10-Q


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 September 30, 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 October 31, 2015, there were 33,385,821 and 11,476,932 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
September 30, 2015


 
 
Item 1.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 5.
Other Information
 
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
 
 
September 30, 2015

December 31, 2014
Assets:
 
 
 
 
Student loans receivable (net of allowance for loan losses of $50,380 and $48,900, respectively)
 
$
28,954,280

 
28,005,195

Cash and cash equivalents:
 
 

 
 

Cash and cash equivalents - not held at a related party
 
27,613

 
37,781

Cash and cash equivalents - held at a related party
 
86,885

 
92,700

Total cash and cash equivalents
 
114,498

 
130,481

Investments and notes receivable
 
236,010

 
235,709

Restricted cash and investments
 
895,271

 
850,440

Restricted cash - due to customers
 
100,089

 
118,488

Accrued interest receivable
 
380,441

 
351,588

Accounts receivable (net of allowance for doubtful accounts of $2,062 and $1,656, respectively)
 
64,640

 
50,552

Goodwill
 
126,200

 
126,200

Intangible assets, net
 
35,386

 
42,582

Property and equipment, net
 
46,706

 
45,894

Other assets
 
76,133

 
76,622

Fair value of derivative instruments
 
15,741

 
64,392

Total assets
 
$
31,045,395

 
30,098,143

Liabilities:
 
 

 
 

Bonds and notes payable
 
$
28,827,603

 
28,027,350

Accrued interest payable
 
31,632

 
25,904

Other liabilities
 
170,611

 
167,881

Due to customers
 
100,089

 
118,488

Fair value of derivative instruments
 
80,061

 
32,842

Total liabilities
 
29,209,996

 
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 33,388,556 shares and 34,756,384 shares, respectively
 
334

 
348

Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,476,932 shares and 11,486,932 shares, respectively
 
115

 
115

Additional paid-in capital
 
1,441

 
17,290

Retained earnings
 
1,830,387

 
1,702,560

Accumulated other comprehensive earnings
 
2,876

 
5,135

Total Nelnet, Inc. shareholders' equity
 
1,835,153

 
1,725,448

Noncontrolling interest
 
246

 
230

Total equity
 
1,835,399

 
1,725,678

Total liabilities and equity
 
$
31,045,395

 
30,098,143

 
 
 
 
 
Supplemental information - assets and liabilities of consolidated variable interest entities:
 
 
 
 
Student loans receivable
 
$
29,150,270

 
28,181,244

Restricted cash and investments
 
853,186

 
846,199

Other assets
 
381,698

 
351,934

Bonds and notes payable
 
(29,159,553
)
 
(28,391,530
)
Other liabilities
 
(391,535
)
 
(280,233
)
Fair value of derivative instruments, net
 
(53,866
)
 
(20,455
)
Net assets of consolidated variable interest entities
 
$
780,200

 
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
 
Nine months
 
ended September 30,
 
ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Loan interest
$
187,701

 
187,862

 
535,480

 
520,224

Investment interest
1,456

 
1,562

 
5,548

 
5,023

Total interest income
189,157

 
189,424

 
541,028

 
525,247

Interest expense:
 

 
 

 
 

 
 

Interest on bonds and notes payable
77,164

 
71,937

 
221,344

 
201,176

Net interest income
111,993

 
117,487

 
319,684

 
324,071

Less provision for loan losses
3,000

 
2,000

 
7,150

 
6,000

Net interest income after provision for loan losses
108,993

 
115,487

 
312,534

 
318,071

Other income:
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
61,520

 
52,659

 
183,164

 
183,876

Tuition payment processing, school information, and campus commerce revenue
30,439

 
26,399

 
92,805

 
73,468

Enrollment services revenue
19,500

 
22,936

 
54,524

 
65,092

Other income
6,523

 
7,650

 
20,945

 
41,096

Gain on sale of loans and debt repurchases
597

 
—

 
4,987

 
57

Derivative market value and foreign currency adjustments and derivative settlements, net
(30,658
)
 
24,203

 
(27,234
)
 
