Edgar Filing: NELNET INC

As of September 30, 2018

As of December 31, 2017

Deferred revenue, which is included in "other liabilities" on the consolidated balance sheets

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 September 30, 2018



¨	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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 [ ] 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 October 31, 2018, there were 29,257,880 and 11,468,587 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding a total of 11,305,731 shares of Class A Common Stock held by wholly owned subsidiaries).

NELNET, INC.

FORM 10-Q

INDEX

September 30, 2018



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
	Item 4.	Controls and Procedures	72

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	72
	Item 1A.	Risk Factors	72
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
	Item 6.	Exhibits	74

Signatures			75

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(unaudited)
	As of			As of
	September 30, 2018			December 31, 2017
Assets:
Loans receivable (net of allowance for loan losses of $60,217 and $54,590, respectively)	$	22,528,362		21,814,507
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	10,766			6,982
Cash and cash equivalents - held at a related party	72,771			59,770
Total cash and cash equivalents	83,537			66,752
Investments and notes receivable	246,815			240,538
Restricted cash	723,338			688,193
Restricted cash - due to customers	188,591			187,121
Loan accrued interest receivable	624,259			430,385
Accounts receivable (net of allowance for doubtful accounts of $2,426 and $1,436, respectively)	76,899			37,863
Goodwill	153,802			138,759
Intangible assets, net	95,660			38,427
Property and equipment, net	339,730			248,051
Other assets	41,889			73,021
Fair value of derivative instruments	2,043			818
Total assets	$	25,104,925		23,964,435
Liabilities:
Bonds and notes payable	$	22,251,433		21,356,573
Accrued interest payable	60,658			50,039
Other liabilities	272,891			198,252
Due to customers	188,591			187,121
Fair value of derivative instruments	4,224			7,063
Total liabilities	22,777,797			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 29,341,791 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	4,908			521
Retained earnings	2,307,573			2,143,983
Accumulated other comprehensive earnings	3,975			4,617
Total Nelnet, Inc. shareholders' equity	2,316,864			2,149,529
Noncontrolling interests	10,264			15,858
Total equity	2,327,128			2,165,387
Total liabilities and equity	$	25,104,925		23,964,435

Supplemental information - assets and liabilities of consolidated education lending variable interest entities:
Student loans receivable	$	22,536,434		21,909,476
Restricted cash	683,211			641,994
Loan accrued interest receivable and other assets	625,122			431,934
Bonds and notes payable	(22,337,987		)	(21,702,298	)
Accrued interest payable and other liabilities	(214,554		)	(168,637	)
Net assets of consolidated education lending variable interest entities	$	1,292,226		1,112,469

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
	Three months ended				Nine months ended
	September 30,				September 30,
	2018			2017	2018	2017
Interest income:
Loan interest	$	232,320		193,087	653,414	564,173
Investment interest	7,628			3,800	18,581	9,616
Total interest income	239,948			196,887	671,995	573,789
Interest expense:
Interest on bonds and notes payable	180,175			121,650	487,174	341,787
Net interest income	59,773			75,237	184,821	232,002
Less provision for loan losses	10,500			6,700	18,000	10,700
Net interest income after provision for loan losses	49,273			68,537	166,821	221,302
Other income:
Loan servicing and systems revenue	112,579			55,950	327,265	167,079
Education technology, services, and payment processing revenue	58,409			50,358	167,372	149,862
Communications revenue	11,818			6,751	31,327	17,577
Other income	16,673			19,756	44,449	44,874
Gain from debt repurchases	—			116	359	5,537
Derivative market value and foreign currency transaction adjustments and derivative settlements, net	17,098			7,173	100,927	(25,568	)
Total other income	216,577			140,104	671,699	359,361
Cost of services:
Cost to provide education technology, services, and payment processing services	19,087			15,151	44,087	37,456
Cost to provide communications services	4,310			2,632	11,892	6,789
Total cost of services	23,397			17,783	55,979	44,245
Operating expenses:
Salaries and benefits	114,172			74,193	321,932	220,684
Depreciation and amortization	22,992			10,051	62,943	27,687
Loan servicing fees	3,087			8,017	9,428	19,670
Other expenses	45,194			29,500	119,020	81,923
Total operating expenses	185,445			121,761	513,323	349,964
Income before income taxes	57,008			69,097	269,218	186,454
Income tax expense	13,882			25,562	63,369	70,349
Net income	43,126			43,535	205,849	116,105
Net (income) loss attributable to noncontrolling interests	(199		)	2,768	438	8,960
Net income attributable to Nelnet, Inc.	$	42,927		46,303	206,287	125,065
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.05		1.11	5.04	2.97
Weighted average common shares outstanding - basic and diluted	40,988,965			41,553,316	40,942,177	42,054,532

