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 March 31, 2018
 
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, 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 April 30, 2018, there were 29,212,160 and 11,468,587 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, 2018


 
 
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, 2018

December 31, 2017
Assets:
 
 
 
 
Loans receivable (net of allowance for loan losses of $55,294 and $54,590, respectively)
 
$
21,562,030

 
21,814,507

Cash and cash equivalents:
 
 

 
 

Cash and cash equivalents - not held at a related party
 
17,200

 
6,982

Cash and cash equivalents - held at a related party
 
52,086

 
59,770

Total cash and cash equivalents
 
69,286

 
66,752

Investments and notes receivable
 
258,426

 
240,538

Restricted cash
 
727,471

 
688,193

Restricted cash - due to customers
 
128,515

 
187,121

Loan accrued interest receivable
 
489,395

 
430,385

Accounts receivable (net of allowance for doubtful accounts of $1,627 and $1,436, respectively)
 
61,394

 
37,863

Goodwill
 
158,456

 
138,759

Intangible assets, net
 
107,192

 
38,427

Property and equipment, net
 
299,837

 
248,051

Other assets
 
34,509

 
73,021

Fair value of derivative instruments
 
1,891

 
818

Total assets
 
$
23,898,402

 
23,964,435

Liabilities:
 
 

 
 

Bonds and notes payable
 
$
21,227,349

 
21,356,573

Accrued interest payable
 
54,252

 
50,039

Other liabilities
 
237,459

 
198,252

Due to customers
 
128,515

 
187,121

Fair value of derivative instruments
 
5,601

 
7,063

Total liabilities
 
21,653,176

 
21,799,048

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 29,289,689 shares and 29,341,517 shares, respectively
 
293

 
293

Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,468,587 shares
 
115

 
115

Additional paid-in capital
 
448

 
521

Retained earnings
 
2,231,875

 
2,143,983

Accumulated other comprehensive earnings
 
3,022

 
4,617

Total Nelnet, Inc. shareholders' equity
 
2,235,753

 
2,149,529

Noncontrolling interests
 
9,473

 
15,858

Total equity
 
2,245,226

 
2,165,387

Total liabilities and equity
 
$
23,898,402

 
23,964,435

 
 
 
 
 
Supplemental information - assets and liabilities of consolidated education lending variable interest entities:
 
 
 
 
Student loans receivable
 
$
21,633,845

 
21,909,476

Restricted cash
 
682,446

 
641,994

Loan accrued interest receivable and other assets
 
490,747

 
431,934

Bonds and notes payable
 
(21,450,983
)
 
(21,702,298
)
Accrued interest payable and other liabilities
 
(186,611
)
 
(168,637
)
Net assets of consolidated education lending variable interest entities
 
$
1,169,444

 
1,112,469

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,
 
2018
 
2017
Interest income:
 
 
 
Loan interest
$
197,723

 
181,207

Investment interest
5,134

 
2,617

Total interest income
202,857

 
183,824

Interest expense:
 
 
 

Interest on bonds and notes payable
135,550

 
106,899

Net interest income
67,307

 
76,925

Less provision for loan losses
4,000

 
1,000

Net interest income after provision for loan losses
63,307

 
75,925

Other income:
 
 
 

Loan servicing and systems revenue
100,141

 
54,229

Education technology, services, and payment processing revenue
60,221

 
56,024

Communications revenue
9,189

 
5,106

Other income
18,198

 
12,632

Gain from debt repurchases
359

 
4,980

Derivative market value and foreign currency transaction adjustments and derivative settlements, net
66,799

 
(4,830
)
Total other income
254,907

 
128,141

Cost of services:
 
 
 
Cost to provide education technology, services, and payment processing services
13,683

 
12,790

Cost to provide communications services
3,717

 
1,954

Total cost of services
17,400

 
14,744

Operating expenses:
 

 
 

Salaries and benefits
96,643

 
71,863

Depreciation and amortization
18,457

 
8,598

Loan servicing fees
3,136

 
6,025

Other expenses
33,417

 
26,161

Total operating expenses
151,653

 
112,647

Income before income taxes
149,161

 
76,675

Income tax expense
35,976

 
28,755

Net income
113,185

 
47,920

Net loss attributable to noncontrolling interests
740

 
2,106

Net income attributable to Nelnet, Inc.
$
113,925

 
50,026

Earnings per common share:
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
2.78

 
1.18

Weighted average common shares outstanding - basic and diluted
40,950,528

 
42,291,857


 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,
 
2018
 
2017
Net income
$
113,185

 
47,920

Other comprehensive (loss) income:
 
 
 
Available-for-sale securities:
 
 
 
Unrealized holding (losses) gains arising during period, net
(1,061
)
 
1,259

Reclassification adjustment for gains recognized in net income, net of losses
(47
)
 
(331
)
Income tax effect
256

 
(343
)
Total other comprehensive (loss) income
(852
)
 
585

Comprehensive income
112,333

 
48,505

Comprehensive loss attributable to noncontrolling interests
740

 
2,106

Comprehensive income attributable to Nelnet, Inc.
$
113,073

 
50,611


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 (loss) earnings
 
Noncontrolling interests
 
Total equity
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
12,626

 
12,626

Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
50,026

 
—

 
(2,106
)
 
47,920

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
585

 
—

 
585

Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(310
)
 
(310
)
Cash dividend on Class A and Class B common stock - $0.14 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,896
)
 