21,508

Total other income
87,921

 
133,847

 
329,191

 
385,097

Operating expenses:
 

 
 

 
 

 
 

Salaries and benefits
63,215

 
61,098

 
183,052

 
167,470

Cost to provide enrollment services
12,534

 
14,178

 
35,398

 
41,964

Loan servicing fees
7,793

 
7,077

 
22,829

 
19,798

Depreciation and amortization
6,977

 
5,493

 
19,140

 
15,490

Other
30,419

 
29,599

 
91,575

 
92,882

Total operating expenses
120,938

 
117,445

 
351,994

 
337,604

Income before income taxes
75,976

 
131,889

 
289,731

 
365,564

Income tax expense
26,999

 
46,513

 
104,985

 
130,202

Net income
48,977

 
85,376

 
184,746

 
235,362

Net income attributable to noncontrolling interest
22

 
157

 
117

 
1,363

Net income attributable to Nelnet, Inc.
$
48,955

 
85,219

 
184,629

 
233,999

Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.09

 
1.84

 
4.03

 
5.03

Weighted average common shares outstanding - basic and diluted
45,047,777

 
46,432,680

 
45,763,443

 
46,496,309


 See accompanying notes to consolidated financial statements.

3


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
 
Three months
 
Nine months
 
ended September 30,
 
ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
48,977

 
85,376

 
184,746

 
235,362

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during period, net
(568
)
 
(738
)
 
(1,217
)
 
8,763

Less reclassification adjustment for gains recognized in net income, net of losses
(73
)
 
(8
)
 
(2,370
)
 
(8,319
)
Income tax effect
234

 
276

 
1,328

 
(164
)
Total other comprehensive (loss) income
(407
)
 
(470
)
 
(2,259
)
 
280

Comprehensive income
48,570

 
84,906

 
182,487

 
235,642

Comprehensive income attributable to noncontrolling interest
22

 
157

 
117

 
1,363

Comprehensive income attributable to Nelnet, Inc.
$
48,548

 
84,749

 
182,370

 
234,279


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 June 30, 2014
—

 
34,859,786

 
11,491,932

 
$
—

 
349

 
115

 
20,721

 
1,552,988

 
5,569

 
386

 
1,580,128

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
85,219

 
—

 
157

 
85,376

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(470
)
 
—

 
(470
)
Distribution to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(275
)
 
(275
)
Cash dividend on Class A and Class B common stock - $0.10 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,630
)
 
—

 
—

 
(4,630
)
Issuance of common stock, net of forfeitures
—

 
28,729

 
—

 
—

 
—

 
—

 
213

 
—

 
—

 
—

 
213

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
1,248

 
—

 
—

 
—

 
1,248

Repurchase of common stock
—

 
(96,792
)
 
—

 
—

 
(1
)
 
—

 
(4,032
)
 
—

 
—

 
—

 
(4,033
)
Conversion of common stock
—

 
5,000

 
(5,000
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance as of September 30, 2014
—

 
34,796,723

 
11,486,932

 
$
—

 
348

 
115

 
18,150

 
1,633,577

 
5,099

 
268

 
1,657,557

Balance as of June 30, 2015
—

 
33,724,471

 
11,486,932

 
$
—

 
337

 
115

 
—

 
1,801,457

 
3,283

 
300

 
1,805,492

Issuance of noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4

 
4

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
48,955

 
—

 
22

 
48,977

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(407
)
 
—

 
(407
)
Distribution to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(80
)
 
(80
)
Cash dividend on Class A and Class B common stock - $0.10 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,486
)
 
—

 
—

 
(4,486
)
Issuance of common stock, net of forfeitures
—

 
10,669

 
—

 
—

 
1

 
—

 
267

 
—

 
—

 
—

 
268

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
1,246

 
—

 
—

 
—

 
1,246

Repurchase of common stock
—

 
(356,584
)
 
—

 
—

 
(4
)
 
—

 
(72
)
 
(15,539
)
 
—

 
—

 
(15,615
)
Conversion of common stock
—

 
10,000

 
(10,000
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance as of September 30, 2015
—

