UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
August 7, 2014

NELNET, INC.
(Exact name of registrant as specified in its charter)
Nebraska
 
001-31924
 
84-0748903
(State or other jurisdiction of incorporation)
 
(Commission File Number)
 
(I.R.S. Employer Identification No.)

121 South 13th Street, Suite 100
Lincoln, Nebraska
 
68508
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code (402) 458-2370
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))




Item 2.02 Results of Operations and Financial Condition.
On August 7, 2014, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended June 30, 2014. A copy of the press release is furnished as Exhibit 99.1 to this report. In addition, a copy of the supplemental financial information for the quarter ended June 30, 2014, which was made available on the Company's website at www.nelnetinvestors.com on August 7, 2014 in connection with the press release, is furnished as Exhibit 99.2 to this report.

The above information and Exhibits 99.1 and 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall such information and Exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. In addition, information on the Company's website is not incorporated by reference into this report and should not be considered part of this report.

Certain statements contained in the exhibits furnished with this report may be considered forward looking in nature and are subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual results may vary materially from those anticipated, estimated, or expected. Among the key risks and uncertainties that may have a direct bearing on the Company's future operating results, performance, or financial condition expressed or implied by the forward-looking statements are the matters discussed in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 27, 2014. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

Item 9.01 Financial Statements and Exhibits.

(d)    Exhibits. The following exhibits are furnished as part of this report:
Exhibit
No.
 
Description
 
 
 
99.1
 
Press Release dated August 7, 2014 - “Nelnet Reports Second Quarter 2014 Results”
99.2
 
Supplemental Financial Information for the Quarter Ended June 30, 2014







SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: August 7, 2014
NELNET, INC.
By:     /s/ JAMES D. KRUGER     
Name:
James D. Kruger
Title:
Chief Financial Officer



Exhibit 99.1 8.7.14 Earnings Release


Nelnet Reports Second Quarter 2014 Results
•
GAAP net income $1.61 per share, $1.51 per share excluding adjustments
•
Purchased $4.8 billion of student loans
•
Department of Education servicing contract extended
•
Acquired school information systems provider

LINCOLN, Neb., Aug 7, 2014-Nelnet (NYSE: NNI) today reported GAAP net income of $75.0 million, or $1.61 per share, for the second quarter of 2014, compared with GAAP net income of $101.2 million, or $2.17 per share, for the same period a year ago.

Excluding derivative market value and foreign currency adjustments, net income was $70.2 million, or $1.51 per share, for the second quarter of 2014, compared with $71.1 million, or $1.53 per share, for the same period in 2013. The company reported income from derivative market value and foreign currency adjustments of $4.8 million after tax, or $0.10 per share, for the second quarter of 2014, compared with income of $30.1 million after tax, or $0.64 per share, for the second quarter of 2013. Also, the second quarter of 2013 operating results include a gain of $7.4 million ($0.10 per share after tax) from the repurchase of the company's own asset-backed securities. 

Excluding the gain from the repurchase of debt and derivative market value and foreign currency adjustments, net income in the second quarter of 2014 increased $0.08 per share compared with the same period in 2013 due to increases in income from the company’s student loan portfolio, from providing investment advisory services, and from investment activities.

"We accomplished a tremendous amount during our second quarter, the positive benefits of which will have a significant impact for years to come,” said Jeff Noordhoek, Nelnet chief executive officer. “In addition to delivering strong earnings, our largest contract was extended by the Department of Education, we purchased nearly $5 billion of student loans, and we completed the strategic acquisition of RenWeb. Going forward, we will continue to provide a great customer experience and to effectively deploy capital in existing and new businesses.”

Nelnet operates four primary business segments, earning interest income on student loans in its Asset Generation and Management operating segment, and fee-based revenue in its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments.

Asset Generation and Management

For the second quarter of 2014, Nelnet reported net interest income of $107.7 million, compared with $101.4 million for the same period a year ago.  Core student loan spread decreased to 1.46 percent for the second quarter of 2014, compared with 1.52 percent for the same period in 2013. Student loan spread tightened as a result of recent acquisitions of consolidation loans, which have lower margins but longer terms. An increase in the company's student loan portfolio more than offset the decline in core student loan spread.

During the second quarter of 2014, the company purchased $4.8 billion of legacy FFELP student loans. Year to date, the company has purchased $5.2 billion of student loans, bringing its total student loan portfolio to $29.3 billion as of June 30, 2014.

Fee-Based Operating Segments

The company reported total revenue from its fee-based operating segments in the second quarters of 2014 and 2013 of $108.4 million and $103.3 million, respectively. Net income from fee-based operating segments was $15.1 million for the second quarter of 2014, compared to $16.5 million for the same period in 2013.

Revenue from the company's Student Loan and Guaranty Servicing segment increased 11 percent, or $6.4 million, to $66.5 million for the second quarter of 2014, up from $60.1 million for the second quarter of 2013. The increase in revenue was the result of growth in servicing volume under the company's servicing contract with the U.S. Department of Education (Department). On June 17, 2014, the Department extended the contact for an additional five years through June 16, 2019.