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
	Three months ended					Nine months ended
	September 30,					September 30,
	2018			2017		2018		2017
Net income	$	43,126		43,535		205,849		116,105
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding losses arising during period, net	2,438			405		964		383
Reclassification adjustment for gains recognized in net income, net of losses	(765		)	(504	)	(817	)	(1,244	)
Income tax effect	(402		)	35		(46	)	318
Total other comprehensive income (loss)	1,271			(64	)	101		(543	)
Comprehensive income	44,397			43,471		205,950		115,562
Comprehensive (income) loss attributable to noncontrolling interests	(199		)	2,768		438		8,960
Comprehensive income attributable to Nelnet, Inc.	$	44,198		46,239		206,388		124,522

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 June 30, 2017	—	30,373,691		11,476,932	$	—	304		115	366		2,110,158		4,251		15,215		2,130,409
Issuance of noncontrolling interests	—	—		—	—		—		—	—		—		—		6,901		6,901
Net income (loss)	—	—		—	—		—		—	—		46,303		—		(2,768	)	43,535
Other comprehensive loss	—	—		—	—		—		—	—		—		(64	)	—		(64	)
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(759	)	(759	)
Cash dividend on Class A and Class B common stock - $0.14 per share	—	—		—	—		—		—	—		(5,766	)	—		—		(5,766	)
Issuance of common stock, net of forfeitures	—	10,125		—	—		—		—	278		—		—		—		278
Compensation expense for stock based awards	—	—		—	—		—		—	1,042		—		—		—		1,042
Repurchase of common stock	—	(947,794	)	—	—		(10	)	—	(1,326	)	(43,800	)	—		—		(45,136	)
Balance as of September 30, 2017	—	29,436,022		11,476,932	$	—	294		115	360		2,106,895		4,187		18,589		2,130,440
Balance as of June 30, 2018	—	29,331,002		11,468,587	$	—	293		115	2,586		2,271,171		2,704		9,834		2,286,703
Issuance of noncontrolling interests	—	—		—	—		—		—	—		—		—		326		326
Net income	—	—		—	—		—		—	—		42,927		—		199		43,126
Other comprehensive income	—	—		—	—		—		—	—		—		1,271		—		1,271
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(95	)	(95	)
Cash dividend on Class A and Class B common stock - $0.16 per share	—	—		—	—		—		—	—		(6,525	)	—		—		(6,525	)
Issuance of common stock, net of forfeitures	—	14,086		—	—		—		—	580		—		—		—		580
Compensation expense for stock based awards	—	—		—	—		—		—	1,934		—		—		—		1,934
Repurchase of common stock	—	(3,297	)	—	—		—		—	(192	)	—		—		—		(192	)
Balance as of September 30, 2018	—	29,341,791		11,468,587	$	—	293		115	4,908		2,307,573		3,975		10,264		2,327,128
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	—	—		—	—		—		—	—		—		—		19,553		19,553
Net income (loss)	—	—		—	—		—		—	—		125,065		—		(8,960	)	116,105
Other comprehensive loss	—	—		—	—		—		—	—		—		(543	)	—		(543	)
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(1,274	)	(1,274	)
Cash dividends on Class A and Class B common stock - $0.42 per share	—	—		—	—		—		—	—		(17,569	)	—		—		(17,569	)
Issuance of common stock, net of forfeitures	—	171,481		—	—		2		—	3,359		—		—		—		3,361
Compensation expense for stock based awards	—	—		—	—		—		—	3,213		—		—		—		3,213
Repurchase of common stock	—	(1,363,571	)	—	—		(14	)	—	(6,632	)	(56,685	)	—		—		(63,331	)
Balance as of September 30, 2017	—	29,436,022		11,476,932	$	—	294		115	360		2,106,895		4,187		18,589		2,130,440
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	—	—		—	—		—		—	—		—		—		847		847
Net income (loss)	—	—		—	—		—		—	—		206,287		—		(438	)	205,849
Other comprehensive income	—	—		—	—		—		—	—		—		101		—		101
Distribution to noncontrolling interests	—	—		—	—		—		—	—		—		—		(351	)	(351	)
Cash dividends on Class A and Class B common stock - $0.48 per share	—	—		—	—		—		—	—		(19,539	)	—		—		(19,539	)
Issuance of common stock, net of forfeitures	—	319,365		—	—		3		—	4,662		—		—		—		4,665
Compensation expense for stock based awards	—	—		—	—		—		—	4,526		—		—		—		4,526
Repurchase of common stock	—	(319,091	)	—	—		(3	)	—	(4,801	)	(11,716	)	—		—		(16,520	)
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 September 30, 2018	—	29,341,791		11,468,587	$	—	293		115	4,908		2,307,573		3,975		10,264		2,327,128

