Edgar Filing: NELNET INC

Document

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 June 30, 2017



¨	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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]

Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 July 31, 2017, there were 30,062,906 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

June 30, 2017



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4.	Controls and Procedures	60

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	60
	Item 1A.	Risk Factors	60
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
	Item 6.	Exhibits	62

Signatures			63

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
	June 30, 2017			December 31, 2016
Assets:
Student loans receivable (net of allowance for loan losses of $49,708 and $51,842, respectively)	$	23,202,294		24,903,724
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	8,538			7,841
Cash and cash equivalents - held at a related party	60,701			61,813
Total cash and cash equivalents	69,239			69,654
Investments and other receivables	290,304			254,144
Restricted cash	780,141			980,961
Restricted cash - due to customers	136,900			119,702
Accrued interest receivable	395,734			391,264
Accounts receivable (net of allowance for doubtful accounts of $1,704 and $1,549, respectively)	60,246			43,972
Goodwill	147,312			147,312
Intangible assets, net	43,077			47,813
Property and equipment, net	181,098			123,786
Other assets	15,123			10,245
Fair value of derivative instruments	1,619			87,531
Total assets	$	25,323,087		27,180,108
Liabilities:
Bonds and notes payable	$	22,790,780		24,668,490
Accrued interest payable	47,064			45,677
Other liabilities	171,528			197,488
Due to customers	136,900			119,702
Fair value of derivative instruments	46,406			77,826
Total liabilities	23,192,678			25,109,183
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 30,373,691 shares and 30,628,112 shares, respectively	304			306
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,476,932 shares	115			115
Additional paid-in capital	366			420
Retained earnings	2,110,158			2,056,084
Accumulated other comprehensive earnings	4,251			4,730
Total Nelnet, Inc. shareholders' equity	2,115,194			2,061,655
Noncontrolling interests	15,215			9,270
Total equity	2,130,409			2,070,925
Total liabilities and equity	$	25,323,087		27,180,108

Supplemental information - assets and liabilities of consolidated education lending variable interest entities:
Student loans receivable	$	23,382,949		25,090,530
Restricted cash	740,544			970,306
Accrued interest receivable and other assets	395,900			390,504
Bonds and notes payable	(23,179,144		)	(25,105,704	)
Other liabilities	(284,408		)	(290,996	)
Fair value of derivative instruments, net	(39,031		)	(66,453	)
Net assets of consolidated education lending variable interest entities	$	1,016,810		988,187

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
	Three months					Six months
	ended June 30,					ended June 30,
	2017			2016		2017		2016
Interest income:
Loan interest	$	189,488		184,067		370,695		374,055
Investment interest	3,589			2,185		6,206		4,214
Total interest income	193,077			186,252		376,901		378,269
Interest expense:
Interest on bonds and notes payable	113,236			94,052		220,135		184,460
Net interest income	79,841			92,200		156,766		193,809
Less provision for loan losses	2,000			2,000		3,000		4,500
Net interest income after provision for loan losses	77,841			90,200		153,766		189,309
Other income:
Loan systems and servicing revenue	56,899			54,402		111,128		106,732
Tuition payment processing, school information, and campus commerce revenue	34,224			30,483		77,844		69,140
Communications revenue	5,719			4,478		10,826		8,824
Enrollment services revenue	—			—		—		4,326
Other income	12,485			9,765		25,118		23,559
Gain from debt repurchases	442			—		5,421		101
Derivative market value and foreign currency transaction adjustments and derivative settlements, net	(27,910		)	(40,702	)	(32,741	)	(69,392	)
Total other income	81,859			58,426		197,596		143,290
Operating expenses:
Salaries and benefits	74,628			60,923		146,491		124,165
Depreciation and amortization	9,038			8,183		17,636		15,823
Loan servicing fees	5,620			7,216		11,645		14,144
Cost to provide communications services	2,203			1,681		4,157		3,384
Cost to provide enrollment services	—			—		—		3,623
Other expenses	27,528			29,409		54,075		57,783
Total operating expenses	119,017			107,412		234,004		218,922
Income before income taxes	40,683			41,214		117,358		113,677
Income tax expense	16,032			15,036		44,787		39,469
Net income	24,651			26,178		72,571		74,208
Net loss (income) attributable to noncontrolling interests	4,086			(28	)	6,192		(97	)
Net income attributable to Nelnet, Inc.	$	28,737		26,150		78,763		74,111
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	0.68		0.61		1.86		1.73
Weighted average common shares outstanding - basic and diluted	42,326,540			42,635,700		42,309,295		42,861,896