As of June 30, 2014, the company was servicing $123.2 billion of loans for 5.5 million borrowers on behalf of the Department, compared with $89.2 billion of loans for 4.4 million borrowers as of June 30, 2013. Revenue from this contract increased to $31.0 million for the second quarter of 2014, up from $22.1 million for the same period a year ago.





For the second quarter of 2014, revenue from the company's Tuition Payment Processing and Campus Commerce segment was $21.8 million, an increase of $3.5 million, or 19 percent, from the same period in 2013. In June 2014, the company acquired RenWeb, one of the leading providers of school information systems for private and faith-based schools. The combination of RenWeb’s school administration software and the company’s existing tuition management and financial needs assessment services increases the value of the company’s offerings, allowing the company to deliver a comprehensive suite of solutions.

The company reported second quarter of 2014 revenue from its Enrollment Services segment of $20.1 million, compared with $24.8 million for the same period in 2013. Enrollment services revenue has been affected by for-profit career colleges spending less to recruit students.

Other Income

Other income increased $3.0 million to $15.3 million for the second quarter of 2014, compared with $12.3 million for the same period in 2013. The increase was due to gains on investments, which totaled $2.1 million for the second quarter of 2014, compared with a loss of $0.2 million for the same period in 2013, and increased investment advisory fee revenue, which totaled $7.0 million for the second quarter of 2014, compared with $6.3 million for the same period in 2013.

Operating Expenses

The company reported consolidated operating expenses of $112.8 million for the second quarter of 2014, compared with $102.9 million for the same period in 2013.

Board of Directors Approves Dividend

The Nelnet Board of Directors declared a third quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.10 per share. The dividend will be paid on Monday, September 15, 2014, to shareholders of record at the close of business on Monday, September 1, 2014.

Non-GAAP Performance Measures

The company provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results, including specifically, the impact of unrealized gains and losses resulting from changes in fair values of derivative instruments which do not qualify for “hedge treatment” under GAAP and foreign currency transaction gains or losses resulting from the re-measurement of the company's Euro-denominated bonds to U.S. dollars. The company believes these point in time estimates of asset and liability values related to financial instruments that are subject to interest and currency rate fluctuations, and items whose timing and/or amount cannot be reasonably estimated in advance, affect the period to period comparability of the results of the company's fundamental business operations on a recurring basis. Accordingly, the company provides operating results excluding these items for comparability purposes.

Forward-looking and Cautionary Statements  

This press release contains forward-looking statements within the meaning of federal securities laws.  These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, among others, risks related to the company's student loan portfolio such as interest rate basis and repricing risk, the use of derivatives to manage exposure to interest rate fluctuations, and the uncertain nature of expected benefits from recent FFELP loan purchases; the company's funding requirements to satisfy asset financing needs; risks related to the company's ability to maintain and increase volumes under the company’s loan servicing contract with the Department to service federally owned student loans; changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets; risks related to the recent reduction in government payments to guaranty agencies to rehabilitate defaulted FFELP loans and services in support of those activities; and changes in general economic and credit market conditions. For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the second quarter ended June 30, 2014.  All forward-looking statements in this release are as of the date of this release. Although the company may from time to time voluntarily update or revise its forward-looking statements to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by securities laws.





Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)
 
Three months ended
 
Six months ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30, 2014
 
June 30, 2013
Interest income:
 
 
 
 
 
 
 
 
 
Loan interest
$
175,466

 
156,896

 
158,063

 
332,362

 
313,602

Investment interest
1,482

 
1,979

 
1,483

 
3,461

 
3,100

Total interest income
176,948

 
158,875

 
159,546

 
335,823

 
316,702

Interest expense:
 
 
 
 
 
 
 
 
 
Interest on bonds and notes payable
69,235

 
60,004

 
58,127

 
129,239

 
116,485

Net interest income
107,713

 
98,871

 
101,419

 
206,584

 
200,217

Less provision for loan losses
1,500

 
2,500

 
5,000

 
4,000

 
10,000

Net interest income after provision for loan losses
106,213

 
96,371

 
96,419

 
202,584

 
190,217

Other income (expense):
 
 
 
 
 
 
 
 
 
Loan and guaranty servicing revenue
66,460

 
64,757

 
60,078

 
131,217

 
115,679

Tuition payment processing and campus commerce revenue
21,834

 
25,235

 
18,356

 
47,069

 
41,767

Enrollment services revenue
20,145

 
22,011

 
24,823

 
42,156

 
53,780

Other income
15,315

 
18,131

 
12,288

 
33,446

 
21,704

Gain on sale of loans and debt repurchases
18

 
39

 
7,355

 
57

 
8,762

Derivative settlements, net
(6,214
)
 
(6,229
)
 
(8,357
)
 
(12,443
)
 
(16,541
)
Derivative market value and foreign currency adjustments, net
7,784

 
1,964

 
48,545

 
9,748

 
57,801

Total other income
125,342

 
125,908

 
163,088

 
251,250

 
282,952

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
53,888

 
52,484

 
47,432

 
106,372

 
95,337

Cost to provide enrollment services
13,311

 
14,475

 
16,787

 
27,786

 
36,429

Depreciation and amortization
5,214

 
4,783

 
4,320

 
9,997

 
8,697

Other
40,377

 
35,627

 
34,365

 
76,004

 
69,306

Total operating expenses
112,790

 
107,369

 
102,904

 
220,159

 
209,769

Income before income taxes
118,765

 
114,910

 
156,603

 
233,675

 
263,400

Income tax expense
43,078

 
40,611

 
54,746

 
83,689

 
93,193

Net income
75,687

 
74,299

 
101,857

 
149,986

 
170,207

Net income attributable to noncontrolling interest
693

 
513

 
614

 
1,206

 
885

Net income attributable to Nelnet, Inc.
$
74,994

 
73,786

 
101,243

 
148,780

 
169,322

Earnings per common share:
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.61