—

 
—

 
(5,896
)
Issuance of common stock, net of forfeitures
—

 
143,789

 
—

 
—

 
1

 
—

 
2,089

 
—

 
—

 
—

 
2,090

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
1,096

 
—

 
—

 
—

 
1,096

Repurchase of common stock
—

 
(31,716
)
 
—

 
—

 
—

 
—

 
(1,369
)
 
—

 
—

 
—

 
(1,369
)
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

Balance as of December 31, 2017
—

 
29,341,517

 
11,468,587

 
$
—

 
293

 
115

 
521

 
2,143,983

 
4,617

 
15,858

 
2,165,387

Issuance of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
26

 
26

Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
113,925

 
—

 
(740
)
 
113,185

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(852
)
 
—

 
(852
)
Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(19
)
 
(19
)
Cash dividend on Class A and Class B common stock - $0.16 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(6,506
)
 
—

 
—

 
(6,506
)
Issuance of common stock, net of forfeitures
—

 
170,346

 
—

 
—

 
2

 
—

 
2,171

 
—

 
—

 
—

 
2,173

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
1,087

 
—

 
—

 
—

 
1,087

Repurchase of common stock
—

 
(222,174
)
 
—

 
—

 
(2
)
 
—

 
(3,331
)
 
(8,085
)
 
—

 
—

 
(11,418
)
Impact of adoption of new accounting standards
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,007

 
(743
)
 
—

 
1,264

Acquisition of noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(13,449
)
 
—

 
(5,652
)
 
(19,101
)
Balance as of March 31, 2018
—

 
29,289,689

 
11,468,587

 
$
—

 
293

 
115

 
448

 
2,231,875

 
3,022

 
9,473

 
2,245,226

 
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,
 
2018
 
2017
Net income attributable to Nelnet, Inc.
$
113,925

 
50,026

Net loss attributable to noncontrolling interests
(740
)
 
(2,106
)
Net income
113,185

 
47,920

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

 
 

Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs
43,301

 
34,310

Loan discount accretion
(11,691
)
 
(12,014
)
Provision for loan losses
4,000

 
1,000

Derivative market value adjustment
(60,033
)
 
(1,238
)
Unrealized foreign currency transaction adjustment
—

 
4,690

Proceeds from clearinghouse to settle variation margin, net
62,689

 
—

Gain from debt repurchases
(359
)
 
(4,980
)
Gain from equity securities, net of losses
(6,838
)
 
—

Deferred income tax expense (benefit)
16,883

 
(1,753
)
Non-cash compensation expense
1,161

 
1,121

Other
(4,302
)
 
242

Increase in loan accrued interest receivable
(59,038
)
 
(1,490
)
Decrease (increase) in accounts receivable
177

 
(282
)
Decrease (increase) in other assets
49,415

 
(1,397
)
Increase in accrued interest payable
4,213

 
750

(Decrease) increase in other liabilities
(36,205
)
 
6,954

Decrease in due to customers
(58,606
)
 
(26,003
)
Net cash provided by operating activities
57,952

 
47,830

Cash flows from investing activities, net of acquisition:
 

 
 

Purchases of loans
(610,855
)
 
(50,126
)
Net proceeds from loan repayments, claims, capitalized interest, and other
863,270

 
953,698

Purchases of available-for-sale securities
(28,164
)
 
(53,530
)
Proceeds from sales of available-for-sale securities
21,951

 
37,809

Purchases of investments and issuance of notes receivable
(16,370
)
 
(4,898
)
Proceeds from investments and notes receivable
9,718

 
1,605

Purchases of property and equipment
(28,068
)
 
(26,469
)
Business acquisition, net of cash acquired
(109,152
)
 
—

Net cash provided by investing activities
102,330

 
858,089

Cash flows from financing activities:
 

 
 

Payments on bonds and notes payable
(901,008
)
 
(1,128,899
)
Proceeds from issuance of bonds and notes payable
756,700

 
37,496

Payments of debt issuance costs
(1,650
)
 
(364
)
Dividends paid
(6,506
)
 
(5,896
)
Repurchases of common stock
(11,418
)
 
(1,369
)
Proceeds from issuance of common stock
274

 
—

Acquisition of noncontrolling interest
(13,449
)
 
—

Issuance of noncontrolling interests
—

 
12,600

Distribution to noncontrolling interests
(19
)
 
(310
)
Net cash used in financing activities
(177,076
)
 
(1,086,742
)
Net decrease in cash, cash equivalents, and restricted cash
(16,794
)
 
(180,823
)
Cash, cash equivalents, and restricted cash, beginning of period
942,066

 
1,170,317

Cash, cash equivalents, and restricted cash, end of period
$
925,272

 
989,494


6


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(unaudited)
 
Three months ended
 
March 31,
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 
 
Cash disbursements made for interest
$
114,243

 
88,066

Cash (refunds received) disbursements made for income taxes, net
$
(30,569
)
 
1,180


Supplemental disclosures of noncash operating and investing activities regarding the Company's business acquisition during the three months ended March 31, 2018 are contained in note 7.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows.
 
As of
 
As of
 
As of
 
As of
 
March 31,
2018
 
December 31, 2017
 
March 31,
2017
 
December 31, 2016
Total cash and cash equivalents
$
69,286

 
66,752

 
108,160

 
69,654

Restricted cash
727,471

 
688,193

 
787,635

 
980,961

Restricted cash - due to customers
128,515

 
187,121

 
93,699

 
119,702

Cash, cash equivalents, and restricted cash
$
925,272

 
942,066

 
989,494

 
1,170,317


See accompanying notes to consolidated financial statements.