 
33,388,556

 
11,476,932

 
$
—

 
334

 
115

 
1,441

 
1,830,387

 
2,876

 
246

 
1,835,399

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
—

 
—

 
—

 
—

 
—

 
—

 
—

 
233,999

 
—

 
1,363

 
235,362

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
280

 
—

 
280

Distribution to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,624
)
 
(1,624
)
Cash dividends on Class A and Class B common stock - $0.30 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(13,914
)
 
—

 
—

 
(13,914
)
Issuance of common stock, net of forfeitures
—

 
234,236

 
—

 
—

 
2

 
—

 
3,339

 
—

 
—

 
—

 
3,341

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
3,258

 
—

 
—

 
—

 
3,258

Repurchase of common stock
—

 
(327,296
)
 
—

 
—

 
(3
)
 
—

 
(13,334
)
 
—

 
—

 
—

 
(13,337
)
Conversion of common stock
—

 
8,445

 
(8,445
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance as of September 30, 2014
—

 
34,796,723

 
11,486,932

 
$
—

 
348

 
115

 
18,150

 
1,633,577

 
5,099

 
268

 
1,657,557

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

Issuance of noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
23

 
23

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
184,629

 
—

 
117

 
184,746

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,259
)
 
—

 
(2,259
)
Distribution to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(124
)
 
(124
)
Cash dividends on Class A and Class B common stock - $0.30 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(13,659
)
 
—

 
—

 
(13,659
)
Issuance of common stock, net of forfeitures
—

 
152,764

 
—

 
—

 
2

 
—

 
3,678

 
—

 
—

 
—

 
3,680

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
3,957

 
—

 
—

 
—

 
3,957

Repurchase of common stock
—

 
(1,530,592
)
 
—

 
—

 
(16
)
 
—

 
(23,484
)
 
(43,143
)
 
—

 
—

 
(66,643
)
Conversion of common stock
—

 
10,000

 
(10,000
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance as of September 30, 2015
—

 
33,388,556

 
11,476,932

 
$
—

 
334

 
115

 
1,441

 
1,830,387

 
2,876

 
246

 
1,835,399


 See accompanying notes to consolidated financial statements.

5



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 
Nine months
 
ended September 30,
 
2015
 
2014
Net income attributable to Nelnet, Inc.
$
184,629

 
233,999

Net income attributable to noncontrolling interest
117

 
1,363

Net income
184,746

 
235,362

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
91,045

 
78,318

Student loan discount accretion
(32,684
)
 
(32,393
)
Provision for loan losses
7,150

 
6,000

Derivative market value adjustment
43,179

 
431

Foreign currency transaction adjustment
(32,480
)
 
(39,216
)
Proceeds from termination of derivative instruments
55,627

 
—

Payment to enter into derivative instruments
(2,936
)
 
(9,087
)
Gain on sale of loans
(351
)
 
—

Gain from debt repurchases
(4,636
)
 
(57
)
 Gain from sales of available-for-sale securities, net
(2,370
)
 
(8,319
)
Payments for purchases of trading securities, net
(8,168
)
 
(3,380
)
Deferred income tax (benefit) expense
(7,901
)
 
21,391

Non-cash compensation expense
4,120

 
3,364

Other
2,469

 
5,638

(Increase) decrease in accrued interest receivable
(435
)
 
4,303

Increase in accounts receivable
(14,088
)
 
(1,884
)
Decrease in other assets
1,848

 
2,723

Increase in accrued interest payable
5,242

 
2,314

Increase (decrease) in other liabilities
17,978

 
(2,441
)
Net cash provided by operating activities
307,355

 
263,067

Cash flows from investing activities, net of acquisitions:
 

 
 

Purchases of student loans and student loan residual interests
(1,994,416
)
 
(3,211,328
)
Net proceeds from student loan repayments, claims, capitalized interest, and other
2,843,119

 
2,721,886

Proceeds from sale of student loans
3,996

 
8

Purchases of available-for-sale securities
(6,939
)
 
(143,695
)
Proceeds from sales of available-for-sale securities
49,278

 
200,098

Purchases of investments and issuance of notes receivable
(65,548
)
 
