NNI - 3.31.15-10Q


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, 2015
 
or

¨
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
SUITE 100
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, 2015, there were 34,592,926 and 11,486,932 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, 2015


 
 
Item 1.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 
 
 






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, 2015

December 31, 2014
Assets:
 
 
 
 
Student loans receivable (net of allowance for loan losses of $51,161 and $48,900, respectively)
 
$
27,897,949

 
28,005,195

Cash and cash equivalents:
 
 

 
 

Cash and cash equivalents - not held at a related party
 
38,071

 
37,781

Cash and cash equivalents - held at a related party
 
61,975

 
92,700

Total cash and cash equivalents
 
100,046

 
130,481

Investments and notes receivable
 
276,904

 
235,709

Restricted cash and investments
 
866,587

 
850,440

Restricted cash - due to customers
 
71,890

 
118,488

Accrued interest receivable
 
355,372

 
351,588

Accounts receivable (net of allowance for doubtful accounts of $1,908 and $1,656, respectively)
 
55,968

 
50,552

Goodwill
 
126,200

 
126,200

Intangible assets, net
 
40,183

 
42,582

Property and equipment, net
 
51,003

 
45,894

Other assets
 
77,097

 
76,622

Fair value of derivative instruments
 
36,595

 
64,392

Total assets
 
$
29,955,794

 
30,098,143

Liabilities:
 
 

 
 

Bonds and notes payable
 
$
27,815,324

 
28,027,350

Accrued interest payable
 
27,275

 
25,904

Other liabilities
 
174,248

 
167,881

Due to customers
 
71,890

 
118,488

Fair value of derivative instruments
 
85,564

 
32,842

Total liabilities
 
28,174,301

 
28,372,465

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 34,713,065 shares and 34,756,384 shares, respectively
 
347

 
348

Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,486,932 shares
 
115

 
115

Additional paid-in capital
 
13,177

 
17,290

Retained earnings
 
1,762,711

 
1,702,560

Accumulated other comprehensive earnings
 
4,872

 
5,135

Total Nelnet, Inc. shareholders' equity
 
1,781,222

 
1,725,448

Noncontrolling interest
 
271

 
230

Total equity
 
1,781,493

 
1,725,678

Total liabilities and equity
 
$
29,955,794

 
30,098,143

 
 
 
 
 
Supplemental information - assets and liabilities of consolidated variable interest entities:
 
 
 
 
Student loans receivable
 
$
27,965,879

 
28,181,244

Restricted cash and investments
 
850,890

 
846,199

Fair value of derivative instruments, net
 
(70,261
)
 
(20,455
)
Other assets
 
355,015

 
351,934

Bonds and notes payable
 
(28,119,030
)
 
(28,391,530
)
Other liabilities
 
(295,163
)
 
(280,233
)
Net assets of consolidated variable interest entities
 
$
687,330

 
687,159

See accompanying notes to consolidated financial statements.

2


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
 
Three months
 
ended March 31,
 
2015
 
2014
Interest income:
 
 
 
Loan interest
$
171,944

 
156,896

Investment interest
2,205

 
1,979

Total interest income
174,149

 
158,875

Interest expense:
 

 
 

Interest on bonds and notes payable
71,554

 
60,004

Net interest income
102,595

 
98,871

Less provision for loan losses
2,000

 
2,500

Net interest income after provision for loan losses
100,595

 
96,371

Other income (expense):
 

 
 

Loan and guaranty servicing revenue
57,811

 
64,757

Tuition payment processing, school information, and campus commerce revenue
34,680

 
25,235

Enrollment services revenue
17,863

 
22,011

Other income
6,918

 
18,131

Gain on sale of loans and debt repurchases
2,875

 
39

Derivative market value and foreign currency adjustments and derivative settlements, net
(3,078
)
 
(4,265
)
Total other income
117,069

 
125,908

Operating expenses:
 

 
 

Salaries and benefits
61,050

 
52,484

Cost to provide enrollment services
11,702

 
14,475

Loan servicing fees
7,685

 
5,421

Depreciation and amortization
5,662

 
4,783

Other
29,129

 
30,206

Total operating expenses
115,228

 
107,369

Income before income taxes
102,436

 
114,910

Income tax expense
37,630

 
40,611

Net income
64,806

 
74,299

Net income attributable to noncontrolling interest
41

 
513

Net income attributable to Nelnet, Inc.
$
64,765

 
73,786

Earnings per common share:
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.40

 
1.59

Weighted average common shares outstanding - basic and diluted
46,290,590

 
46,527,917


 See accompanying notes to consolidated financial statements.