7


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, 2018 and for the three months ended March 31, 2018 and 2017 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2017 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, 2018 are not necessarily indicative of the results for the year ending December 31, 2018. 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, 2017 (the "2017 Annual Report").

Reporting Segment Name Changes

The Company changed the name of the Tuition Payment Processing and Campus Commerce operating segment to Education Technology, Services, and Payment Processing this quarter to better describe the evolution of services this operating segment provides. In addition, the Loan Systems and Servicing segment was retitled as Loan Servicing and Systems. As a result, the line items "tuition payment processing, school information, and campus commerce revenue" and "loan systems and servicing revenue" on the consolidated statements of income were changed to "education technology, services, and payment processing revenue" and "loan servicing and systems revenue," respectively.

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 non-customer receivables, which were previously included in "accounts receivable" to "other assets."

•
Reclassifying direct costs to provide services for education technology, services, and payment processing, which were previously included in "other expenses" to "cost to provide education technology, services, and payment processing services."

•
Reclassifying the line item "cost to provide communications services" on the statements of income from part of "operating expenses" and presenting such costs as part of "cost of services."

Accounting Standards Adopted in 2018

In the first quarter of 2018, the Company adopted the following new accounting guidance:
Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted the standard effective January 1, 2018, using the full retrospective method, which required it to restate each prior reporting period presented. As a result, the Company has changed its accounting policy for revenue recognition as detailed in note 2, “Summary of Significant Accounting Policies and Practices.”
The most significant impact of the standard relates to identifying the Company's Education Technology, Services, and Payment Processing operating segment as the principal in its payment services transactions. As a result of this change, the Company will present the payment services revenue gross with the direct costs to provide these services presented separately. The majority of the Company's revenue earned in its Asset Generation and Management operating segment, including loan interest and derivative

8


activity, is explicitly excluded from the scope of the new guidance. Other than the payment services transactions discussed above, the Company’s other fee-based operating segments will recognize revenue consistent with historical revenue recognition patterns.
Impacts to Previously Reported Results
Adoption of the revenue recognition standard impacted the Company’s previously reported results on the consolidated statements of income as follows:
 
Three months ended March 31, 2017
 
As previously reported
 
Impact of adoption
 
As restated
Education technology, services, and payment processing revenue
$
43,620

 
12,404

 
56,024

 
Cost to provide education technology, services, and payment processing services
—

 
12,404

 
12,404

(a)

(a)
In addition to the impact of adopting the new revenue recognition standard, as discussed above, the Company reclassed other direct costs to provide education technology, services, and payment processing revenue which were previously reported as part of "other expenses" to "cost to provide education technology, services, and payment processing services."
Adoption of the new revenue recognition standard had no impact to the consolidated balance sheets or cash provided by or used in operating, financing, or investing activities on the consolidated statements of cash flows.
Equity Investments

In January 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. The guidance requires equity investments with readily determinable fair values to be measured at fair value, with changes in the fair value recognized through net income (other than those equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee). An entity may choose to measure equity investments without readily determinable fair values at fair value or use the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. In addition, the impairment assessment is simplified by requiring a qualitative assessment to identify impairment.

The guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities with readily determinable fair values previously recognized in accumulated other comprehensive income; and along with a related clarifying update, was adopted by the Company as of January 1, 2018. Upon adoption, the Company recorded an immaterial cumulative-effect adjustment to retained earnings, accumulated other comprehensive earnings, and investments and notes receivable. Subsequent to the adoption, the Company is accounting for the majority of its equity investments without readily determinable fair values using the measurement alternative.

Other Comprehensive Income

In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive earnings to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, which became effective on January 1, 2018. This guidance is effective for fiscal years beginning after December 15, 2018, but early adoption is permitted in periods for which financial statements have not yet been issued. The Company elected to early adopt this guidance as of January 1, 2018. Upon adoption, the Company recorded an immaterial reclassification between accumulated other comprehensive earnings and retained earnings.

Restricted Cash

In November 2016, the FASB issued accounting guidance related to restricted cash. The new standard requires that the statement of cash flows present the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents, and a reconciliation of such total to amounts on the balance sheet. The Company adopted the standard effective January 1, 2018 using the retrospective transition method. Adoption of this standard impacted the Company's previously reported results on the consolidated statements of cash flows as follows:

9


 
Three months ended March 31, 2017
 
As previously reported
 
Impact of adoption
 
As restated
Decrease in due to customers
$
—

 
(26,003
)
 
(26,003
)
Net cash provided by operating activities
73,833

 
(26,003
)
 
47,830

Decrease in restricted cash
193,326

 
(193,326
)
 
—

Net cash provided by investing activities
1,051,415

 
(193,326
)
 
858,089


2. Summary of Significant Accounting Policies and Practices

Except for the changes below, no material changes have been made to the Company’s significant accounting policies disclosed in note 3, Summary of Significant Accounting Policies and Practices, in its 2017 Annual Report.

Revenue Recognition

The Company applies the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), to its fee-based operating segments. The majority of the Company’s revenue earned in its Asset Generation and Management operating segment, including loan interest and derivative activity, is explicitly excluded from the scope of ASC Topic 606. The Company recognizes revenue under the core principle of ASC Topic 606 to depict the transfer of control of products and services to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. Additional information related to the Company's revenue recognition of specific items is further provided below.