 
1.59

 
2.17

 
3.20

 
3.63

Weighted average common shares outstanding - basic and diluted
46,529,377

 
46,527,917

 
46,626,853

 
46,528,651

 
46,642,356








Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)

 
As of
 
As of
 
As of
 
June 30, 2014
 
December 31, 2013
 
June 30, 2013
Assets:
 
 
 
 
 
Student loans receivable, net
$
29,342,430

 
25,907,589

 
24,575,636

Cash, cash equivalents, and investments
233,588

 
255,307

 
245,825

Restricted cash and investments
960,039

 
902,699

 
763,909

Goodwill and intangible assets, net
171,049

 
123,250

 
124,849

Other assets
663,916

 
582,004

 
592,958

Total assets
$
31,371,022

 
27,770,849

 
26,303,177

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
29,492,560

 
25,955,289

 
24,690,952

Other liabilities
298,334

 
371,570

 
292,630

Total liabilities
29,790,894

 
26,326,859

 
24,983,582

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
1,579,742

 
1,443,662

 
1,319,482

Noncontrolling interest
386

 
328

 
113

Total equity
1,580,128

 
1,443,990

 
1,319,595

Total liabilities and equity
$
31,371,022

 
27,770,849

 
26,303,177



Contacts:
Media, Ben Kiser, +1-402-458-3024, or Investors, Phil Morgan, +1-402-458-3038, both of Nelnet, Inc.








Exhibit 99.2 - NNI-8.7.14-10Q-supplement


For Release: August 7, 2014
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038

Nelnet, Inc. supplemental financial information for the second quarter 2014
(All dollars are in thousands, except per share amounts, unless otherwise noted)

The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for second quarter 2014 earnings, dated August 7, 2014, and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document.  Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.

The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements.  These factors include, among others, the risks and uncertainties set forth in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report"), in particular such risks and uncertainties as:

•
student loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from recently purchased securitized and unsecuritized FFELP student loans, and risks from changes in levels of student loan prepayment or default rates;

•
financing and liquidity risks, including risks of changes in the general interest rate environment and in the securitization and other financing markets for student loans, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;

•
risks from changes in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, risks related to reduced government payments to guaranty agencies to rehabilitate defaulted FFELP loans and services in support of those activities, risks related to the Company's ability to maintain or increase volumes under the Company's loan servicing contract with the Department, which accounted for 23 percent of the Company's fee-based revenue in 2013, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of FFELP and Federal Direct Loan Program loans;

•
risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors;

•
uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; and
 
•
risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.

All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws.


1



Consolidated Statements of Income
(unaudited)

 
Three months ended
 
Six months ended
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Interest income:
 
 
 
 
 
 
 
 
 
Loan interest
$
175,466

 
156,896

 
158,063

 
332,362

 
313,602

Investment interest
1,482

 
1,979

 
1,483

 
3,461

 
3,100

Total interest income
176,948

 
158,875

 
159,546

 
335,823

 
316,702

Interest expense:
 
 
 
 
 
 
 
 
 
Interest on bonds and notes payable
69,235

 
60,004

 
58,127

 
129,239

 
116,485

Net interest income
107,713

 
98,871

 
101,419

 
206,584

 
200,217

Less provision for loan losses
1,500

 
2,500

 
5,000

 
4,000

 
10,000

Net interest income after provision for loan losses
106,213

 
96,371

 
96,419

 
202,584

 
190,217

Other income (expense):
 
 
 
 
 
 
 
 
 
Loan and guaranty servicing revenue
66,460

 
64,757

 
60,078

 
131,217

 
115,679

Tuition payment processing and campus commerce revenue
21,834

 
25,235

 
18,356

 
47,069

 
41,767

Enrollment services revenue
20,145

 
22,011

 
24,823

 
42,156

 
53,780

Other income
15,315

 
18,131

 
12,288

 
33,446

 
21,704

Gain on sale of loans and debt repurchases
18

 
39

 
7,355

 
57

 
8,762

Derivative settlements, net
(6,214
)
 
(6,229
)
 
(8,357
)
 
(12,443
)
 
(16,541
)
Derivative market value and foreign currency adjustments, net
7,784

 
1,964

 
48,545

 
9,748

 
57,801

Total other income
125,342

 
125,908

 
163,088

 
251,250

 
282,952

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
53,888

 
52,484

 
47,432

 
106,372

 
95,337

Cost to provide enrollment services
13,311

 
14,475

 
16,787

 
27,786

 
36,429

Depreciation and amortization
5,214

 
4,783

 
4,320

 
9,997

 
8,697

Other
40,377

 
35,627

 
34,365

 
76,004

 
69,306

Total operating expenses
112,790

 
107,369

 
102,904

 
220,159

 
209,769

Income before income taxes
118,765

 
114,910

 
156,603

 
233,675

 
263,400

Income tax expense
43,078

 
40,611

 
54,746

 
83,689

 
93,193

Net income
75,687

 
74,299

 
101,857

 
149,986

 
170,207

Net income attributable to noncontrolling interest
693

 
513

 
614

 
1,206

 
885

Net income attributable to Nelnet, Inc.
$
74,994

 
73,786

 
101,243

 
148,780

 
169,322

Earnings per common share:
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.61