3


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
 
Three months
 
ended March 31,
 
2015
 
2014
Net income
$
64,806

 
74,299

Other comprehensive income (loss):
 
 
 
Available-for-sale securities:
 
 
 
Unrealized holding (losses) gains arising during period, net
(213
)
 
3,675

Less reclassification adjustment for gains recognized in net income, net of losses
(205
)
 
(7,073
)
Income tax effect
155

 
1,258

Total other comprehensive loss
(263
)
 
(2,140
)
Comprehensive income
64,543

 
72,159

Comprehensive income attributable to noncontrolling interest
41

 
513

Comprehensive income attributable to Nelnet, Inc.
$
64,502

 
71,646


See accompanying notes to consolidated financial statements.


4


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
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
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

Balance as of December 31, 2014
—

 
34,756,384

 
11,486,932

 
$
—

 
348

 
115

 
17,290

 
1,702,560

 
5,135

 
230

 
1,725,678

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
64,765

 
—

 
41

 
64,806

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(263
)
 
—

 
(263
)
Cash dividends on Class A and Class B common stock - $0.10 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,614
)
 
—

 
—

 
(4,614
)
Issuance of common stock, net of forfeitures
—

 
132,479

 
—

 
—

 
1

 
—

 
2,467

 
—

 
—

 
—

 
2,468

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
1,357

 
—

 
—

 
—

 
1,357

Repurchase of common stock
—

 
(175,798
)
 
—

 
—

 
(2
)
 
—

 
(7,937
)
 
—

 
—

 
—

 
(7,939
)
Balance as of March 31, 2015
—

 
34,713,065

 
11,486,932

 
$
—

 
347

 
115

 
13,177

 
1,762,711

 
4,872

 
271

 
1,781,493


 See accompanying notes to consolidated financial statements.

5


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 
Three months
 
ended March 31,
 
2015
 
2014
Net income attributable to Nelnet, Inc.
$
64,765

 
73,786

Net income attributable to noncontrolling interest
41

 
513

Net income
64,806

 
74,299

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:
 

 
 

Depreciation and amortization, including debt discounts and student loan premiums and deferred origination costs
30,225

 
21,999

Student loan discount accretion
(10,746
)
 
(10,023
)
Provision for loan losses
2,000

 
2,500

Derivative market value adjustment
46,072

 
(2,916
)
Foreign currency transaction adjustment
(48,209
)
 
952

Proceeds from termination of derivative instruments
34,447

 
—

Gain on sale of loans
(351
)
 
—

Gain from debt repurchases
(2,524
)
 
(39
)
 Gain from sales of available-for-sale securities, net
(205
)
 
(7,073
)
Proceeds (payments) from sales (purchases) of trading securities, net
1,304

 
(731
)
Deferred income tax expense
224

 
2,497

Other
3,115

 
2,285

(Increase) decrease in accrued interest receivable
(3,784
)
 
8,881

Increase in accounts receivable
(5,416
)
 
(5,758
)
Decrease in other assets
605

 
1,303

Increase in accrued interest payable
1,371

 
613

Increase (decrease) in other liabilities
16,414

 
(185
)
Net cash provided by operating activities
129,348

 
88,604

Cash flows from investing activities, net of acquisitions:
 

 
 

Purchases of student loans
(844,120
)
 
(386,100
)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
940,907

 
686,908

Proceeds from sale of student loans
3,996

 
—

Purchases of available-for-sale securities
(512
)
 
(69,930
)
Proceeds from sales of available-for-sale securities
1,317

 
99,799

Purchases of investments and issuance of notes receivable
(49,953
)
 