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Loan servicing and systems revenue - Loan servicing and systems revenue consists of the following items:

•
Loan servicing revenue - Loan servicing revenue consideration is determined from individual contracts with customers and is calculated monthly based on the dollar value of loans, number of loans, or number of borrowers serviced for each customer. Loan servicing requires a significant level of integration and the individual components are not considered distinct. The Company will perform various services during each distinct service period. Even though the mix and quantity of activities that the Company performs each period may differ, the nature of the promise is substantially the same. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously consume and receive benefits.

•
Software services revenue - Software services revenue consideration is determined from individual contracts with customers and includes license and maintenance fees associated with loan software products, generally in a remote hosted environment, and computer and software consulting. Usage-based revenue from remote hosted licenses is allocated to and recognized in the distinct service period, typically a month, and recognized as control transfers, and non-refundable up-front revenue is recognized ratably over the contract period as customers simultaneously consume and receive benefits. Loan conversion activities in certain customer contracts are capable of being distinct and accounted for as a separate performance obligation. Revenue allocated to loan conversion activities is recognized at the point in time when the conversion is complete. Computer and software consulting is also capable of being distinct and accounted for as a separate performance obligation. Revenue allocated to computer and software consulting is recognized as services are provided.

•
Outsourced services revenue - Outsourced services revenue consideration is determined from individual contracts with customers and is calculated monthly based on the volume of services. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously consume and receive benefits.






10


The following table provides disaggregated revenue by service offering:
 
Three months ended March 31,
 
2018
 
2017
Government servicing - Nelnet
$
39,327

 
39,007

Government servicing - Great Lakes (a)
30,754

 
—

Private education and consumer loan servicing
13,101

 
5,817

FFELP servicing
7,691

 
4,077

Software services
7,589

 
4,337

 Outsourced services revenue and other
1,679

 
991

Loan servicing and systems revenue
$
100,141

 
54,229


(a)
Great Lakes Educational Loan Services, Inc. ("Great Lakes") was acquired by the Company on February 7, 2018. For additional information about the acquisition, see note 7.

Education technology, services, and payment processing revenue - Education technology, services, and payment processing revenue consists of the following items:

•
Tuition payment plan services - Tuition payment plan services consideration is determined from individual plan agreements, which are governed by plan service agreements, and includes access to a remote hosted environment and management of payment processing. The management of payment processing is considered a distinct performance obligation when sold with the remote hosted environment. Revenue for each performance obligation is allocated to the distinct service period, the academic school term, and recognized ratably over the service period as customers simultaneously consume and receive benefits.

•
Education technology and services - Education technology and services consideration is determined from individual contracts with customers and is determined based on the services selected by the customer. Services in K-12 private and faith based schools include (i) assistance with financial needs assessment, (ii) automating administrative processes such as admissions, online applications and enrollment services, scheduling, student billing, attendance, and grade book management, and (iii) professional development and educational instruction services. Revenue for these services is recognized for the consideration the Company has a right to invoice. The amount the Company has a right to invoice is an amount that corresponds directly with the value provided to the customer based on the performance completed. Services also include innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data. These services are considered distinct performance obligations. Revenue for each performance obligation is allocated to the distinct service period, typically a month or based on when each transaction is completed, and recognized as control transfers as customers simultaneously consume and receive benefits.

•
Payment processing - Payment processing consideration is determined from individual contracts with customers and includes electronic transfer and credit card processing, reporting, virtual terminal solutions, and specialized integrations to business software for education and non-education markets. Volume-based revenue from payment processing is allocated and recognized to the distinct service period, based on when each transaction is completed, and recognized as control transfers as customers simultaneously consume and receive benefits.

The following table provides disaggregated revenue by service offering:
 
Three months ended March 31,
 
2018
 
2017
Tuition payment plan services
$
23,043

 
21,787

Payment processing
19,926

 
18,945

Education technology and services
16,975

 
15,147

Other
277

 
145

Education technology, services, and payment processing revenue
$
60,221

 
56,024



11


Cost to provide education technology, services, and payment processing services is primarily associated with providing payment processing services. Interchange and payment network fees are charged by the card associations or payment networks. Depending upon the transaction type, the fees are a percentage of the transaction’s dollar value, a fixed amount, or a combination of the two methods. Other costs included in cost to provide education technology, services, and payment processing services include salaries and benefits and outside professional services costs directly related to providing professional development and educational instruction services to teachers, school leaders, and students.

Communications revenue - Communications revenue is derived principally from internet, television, and telephone services and is billed as a flat fee in advance of providing the service. Revenues for usage-based services, such as access charges billed to other telephone carriers for originating and terminating long-distance calls on the Company's network, are billed in arrears. These are each considered distinct performance obligations. Revenue is recognized monthly for the consideration the Company has a right to invoice. The amount the Company has a right to invoice is an amount that corresponds directly with the value provided to the customer based on the performance completed. The Company recognizes revenue from these services in the period the services are rendered rather than billed. The Company records deferred revenue when revenue is recognized subsequent to invoicing. Earned but unbilled usage-based services are recorded in accounts receivable.