 
1.59

 
2.17

 
3.20

 
3.63

Weighted average common shares outstanding - basic and diluted
46,529,377

 
46,527,917

 
46,626,853

 
46,528,651

 
46,642,356


2


Condensed Consolidated Balance Sheets
(unaudited)

 
As of
 
As of
 
As of
 
June 30, 2014
 
December 31, 2013
 
June 30, 2013
Assets:
 
 
 
 
 
Student loans receivable, net
$
29,342,430

 
25,907,589

 
24,575,636

Cash, cash equivalents, and investments
233,588

 
255,307

 
245,825

Restricted cash and investments
960,039

 
902,699

 
763,909

Goodwill and intangible assets, net
171,049

 
123,250

 
124,849

Other assets
663,916

 
582,004

 
592,958

Total assets
$
31,371,022

 
27,770,849

 
26,303,177

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
29,492,560

 
25,955,289

 
24,690,952

Other liabilities
298,334

 
371,570

 
292,630

Total liabilities
29,790,894

 
26,326,859

 
24,983,582

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
1,579,742

 
1,443,662

 
1,319,482

Noncontrolling interest
386

 
328

 
113

Total equity
1,580,128

 
1,443,990

 
1,319,595

Total liabilities and equity
$
31,371,022

 
27,770,849

 
26,303,177




3


Overview

The Company is an education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: asset management and finance, loan servicing, payment processing, and enrollment services (education planning). These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns interest income on a portfolio of federally insured student loans.

A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency adjustments, is provided below.
 
Three months ended
 
Six months ended
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
GAAP net income attributable to Nelnet, Inc.
$
74,994

 
73,786

 
101,243

 
148,780

 
169,322

Derivative market value and foreign currency adjustments, net of tax
(4,826
)
 
(1,218
)
 
(30,098
)
 
(6,044
)
 
(35,837
)
Net income, excluding derivative market value and foreign currency adjustments (a)
$
70,168

 
72,568

 
71,145

 
142,736

 
133,485

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
GAAP net income attributable to Nelnet, Inc.
$
1.61

 
1.59

 
2.17

 
3.20

 
3.63

Derivative market value and foreign currency adjustments, net of tax
(0.10
)
 
(0.03
)
 
(0.64
)
 
(0.13
)
 
(0.77
)
Net income, excluding derivative market value and foreign currency adjustments (a)
$
1.51

 
1.56

 
1.53

 
3.07

 
2.86


(a)
The Company provides non-GAAP information that reflects specific items management believes to be important in the evaluation of its financial position and performance. "Derivative market value and foreign currency adjustments" include (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars. The Company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations affect the period-to-period comparability of the results of operations. Accordingly, the Company provides operating results excluding these items for comparability purposes.

Included in net income for the three and six month periods ended June 30, 2013 were gains on the repurchase of the Company's own asset-backed debt securities of $7.4 million ($0.10 per share after tax) and $8.7 million ($0.12 per share after tax), respectively. Excluding these gains, the increase in net income, excluding derivative market value and foreign currency adjustments, in the 2014 periods compared with the same periods in 2013 was primarily due to an increase in income from the Company's student loan portfolio, an increase in income from providing investment advisory services through a SEC registered investment advisor subsidiary, and an increase in gains from investment activities. The increase in income from the Company's student loan portfolio in 2014 compared to 2013 was due to an increase in the portfolio from recent acquisitions and a lower provision for loan losses expense recorded in 2014 compared to 2013.

The Company earns net interest income on its FFELP student loan portfolio in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of June 30, 2014, the Company had a $29.3 billion student loan portfolio that will amortize over the next approximately 25 years. The Company actively seeks to acquire additional FFELP loan portfolios to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

In addition, the Company earns fee-based revenue through the following reportable operating segments:
 
•
Student Loan and Guaranty Servicing ("LGS") - referred to as Nelnet Diversified Solutions ("NDS")
•
Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS")
•
Enrollment Services - commonly called Nelnet Enrollment Solutions ("NES")


4


The information below provides the operating results for each reportable operating segment for the three and six months ended June 30, 2014 and 2013 (dollars in millions).

(a)
Revenue includes intersegment revenue of $13.8 million and $13.9 million for the three months ended June 30, 2014 and 2013, respectively, and $28.0 million and $28.9 million for the six months ended June 30, 2014 and 2013, respectively, earned by LGS as a result of servicing loans for AGM.

(b)
Total revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments, which was income of $8.8 million and $43.1 million for the three months ended June 30, 2014 and 2013, respectively, and income of $12.3 million and $48.4 million for the six months ended June 30, 2014 and 2013, respectively. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax, which was income of $5.5 million and $26.7 million for the three months ended June 30, 2014 and 2013, respectively, and income of $7.6 million and $30.0 million for the six months ended June 30, 2014 and 2013, respectively.