(14,467
)
Proceeds from investments and notes receivable
4,709

 
—

Purchases of property and equipment, net
(8,372
)
 
(3,146
)
(Increase) decrease in restricted cash and investments, net
(16,147
)
 
29,356

Business acquisition, net of cash acquired
—

 
(1,909
)
Net cash provided by investing activities
31,825

 
340,511

Cash flows from financing activities:
 

 
 

Payments on bonds and notes payable
(1,459,807
)
 
(1,347,517
)
Proceeds from issuance of bonds and notes payable
1,285,760

 
972,384

Payments of debt issuance costs
(5,256
)
 
(4,700
)
Dividends paid
(4,614
)
 
(4,641
)
Repurchases of common stock
(7,939
)
 
(869
)
Proceeds from issuance of common stock
248

 
149

Issuance of noncontrolling interest
—

 
201

Distribution to noncontrolling interest
—

 
(287
)
Net cash used in financing activities
(191,608
)
 
(385,280
)
Net (decrease) increase in cash and cash equivalents
(30,435
)
 
43,835

Cash and cash equivalents, beginning of period
130,481

 
63,267

Cash and cash equivalents, end of period
$
100,046

 
107,102

 
 
 
 
Cash disbursements made for:
 

 
 

Interest
$
53,235

 
48,750

Income taxes, net of refunds
$
45

 
13,378


See accompanying notes to consolidated financial statements.

6


NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless otherwise noted)
(unaudited)

1.    Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of March 31, 2015 and for the three months ended March 31, 2015 and 2014 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2014 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, 2015 are not necessarily indicative of the results for the year ending December 31, 2015. 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, 2014 (the "2014 Annual Report").

Reclassifications

Certain amounts previously reported within the Company's consolidated balance sheet and statements of income have been reclassified to conform to the current period presentation. These reclassifications include:

•
Reclassifying certain investments and notes receivable, which were previously included in "other assets" to "investments and notes receivable."

•
Reclassifying third-party loan servicing fees, which were previously included in "other" operating expenses to "loan servicing fees."

The reclassifications had no effect on consolidated net income or consolidated assets and liabilities.

2.    Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:
 
As of
 
As of
 
March 31, 2015
 
December 31, 2014
Federally insured loans
 
 
 
Stafford and other
$
6,287,829

 
6,030,825

Consolidation
21,687,746

 
22,165,605

Total
27,975,575

 
28,196,430

Private education loans
131,513

 
27,478

 
28,107,088

 
28,223,908

Loan discount, net of unamortized loan premiums and deferred origination costs (a)
(157,978
)
 
(169,813
)
Allowance for loan losses – federally insured loans
(38,021
)
 
(39,170
)
Allowance for loan losses – private education loans
(13,140
)
 
(9,730
)
 
$
27,897,949

 
28,005,195


(a)
As of March 31, 2015 and December 31, 2014, "loan discount, net of unamortized loan premiums and deferred origination costs" included $32.4 million and $28.8 million, respectively, of non-accretable discount associated with purchased loans of $8.9 billion and $8.5 billion, respectively.


7


On February 5, 2015, the Company entered into an agreement with CommonBond, Inc. ("CommonBond"), a student lending company that provides private education loans to graduate students, under which the Company committed to purchase up to $150.0 million of private education loans. As of March 31, 2015, the Company had purchased $15.2 million in private loans from CommonBond pursuant to this agreement.

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient 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,
 
2015
 
2014
Balance at beginning of period
$
48,900

 
55,122

Provision for loan losses:
 
 
 
Federally insured loans
2,000

 
3,000

Private education loans
—

 
(500
)
Total provision for loan losses
2,000

 
2,500

Charge-offs:
 

 
 

Federally insured loans
(3,149
)
 
(3,631
)
Private education loans
(676
)
 
(421
)
Total charge-offs
(3,825
)
 
(4,052
)
Recoveries - private education loans
254

 
371

Purchase (sale) of federally insured and private education loans, net
(230
)
 
100

Transfer from repurchase obligation related to private education loans repurchased
4,062

 
587

Balance at end of period
$
51,161

 
54,628

 
 