The following table provides disaggregated revenue by service offering and customer type:
 
Three months ended March 31,
 
2018
 
2017
Internet
$
4,696

 
2,202

Television
2,783

 
1,623

Telephone
1,689

 
1,262

Other
21

 
19

Communications revenue
$
9,189

 
5,106

 
 
 
 
Residential revenue
$
6,747

 
3,351

Business revenue
2,381

 
1,696

Other revenue
61

 
59

Communications revenue
$
9,189

 
5,106


Cost to provide communications services is primarily associated with television programming costs.  The Company has various contracts to obtain video programming from programming vendors whose compensation is typically based on a flat fee per customer. The cost of the right to exhibit network programming under such arrangements is recorded in the month the programming is available for exhibition.  Programming costs are paid each month based on calculations performed by the Company and are subject to periodic audits performed by the programmers. Other costs included in cost to provide communications services include connectivity, franchise, and other regulatory costs directly related to providing internet and voice services.

Other income - The following table provides the components of "other income" on the consolidated statements of income:
 
Three months ended March 31,
 
2018
 
2017
Realized and unrealized gains on investments, net
$
9,081

 
324

Borrower late fee income
2,983

 
3,319

Investment advisory fees
1,593

 
3,516

Management fee revenue
1,161

 
—

Peterson's revenue
—

 
2,836

Other
3,380

 
2,637

Other income
$
18,198

 
12,632


•
Borrower late fee income - Late fee income is earned by the education lending subsidiaries. Revenue is allocated to the distinct service period, based on when each transaction is completed.


12


•
Investment advisory fees - Investment advisory services are provided by the Company through an SEC-registered investment advisor subsidiary under various arrangements. The Company earns monthly fees based on the monthly outstanding balance of investments and certain performance measures, which are recognized monthly as the uncertainty of the transaction price is resolved.

•
Management fee revenue - Management fee revenue is earned for technology and certain administrative support services provided to Great Lakes' former parent company. Revenue is allocated to the distinct service period, based on when each transaction is completed.

•
Peterson's revenue - The Company earned revenue related to digital marketing and content solution products and services under the brand name Peterson's. These products and services included test preparation study guides, school directories and databases, career exploration guides, on-line courses and test preparation, scholarship search and selection data, career planning information and guides, and on-line information about colleges and universities. Several content solutions services included services to connect students to colleges and universities, and were sold based on subscriptions. Revenue from sales of subscription services was recognized ratably over the term of the contract as it was earned. Subscription revenue received or receivable in advance of the delivery of services was included in deferred revenue. Revenue from the sale of print products was generally earned and recognized, net of estimated returns, upon shipment or delivery. All other digital marketing and content solutions revenue was recognized over the period in which services were provided to customers. On December 31, 2017, the Company sold Peterson's. The Company applied a practical expedient allowed for the retrospective comparative period which does not require the Company to restate revenue from contracts that began and were completed within the same annual reporting period.

Contract Balances - The following table provides information about contract liabilities from contracts with customers:
 
As of March 31, 2018
 
As of December 31, 2017
Deferred revenue, which is included in "other liabilities" on the consolidated balance sheets
$
22,715

 
32,276


Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records deferred revenue when revenue is recognized subsequent to invoicing. For multi-year contracts, the Company generally invoices customers annually at the beginning of each annual coverage period. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant financing component.

Activity in the deferred revenue balance is shown below:
 
Three months ended March 31,
 
2018
 
2017
Balance, beginning of period
$
32,276

 
33,141

Deferral of revenue
17,050

 
15,918

Recognition of unearned revenue
(26,802
)
 
(24,878
)
Other
191

 
87

Balance, end of period
$
22,715

 
24,268


Assets Recognized from the Costs to Obtain a Contract with a Customer - The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in “other assets” on the consolidated balance sheets.


13


3.  Loans Receivable and Allowance for Loan Losses

Loans receivable consisted of the following:
 
As of
 
As of
 
March 31, 2018
 
December 31, 2017
Federally insured student loans:
 
 
 
Stafford and other
$
4,363,159

 
4,418,881

Consolidation
17,098,389

 
17,302,725

Total
21,461,548

 
21,721,606

Private education loans
194,310

 
212,160

Consumer loans
77,855

 
62,111

 
21,733,713

 
21,995,877

Loan discount, net of unamortized loan premiums and deferred origination costs
(103,542
)
 
(113,695
)
Non-accretable discount
(12,847
)
 
(13,085
)
Allowance for loan losses:
 
 
 
Federally insured loans
(38,374
)
 
(38,706
)
Private education loans
(12,255
)
 
(12,629
)
Consumer loans
(4,665
)
 
(3,255
)
 
$
21,562,030

 
21,814,507

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 loans. Activity in the allowance for loan losses is shown below.
 
Three months ended March 31, 2018
 
Balance at beginning of period
 
Provision for loan losses
 
Charge-offs
 
Recoveries
 
Other
 
Balance at end of period
Federally insured loans
$
38,706

 
2,000

 
(3,332
)
 
—

 
1,000

 
38,374

Private education loans
12,629

 
—

 
(539
)
 
165

 
—

 
12,255

Consumer loans
3,255

 
2,000

 
(595
)
 
5

 
—

 
4,665

 
$
54,590

 
4,000

 
(4,466
)
 
170

 
1,000

 
55,294

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017
Federally insured loans
$
37,268

 
2,000

 
(2,581
)
 
—

 
—

 
36,687

Private education loans
14,574

 
(1,000
)
 
(82
)
 
197

 
150

 
13,839

Consumer loans
—

 
—

 
—

 
—

 
—

 
—

 
$
51,842

 
1,000

 
(2,663
)
 
197

 
150

 
50,526



14


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 for federally insured and private education loans.
 