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
	Three months					Six months
	ended June 30,					ended June 30,
	2017			2016		2017		2016
Net income	$	24,651		26,178		72,571		74,208
Other comprehensive loss:
Available-for-sale securities:
Unrealized holding losses arising during period, net of gains	(1,281		)	(6,138	)	(22	)	(7,648	)
Reclassification adjustment for (gains) losses recognized in net income, net	(409		)	277		(740	)	409
Income tax effect	626			2,168		283		2,678
Total other comprehensive loss	(1,064		)	(3,693	)	(479	)	(4,561	)
Comprehensive income	23,587			22,485		72,092		69,647
Comprehensive loss (income) attributable to noncontrolling interests	4,086			(28	)	6,192		(97	)
Comprehensive income attributable to Nelnet, Inc.	$	27,673		22,457		78,284		69,550

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 (loss) earnings		Noncontrolling interests		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 (loss) earnings		Noncontrolling interests		Total equity
Balance as of March 31, 2016	—	31,008,226		11,476,932	$	—	310		115	2,913		1,873,500		1,416		8,672		1,886,926
Issuance of noncontrolling interests	—	—		—	—		—		—	—		—		—		338		338
Net income	—	—		—	—		—		—	—		26,150		—		28		26,178
Other comprehensive loss	—	—		—	—		—		—	—		—		(3,693	)	—		(3,693	)
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(122	)	(122	)
Cash dividend on Class A and Class B common stock - $0.12 per share	—	—		—	—		—		—	—		(5,099	)	—		—		(5,099	)
Issuance of common stock, net of forfeitures	—	27,946		—	—		—		—	954		—		—		—		954
Compensation expense for stock based awards	—	—		—	—		—		—	1,133		—		—		—		1,133
Repurchase of common stock	—	(11,942	)	—	—		—		—	(399	)	—		—		—		(399	)
Balance as of June 30, 2016	—	31,024,230		11,476,932	$	—	310		115	4,601		1,894,551		(2,277	)	8,916		1,906,216
Balance as of March 31, 2017	—	30,740,185		11,476,932	$	—	307		115	2,236		2,100,214		5,315		19,480		2,127,667
Issuance of noncontrolling interests	—	—		—	—		—		—	—		—		—		26		26
Net income (loss)	—	—		—	—		—		—	—		28,737		—		(4,086	)	24,651
Other comprehensive loss	—	—		—	—		—		—	—		—		(1,064	)	—		(1,064	)
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(205	)	(205	)
Cash dividend on Class A and Class B common stock - $0.14 per share	—	—		—	—		—		—	—		(5,907	)	—		—		(5,907	)
Issuance of common stock, net of forfeitures	—	17,567		—	—		—		—	992		—		—		—		992
Compensation expense for stock based awards	—	—		—	—		—		—	1,075		—		—		—		1,075
Repurchase of common stock	—	(384,061	)	—	—		(3	)	—	(3,937	)	(12,886	)	—		—		(16,826	)
Balance as of June 30, 2017	—	30,373,691		11,476,932	$	—	304		115	366		2,110,158		4,251		15,215		2,130,409
Balance as of December 31, 2015	—	32,476,528		11,476,932	$	—	325		115	—		1,881,708		2,284		7,726		1,892,158
Issuance of noncontrolling interests	—	—		—	—		—		—	—		—		—		1,312		1,312
Net income	—	—		—	—		—		—	—		74,111		—		97		74,208
Other comprehensive loss	—	—		—	—		—		—	—		—		(4,561	)	—		(4,561	)
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(219	)	(219	)
Cash dividend on Class A and Class B common stock - $0.24 per share	—	—		—	—		—		—	—		(10,192	)	—		—		(10,192	)
Issuance of common stock, net of forfeitures	—	158,743		—	—		1		—	3,661		—		—		—		3,662
Compensation expense for stock based awards	—	—		—	—		—		—	2,316		—		—		—		2,316
Repurchase of common stock	—	(1,611,041	)	—	—		(16	)	—	(1,376	)	(51,076	)	—		—		(52,468	)
Balance as of June 30, 2016	—	31,024,230		11,476,932	$	—	310		115	4,601		1,894,551		(2,277	)	8,916		1,906,216
Balance as of December 31, 2016	—	30,628,112		11,476,932	$	—	306		115	420		2,056,084		4,730		9,270		2,070,925
Issuance of noncontrolling interests	—	—		—	—		—		—	—		—		—		12,652		12,652
Net income (loss)	—	—		—	—		—		—	—		78,763		—		(6,192	)	72,571
Other comprehensive loss	—	—		—	—		—		—	—		—		(479	)	—		(479	)
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(515	)	(515	)
Cash dividend on Class A and Class B common stock - $0.28 per share	—	—		—	—		—		—	—		(11,803	)	—		—		(11,803	)
Issuance of common stock, net of forfeitures	—	161,356		—	—		2		—	3,081		—		—		—		3,083
Compensation expense for stock based awards	—	—		—	—		—		—	2,170		—		—		—		2,170
Repurchase of common stock	—	(415,777	)	—	—		(4	)	—	(5,305	)	(12,886	)	—		—		(18,195	)
Balance as of June 30, 2017	—	30,373,691		11,476,932	$	—	304		115	366		2,110,158		4,251		15,215		2,130,409