 
 
Allocation of the allowance for loan losses:
 
 
 

Federally insured loans
$
38,021

 
42,909

Private education loans
13,140

 
11,719

Total allowance for loan losses
$
51,161

 
54,628


Repurchase Obligation

The Company has sold various portfolios of private education loans to third-parties. Per the terms of the servicing agreements, the Company’s servicing operations are obligated to repurchase loans subject to the sale agreements in the event such loans become 60 or 90 days delinquent. As of March 31, 2015 and December 31, 2014, the balance of loans subject to these repurchase obligations was $57.7 million and $155.3 million, respectively, and the associated obligation related to these loans was $3.9 million and $11.8 million, respectively. The Company repurchased $94.1 million of private education loans during the three month period ended March 31, 2015. The Company's estimate related to its obligation to repurchase these loans is included in "other liabilities" in the Company's consolidated balance sheets.




8


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 table below shows the Company’s loan delinquency amounts.

 
As of March 31, 2015
 
As of December 31, 2014
 
As of March 31, 2014
Federally insured loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
2,781,537

 
 
 
$
2,805,228

 
 
 
$
2,879,382

 
 
Loans in forbearance
3,244,255

 
 
 
3,288,412

 
 
 
3,213,638

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
18,672,471

 
85.0
%
 
18,460,279

 
83.5
%
 
16,498,560

 
83.9
%
Loans delinquent 31-60 days
911,653

 
4.2

 
1,043,119

 
4.8

 
832,381

 
4.2

Loans delinquent 61-90 days
571,759

 
2.6

 
588,777

 
2.7

 
522,699

 
2.7

Loans delinquent 91-120 days
346,857

 
1.6

 
404,905

 
1.8

 
344,143

 
1.8

Loans delinquent 121-270 days
1,030,645

 
4.7

 
1,204,405

 
5.4

 
984,648

 
5.0

Loans delinquent 271 days or greater
416,398

 
1.9

 
401,305

 
1.8

 
470,204

 
2.4

Total loans in repayment
21,949,783

 
100.0
%
 
22,102,790

 
100.0
%
 
19,652,635

 
100.0
%
Total federally insured loans
$
27,975,575

 
 

 
$
28,196,430

 
 

 
$
25,745,655

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private education loans:
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
5,006

 
 
 
$
905

 
 
 
$
2,612

 
 
Loans in forbearance
20

 
 
 
—

 
 
 
24

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
118,278

 
93.5
%
 
18,390

 
69.2
%
 
57,115

 
86.6
%
Loans delinquent 31-60 days
1,200

 
0.9

 
1,078

 
4.1

 
1,223

 
1.9

Loans delinquent 61-90 days
1,753

 
1.4

 
1,035

 
3.9

 
1,748

 
2.7

Loans delinquent 91 days or greater
5,256

 
4.2

 
6,070

 
22.8

 
5,818

 
8.8

Total loans in repayment
126,487

 
100.0
%
 
26,573

 
100.0
%
 
65,904

 
100.0
%
Total non-federally insured loans
$
131,513

 
 

 
$
27,478

 
 

 
$
68,540

 
 


9


3.    Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
As of March 31, 2015
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
 
 
 
 
 
Bonds and notes based on indices
$
25,850,638

 
0.16% - 6.90%
 
8/26/19 - 8/26/52
Bonds and notes based on auction
1,197,065

 
0.64% - 2.16%
 
3/22/32 - 11/26/46
Total variable-rate bonds and notes
27,047,703

 
 
 
 
FFELP warehouse facilities
1,010,258

 
0.17% - 0.29%
 
1/17/16 - 12/17/17
Unsecured line of credit
—

 
—
 
6/30/19
Unsecured debt - Junior Subordinated Hybrid Securities
59,837

 
3.65%
 
9/15/61
Other borrowings
82,305

 
1.68% - 5.10%
 
11/11/15 - 12/31/18
 
28,200,103

 
 
 
 
Discount on bonds and notes payable
(384,779
)
 
 
 
 
Total
$
27,815,324

 
 
 
 
 
As of December 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
$
25,713,431