(35,454
)
Proceeds from investments and notes receivable
27,773

 
11,006

Purchases of property and equipment, net
(12,756
)
 
(21,691
)
Decrease (increase) in restricted cash and investments, net
3,611

 
(32,720
)
Business acquisitions, net of cash acquired
—

 
(45,583
)
Net cash provided by (used in) investing activities
848,118

 
(557,473
)
Cash flows from financing activities, net of borrowings assumed:
 

 
 

Payments on bonds and notes payable
(3,483,804
)
 
(3,013,378
)
Proceeds from issuance of bonds and notes payable
2,401,993

 
3,362,227

Payments of debt issuance costs
(9,859
)
 
(14,933
)
Dividends paid
(13,659
)
 
(13,914
)
Repurchases of common stock
(66,643
)
 
(13,337
)
Proceeds from issuance of common stock
617

 
476

Issuance of noncontrolling interest
23

 
201

Distribution to noncontrolling interest
(124
)
 
(1,624
)
Net cash (used in) provided by financing activities
(1,171,456
)
 
305,718

Net (decrease) increase in cash and cash equivalents
(15,983
)
 
11,312

Cash and cash equivalents, beginning of period
130,481

 
63,267

Cash and cash equivalents, end of period
$
114,498

 
74,579

 
 
 
 
Cash disbursements made for:
 

 
 

Interest
$
165,885

 
155,962

Income taxes, net of refunds
$
104,403

 
118,866

Noncash activity:
 
 
 
Investing activity - student loans and other assets acquired
$
2,025,453

 
2,571,997

Financing activity - borrowings and other liabilities assumed in acquisition of student loans
$
1,885,453

 
2,444,874


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 September 30, 2015 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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
 
September 30, 2015
 
December 31, 2014
Federally insured loans
 
 
 
Stafford and other
$
6,375,336

 
6,030,825

Consolidation
22,580,043

 
22,165,605

Total
28,955,379

 
28,196,430

Private education loans
232,824

 
27,478

 
29,188,203

 
28,223,908

Loan discount, net of unamortized loan premiums and deferred origination costs (a)
(183,543
)
 
(169,813
)
Allowance for loan losses – federally insured loans
(35,945
)
 
(39,170
)
Allowance for loan losses – private education loans
(14,435
)
 
(9,730
)
 
$
28,954,280

 
28,005,195


(a)
As of September 30, 2015 and December 31, 2014, "loan discount, net of unamortized loan premiums and deferred origination costs" included $35.4 million and $28.8 million, respectively, of non-accretable discount associated with purchased loans of $10.9 billion and $8.5 billion, respectively.





7


Private Education Loans

During the first quarter of 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 private education loans for a period of 18 months, with the total purchase obligation limited to $150.0 million. On August 17, 2015, the Company amended the agreement with CommonBond to increase the maximum purchase obligation to $200.0 million. As of September 30, 2015, the Company had purchased $127.8 million in private education loans from CommonBond pursuant to this agreement.

Acquisition of Student Loan Residual Interests

On May 26, 2015, the Company acquired the ownership interest in a federally insured student loan securitization trust (the "May Trust"), giving the Company rights to the residual interest in $504.2 million of securitized federally insured loans. The trust includes loans funded to term with $448.9 million (par value) of bonds and notes payable.

On August 3, 2015, the Company acquired the ownership interest in two federally insured student loan securitization trusts (the "August Trusts"), giving the Company rights to the residual interest in $1.5 billion of securitized federally insured loans. The two trusts include loans funded to term with $1.5 billion (par value) of bonds and notes payable.

The Company has consolidated the May Trust and August Trusts on its consolidated balance sheet because management has determined the Company is the primary beneficiary of the trusts. Upon acquisition of the May Trust and August Trusts, the Company recorded all assets and liabilities of the trusts at fair value, resulting in the recognition of a student loan fair value discount of $20.7 million and $20.2 million, respectively, and a bonds and notes payable fair value premium of $2.2 million and a fair value discount of $86.7 million, respectively. The discounts/premium will be accreted/amortized using the effective interest method over the lives of the underlying assets and liabilities. All other assets acquired and liabilities assumed (restricted cash, accrued interest receivable/payable, and other assets/liabilities) were recorded at cost, which approximates fair value.