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Six months
	ended June 30,
	2017			2016
Net income attributable to Nelnet, Inc.	$	78,763		74,111
Net (loss) income attributable to noncontrolling interests	(6,192		)	97
Net income	72,571			74,208
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	66,805			62,298
Student loan discount accretion	(22,934		)	(21,524	)
Provision for loan losses	3,000			4,500
Derivative market value adjustment	(951		)	48,649
Unrealized foreign currency transaction adjustment	31,951			8,712
Proceeds from termination of derivative instruments	3,013			3,523
Payments to enter into derivative instruments	(929		)	—
Proceeds from clearinghouse to settle variation margin, net	25,927			—
Gain from debt repurchases	(5,421		)	(101	)
(Gain) loss from sales of available-for-sale securities, net	(740		)	409
Proceeds (purchases) related to trading securities, net	23			(235	)
Deferred income tax benefit	(15,249		)	(20,260	)
Non-cash compensation expense	2,260			2,388
Other	2,209			3,681
(Increase) decrease in accrued interest receivable	(4,470		)	3,685
(Increase) decrease in accounts receivable	(16,274		)	9,462
Increase in other assets	(2,155		)	(2,579	)
Increase in accrued interest payable	1,387			8,419
Decrease in other liabilities	(7,891		)	(10,006	)
Net cash provided by operating activities	132,132			175,229
Cash flows from investing activities:
Purchases of student loans	(100,843		)	(183,375	)
Net proceeds from student loan repayments, claims, capitalized interest, and other	1,807,765			1,927,319
Proceeds from sale of student loans	—			44,738
Purchases of available-for-sale securities	(77,118		)	(51,735	)
Proceeds from sales of available-for-sale securities	66,492			58,232
Purchases of investments and loans receivable and issuance of notes receivable	(33,131		)	(10,222	)
Proceeds from investments and other receivables	5,551			5,360
Purchases of property and equipment	(70,814		)	(29,577	)
Decrease (increase) in restricted cash, net	226,409			(131,325	)
Net cash provided by investing activities	1,824,311			1,629,415
Cash flows from financing activities:
Payments on bonds and notes payable	(2,549,189		)	(1,972,880	)
Proceeds from issuance of bonds and notes payable	612,279			226,194
Payments of debt issuance costs	(2,256		)	(1,084	)
Dividends paid	(11,803		)	(10,192	)
Repurchases of common stock	(18,195		)	(52,468	)
Proceeds from issuance of common stock	221			417
Issuance of noncontrolling interests	12,600			1,312
Distribution to noncontrolling interests	(515		)	(219	)
Net cash used in financing activities	(1,956,858		)	(1,808,920	)
Net decrease in cash and cash equivalents	(415		)	(4,276	)
Cash and cash equivalents, beginning of period	69,654			63,529
Cash and cash equivalents, end of period	$	69,239		59,253

Cash disbursements made for:
Interest	$	183,821		142,446
Income taxes, net of refunds	$	46,193		55,988

See accompanying notes to consolidated financial statements.

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 June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2016 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 six months ended June 30, 2017 are not necessarily indicative of the results for the year ending December 31, 2017. 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, 2016 (the "2016 Annual Report").

Consolidation

The consolidated financial statements include the accounts of Nelnet, Inc. and its consolidated subsidiaries. In addition, the accounts of all variable interest entities (“VIEs”) of which the Company has determined that it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.