(c)
Computed as income before income taxes divided by total revenue.

Student Loan and Guaranty Servicing

•
As of June 30, 2014, the Company was servicing $150.0 billion in FFELP, private, and government owned student loans, as compared with $116.8 billion of loans as of June 30, 2013.

•
Revenue increased in the three and six months ended June 30, 2014 compared to the same periods in 2013 due to growth in servicing volume under the Company's contract with the Department, offset partially by a decrease in traditional FFELP servicing revenue. Revenue from the Department servicing contract increased to $31.0 million and $60.9 million for the three and six months ended June 30, 2014, respectively, compared to $22.1 million and $42.5 million, respectively, for the same periods in 2013. As of June 30, 2014, the Company was servicing $123.2 billion of loans for 5.5 million borrowers under this contract.

•
The servicing contract with the Department was originally scheduled to expire in June 2014, with a five-year extension at the option of the Department.   Effective as of June 17, 2014, the Department exercised its optional ordering period to extend the servicing contract for an additional five years through June 16, 2019.  The Company expects the performance metrics to determine loan servicing volume allocation each servicer will receive and the amount servicers may be paid per borrower will change during the extended period of the contract. 

•
Before tax operating margin was 26.6% and 30.8% for the three months ended June 30, 2014 and 2013, respectively, and 27.5% and 28.9% for the six months ended June 30, 2014 and 2013, respectively. Operating margin in this segment will continue to decrease as the volume of loans serviced under the Department servicing contract increases as a percentage of overall volume serviced.


5


•
Recent federal budget provisions that became effective July 1, 2014 reduced payments by the Department to guaranty agencies for assisting student loan borrowers with the rehabilitation of defaulted loans under FFELP. Rehabilitation collection revenue recognized by the Company was $17.3 million and $13.6 million for the three months ended June 30, 2014 and 2013, respectively, and $30.7 million and $25.7 million for the six months ended June 30, 2014 and 2013, respectively. The Company anticipates this revenue will be negatively impacted as a result of these federal budget provisions.

Tuition Payment Processing and Campus Commerce

•
On June 3, 2014, the Company purchased 100 percent of the ownership interests of RenWeb for total consideration of $46.3 million (of which $2.3 million represents the estimated fair value of contingent consideration). RenWeb provides school information systems for private and faith-based schools that currently help over 3,000 schools automate administrative processes such as admissions, scheduling, student billing, attendance, and grade book management. The Company currently offers tuition management and financial needs assessment services to over 6,500 schools. The combination of RenWeb’s school administration software and the Company’s tuition management and financial needs assessment services are expected to significantly increase the value of the Company’s offerings, allowing the Company to deliver a comprehensive suite of solutions to over 8,500 school customers in this area. The results of operations of RenWeb are reported in the Company's consolidated financial statements from the date of acquisition. RenWeb's revenue for the twelve months ended December 31, 2013 was $14 million.

•
In addition to the acquisition of RenWeb, revenue increased in the three and six months ended June 30, 2014 compared to the same periods in 2013 due to increases in the number of managed tuition payment plans, campus commerce customer transaction volume, and new school customers.

•
Excluding the amortization of intangibles, before tax operating margin was 24.1% for both the three months ended June 30, 2014 and 2013 and 32.7% and 33.9% for the six months ended June 30, 2014 and 2013, respectively.

•
This segment is subject to seasonal fluctuations. Based on the timing of when revenue is recognized and when expenses are incurred, revenue and operating margin are higher in the first quarter as compared to the remainder of the year.

Enrollment Services

•
Revenue decreased in the three and six months ended June 30, 2014 compared to the same periods in 2013 due to a decrease in inquiry management and generation revenue as a result of the regulatory uncertainty regarding recruiting and marketing to potential students in the for-profit college industry, which has caused schools to decrease spending on marketing efforts.

•
The Company continues to focus on improving the profitability of this segment by reducing operating expenses in reaction to the ongoing decline in revenue and gross margin.

•
Due to the on-going decrease in school spending on marketing efforts, effective August 29, 2014, the Company will stop providing inquiry generation services. The initial and on-going impact to net income as a result of shutting down the inquiry generation services portion of this segment is expected to be immaterial.

Asset Generation and Management

•
The Company acquired $5.2 billion of student loans during the first six months of 2014, of which $4.8 billion were purchased in the second quarter. The average loan portfolio balance for the three months ended June 30, 2014 and 2013 was $28.2 billion and $24.8 billion, respectively.

•
Forecasted future cash flows from the Company's FFELP student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.39 billion as of June 30, 2014.

•
Core student loan spread was 1.46% for the three months ended June 30, 2014, compared to 1.44% for the three months ended March 31, 2014 and 1.52% for the three months ended June 30, 2013. The year over year decrease in student loan spread was the result of recent consolidation loan acquisitions, which have lower margins but longer terms. The increase in student loan spread for the three months ended June 30, 2014 compared to the three months ended March 31, 2014, was due to an increase in fixed rate floor income. Due to recent loan acquisitions, the Company is earning fixed rate floor income on a larger portfolio.