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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
50,024

 
52,467

 
48,900

 
55,122

Provision for loan losses:
 
 
 
 
 

 
 

Federally insured loans
2,000

 
2,000

 
6,000

 
7,000

Private education loans
1,000

 
—

 
1,150

 
(1,000
)
Total provision for loan losses
3,000

 
2,000

 
7,150

 
6,000

Charge-offs:
 

 
 

 
 

 
 

Federally insured loans
(2,817
)
 
(3,521
)
 
(9,225
)
 
(11,290
)
Private education loans
(357
)
 
(623
)
 
(1,479
)
 
(1,642
)
Total charge-offs
(3,174
)
 
(4,144
)
 
(10,704
)
 
(12,932
)
Recoveries - private education loans
250

 
279

 
742

 
989

Purchase (sale) of federally insured and private education loans, net
30

 
70

 
(200
)
 
320

Transfer from repurchase obligation related to private education loans repurchased
250

 
1,296

 
4,492

 
2,469

Balance at end of period
$
50,380

 
51,968

 
50,380

 
51,968

 
 
 
 
 
 
 
 
Allocation of the allowance for loan losses:
 
 
 

 
 

 
 

Federally insured loans
$
35,945

 
39,470

 
35,945

 
39,470

Private education loans
14,435

 
12,498

 
14,435

 
12,498

Total allowance for loan losses
$
50,380

 
51,968

 
50,380

 
51,968




8



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 September 30, 2015 and December 31, 2014, the balance of loans subject to these repurchase obligations was $53.1 million and $155.3 million, respectively. The Company repurchased $94.1 million of private education loans during the first quarter of 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 and was $3.3 million and $11.8 million as of September 30, 2015 and December 31, 2014, respectively.

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 September 30, 2015
 
As of December 31, 2014
 
As of September 30, 2014
Federally insured loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
2,638,639

 
 
 
$
2,805,228

 
 
 
$
3,072,318

 
 
Loans in forbearance
2,993,844

 
 
 
3,288,412

 
 
 
3,505,103

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
19,681,517

 
84.4
%
 
18,460,279

 
83.5
%
 
18,672,178

 
83.8
%
Loans delinquent 31-60 days
1,021,515

 
4.4

 
1,043,119

 
4.8

 
990,696

 
4.5

Loans delinquent 61-90 days
638,037

 
2.7

 
588,777

 
2.7

 
569,879

 
2.6

Loans delinquent 91-120 days
465,261

 
2.0

 
404,905

 
1.8

 
452,463

 
2.0

Loans delinquent 121-270 days
1,139,864

 
4.9

 
1,204,405

 
5.4

 
1,183,616

 
5.3

Loans delinquent 271 days or greater
376,702

 
1.6

 
401,305

 
1.8

 
405,346

 
1.8

Total loans in repayment
23,322,896

 
100.0
%
 
22,102,790

 
100.0
%
 
22,274,178

 
100.0
%
Total federally insured loans
$
28,955,379

 
 

 
$
28,196,430

 
 

 
$
28,851,599

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private education loans:
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
7,724

 
 
 
$
905

 
 
 
$
2,958

 
 
Loans in forbearance
16

 
 
 
—

 
 
 
—

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
216,502

 
96.2
%
 
18,390

 
69.2
%
 
65,560

 
87.8
%
Loans delinquent 31-60 days
1,999

 
0.9

 
1,078

 
4.1

 
1,340

 
1.8

Loans delinquent 61-90 days
1,206

 
0.5

 
1,035

 
3.9

 
1,516

 
2.0

Loans delinquent 91 days or greater
5,377

 
2.4

 
6,070

 
22.8

 
6,249

 
8.4

Total loans in repayment
225,084

 
100.0
%
 
26,573

 
100.0
%
 
74,665

 
100.0
%
Total non-federally insured loans
$
232,824

 
 

 
$
27,478

 
 

 
$
77,623

 
 