Variable Interest Entities

The following entities are VIEs of which the Company has determined that it is the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE.

The Company's education lending subsidiaries are engaged in the securitization of education finance assets. These education lending subsidiaries hold beneficial interests in eligible loans, subject to creditors with specific interests. The liabilities of the Company's education lending subsidiaries are not the direct obligations of Nelnet, Inc. or any of its other subsidiaries. Each education lending subsidiary is structured to be bankruptcy remote, meaning that it should not be consolidated in the event of bankruptcy of the parent company or any other subsidiary. The Company is generally the administrator and master servicer of the securitized assets held in its education lending subsidiaries and owns the residual interest of the securitization trusts. As a result, for accounting purposes, the transfers of student loans to the securitization trusts do not qualify as sales. Accordingly, all the financial activities and related assets and liabilities, including debt, of the securitizations are reflected in the Company's consolidated financial statements and are summarized as supplemental information on the balance sheet.

The Company owns 91.5 percent of the economic rights of Allo Communications LLC and has a disproportional 80 percent of the voting rights related to all operating decisions for Allo's business. Allo management, as current minority members, has the opportunity to earn an additional 11.5 percent of the total ownership interests based on the financial performance of Allo. In addition to the Company’s equity investment, Nelnet, Inc. (the parent) issued a $200.0 million line of credit to Allo on December 30, 2015. The line of credit had $114.0 million outstanding as of June 30, 2017. Nelnet, Inc.’s maximum exposure to loss as a result of its involvement with Allo is equal to its equity investment and the balance of the line of credit. The amounts owed by Allo to Nelnet, Inc., including the interest costs incurred by Allo and interest earnings recognized by Nelnet, Inc., are not reflected in the Company’s consolidated balance sheet as they were eliminated in consolidation. All of Allo’s financial activities and related assets and liabilities, excluding the line of credit, are reflected in the Company’s consolidated financial statements. See note 10, "Segment Reporting," for disclosure of Allo's total assets and results of operations (included in the "Communications" operating segment), note 7, "Goodwill," for disclosure of Allo's goodwill, and note 8, “Property and Equipment,” for disclosure of Allo’s fixed assets. Allo's goodwill and property and equipment comprise the majority of its assets. The assets recognized as a result of consolidating Allo are the property of Allo and are not available for any other purpose, other than to Nelnet, Inc. as a secured lender under Allo's line of credit.

Noncontrolling Interest

Nelnet Servicing, LLC ("Nelnet Servicing"), a subsidiary of the Company, and Great Lakes Educational Loan Services, Inc. ("Great Lakes") created a joint venture to respond to the U.S. Department of Education’s initiative to procure a contract for federal student loan servicing to acquire a single servicing platform to service all loans owned by the Department. The joint venture operates as a new legal entity called GreatNet Solutions, LLC (“GreatNet”). Nelnet Servicing and Great Lakes each own 50 percent of the ownership interests in GreatNet. See note 11 for additional information on the contract procurement process.

During the first quarter of 2017, Nelnet Servicing and Great Lakes each contributed $12.6 million to GreatNet and GreatNet began to incur certain operating costs. For financial reporting purposes, the balance sheet and operating results of GreatNet are included in the Company’s consolidated financial statements and presented in the Company’s Loan Systems and Servicing operating segment. The proportionate share of membership interest (equity) and net loss of GreatNet that is attributable to Great Lakes is reflected as noncontrolling interests in the consolidated financial statements.

For a description of other entities in which the Company reflects noncontrolling interests in its consolidated financial statements, see note 2 of the notes to consolidated financial statements included in the 2016 Annual Report.

2. Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:



	As of			As of
	June 30, 2017			December 31, 2016
Federally insured loans:
Stafford and other	$	4,704,409		5,186,047
Consolidation	18,442,998			19,643,937
Total	23,147,407			24,829,984
Private education loans	242,893			273,659
	23,390,300			25,103,643
Loan discount, net of unamortized loan premiums and deferred origination costs	(123,326		)	(129,507	)
Non-accretable discount (a)	(14,972		)	(18,570	)
Allowance for loan losses – federally insured loans	(35,862		)	(37,268	)
Allowance for loan losses – private education loans	(13,846		)	(14,574	)
	$	23,202,294		24,903,724


(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.