6



•
Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the three months ended June 30, 2014 and 2013, the Company earned $43.6 million and $36.1 million, respectively, of fixed rate floor income (net of $7.0 million and $8.5 million of derivative settlements, respectively, used to hedge such loans). As of June 30, 2014, the Company was earning fixed rate floor income on $13.0 billion of student loans.

•
The provision for loan losses on the Company’s federally insured loans was $2.0 million and $5.0 million for the three months ended June 30, 2014 and 2013, respectively, and $5.0 million and $11.0 million for the six months ended June 30, 2014 and 2013, respectively.   As the Company’s overall student loan portfolio continues to season with the length of time that loans are in active repayment, credit performance continues to improve.

Corporate Activities

•
Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisory subsidiary, recognized investment advisory revenue of $7.0 million and $6.3 million for the three months ended June 30, 2014 and 2013, respectively, and $12.2 million and $9.2 million for the six months ended June 30, 2014 and 2013, respectively. WRCM earns annual fees of up to 25 basis points on the outstanding balance of investments and up to 50 percent of the gains from the sale of securities for which it provides advisory services. Due to improvements in the capital markets, the opportunities to earn performance fees on the sale of securities are becoming more limited. As of June 30, 2014, WRCM was managing an investment portfolio of $814.4 million for third-party entities.

•
The Company had $2.1 million in gains on investments during the three months ended June 30, 2014, compared to a net loss of $0.2 million for the same period in 2013. The Company had gains on investments of $9.3 million and $1.0 million during the six months ended June 30, 2014 and 2013, respectively.

•
The Company’s effective tax rate was 36.5% and 35.1% in the three months ended June 30, 2014 and 2013, respectively, and 36.0% and 35.5% in the six months ended June 30, 2014 and 2013, respectively.   The lower effective tax rates in 2013 were due to the resolution of certain tax positions which lowered income tax expense.

Liquidity and Capital Resources

•
As of June 30, 2014, the Company had cash and investments of $233.6 million.

•
For the six months ended June 30, 2014, the Company generated $156.5 million in net cash provided by operating activities.

•
On June 30, 2014, the Company’s unsecured line of credit was amended to increase the line of credit from $275.0 million to $350.0 million and extend the maturity date from March 28, 2018 to June 30, 2019.  As of June 30, 2014, $65.0 million was outstanding on the line of credit and $285.0 million was available for future use.

•
During the three months ended June 30, 2014, the Company repurchased a total of 209,940 shares of Class A common stock for $8.4 million ($40.18 per share).

•
The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP student loan acquisitions; strategic acquisitions and investments in its core business areas of loan financing, loan servicing, payment processing, and enrollment services; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions.


7



Operating Segments

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. See note 1 of the notes to consolidated financial statements included in the 2013 Annual Report for a description of each operating segment, including the primary products and services offered.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources. Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments based on their financial results prepared in conformity with U.S. generally accepted accounting principles.  

Intersegment revenues are charged by a segment that provides a product or service to another segment.  Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.  Income taxes are allocated based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.

Corporate Activity and Overhead

Corporate Activity and Overhead includes the following items:

•
The operating results of WRCM, the Company's SEC-registered investment advisory subsidiary
•
Income earned on certain investment activities
•
Interest expense incurred on unsecured debt transactions
•
Other product and service offerings that are not considered operating segments

Corporate Activities and Overhead also includes certain corporate activities and overhead functions related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.


8



Segment Results of Operations

The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.

 
Three months ended June 30, 2014
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
9

 
3

 
—

 
12

 
175,562

 
2,036

 
(662
)
 
176,948

Interest expense
—

 
—

 
—

 
—

 
67,936

 
1,961

 
(662
)
 
69,235

Net interest income
9

 
3

 
—

 
12

 
107,626

 
75

 
—

 
107,713

Less provision for loan losses
—

 
—

 
—

 
—

 
1,500

 
—

 
—

 
1,500

Net interest income after provision for loan losses
9

 
3

 
—

 
12

 
106,126

 
75

 
—

 
106,213

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
66,460

 
—

 
—

 
66,460

 
—

 
—

 
—

 
66,460

Intersegment servicing revenue
13,800

 
—

 
—

 
13,800

 
—

 
—

 
(13,800
)
 
—

Tuition payment processing and campus commerce revenue
—

 
21,834

 
—

 
21,834

 
—

 
—

 
—

 
21,834

Enrollment services revenue
—

 
—

 
20,145

 
20,145

 
—

 
—

 
—

 
20,145

Other income
—

 
—

 
—

 
—

 
4,496

 
10,819

 
—

 
15,315

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
18

 
—

 
—

 
18

Derivative market value and foreign currency adjustments, net
—

 
—

 
—

 
—

 
8,848

 
(1,064
)
 
—

 
7,784

Derivative settlements, net
—

 
—

 
—

 
—

 
(5,958
)
 
(256
)
 
—

 
(6,214
)
Total other income (expense)
80,260

 
21,834

 
20,145

 
122,239

 
7,404

 
9,499

 
(13,800
)
 
125,342

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
33,093

 
11,112

 
4,132

 
48,337

 
570

 
4,981

 
—

 
53,888

Cost to provide enrollment services
—

 
—

 
13,311

 
13,311

 
—

 
—

 
—

 
13,311

Depreciation and amortization
2,819

 
1,845

 
41

 
4,705

 
—

 
509

 
—

 
5,214

Other
19,815

 
2,956

 
1,844

 
24,615

 
8,845

 
6,917

 
—

 
40,377

Intersegment expenses, net
1,124

 
1,404

 
944

 
3,472

 
13,968

 
(3,640
)
 