9


3.    Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
As of September 30, 2015
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
 
 
 
 
 
Bonds and notes based on indices
$
26,346,635

 
0.08% - 6.90%
 
8/26/19 - 8/26/52
Bonds and notes based on auction
1,161,515

 
1.11% - 2.13%
 
3/22/32 - 11/26/46
Total variable-rate bonds and notes
27,508,150

 
 
 
 
FFELP warehouse facilities
1,391,877

 
0.20% - 0.41%
 
12/17/17 - 7/9/18
Private education loan warehouse facility
170,081

 
0.42%
 
12/26/16
Unsecured line of credit
70,000

 
1.72%
 
6/30/19
Unsecured debt - Junior Subordinated Hybrid Securities
57,582

 
3.70%
 
9/15/61
Other borrowings
75,000

 
1.69%
 
10/31/16
 
29,272,690

 
 
 
 
Discount on bonds and notes payable
(445,087
)
 
 
 
 
Total
$
28,827,603

 
 
 
 
 
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 September 30, 2015, the Company had three FFELP warehouse facilities as summarized below.
 
 
NHELP-II
 
NHELP-III
 
NFSLW-I (a)
 
Total
Maximum financing amount
 
$
500,000

 
750,000

 
875,000

 
2,125,000

Amount outstanding
 
446,624

 
395,631

 
549,622

 
1,391,877

Amount available
 
$
53,376

 
354,369

 
325,378

 
733,123

Expiration of liquidity provisions
 
December 17, 2015

 
April 29, 2016

 
July 8, 2016

 
 
Final maturity date
 
December 17, 2017

 
April 29, 2018

 
July 9, 2018

 
 
Maximum advance rates
 
91.0 - 97.0%

 
92.2 - 95.0%

 
92.0 - 98.0%

 
 
Minimum advance rates
 
91.0 - 97.0%

 
92.2 - 95.0%

 
84.0 - 90.0%

 
 
Advanced as equity support
 
$
24,538

 
22,427

 
26,124

 
73,089


(a)
On July 10, 2015, the Company amended the agreement for this warehouse facility to temporarily increase the maximum financing amount to $875.0 million, extend the expiration of the liquidity provisions to July 8, 2016, and extend the maturity date to July 9, 2018. The maximum financing amount is scheduled to decrease by $125.0 million on March 31, 2016.

Asset-backed Securitizations

The following table summarizes the asset-backed securitization transactions completed during the nine months ended September 30, 2015.
 
 
2015-1
 
2015-2
 
2015-3
 
Total
 
 
 
 
Class A-1 notes
 
Class A-2 notes
 
2015-2 total
 
Class A-1 notes
 
Class A-2 notes
 
Class A-3 notes
 
2015-3 total
 
 
Date securities issued
 
2/27/15
 
3/26/15
 
3/26/15
 
3/26/15
 
5/21/15
 
5/21/15
 
5/21/15
 
5/21/15
 
 
Total original principal amount
 
$
566,346

 
122,500

 
584,500

 
722,000

 
82,500

 
270,000

 
41,400

 
401,400

 
$
1,689,746

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

 
122,500

 
584,500

 
707,000

 
82,500

 
270,000

 
41,400

 
393,900

 
1,654,132

Bond discount
 
—

 
—

 
—

 
—

 
—

 
(380
)
 
(1,095
)
 
(1,475
)
 
(1,475
)
Issue price
 
$
553,232

 
122,500

 
584,500

 
707,000

 
82,500

 
269,620

 
40,305

 
392,425

 
1,652,657

Cost of funds (1-month LIBOR plus:)
 
0.59
%
 
0.27
%
 
0.60
%
 
 
 
0.30
%
 
0.60
%
 
0.90
%
 
 
 
 
Final maturity date
 
4/25/41

 
3/25/20

 
9/25/42

 
 
 
1/27/25

 
2/26/46

 
6/25/49

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

 
 
 
 
 
15,000

 

 
 
 
 
 
7,500

 
35,614

Bond discount
 
(1,157
)
 
 
 
 
 
(1,793
)
 

 
 
 
 
 
(968
)
 