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Nine months ended
	September 30,
	2018			2017
Net income attributable to Nelnet, Inc.	$	206,287		125,065
Net loss attributable to noncontrolling interests	(438		)	(8,960	)
Net income	205,849			116,105
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	136,816			99,826
Loan discount accretion	(31,315		)	(32,820	)
Provision for loan losses	18,000			10,700
Derivative market value adjustment	(49,909		)	(22,381	)
Unrealized foreign currency transaction adjustment	—			45,635
Proceeds from clearinghouse - initial and variation margin, net	46,418			58,900
Gain from debt repurchases	(359		)	(5,537	)
Gain from equity securities, net of losses	(8,280		)	—
Deferred income tax expense (benefit)	23,574			(15,012	)
Non-cash compensation expense	4,781			3,370
Impairment expense	3,907			—
Other	(856		)	3,451
Increase in loan accrued interest receivable	(193,926		)	(5,572	)
Increase in accounts receivable	(15,328		)	(19,209	)
Decrease (increase) in other assets	49,255			(8,660	)
Increase in accrued interest payable	10,619			2,147
(Decrease) increase in other liabilities	(7,159		)	20,548
Increase (decrease) in due to customers	1,470			(14,403	)
Net cash provided by operating activities	193,557			237,088
Cash flows from investing activities, net of acquisition:
Purchases of loans	(3,231,956		)	(183,466	)
Net proceeds from loan repayments, claims, capitalized interest, and other	2,484,596			2,520,197
Proceeds from sale of loans	23,712			—
Purchases of available-for-sale securities	(38,064		)	(109,666	)
Proceeds from sales of available-for-sale securities	58,594			141,206
Purchases of investments and issuance of notes receivable	(49,216		)	(21,823	)
Proceeds from investments and notes receivable	21,461			6,174
Purchases of property and equipment	(96,480		)	(106,656	)
Business acquisition, net of cash acquired	(109,152		)	—
Net cash (used in) provided by investing activities	(936,505		)	2,245,966
Cash flows from financing activities:
Payments on bonds and notes payable	(2,149,449		)	(3,679,592	)
Proceeds from issuance of bonds and notes payable	3,004,848			1,178,027
Payments of debt issuance costs	(10,953		)	(4,411	)
Dividends paid	(19,539		)	(17,569	)
Repurchases of common stock	(16,520		)	(63,331	)
Proceeds from issuance of common stock	993			457
Acquisition of noncontrolling interest	(13,449		)	—
Issuance of noncontrolling interests	768			19,475
Distribution to noncontrolling interests	(351		)	(1,274	)
Net cash provided by (used in) financing activities	796,348			(2,568,218	)
Net increase (decrease) in cash, cash equivalents, and restricted cash	53,400			(85,164	)
Cash, cash equivalents, and restricted cash, beginning of period	942,066			1,170,317
Cash, cash equivalents, and restricted cash, end of period	$	995,466		1,085,153