The Company recognizes student loan interest income as earned, net of amortization of loan premiums and deferred origination costs and the accretion of loan discounts. Loan interest income is recognized based upon the expected yield of the loan after giving effect to interest rate reductions resulting from borrower utilization of incentives such as timely payments ("borrower benefits") and other yield adjustments. Loan premiums or discounts, deferred origination costs, and borrower benefits are amortized/accreted over the estimated life of the loans, which includes an estimate of forecasted payments in excess of contractually required payments. The Company periodically evaluates the assumptions used to estimate the life of the loans and prepayment rates. In instances where there are changes to the assumptions, amortization/accretion is adjusted on a cumulative basis to reflect the change since the acquisition of the loan.

In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and deferred origination costs and accrete discounts on its student loan portfolio. Previously, the Company amortized premiums and deferred origination costs and accreted discounts by including in its prepayment assumption forecasted payments in excess of contractually required payments as well as forecasted defaults. The Company has determined that only payments in excess of contractually required payments (excluding forecasted defaults) should be included in the prepayment assumption. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete student loan premiums/discounts was decreased. The constant prepayment rates under the Company's revised policy are 5 percent for Stafford loans and 3 percent for Consolidation loans. The constant prepayment rates

under the Company's prior policy in effect before this correction were 6 percent and 4 percent, respectively. During the third quarter of 2016, the Company recorded an adjustment to reflect the cumulative net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding pre-tax increase to interest income. The Company concluded this error had an immaterial impact on 2016 results as well as the results for prior periods.

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 June 30,					Six months ended June 30,
	2017			2016		2017		2016
Balance at beginning of period	$	50,526		50,084		51,842		50,498
Provision for loan losses:
Federally insured loans	2,000			2,000		4,000		4,000
Private education loans	—			—		(1,000	)	500
Total provision for loan losses	2,000			2,000		3,000		4,500
Charge-offs:
Federally insured loans	(2,825		)	(3,217	)	(5,406	)	(6,266		)
Private education loans	(288		)	(514	)	(370	)	(915		)
Total charge-offs	(3,113		)	(3,731	)	(5,776	)	(7,181		)
Recoveries - private education loans	245			250		442		526
Purchase of private education loans	—			100		—		260
Transfer from repurchase obligation related to private education loans repurchased	50			50		200		150
Balance at end of period	$	49,708		48,753		49,708		$	48,753

Allocation of the allowance for loan losses:
Federally insured loans	$	35,862		33,224		35,862		33,224
Private education loans	13,846			15,529		13,846		15,529
Total allowance for loan losses	$	49,708		48,753		49,708		48,753

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 June 30, 2017				As of December 31, 2016				As of June 30, 2016
Federally insured loans:
Loans in-school/grace/deferment	$	1,454,802			$	1,606,468			$	1,936,064
Loans in forbearance	2,065,167				2,295,367				2,672,241
Loans in repayment status:
Loans current	17,106,921		87.2	%	18,125,768		86.6	%	18,957,457		86.7	%
Loans delinquent 31-60 days	743,738		3.8		818,976		3.9		828,885		3.8
Loans delinquent 61-90 days	479,552		2.4		487,647		2.3		482,379		2.2
Loans delinquent 91-120 days	267,139		1.4		335,291		1.6		320,213		1.5
Loans delinquent 121-270 days	772,875		3.9		854,432		4.1		918,788		4.2
Loans delinquent 271 days or greater	257,213		1.3		306,035		1.5		350,363		1.6
Total loans in repayment	19,627,438		100.0	%	20,928,149		100.0	%	21,858,085		100.0	%
Total federally insured loans	$	23,147,407			$	24,829,984			$	26,466,390

Private education loans:
Loans in-school/grace/deferment	$	32,016			$	35,146			$	54,597
Loans in forbearance	1,814				3,448				1,610
Loans in repayment status:
Loans current	202,155		96.7	%	228,612		97.2	%	225,585		97.2	%
Loans delinquent 31-60 days	2,066		1.0		1,677		0.7		1,361		0.6
Loans delinquent 61-90 days	1,323		0.6		1,110		0.5		929		0.4
Loans delinquent 91 days or greater	3,519		1.7		3,666		1.6		4,088		1.8
Total loans in repayment	209,063		100.0	%	235,065		100.0	%	231,963		100.0	%
Total private education loans	$	242,893			$	273,659			$	288,170