 
0.19% - 6.90%
 
5/25/18 - 8/26/52
Bonds and notes based on auction
1,311,669

 
0.47% - 2.17%
 
3/22/32 - 11/26/46
Total variable-rate bonds and notes
27,025,100

 
 
 
 
FFELP warehouse facilities
1,241,665

 
0.16% - 0.26%
 
1/17/16 - 6/11/17
Unsecured line of credit
—

 
—
 
6/30/19
Unsecured debt - Junior Subordinated Hybrid Securities
71,688

 
3.63%
 
9/15/61
Other borrowings
81,969

 
1.67% - 5.10%
 
11/11/15 - 12/31/18
 
28,420,422

 
 
 
 
Discount on bonds and notes payable
(393,072
)
 
 
 
 
Total
$
28,027,350

 
 
 
 


10


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, 2015, the Company had three FFELP warehouse facilities as summarized below.
 
 
NHELP-III (a)
 
NFSLW-I (b)
 
NHELP-II
 
Total
Maximum financing amount
 
$
750,000

 
750,000

 
500,000

 
2,000,000

Amount outstanding
 
537,005

 
404,020

 
69,233

 
1,010,258

Amount available
 
$
212,995

 
345,980

 
430,767

 
989,742

Expiration of liquidity provisions
 
May 5, 2015

 
June 11, 2015

 
December 17, 2015

 
 
Final maturity date
 
January 17, 2016

 
June 11, 2017

 
December 17, 2017

 
 
Maximum advance rates
 
92.2 - 95.0%

 
92.0 - 98.0%

 
91.0 - 97.0%

 
 
Minimum advance rates
 
92.2 - 95.0%

 
84.0 - 90.0%

 
91.0 - 97.0%

 
 
Advanced as equity support
 
$
32,515

 
19,001

 
3,640

 
55,156

(a)
On April 30, 2015, the Company amended the agreement for this warehouse facility to change the expiration date for the liquidity provisions to April 29, 2016, and to change the final maturity date to April 29, 2018.
(b)
On January 27, 2015, the Company amended the agreement for this warehouse facility to temporarily increase the maximum financing amount to $1.2 billion. On March 26, 2015, the Company reduced the maximum financing amount from $1.2 billion to $750 million.
Asset-backed Securitizations

The following table summarizes the asset-backed securitization transactions completed during the three months ended March 31, 2015.
 
 
2015-1
 
2015-2
 
Total
 
 
 
 
Class A-1 notes
 
Class A-2 notes
 
2015-2 total
 
 
Date securities issued
 
2/27/15
 
3/26/15
 
3/26/15
 
3/26/15
 
 
Total original principal amount
 
$
566,346

 
122,500

 
584,500

 
722,000

 
$
1,288,346

 
 
 
 
 
 
 
 
 
 
 
Class A senior notes:
 
 
 
 
 
 
 
 
 
 
Total original principal amount
 
$
553,232

 
122,500

 
584,500

 
707,000

 
1,260,232

Bond discount
 
—

 
—

 
—

 
—

 
—

Issue price
 
$
553,232

 
122,500

 
584,500

 
707,000

 
1,260,232

Cost of funds (1-month LIBOR plus:)
 
0.59
%
 
0.27
%
 
0.60
%
 
 
 
 
Final maturity date
 
4/25/41

 
3/25/20

 
9/25/42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class B subordinated notes:
 
 
 
 
 
 
 
 
 
 
Total original principal amount
 
$
13,114

 
 
 
 
 
15,000

 
28,114

Bond discount
 
(1,157
)
 
 
 
 
 
(1,793
)
 
(2,950
)
Issue price
 
$
11,957

 

 
 
 
13,207

 
25,164

Cost of funds (1-month LIBOR plus:)
 
1.50
%
 
 
 
 
 
1.50
%
 
 
Final maturity date
 
6/25/46

 
 
 
 
 
5/25/49

 
 

Unsecured Line of Credit

The Company has a $350.0 million line of credit that has a maturity date of June 30, 2019. As of March 31, 2015, the $350.0 million unsecured line of credit had no amount outstanding and $350.0 million was available for future use.