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(unaudited)
	Nine months ended
	September 30,
	2018			2017
Supplemental disclosures of cash flow information:
Cash disbursements made for interest	$	425,782		287,265
Cash (refunds received) disbursements made for income taxes, net	$	(6,491	)	71,431

Supplemental disclosures of noncash operating and investing activities regarding the Company's business acquisition during the nine months ended September 30, 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
	September 30, 2018		December 31, 2017	September 30, 2017	December 31, 2016
Total cash and cash equivalents	$	83,537	66,752	254,391	69,654
Restricted cash	723,338		688,193	725,463	980,961
Restricted cash - due to customers	188,591		187,121	105,299	119,702
Cash, cash equivalents, and restricted cash	$	995,466	942,066	1,085,153	1,170,317

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 September 30, 2018 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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

During the first quarter of 2018, the Company changed the name of the Tuition Payment Processing and Campus Commerce operating segment to Education Technology, Services, and Payment Processing 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, statements of income, and statements of cash flows 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 consolidated statements of income from part of "operating expenses" and presenting such costs as part of "cost of services."

•

Reclassifying consumer loan activity on the consolidated statements of income, which was previously included in "investment interest" and "other expenses," to "loan interest" and "provision for loan losses" and "loan servicing fees," respectively, and reclassifying consumer loan activity on the consolidated statements of cash flows as appropriate. This did not result in a change in the Company's previously reported net cash provided by operating or investing activities.

Accounting Standards Adopted in 2018

In the first quarter of 2018, the Company adopted the following new accounting standards and other guidance:

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"). 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 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 fee-based Education Technology, Services, and Payment Processing operating segment as the principal in its payment services transactions. As a result of this change, the Company presents the payment services revenue gross, with the direct costs to provide these services presented separately. The Company’s other fee-based operating segments will recognize revenue consistent with historical revenue recognition patterns. The majority of the Company's revenue earned in its non-fee-based Asset Generation and Management operating segment, including loan interest and derivative activity, is explicitly excluded from the scope of the new standard.

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 September 30, 2017
	As previously reported		Impact of adoption	As restated
Education technology, services, and payment processing revenue	$	35,450	14,908	50,358
Cost to provide education technology, services, and payment processing services	—		14,908	14,908	(a)



	Nine months ended September 30, 2017
	As previously reported		Impact of adoption	As restated
Education technology, services, and payment processing revenue	$	113,293	36,569	149,862
Cost to provide education technology, services, and payment processing services	—		36,569	36,569	(a)


(a)	In addition to the impact of adopting the new revenue recognition standard, as discussed above, the Company reclassified other direct costs to provide education technology, services, and payment processing services 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, investing, or financing 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, including a related clarifying update, 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 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. 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 guidance requires that the statement of cash flows present the change during the period in 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 amounts on the consolidated statements of cash flows as follows:



	Nine months ended September 30, 2017
	As previously reported		Impact of adoption		As restated
Decrease in due to customers	$	—	(14,403	)	(14,403	)
Proceeds from clearinghouse - initial and variation margin, net	37,744		21,156		58,900
Net cash provided by operating activities	230,335		6,753		237,088
Decrease in restricted cash, net	276,654		(276,654	)	—
Net cash provided by investing activities	2,522,620		(276,654	)	2,245,966

2. Summary of Significant Accounting Policies and Practices

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

Revenue Recognition

The Company applies the provisions of 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 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, number of borrowers serviced for each customer, or number of transactions. Loan servicing requires a significant level of integration and the individual components are not considered distinct. The Company will perform various services, including, but not limited to, (i) application processing, (ii) monthly servicing, (iii) conversion processing, and (iv) fulfillment 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 activities are substantially the same. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume 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 the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits. Revenue from any non-refundable up-front fee is recognized ratably over the contract period, as the fee relates to set-up activities that provide no incremental benefit to the customers. 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 receive and consume benefits.