As of March 31, 2018
 
As of December 31, 2017
 
As of March 31, 2017
Federally insured loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
1,312,319

 
 
 
$
1,260,394

 
 
 
$
1,604,494

 
 
Loans in forbearance
1,650,913

 
 
 
1,774,405

 
 
 
2,125,344

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
16,368,668

 
88.5
%
 
16,477,004

 
88.2
%
 
17,690,083

 
87.5
%
Loans delinquent 31-60 days
669,490

 
3.6

 
682,586

 
3.7

 
732,433

 
3.6

Loans delinquent 61-90 days
426,696

 
2.3

 
374,534

 
2.0

 
493,876

 
2.4

Loans delinquent 91-120 days
252,659

 
1.4

 
287,922

 
1.5

 
275,711

 
1.4

Loans delinquent 121-270 days
570,538

 
3.1

 
629,480

 
3.4

 
763,030

 
3.8

Loans delinquent 271 days or greater
210,265

 
1.1

 
235,281

 
1.2

 
255,122

 
1.3

Total loans in repayment
18,498,316

 
100.0
%
 
18,686,807

 
100.0
%
 
20,210,255

 
100.0
%
Total federally insured loans
$
21,461,548

 
 

 
$
21,721,606

 
 

 
$
23,940,093

 
 
Private education loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
5,532

 
 
 
$
6,053

 
 
 
$
34,138

 
 
Loans in forbearance
2,574

 
 
 
2,237

 
 
 
3,811

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
178,976

 
96.1
%
 
196,720

 
96.5
%
 
213,081

 
97.4
%
Loans delinquent 31-60 days
1,630

 
0.9

 
1,867

 
0.9

 
1,355

 
0.6

Loans delinquent 61-90 days
1,110

 
0.6

 
1,052

 
0.5

 
1,402

 
0.6

Loans delinquent 91 days or greater
4,488

 
2.4

 
4,231

 
2.1

 
3,029

 
1.4

Total loans in repayment
186,204

 
100.0
%
 
203,870

 
100.0
%
 
218,867

 
100.0
%
Total private education loans
$
194,310

 
 

 
$
212,160

 
 

 
$
256,816

 
 


15


4.  Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
As of March 31, 2018
 
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
$
20,132,994

 
1.85% - 3.99%
 
4/25/24 - 5/25/66
Bonds and notes based on auction
766,948

 
2.20% - 2.88%
 
3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes
20,899,942

 
 
 
 
FFELP warehouse facilities
339,063

 
1.94% / 2.00%
 
11/19/19 / 5/31/20
Variable-rate bonds and notes issued in private education loan asset-backed securitization
66,765

 
3.62%
 
12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization
76,193

 
3.60% / 5.35%
 
12/26/40 / 12/28/43
Unsecured line of credit
150,000

 
3.20%
 
12/12/21
Unsecured debt - Junior Subordinated Hybrid Securities
20,381

 
5.68%
 
9/15/61
Other borrowings
29,450

 
3.16% - 3.66%
 
3/31/23 - 12/15/45
 
21,581,794

 
 
 
 
Discount on bonds and notes payable and debt issuance costs
(354,445
)
 
 
 
 
Total
$
21,227,349

 
 
 
 
 
As of December 31, 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
$
20,352,045

 
1.47% - 3.37%
 
8/25/21 - 2/25/66
Bonds and notes based on auction
780,829

 
2.09% - 2.69%
 
3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes
21,132,874

 
 
 
 
FFELP warehouse facilities
335,992

 
1.55% / 1.56%
 
11/19/19 / 5/31/20
Variable-rate bonds and notes issued in private education loan asset-backed securitization
74,717

 
3.30%
 
12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization
82,647

 
3.60% / 5.35%
 
12/26/40 / 12/28/43
Unsecured line of credit
10,000

 
2.98%
 
12/12/21
Unsecured debt - Junior Subordinated Hybrid Securities
20,381

 
5.07%
 
9/15/61
Other borrowings
70,516

 
2.44% - 3.38%
 
1/12/18 - 12/15/45
 
21,727,127

 
 
 
 
Discount on bonds and notes payable and debt issuance costs
(370,554
)
 
 
 
 
Total
$
21,356,573

 
 
 
 



16


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, 2018, the Company had two FFELP warehouse facilities as summarized below.
 
 
NFSLW-I
 
NHELP-II
 
Total
Maximum financing amount
 
$
500,000

 
500,000

 
1,000,000

Amount outstanding
 
49,623

 
289,440

 
339,063

Amount available
 
$
450,377

 
210,560

 
660,937

Expiration of liquidity provisions
 
September 20, 2019

 
May 31, 2018

 
 
Final maturity date
 
November 19, 2019

 
May 31, 2020

 
 
Maximum advance rates
 
92.0 - 98.0%

 
85.0 - 95.0%

 
 
Minimum advance rates
 
84.0 - 90.0%

 
85.0 - 95.0%

 
 
Advanced as equity support
 
$
2,402

 
25,269

 
27,671


Asset-Backed Securitizations

The following table summarizes the asset-backed securitization transactions completed during the first three months of 2018.
 
 
NSLT 2018-1
 
Total
 
 
Class A-1 Notes
 
Class A-2 Notes
 
 
Date securities issued
 
3/29/18
 
3/29/18
 
 
Total principal amount
 
$
98,000

 
375,750

 
473,750

Cost of funds
 
1-month LIBOR plus 0.32%
 
1-month LIBOR plus 0.76%
 
 
Final maturity date
 
5/25/66
 
5/25/66
 
 

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 March 31, 2018, $150.0 million was outstanding on the line of credit and $200.0 million was available for future use.