3. Bonds and Notes Payable

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



	As of June 30, 2017
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations:
Bonds and notes based on indices	$	21,063,700		0.22% - 6.90%	8/25/21 - 9/25/65
Bonds and notes based on auction	796,140			1.82% - 2.36%	3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes	21,859,840
FFELP warehouse facilities	1,058,413			1.08% - 1.29%	9/7/18 - 4/27/20
Variable-rate bonds and notes issued in private education loan asset-backed securitization	93,727			2.97%	12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization	98,076			3.60% / 5.35%	12/26/40 / 12/28/43
Unsecured line of credit	—			—	12/12/21
Unsecured debt - Junior Subordinated Hybrid Securities	20,526			4.67%	9/15/61
Other borrowings	60,169			1.96% - 3.38%	7/17/17 - 12/15/45
	23,190,751
Discount on bonds and notes payable and debt issuance costs	(399,971		)
Total	$	22,790,780



	As of December 31, 2016
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations:
Bonds and notes based on indices	$	22,130,063		0.24% - 6.90%	6/25/21 - 9/25/65
Bonds and notes based on auction	998,415			1.61% - 2.28%	3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes	23,128,478
FFELP warehouse facilities	1,677,443			0.63% - 1.09%	9/7/18 - 12/13/19
Variable-rate bonds and notes issued in private education loan asset-backed securitization	112,582			2.60%	12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization	113,378			3.60% / 5.35%	12/26/40 / 12/28/43
Unsecured line of credit	—			—	12/12/21
Unsecured debt - Junior Subordinated Hybrid Securities	50,184			4.37%	9/15/61
Other borrowings	18,355			3.38%	3/31/23 / 12/15/45
	25,100,420
Discount on bonds and notes payable and debt issuance costs	(431,930		)
Total	$	24,668,490

Asset-Backed Securitizations

On May 24, 2017, the Company completed an asset-backed securitization totaling $535.0 million (par value). The interest rate and final maturity of these notes are 1-month LIBOR plus 0.78 percent and June 25, 2065, respectively.

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 June 30, 2017, the Company had three FFELP warehouse facilities as summarized below.



	NFSLW-I (a)		NHELP-II	NHELP-III (b)	Total
Maximum financing amount	$	700,000	500,000	200,000	1,400,000
Amount outstanding	511,846		357,461	189,106	1,058,413
Amount available	$	188,154	142,539	10,894	341,587
Expiration of liquidity provisions	July 10, 2018		December 15, 2017	April 27, 2018
Final maturity date	September 7, 2018		December 13, 2019	April 27, 2020
Maximum advance rates	92.0 - 98.0%		85.0 - 95.0%	92.2 - 95.0%
Minimum advance rates	84.0 - 90.0%		85.0 - 95.0%	92.2 - 95.0%
Advanced as equity support	$	13,260	26,440	5,668	45,368


(a)	On May 25, 2017, the Company decreased the maximum financing amount for this warehouse facility from $875.0 million to $700.0 million.

(b)

On April 3, 2017, the Company entered into a letter agreement for this warehouse facility to decrease the maximum financing amount from $750.0 million to $600.0 million. On April 28, 2017, the Company amended the agreement for this warehouse facility, which changed the expiration date for the liquidity provisions to April 27, 2018 and changed the final maturity date to April 27, 2020. On May 5, 2017, May 25, 2017, and June 2, 2017, the Company decreased the maximum financing amount for this warehouse facility by $200.0 million, $100.0 million, and $100.0 million, respectively. As of June 30, 2017, the maximum financing amount for this warehouse facility was $200.0 million, as reflected in this table.

Unsecured Line of Credit

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

Repurchase Agreement

Included in "other borrowings" as of June 30, 2017 is $41.8 million that is subject to a repurchase agreement. Proceeds from this agreement are collateralized by FFELP asset-backed security investments.

Debt Repurchases

During the three months ended March 31, 2017, the Company initiated a cash tender offer to purchase any and all of its outstanding Hybrid Securities, including a related consent solicitation to effect certain amendments to the indenture governing the notes to eliminate a provision requiring a minimum principal amount of the notes to remain outstanding after a partial redemption. The aggregate principal amount of notes tendered to the Company was $29.7 million. The Company paid $25.3 million to redeem these notes and recognized a gain of $4.4 million. In addition, the amendments described above were made to the indenture. After the completion of this tender offer, the Company has $20.5 million of Hybrid Securities that remain outstanding. In addition, during the three and six months ended June 30, 2017, the Company recognized gains of $0.4 million and $1.0 million, respectively, on the repurchase of its own FFELP asset-backed securities.