The following table provides disaggregated revenue by service offering:



	Three months ended September 30,			Nine months ended September 30,
	2018		2017	2018	2017
Government servicing - Nelnet	$	38,907	38,594	118,015	117,409
Government servicing - Great Lakes (a)	45,671		—	122,107	—
FFELP servicing	7,422		3,979	24,259	11,693
Private education and consumer loan servicing	10,007		7,596	31,990	20,535
Software services	8,201		4,430	24,461	13,093
Outsourced services and other	2,371		1,351	6,433	4,349
Loan servicing and systems revenue	$	112,579	55,950	327,265	167,079


(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 receive and consume 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 receive and consume benefits.

•

Education technology and services - Education technology and services consideration is determined from individual contracts with customers and is 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 of which corresponds directly with the value provided to the customer based on the performance completed. Services provided to the higher education market 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 receive and consume benefits.

The following table provides disaggregated revenue by service offering:



	Three months ended September 30,			Nine months ended September 30,
	2018		2017	2018	2017
Tuition payment plan services	$	19,771	17,885	63,209	58,543
Payment processing	26,956		22,541	62,908	55,371
Education technology and services	11,419		9,831	40,411	35,804
Other	263		101	844	144
Education technology, services, and payment processing revenue	$	58,409	50,358	167,372	149,862

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 items included in cost to provide education technology, services, and payment processing services include salaries and benefits and third-party professional service 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 of which 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. Revenue received or receivable in advance of the delivery of services is included in deferred revenue. 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 September 30,			Nine months ended September 30,
	2018		2017	2018	2017
Internet	$	6,456	3,205	16,547	7,978
Television	3,385		2,115	9,250	5,498
Telephone	1,957		1,413	5,471	4,018
Other	20		18	59	83
Communications revenue	$	11,818	6,751	31,327	17,577

Residential revenue	$	8,896	4,680	23,367	11,851
Business revenue	2,861		2,013	7,779	5,525
Other	61		58	181	201
Communications revenue	$	11,818	6,751	31,327	17,577

Cost to provide communications services is primarily associated with television programming costs. The Company has various contracts to obtain television 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 items in cost to provide communications services include connectivity, franchise, and other regulatory costs directly related to providing internet and telephone services.

Other income - The following table provides the components of "other income" on the consolidated statements of income:



	Three months ended September 30,			Nine months ended September 30,
	2018		2017	2018	2017
Realized and unrealized gains on investments, net	$	1,288	2,201	11,505	3,818
Borrower late fee income	3,253		2,731	8,994	9,098
Investment advisory fees	1,183		5,852	4,169	11,661
Management fee revenue	1,756		—	4,673	—
Peterson's revenue	—		3,402	—	9,282
Other	9,193		5,570	15,108	11,015
Other income	$	16,673	19,756	44,449	44,874


•	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.


•	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 liabilities from contracts with customers:

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records deferred revenue when revenue is received or receivable in advance of the delivery of service. 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 September 30,					Nine months ended September 30,
	2018			2017		2018		2017
Balance, beginning of period	$	25,660		25,954		32,276		33,141
Deferral of revenue	45,174			38,705		97,726		79,435
Recognition of revenue	(27,992		)	(22,181	)	(87,303	)	(70,128	)
Other	(11		)	27		132		57
Balance, end of period	$	42,831		42,505		42,831		42,505

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.

3. Loans Receivable and Allowance for Loan Losses

Loans receivable consisted of the following:



	As of			As of
	September 30, 2018			December 31, 2017
Federally insured student loans:
Stafford and other	$	4,956,324		4,418,881
Consolidation	17,434,419			17,302,725
Total	22,390,743			21,721,606
Private education loans	169,467			212,160
Consumer loans	112,547			62,111
	22,672,757			21,995,877
Loan discount, net of unamortized loan premiums and deferred origination costs	(63,566		)	(113,695	)
Non-accretable discount	(20,612		)	(13,085	)
Allowance for loan losses:
Federally insured loans	(43,053		)	(38,706	)
Private education loans	(11,253		)	(12,629	)
Consumer loans	(5,911		)	(3,255	)
	$	22,528,362		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 September 30, 2018
	Balance at beginning of period		Provision for loan losses		Charge-offs		Recoveries	Other	Balance at end of period
Federally insured loans	$	37,263	8,000		(2,210	)	—	—	43,053
Private education loans	11,664		—		(535	)	124	—	11,253
Consumer loans	4,788		2,500		(1,403	)	26	—	5,911
	$	53,715	10,500		(4,148	)	150	—	60,217