11



Debt Repurchases

During the three months ended March 31, 2015 and 2014, the Company repurchased $11.9 million (par value) of its Junior Subordinated Hybrid Securities unsecured debt and $1.4 million (par value) of its own asset-backed debt securities and recognized gains on such purchases of $2.5 million and approximately $39,000, 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 5 of the notes to consolidated financial statements included in the 2014 Annual Report. A tabular presentation of such derivatives outstanding as of March 31, 2015 and December 31, 2014 is presented below.

Basis Swaps

The following table summarizes the Company’s basis swaps outstanding as of March 31, 2015 and December 31, 2014 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").
 
 
 
 
As of March 31,
 
As of December 31,
 
 
 
 
2015
 
2014
 
Maturity
 
Notional amount
 
Notional amount
 
2016
 
 
$
1,000,000

 
$
—

 
2021
 
 
—

 
250,000

 
2022
 
 
1,900,000

 
1,900,000

 
2023
 
 
2,400,000

 
3,650,000

 
2024
 
 
—

 
250,000

 
2026
 
 
800,000

 
800,000

 
2028
 
 
—

 
100,000

 
2036
 
 
—

 
700,000

 
2039
 
 
—

 
150,000

 
 
 
 
$
6,100,000

 
$
7,800,000

 
The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2015 and December 31, 2014 was one-month LIBOR plus 6.0 basis points and 3.5 basis points, respectively.
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, 2015
 
As of December 31, 2014
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
 
 
2015
 
$
1,100,000

 
0.89
%
 
$
1,100,000

 
0.89
%
2016
 
750,000

 
0.85

 
750,000

 
0.85

2017
 
1,350,000

 
0.85

 
1,250,000

 
0.86

2018
 
100,000

 
1.02

 
—

 
—

2025
 
100,000

 
2.32

 
—

 
—

2045
 
25,000

 
2.46

 
—

 
—

 
 
$
3,425,000

 
0.92
%
 
$
3,100,000

 
0.87
%

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

12


On August 20, 2014, the Company paid $9.1 million for an interest rate swap option to economically hedge loans earning fixed rate floor income. The interest rate swap option gives the Company the right, but not the obligation, to enter into a $250 million notional interest rate swap in which the Company would pay a fixed amount of 3.30% and receive discrete one-month LIBOR. If the interest rate swap option is exercised, the swap would become effective in 2019 and mature in 2024.

Interest Rate Swaps – Unsecured Debt Hedges

The Company had the following derivatives outstanding as of March 31, 2015 and December 31, 2014 that are used to effectively convert the variable interest rate on a portion of the Junior Subordinated 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,
 
2015
 
2014
Re-measurement of Euro Notes
$
48,209

 
(952
)
Change in fair value of cross-currency interest rate swap
(49,805
)
 
(39
)
Total impact to consolidated statements of income - income (expense) (a)
$
(1,596
)
 
(991
)
(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.
The re-measurement of the Euro-denominated bonds generally correlates with the change in fair value of the corresponding cross-currency interest rate swap. However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swap if the two underlying indices (and related forward curve) do not move in parallel.


13


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,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
1:3 basis swaps
$
30,072

 
53,549

 
—

 
—

Interest rate swaps - floor income hedges
1,756

 
5,165

 
6,498

 
5,034

Interest rate swap option - floor income hedge
4,767

 
5,678

 
—

 
—

Interest rate swaps - hybrid debt hedges
—

 
—

 
8,805

 
7,353

Cross-currency interest rate swap
—


—

 
70,261

 
20,455

Total
$
36,595

 
64,392

 
85,564

 
32,842


During the three months ended March 31, 2015, the Company terminated a total notional amount of $2.7 billion of 1:3 Basis Swaps for gross proceeds of $34.4 million.

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 pledged (received)
 
Net asset (liability)
Balance as of March 31, 2015
 
$
36,595

 
(9,761
)
 
5,556

 
32,390

Balance as of December 31, 2014
 
64,392

 
(12,387
)
 
—

 
52,005


 
 
 
 
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 (received)
 
Net asset (liability)
Balance as of March 31, 2015
 
$
(85,564
)
 
9,761

 
6,400

 
(69,403
)
Balance as of December 31, 2014
 
(32,842
)
 
12,387

 
(1,454
)
 
(21,909
)


14


The following table summarizes the effect of derivative instruments in the consolidated statements of income.
 
