,004
Net interest income	11			—		—		11	97,527		1,333		—		98,871
Less provision for loan losses	—			—		—		—	2,500		—		—		2,500
Net interest income after provision for loan losses	11			—		—		11	95,027		1,333		—		96,371
Other income (expense):
Loan and guaranty servicing revenue	64,757			—		—		64,757	—		—		—		64,757
Intersegment servicing revenue	14,221			—		—		14,221	—		—		(14,221	)	—
Tuition payment processing and campus commerce revenue	—			25,235		—		25,235	—		—		—		25,235
Enrollment services revenue	—			—		22,011		22,011	—		—		—		22,011
Other income	—			—		—		—	4,164		13,967		—		18,131
Gain on sale of loans and debt repurchases	—			—		—		—	39		—		—		39
Derivative market value and foreign currency adjustments, net	—			—		—		—	3,477		(1,513	)	—		1,964
Derivative settlements, net	—			—		—		—	(5,977	)	(252	)	—		(6,229	)
Total other income (expense)	78,978			25,235		22,011		126,224	1,703		12,202		(14,221	)	125,908
Operating expenses:
Salaries and benefits	32,307			10,027		4,380		46,714	609		5,161		—		52,484
Cost to provide enrollment services	—			—		14,475		14,475	—		—		—		14,475
Depreciation and amortization	2,789			1,428		47		4,264	—		519		—		4,783
Other	18,452			2,647		1,449		22,548	7,146		5,933		—		35,627
Intersegment expenses, net	1,083			1,420		1,006		3,509	14,371		(3,659	)	(14,221	)	—
Total operating expenses	54,631			15,522		21,357		91,510	22,126		7,954		(14,221	)	107,369
Income before income taxes and corporate overhead allocation	24,358			9,713		654		34,725	74,604		5,581		—		114,910
Corporate overhead allocation	(1,860		)	(620	)	(620	)