	Three months ended September 30, 2017
Federally insured loans	$	35,862	7,000		(3,464	)	—	—	39,398
Private education loans	13,846		(1,000	)	(491	)	161	50	12,566
Consumer loans	1,000		700		(33	)	—	—	1,667
	$	50,708	6,700		(3,988	)	161	50	53,631

	Nine months ended September 30, 2018
Federally insured loans	$	38,706	12,000		(8,653	)	—	1,000	43,053
Private education loans	12,629		—		(1,846	)	470	—	11,253
Consumer loans	3,255		6,000		(3,376	)	32	—	5,911
	$	54,590	18,000		(13,875	)	502	1,000	60,217

	Nine months ended September 30, 2017
Federally insured loans	$	37,268	11,000		(8,870	)	—	—	39,398
Private education loans	14,574		(2,000	)	(861	)	603	250	12,566
Consumer loans	—		1,700		(33	)	—	—	1,667
	$	51,842	10,700		(9,764	)	603	250	53,631

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 September 30, 2018				As of December 31, 2017				As of September 30, 2017
Federally insured loans:
Loans in-school/grace/deferment	$	1,410,902			$	1,260,394			$	1,448,172
Loans in forbearance	1,487,107				1,774,405				2,406,346
Loans in repayment status:
Loans current	16,921,119		86.8	%	16,477,004		88.2	%	16,534,795		88.7	%
Loans delinquent 31-60 days	689,454		3.5		682,586		3.7		579,665		3.1
Loans delinquent 61-90 days	412,639		2.1		374,534		2.0		334,085		1.8
Loans delinquent 91-120 days	347,013		1.8		287,922		1.5		255,567		1.4
Loans delinquent 121-270 days	853,224		4.4		629,480		3.4		700,319		3.8
Loans delinquent 271 days or greater	269,285		1.4		235,281		1.2		228,335		1.2
Total loans in repayment	19,492,734		100.0	%	18,686,807		100.0	%	18,632,766		100.0	%
Total federally insured loans	$	22,390,743			$	21,721,606			$	22,487,284
Private education loans:
Loans in-school/grace/deferment	$	3,550			$	6,053			$	27,188
Loans in forbearance	1,577				2,237				2,904
Loans in repayment status:
Loans current	156,383		95.2	%	196,720		96.5	%	190,153		96.8	%
Loans delinquent 31-60 days	1,796		1.1		1,867		0.9		1,200		0.6
Loans delinquent 61-90 days	1,155		0.7		1,052		0.5		1,195		0.6
Loans delinquent 91 days or greater	5,006		3.0		4,231		2.1		3,989		2.0
Total loans in repayment	164,340		100.0	%	203,870		100.0	%	196,537		100.0	%
Total private education loans	$	169,467			$	212,160			$	226,629

4. Bonds and Notes Payable

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



	As of September 30, 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	$	20,695,887		2.38% - 4.07%	4/25/24 - 10/25/66
Bonds and notes based on auction	799,576			2.77% - 3.51%	3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes	21,495,463
FFELP warehouse facilities	705,144			2.34% / 2.38%	11/19/19 / 5/31/21
Variable-rate bonds and notes issued in private education loan asset-backed securitization	55,406			3.97%	12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization	66,975			3.60% / 5.35%	12/26/40 / 12/28/43
Unsecured line of credit	160,000			3.65%	6/22/23
Unsecured debt - Junior Subordinated Hybrid Securities	20,381			6.91%	9/15/61
Other borrowings	79,669			2.77% - 5.22%	10/1/18 - 12/15/45
	22,583,038
Discount on bonds and notes payable and debt issuance costs	(331,605		)
Total	$	22,251,433