Three months ended March 31,
 
2015
 
2014
Settlements:
 

 
 

1:3 basis swaps
$
266

 
881

Interest rate swaps - floor income hedges
(5,015
)
 
(6,950
)
Interest rate swaps - hybrid debt hedges
(252
)
 
(252
)
Cross-currency interest rate swap
(214
)
 
92

Total settlements - (expense) income
(5,215
)
 
(6,229
)
Change in fair value:
 

 
 

1:3 basis swaps
10,969

 
1,110

Interest rate swaps - floor income hedges
(4,872
)
 
3,358

Interest rate swap option - floor income hedge
(912
)
 
—

Interest rate swaps - hybrid debt hedges
(1,452
)
 
(1,513
)
Cross-currency interest rate swap
(49,805
)
 
(39
)
Total change in fair value - (expense) income
(46,072
)
 
2,916

Re-measurement of Euro Notes (foreign currency transaction adjustment) - income (expense)
48,209

 
(952
)
Derivative market value and foreign currency adjustments and derivative settlements, net - income (expense)
$
(3,078
)
 
(4,265
)

5.    Investments and Notes Receivable

A summary of the Company's investments and notes receivable follows:
 
As of March 31, 2015
 
As of December 31, 2014
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses (a)
 
Fair value
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
 
 
 
 
 
 
 
Investments (at fair value):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Student loan asset-backed and other debt securities (b)
$
130,754

 
5,998

 
(484
)
 
136,268

 
131,589

 
6,204

 
(236
)
 
137,557

Equity securities
1,787

 
2,268

 
(48
)
 
4,007

 
1,553

 
2,216

 
(33
)
 
3,736

Total available-for-sale investments
$
132,541

 
8,266

 
(532
)
 
140,275

 
133,142

 
8,420

 
(269
)
 
141,293

Trading investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Student loan asset-backed securities
 
 
 
 
 
 
6,526

 
 
 
 
 
 
 
7,830

Total available-for-sale and trading investments

 

 

 
146,801

 
 
 
 
 


 
149,123

Other Investments and Notes Receivable (not measured at fair value):
 
 
 
 
 
 
 
 
 
 
 
 
Investments accounted for under the cost and equity methods
 
 
 
 
 
 
81,912

 
 
 
 
 
 
 
36,991

Notes receivable
 
 
 
 
 
 
31,806

 
 
 
 
 
 
 
30,643

Other
 
 
 
 
 
 
16,385

 
 
 
 
 
 
 
18,952

Total investments and notes receivable
 
 
 
 
 
 
$
276,904

 
 
 
 
 
 
 
235,709

    
(a)
As of March 31, 2015, 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, 2015, 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.


15


The amounts reclassified from accumulated other comprehensive income related to the realized gains and losses on available-for-sale-securities are summarized below.
 
 
Three months ended March 31,
Affected line item in the consolidated statements of income - income (expense):
 
2015
 
2014
Other income
 
$
205

 
7,073

Income tax expense
 
(76
)
 
(2,617
)
Net
 
$
129

 
4,456


6. Intangible Assets and Goodwill

Intangible assets consist of the following:
 
Weighted average remaining useful life as of March 31, 2015 (months)
 
As of March 31, 2015
 
As of December 31, 2014
 
 
 
Amortizable intangible assets:
 
 
 
Customer relationships (net of accumulated amortization of $18,820 and $17,361, respectively)
211
 
$
25,871

 
27,330

Computer software (net of accumulated amortization of $2,472 and $1,896, respectively)
39
 
6,393

 
6,969

Trade names (net of accumulated amortization of $403 and $272, respectively)
230
 
6,019

 
6,150

Content (net of accumulated amortization of $225 and $0, respectively)
21
 
1,575

 
1,800

Covenants not to compete (net of accumulated amortization of $30 and $21, respectively)
110
 