(3,918
)
Issue price
 
$
11,957

 

 
 
 
13,207

 

 
 
 
 
 
6,532

 
31,696

Cost of funds (1-month LIBOR plus:)
 
1.50
%
 
 
 
 
 
1.50
%
 

 
 
 
 
 
1.50
%
 
 
Final maturity date
 
6/25/46

 
 
 
 
 
5/25/49

 
 
 
 
 
 
 
6/27/50

 
 


11


Private Education Loan Warehouse Facility
On June 26, 2015, the Company entered into a $275.0 million private education loan warehouse facility. As of September 30, 2015, there was $170.1 million outstanding on the facility and $104.9 million was available for future use. The facility has a static advance rate that requires initial equity for loan funding, but does not require increased equity based on market movements. The maximum advance rate on the entire facility is 88 percent and minimum advance rates, depending on loan characteristics and program type, range from 64 percent to 99 percent. As of September 30, 2015, $23.7 million was advanced on the facility as equity support. The facility is supported by liquidity provisions, which have a defined expiration date of June 24, 2016. In the event the Company is unable to renew the liquidity provisions by such date, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's final maturity date of December 26, 2016.
Unsecured Line of Credit

On October 30, 2015, the Company entered into an amended and restated credit agreement for its $350.0 million line of credit. Under the amended terms, the maturity date of the credit agreement was extended from June 30, 2019 to October 30, 2020.  In addition, the following revisions were made to certain covenants:

•
A provision was added to permit acquisitions of businesses, for consideration of up to $75.0 million per fiscal year, that are not in one of the Company's existing lines of business.

•
The cap for other non-specified permitted investments increased to 20 percent of the Company's consolidated net worth, with the cap excluding all existing investments at the time of the amendment.

•
The current cap related to the volume of private education loans that the Company may hold was reduced from $900.0 million to a revised level of $500.0 million.  All private education loans that are held within securitization vehicles are excluded from the $500.0 million threshold.

•
The minimum consolidated net worth threshold changed beginning as of September 30, 2015 to be not less than the sum of (i) $1.35 billion, plus, in each case for periods after September 30, 2015, (ii) 50 percent of consolidated net income; plus (iii) 100 percent of the increase to consolidated net worth from the issuance of capital stock.

The facility size of $350.0 million and cost of funds did not change as part of the amendment.  

As of September 30, 2015, the unsecured line of credit had an outstanding balance of $70.0 million and $280.0 million was available for future use.

Debt Repurchases

The following table summarizes the Company's repurchases of its own debt. Gains recorded by the Company from the repurchase of debt are included in "gain on sale of loans and debt repurchases" on the Company’s consolidated statements of income.

 
Par value
 
Purchase price
 
Gain
 
Par value
 
Purchase price
 
Gain
 
Three months ended
 
September 30, 2015
 
September 30, 2014
Unsecured debt - Hybrid Securities
$
—

 
—

 
—

 
—

 
—

 
—

   Asset-backed securities
9,650

 
9,053

 
597

 
2,500

 
2,500

 
—

 
$
9,650

 
9,053

 
597

 
2,500

 
2,500

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended
 
September 30, 2015
 
September 30, 2014
Unsecured debt - Hybrid Securities
$
14,106

 
11,108

 
2,998

 
—

 
—

 
—

   Asset-backed securities
31,800

 
30,162

 
1,638

 
4,000

 
3,943

 
57

 
$
45,906

 
41,270

 
4,636

 
4,000

 
3,943

 
57



12


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 September 30, 2015 and December 31, 2014 is presented below.

Basis Swaps

The following table summarizes the Company’s basis swaps outstanding as of September 30, 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 September 30,
 
As of December 31,
 
 
 
2015
 
2014
Maturity
 
Notional amount
 
Notional amount
2016
 
 
$
5,500,000

 
$
—

2021
 
 
—

 
250,000

2022
 
 
450,000

 
1,900,000

2023
 
 
1,050,000

 
3,650,000

2024
 
 
—

 
250,000

2026
 
 
200,000

 
800,000

2028
 
 
—

 
100,000

2036