Debt Repurchases

During the three months ended March 31, 2018, the Company repurchased $12.9 million of its own FFELP asset backed securities. The Company paid $12.5 million to redeem these notes and recognized a gain of $0.4 million. The majority of the gain recognized by the Company from debt repurchases in the three months ended March 31, 2017 was from the Company's cash tender offer in which it repurchased $29.7 million in outstanding Hybrid Securities for $25.3 million in cash.

5.  Derivative Financial Instruments

The Company uses derivative financial instruments primarily to manage interest rate risk and foreign currency exchange risk. Derivative instruments used as part of the Company's risk management strategy are further described in note 6 of the notes to consolidated financial statements included in the 2017 Annual Report. A tabular presentation of such derivatives outstanding as of March 31, 2018 and December 31, 2017 is presented below.

Basis Swaps

The following table summarizes the Company’s outstanding basis swaps 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").

17


 
 
 
As of March 31,
 
As of December 31,
 
 
2018
 
2017
Maturity
 
Notional amount
 
Notional amount
2018
 
$
1,750,000

 
4,250,000

2019
 
3,500,000

 
3,500,000

2022
 
1,000,000

 
1,000,000

2023
 
750,000

 
—

2024
 
250,000

 
250,000

2026
 
1,150,000

 
1,150,000

2027
 
375,000

 
375,000

2028
 
325,000

 
325,000

2029
 
100,000

 
100,000

2031
 
300,000

 
300,000

 
 
$
9,500,000

 
11,250,000

The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2018 and December 31, 2017 was one-month LIBOR plus 10.6 basis points and 12.5 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, 2018
 
As of December 31, 2017
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
 
 
2018
 
$
1,250,000

 
1.08
%
 
$
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

2023
 
750,000

 
2.28

 
750,000

 
2.28

2024
 
300,000

 
2.28

 
300,000

 
2.28

2025
 
100,000

 
2.32

 
100,000

 
2.32

2027
 
50,000

 
2.32

 
50,000

 
2.32

2028
 
100,000

 
3.03

 
—

 
—

 
 
$
7,300,000

 
1.24
%
 
$
7,300,000

 
1.21
%

(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 on August 21, 2019 and mature on August 21, 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 has a notional amount of $125.0 million and a one-month LIBOR strike rate of 2.50%, and the second interest rate cap has 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 rises above the applicable strike rate, the Company would receive monthly payments related to the spread difference. Both interest rate cap contracts have 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

18


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 March 31, 2018 and December 31, 2017, the Company had $20.4 million 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 March 31, 2018 and December 31, 2017 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.

Consolidated Financial Statement Impact Related to Derivatives

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 March 31, 2018
 
As of December 31, 2017
 
As of March 31, 2018
 
As of December 31, 2017
Interest rate swap option - floor income hedge
$
1,290

 
543

 
—

 
—

Interest rate caps
601

 
275

 
—

 
—

Interest rate swaps - hybrid debt hedges
—

 
—

 
5,601

 
7,063

Total
$
1,891

 
818

 
5,601

 
7,063


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 received
 
Net asset
Balance as of March 31, 2018
 
$
1,891

 
—

 
—

 
1,891

Balance as of December 31, 2017
 
818

 
—

 
—

 
818

 
 
 
 
Gross amounts not offset in the consolidated balance sheets
 
 
Derivative liabilities
 
Gross amounts of recognized liabilities presented in the consolidated balance sheets
 
Derivatives subject to enforceable master netting arrangement
 
Cash collateral pledged
 
Net asset (liability)
Balance as of March 31, 2018
 
$
(5,601
)
 
—

 
7,520

 
1,919

Balance as of December 31, 2017
 
(7,063
)
 
—

 
8,520

 
1,457


19


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 March 31,
 
2018
 
2017
Settlements:
 

 
 

1:3 basis swaps
$
(1,664
)
 
698

Interest rate swaps - floor income hedges
8,590

 
(120
)
Interest rate swaps - hybrid debt hedges
(160
)
 
(205
)
Cross-currency interest rate swap
—

 
(1,751
)
Total settlements - income (expense)
6,766

 
(1,378
)
Change in fair value:
 

 
 

1:3 basis swaps
13,297

 
(2,574
)
Interest rate swaps - floor income hedges
44,201

 
4,324

Interest rate swap option - floor income hedge
747

 
(884
)
Interest rate caps
326

 
(522
)
Interest rate swaps - hybrid debt hedges
1,462

 
419

Cross-currency interest rate swap
—

 
935

Other
—

 
(460
)
Total change in fair value - income (expense)
60,033

 
1,238

Re-measurement of Euro Notes (foreign currency transaction adjustment)
—

 
(4,690
)
Derivative market value and foreign currency transaction adjustments and derivative settlements, net - income (expense)
$
66,799

 
(4,830
)

6.  Investments and Notes Receivable

A summary of the Company's investments and notes receivable follows:
 
As of March 31, 2018
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
 
 
 
Investments (at fair value):
 
 
 
 
 
 
 
Student loan asset-backed and other debt securities - available-for-sale (a)
$
78,203

 
4,558

 
(634
)
(b)
82,127

Equity securities
13,682

 
3,554

 
(151
)
 
17,085

Total investments (at fair value)
$
91,885

 
8,112

 
(785
)
 
99,212

 
 
 
 
 
 