325

 
333

Total - amortizable intangible assets
178
 
$
40,183

 
42,582


The Company recorded amortization expense on its intangible assets of $2.4 million and $1.0 million during the three months ended March 31, 2015 and 2014, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of March 31, 2015, the Company estimates it will record amortization expense as follows:

2015 (April 1 - December 31)
$
7,196

2016
6,249

2017
3,752

2018
3,533

2019
2,861

2020 and thereafter
16,592

 
$
40,183


There were no changes in the carrying amount of goodwill during the three months ended March 31, 2015. The carrying amount of goodwill by reportable operating segment as of March 31, 2015 and December 31, 2014 is shown in the table below.
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset Generation and Management
 
Corporate and Other Activities
 
Total
Balance as of December 31, 2014 and March 31, 2015
$
8,596

 
67,168

 
41,883

 
8,553

 
126,200



16


7.   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,
 
2015
 
2014
 
Common shareholders
 
Unvested restricted stock shareholders
 
Total
 
Common shareholders
 
Unvested restricted stock shareholders
 
Total
Numerator:
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc.
$
64,078

 
687

 
64,765

 
73,125

 
661

 
73,786

 
 
 
 
 


 
 
 
 
 
 
Denominator:


 


 


 
 
 
 
 
 
Weighted-average common shares outstanding - basic and diluted
45,799,873

 
490,717

 
46,290,590

 
46,110,952

 
416,965

 
46,527,917

Earnings per share - basic and diluted
$
1.40

 
1.40

 
1.40

 
1.59

 
1.59

 
1.59

 
 
 
 
 
 
 
 
 
 
 
 

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.


17


8.    Segment Reporting

See note 14 of the notes to consolidated financial statements included in the 2014 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.

Effective January 1, 2015, internal reporting to executive management (the "chief operating decision maker") changed to reflect operational changes made within the organization. The operational and internal reporting changes included moving the majority of information technology infrastructure personnel and related functions to Corporate and Other Activities. The associated costs are allocated to the other operating segments based on those segments' actual use of information technology related products and services. Information technology infrastructure personnel and related functions were historically included within the Student Loan and Guaranty Servicing operating segment, and associated costs were allocated to the other operating segments based on those segments' actual use of the related products and services. Prior period segment operating results have been reclassified to reflect these changes; however, the reclassifications had no effect on any operating segment's net income.
 
Three months ended March 31, 2015
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other
Activities
 
Eliminations
 
Total
Total interest income
$
7

 
2

 
172,423

 
2,153

 
(436
)
 
174,149

Interest expense
—

 
—

 
70,540

 
1,450

 
(436
)
 
71,554

Net interest income
7

 
2

 
101,883

 
703

 
—

 
102,595

Less provision for loan losses
—

 
—

 
2,000

 
—

 
—

 
2,000

Net interest income after provision for loan losses
7

 
2

 
99,883

 
703

 
—

 
100,595

Other income:
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
57,811

 
—

 
—

 
—

 
—

 
57,811

Intersegment servicing revenue
12,871

 
—

 
—

 
—

 
(12,871
)
 
—

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

 
34,680

 
—

 
—

 
—

 
34,680

Enrollment services revenue
—

 
—

 
—

 
17,863

 
—

 
17,863

Other income
—

 
—

 
4,576

 
2,342

 
—

 
6,918

Gain on sale of loans and debt repurchases
—

 
—

 
351

 
2,524

 
—

 
2,875

Derivative market value and foreign currency adjustments, net
—

 
—

 
3,590

 
(1,453
)
 
—

 
2,137

Derivative settlements, net
—

 
—

 
(4,963
)
 
(252
)
 
—

 
(5,215
)
Total other income
70,682

 
34,680

 
3,554

 
21,024

 
(12,871
)
 
117,069

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
33,703

 
13,321

 
541

 
13,485

 
—

 
61,050

Cost to provide enrollment services
—

 
—

 
—

 
11,702

 
—

 
11,702

Loan servicing fees
—

 
—

 
7,685

 
—

 
—

 
7,685

Depreciation and amortization