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 2016 Annual Report. A tabular presentation of such derivatives outstanding as of June 30, 2017 and December 31, 2016 is presented below.

Basis Swaps

The following table summarizes the Company’s basis swaps outstanding 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 June 30,		As of December 31,
	2017		2016
Maturity	Notional amount		Notional amount
2018	$	4,000,000	$	—
2019	2,000,000		—
2024	250,000		—
2026	1,150,000		1,150,000
2027	375,000		—
2028	325,000		325,000
2029	100,000		—
2031	300,000		300,000
	$	8,500,000	$	1,775,000

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2017 and December 31, 2016 was one-month LIBOR plus 13.9 basis points and 10.1 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 June 30, 2017				As of December 31, 2016
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)		Notional amount		Weighted average fixed rate paid by the Company (a)
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)		Notional amount		Weighted average fixed rate paid by the Company (a)
2017	$	250,000	1.04	%	$	750,000	0.99	%
2018	1,350,000		1.07		1,350,000		1.07
2019	3,250,000		0.97		3,250,000		0.97
2020	1,500,000		1.01		1,500,000		1.01
2025	100,000		2.32		100,000		2.32
	$	6,450,000	1.02	%	$	6,950,000	1.02	%


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

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 $250.0 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 Caps

In June 2015, in conjunction with the entry into a $275.0 million private education loan warehouse facility, the Company paid $2.9 million for two interest rate cap contracts with a total notional amount of $275.0 million. The first interest rate cap had a notional amount of $125.0 million and a one-month LIBOR strike rate of 2.50%, and the second interest rate cap had a notional amount of $150.0 million and a one-month LIBOR strike rate of 4.99%. In the event that the one-month LIBOR rate rose above

the applicable strike rate, the Company would receive monthly payments related to the spread difference. Both interest rate cap contracts had a maturity date of July 15, 2020. The private education loan warehouse facility was terminated by the Company on December 21, 2016. During the first quarter of 2017, the Company received $913,000 to terminate the interest rate cap contracts that were held in the private education loan warehouse legal entity and paid $929,000 to enter into new interest rate cap contracts with identical terms at Nelnet, Inc. (the parent company). The Company currently intends to keep these derivatives outstanding to partially mitigate a rise in interest rates and its impact on earnings related to its student loan portfolio earning a fixed rate.

Interest Rate Swaps – Unsecured Debt Hedges

As of June 30, 2017 and December 31, 2016, the Company had $20.5 million and $50.2 million, respectively, of unsecured Hybrid Securities outstanding. The interest rate on the Hybrid Securities through September 29, 2036 is equal to three-month LIBOR plus 3.375%, payable quarterly. The Company had the following derivatives outstanding as of June 30, 2017 and December 31, 2016 that are used to effectively convert the variable interest rate on a designated notional amount with respect to the Hybrid Securities to a fixed rate of 7.66%.



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. Changes in the principal and accrued interest amounts as a result of foreign currency exchange rate fluctuations are included in the Company’s consolidated statements of income.

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 unrealized 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 June 30,					Six months ended June 30,
	2017			2016		2017		2016
Re-measurement of Euro Notes	$	(27,261	)	9,768		(31,951	)	(8,712	)
Change in fair value of cross-currency interest rate swap	27,639			(12,008	)	28,574		20,693
Total impact to consolidated statements of income - income (expense) (a)	$	378		(2,240	)	(3,377	)	11,981


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

Management has structured the cross-currency interest rate swap to economically hedge the Euro Notes to effectively convert the Euro Notes to U.S. dollars and pay a spread on these notes based on the LIBOR index. However, the cross-currency interest rate swap does not qualify for hedge accounting. The re-measurement of the Euro-denominated bonds generally correlates with the change in the fair value of the corresponding cross-currency interest rate swap. However, the Company will experience unrealized gains and losses between these financial instruments due to the principal and accrued interest on the Euro Notes being re-measured to U.S. dollars at each reporting date based on the foreign currency exchange rate on that date, while the cross-currency interest rate swap is measured at fair value at each reporting date with the change in fair value recognized in the current period earnings.

Consolidated Financial Statement Impact Related to Derivatives

Effective June 10, 2013, all over-the-counter derivative contracts executed by the Company are cleared post-execution at the Chicago Mercantile Exchange (“CME”), a regulated clearinghouse. Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default.