(13,800
)
 
—

Total operating expenses
56,851

 
17,317

 
20,272

 
94,440

 
23,383

 
8,767

 
(13,800
)
 
112,790

Income before income taxes and corporate overhead allocation
23,418

 
4,520

 
(127
)
 
27,811

 
90,147

 
807

 
—

 
118,765

Corporate overhead allocation
(2,060
)
 
(687
)
 
(687
)
 
(3,434
)
 
(1,249
)
 
4,683

 
—

 
—

Income before income taxes
21,358

 
3,833

 
(814
)
 
24,377

 
88,898

 
5,490

 
—

 
118,765

Income tax expense
(8,116
)
 
(1,456
)
 
309

 
(9,263
)
 
(33,781
)
 
(34
)
 
—

 
(43,078
)
Net income
13,242

 
2,377

 
(505
)
 
15,114

 
55,117

 
5,456

 
—

 
75,687

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
693

 
—

 
693

Net income attributable to Nelnet, Inc.
$
13,242

 
2,377

 
(505
)
 
15,114

 
55,117

 
4,763

 
—

 
74,994

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9


 
Three months ended March 31, 2014
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
11

 
—

 
—

 
11

 
157,003

 
2,658

 
(797
)
 
158,875

Interest expense
—

 
—

 
—

 
—

 
59,476

 
1,325

 
(797
)
 
60,004

Net interest income
11

 
—

 
—

 
11

 
97,527

 
1,333

 
—

 
98,871

Less provision for loan losses
—

 
—

 
—

 
—

 
2,500

 
—

 
—

 
2,500

Net interest income after provision for loan losses
11

 
—

 
—

 
11

 
95,027

 
1,333

 
—

 
96,371

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
64,757

 
—

 
—

 
64,757

 
—

 
—

 
—

 
64,757

Intersegment servicing revenue
14,221

 
—

 
—

 
14,221

 
—

 
—

 
(14,221
)
 
—

Tuition payment processing and campus commerce revenue
—

 
25,235

 
—

 
25,235

 
—

 
—

 
—

 
25,235

Enrollment services revenue
—

 
—

 
22,011

 
22,011

 
—

 
—

 
—

 
22,011

Other income
—

 
—

 
—

 
—

 
4,164

 
13,967

 
—

 
18,131

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
39

 
—

 
—

 
39

Derivative market value and foreign currency adjustments
—

 
—

 
—

 
—

 
3,477

 
(1,513
)
 
—

 
1,964

Derivative settlements, net
—

 
—

 
—

 
—

 
(5,977
)
 
(252
)
 
—

 
(6,229
)
Total other income (expense)
78,978

 
25,235

 
22,011

 
126,224

 
1,703

 
12,202

 
(14,221
)
 
125,908

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
32,307

 
10,027

 
4,380

 
46,714

 
609

 
5,161

 
—

 
52,484

Cost to provide enrollment services
—

 
—

 
14,475

 
14,475

 
—

 
—

 
—

 
14,475

Depreciation and amortization
2,789

 
1,428

 
47

 
4,264

 
—

 
519

 
—

 
4,783

Other
18,452

 
2,647

 
1,449

 
22,548

 
7,146

 
5,933

 
—

 
35,627

Intersegment expenses, net
1,083

 
1,420

 
1,006

 
3,509

 
14,371

 
(3,659
)
 
(14,221
)
 
—

Total operating expenses
54,631

 
15,522

 
21,357

 
91,510

 
22,126

 
7,954

 
(14,221
)
 
107,369

Income before income taxes and corporate overhead allocation
24,358

 
9,713

 
654

 
34,725

 
74,604

 
5,581

 
—

 
114,910

Corporate overhead allocation
(1,860
)
 
(620
)
 
(620
)
 
(3,100
)
 
(1,329
)
 
4,429

 
—

 
—

Income before income taxes
22,498

 
9,093

 
34

 
31,625

 
73,275

 
10,010

 
—

 
114,910

Income tax expense
(8,549
)
 
(3,455
)
 
(13
)
 
(12,017
)
 
(27,844
)
 
(750
)
 
—

 
(40,611
)
Net income
13,949

 
5,638

 
21

 
19,608

 
45,431

 
9,260

 
—

 
74,299

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
513

 
—

 
513

Net income attributable to Nelnet, Inc.
$
13,949

 
5,638

 
21

 
19,608

 
45,431

 
8,747

 
—

 
73,786

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

10


 
Three months ended June 30, 2013
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
9

 
—

 
—

 
9

 
158,175

 
2,196

 
(834
)
 
159,546

Interest expense
—

 
—

 
—

 
—

 
56,920

 
2,041

 
(834
)
 
58,127

Net interest income
9

 
—

 
—

 
9

 
101,255

 
155

 
—

 
101,419

Less provision for loan losses
—

 
—

 
—

 
—

 
5,000

 
—

 
—

 
5,000

Net interest income after provision for loan losses
9

 
—

 
—

 
9

 
96,255

 
155

 
—

 
96,419

Other income (expense):
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
60,078