 
 
Other Investments and Notes Receivable (not measured at fair value):
 
 
 
 
Venture capital:
 
 
 
 
 
 
 
Measurement alternative (c)
 
 
 
 
 
 
68,409

Equity method
 
 
 
 
 
 
16,175

Other
 
 
 
 
 
 
783

  Total venture capital
 
 
 
 
 
 
85,367

Real estate:
 
 
 
 
 
 
 
Equity method
 
 
 
 
 
 
18,850

Other
 
 
 
 
 
 
30,005

  Total real estate
 
 
 
 
 
 
48,855

 
 
 
 
 
 
 
 
Notes receivable
 
 
 
 
 
 
16,373

Tax liens and affordable housing
 
 
 
 
 
 
8,619

Total investments and notes receivable (not measured at fair value)
 
 
 
 
 
 
159,214

Total investments and notes receivable
 
 
 
 
 
 
$
258,426


20


 
As of December 31, 2017
 
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
$
71,943

 
5,056

 
(25
)
 
76,974

Equity securities
1,630

 
2,298

 
—

 
3,928

Total available-for-sale investments
$
73,573

 
7,354

 
(25
)
 
80,902

 
 
 
 
 
 
 
 
Other Investments and Notes Receivable (not measured at fair value):
 
 
 
 
 
 
 
Venture capital and funds
 
 
 
 
 
 
84,752

Real estate
 
 
 
 
 
 
49,464

Notes receivable
 
 
 
 
 
 
16,393

Tax liens and affordable housing
 
 
 
 
 
 
9,027

Total investments and notes receivable
 
 
 
 
 
 
$
240,538

    
(a)
As of March 31, 2018, the stated maturities of substantially all of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years.

(b)
As of March 31, 2018, the aggregate fair value of available-for-sale investments with unrealized losses was $17.8 million, of which none had been in a continuous unrealized loss position for greater than 12 months. Because the Company currently has the intent and ability to retain these investments for an anticipated recovery in fair value, as of March 31, 2018, 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.

(c)
The Company accounts for the majority of its equity securities without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer (the measurement alternative method). For the three months ended March 31, 2018, the Company recorded no impairments and upward adjustments of $6.9 million on these investments. The upward adjustments were made as a result of observable price changes.

7. Business Combination

Great Lakes Educational Loan Services, Inc. ("Great Lakes")

On February 7, 2018, the Company acquired 100 percent of the outstanding stock of Great Lakes for total cash consideration of $150.0 million. Great Lakes provides servicing for federally-owned student loans for the U.S. Department of Education (the "Department"), FFELP loans, and private education and consumer loans. The acquisition of Great Lakes has expanded the Company's portfolio of loans it services. The operating results of Great Lakes are included in the Loan Servicing and Systems operating segment.

As part of the acquisition, the Company acquired the remaining 50 percent ownership in GreatNet Solutions, LLC ("GreatNet"), a joint venture formed prior to the acquisition between Nelnet Servicing, LLC ("Nelnet Servicing"), a subsidiary of the Company, and Great Lakes. Prior to the acquisition of the remaining 50 percent of GreatNet, the Company consolidated the operating results of GreatNet as the Company was deemed to have control over the joint venture. The proportionate share of membership interest (equity) and net loss of GreatNet that was attributable to Great Lakes was reflected as noncontrolling interests in the Company's consolidated financial statements. The Company recognized a $19.1 million reduction to consolidated shareholders' equity as a result of acquiring Great Lakes' 50 percent ownership in GreatNet. This transaction resulted in a $5.7 million decrease in noncontrolling interest and $13.4 million decrease in retained earnings.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The fair value of the assets and liabilities related to Great Lakes are subject to refinement as the Company completes its analysis relative to the fair values at the date of acquisition. The fair value assigned to the acquisition of the noncontrolling interest in GreatNet reduced the total consideration allocated to the assets acquired and liabilities assumed of Great Lakes from $150.0 million to $136.6 million.

21


Cash and cash equivalents
$
27,399

Accounts receivable
23,708

Property and equipment
36,040

Other assets
14,015

Intangible assets
72,278

Excess cost over fair value of net assets acquired (goodwill)
19,697

Other liabilities
(56,586
)
Net assets acquired
$
136,551


The $72.3 million of acquired intangible assets on the date of acquisition had a weighted-average useful life of approximately 4 years. The intangible assets that made up this amount include customer relationships of $67.2 million (4-year useful life) and a trade name of $5.1 million (7-year useful life).

The $19.7 million of goodwill was assigned to the Loan Servicing and Systems operating segment and is not expected to be deductible for tax purposes. The amount allocated to goodwill was primarily attributed to the deferred tax liability related to the difference between the carrying amount and tax bases of acquired identifiable intangible assets and the synergies and economies of scale expected from combining the operations of the Company and Great Lakes.

The consolidated financial statements as of March 31, 2018, and for the three months then ended, include amounts acquired from, as well as the results of operations of Great Lakes from February 7, 2018 and forward. Results of operations for the three months ended March 31, 2018 include revenues of $43.5 million and net income of $11.9 million attributed to Great Lakes since its acquisition. The following unaudited pro forma information for the Company has been prepared as if the acquisition of Great Lakes had occurred on January 1, 2017. The information is based on the historical results of the separate companies and may not necessarily be indicative of the results that could have been achieved or of results that may occur in the future. The pro forma adjustments include the impact of depreciation and amortization of property and equipment and intangible assets acquired.