Prior to January 3, 2017, the Company accounted for variation margin payments to the CME as collateral against its derivative position. As such, these payments were treated as a separate unit of account from the derivative instrument and reported as a liability for cash collateral received and an asset (restricted cash) for cash collateral paid. Effective January 3, 2017, the CME amended its rulebooks to legally characterize variation margin payments for over-the-counter derivatives they clear as settlements of the derivatives’ exposure rather than collateral against the exposure. Based on these rulebook changes, for accounting and presentation purposes, the Company considers variation margin and the corresponding derivative instrument a single unit of account. As such, effective January 3, 2017, the variation margin received or paid is no longer accounted for separately as a liability or asset ("collateralized-to-market"). Instead, these payments are considered in determining the fair value of the centrally cleared derivative portfolio ("settled-to-market"). The principal difference for accounting and presentation purposes is that prior to January 3, 2017, the Company recorded the fair value of collateralized-to-market derivative contracts on its balance sheet as "fair value of derivative instruments" with an equal amount of variation margin collateral accounted for separately as an asset or liability. Subsequent to January 3, 2017, the Company records settled-to-market derivative contracts on its balance sheet with a fair value of zero and no collateral posted due to the payment or receipt of variation margin between the Company and the CME settling the outstanding mark-to-market exposure on such derivatives to a balance of zero on a daily basis, and records the underlying daily changes in the market value of such derivative contracts that result in such receipts or payments on its income statement as realized derivative market value adjustments in "Derivative market value and foreign currency transaction adjustments and derivative settlements, net."

The new clearinghouse requirements did not alter or affect the accounting and presentation of the Company’s derivative instruments executed prior to June 10, 2013 and those derivatives that are not required to be cleared at a clearinghouse (non-centrally cleared derivatives). The Company records these derivative instruments in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain non-centrally cleared derivatives are subject to right of offset provisions with counterparties. For these derivatives, the Company does not offset fair value amounts executed with the same counterparty under a master netting arrangement. In addition, the Company does not offset fair value amounts recognized for derivative instruments with respect to the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable).

Balance Sheet

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
	June 30, 2017		December 31, 2016	June 30, 2017	December 31, 2016
1:3 basis swaps	$	—	—	—	2,624
Interest rate swaps - floor income hedges	20		81,159	—	256
Interest rate swap option - floor income hedge	1,265		2,977	—	—
Interest rate caps	334		1,152	—	—
Interest rate swaps - hybrid debt hedges	—		—	7,375	7,341
Cross-currency interest rate swap	—		—	39,031	67,605
Other	—		2,243	—	—
Total	$	1,619	87,531	46,406	77,826

During the three months ended June 30, 2017, the Company received proceeds of $2.1 million from the termination of derivatives that were included in "other" in the preceding table.

Offsetting of Derivative Assets/Liabilities

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	Net asset (liability)
Balance as of June 30, 2017	$	1,619	—		—	1,619
Balance as of December 31, 2016	87,531		(2,880	)	475	85,126



				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 (received) pledged, net (a)		Net asset (liability)
Balance as of June 30, 2017	$	(46,406	)	—	(13,252	)	(59,658	)
Balance as of December 31, 2016	(77,826		)	2,880	7,292		(67,654	)

(a) As of June 30, 2017, the Company had received $21.4 million of collateral from the counterparty on the Company's cross-currency interest rate swap.

Income Statement Impact

The following table summarizes the components of "derivative market value and foreign currency transaction adjustments and derivative settlements, net" included in the consolidated statements of income.



	Three months ended June 30,					Six months ended June 30,
	2017			2016		2017		2016
Settlements:
1:3 basis swaps	$	(362	)	743		336		414
Interest rate swaps - floor income hedges	2,114			(4,841	)	1,994		(10,084	)
Interest rate swaps - hybrid debt hedges	(198		)	(231	)	(402	)	(463	)
Cross-currency interest rate swap	(1,917		)	(1,166	)	(3,669	)	(1,898	)
Total settlements - (expense) income	(363		)	(5,495	)	(1,741	)	(12,031	)
Change in fair value:
1:3 basis swaps	(8,841		)	(586	)	(11,416	)	183
Interest rate swaps - floor income hedges	(17,810		)	(27,276	)	(13,485	)	(59,985	)
Interest rate swap option - floor income hedge	(828		)	(856	)	(1,712	)	(2,272	)
Interest rate caps	(311		)	(453	)	(833	)	(1,215	)
Interest rate swaps - hybrid debt hedges	(453		)	(1,464	)	(34	)