 
—

 
—

 
60,078

 
—

 
—

 
—

 
60,078

Intersegment servicing revenue
13,903

 
—

 
—

 
13,903

 
—

 
—

 
(13,903
)
 
—

Tuition payment processing and campus commerce revenue
—

 
18,356

 
—

 
18,356

 
—

 
—

 
—

 
18,356

Enrollment services revenue
—

 
—

 
24,823

 
24,823

 
—

 
—

 
—

 
24,823

Other income
—

 
—

 
—

 
—

 
3,030

 
9,258

 
—

 
12,288

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
7,355

 
—

 
—

 
7,355

Derivative market value and foreign currency adjustments, net
—

 
—

 
—

 
—

 
43,096

 
5,449

 
—

 
48,545

Derivative settlements, net
—

 
—

 
—

 
—

 
(7,845
)
 
(512
)
 
—

 
(8,357
)
Total other income (expense)
73,981

 
18,356

 
24,823

 
117,160

 
45,636

 
14,195

 
(13,903
)
 
163,088

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
28,091

 
9,427

 
4,809

 
42,327

 
592

 
4,513

 
—

 
47,432

Cost to provide enrollment services
—

 
—

 
16,787

 
16,787

 
—

 
—

 
—

 
16,787

Depreciation and amortization
2,731

 
1,132

 
61

 
3,924

 
—

 
396

 
—

 
4,320

Other
18,031

 
2,192

 
1,243

 
21,466

 
7,923

 
4,976

 
—

 
34,365

Intersegment expenses, net
851

 
1,494

 
1,130

 
3,475

 
14,108

 
(3,680
)
 
(13,903
)
 
—

Total operating expenses
49,704

 
14,245

 
24,030

 
87,979

 
22,623

 
6,205

 
(13,903
)
 
102,904

Income before income taxes and corporate overhead allocation
24,286

 
4,111

 
793

 
29,190

 
119,268

 
8,145

 
—

 
156,603

Corporate overhead allocation
(1,513
)
 
(504
)
 
(504
)
 
(2,521
)
 
(1,081
)
 
3,602

 
—

 
—

Income before income taxes
22,773

 
3,607

 
289

 
26,669

 
118,187

 
11,747

 
—

 
156,603

Income tax expense
(8,655
)
 
(1,370
)
 
(109
)
 
(10,134
)
 
(44,911
)
 
299

 
—

 
(54,746
)
Net income
14,118

 
2,237

 
180

 
16,535

 
73,276

 
12,046

 
—

 
101,857

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
614

 
—

 
614

Net income attributable to Nelnet, Inc.
$
14,118

 
2,237

 
180

 
16,535

 
73,276

 
11,432

 
—

 
101,243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

11


 
Six months ended June 30, 2014
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
20

 
3

 
—

 
23

 
332,565

 
4,694

 
(1,459
)
 
335,823

Interest expense
—

 
—

 
—

 
—

 
127,412

 
3,286

 
(1,459
)
 
129,239

Net interest income
20

 
3

 
—

 
23

 
205,153

 
1,408

 
—

 
206,584

Less provision for loan losses
—

 
—

 
—

 
—

 
4,000

 
—

 
—

 
4,000

Net interest income after provision for loan losses
20

 
3

 
—

 
23

 
201,153

 
1,408

 
—

 
202,584

Other income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
131,217

 
—

 
—

 
131,217

 
—

 
—

 
—

 
131,217

Intersegment servicing revenue
28,021

 
—

 
—

 
28,021

 
—

 
—

 
(28,021
)
 
—

Tuition payment processing and campus commerce revenue
—

 
47,069

 
—

 
47,069

 
—

 
—

 
—

 
47,069

Enrollment services revenue
—

 
—

 
42,156

 
42,156

 
—

 
—

 
—

 
42,156

Other income
—

 
—

 
—

 
—

 
8,660

 
24,786

 
—

 
33,446

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
57

 
—

 
—

 
57

Derivative market value and foreign currency adjustments, net
—

 
—

 
—

 
—

 
12,325

 
(2,577
)
 
—

 
9,748

Derivative settlements, net
—

 
—

 
—

 
—

 
(11,935
)
 
(508
)
 
—

 
(12,443
)
Total other income
159,238

 
47,069

 
42,156

 
248,463

 
9,107

 
21,701

 
(28,021
)
 
251,250

Operating expenses:
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Salaries and benefits
65,400

 
21,139

 
8,512

 
95,051

 
1,179

 
10,142

 
—

 
106,372

Cost to provide enrollment services
—

 
—

 
27,786

 
27,786

 
—

 
—

 
—

 
27,786

Depreciation and amortization
5,608

 
3,273

 
88

 
8,969

 
—

 
1,028

 
—

 
9,997

Other
38,267

 
5,603

 
3,293

 
47,163

 
15,991

 
12,850

 
—

 
76,004

Intersegment expenses, net
2,207

 
2,824

 
1,950

 
6,981

 
28,339

 
(7,299
)
 
(28,021
)
 
—

Total operating expenses
111,482

 
32,839

 
41,629

 
185,950

 
45,509

 
16,721

 
(28,021
)
 
220,159

Income before income taxes and corporate overhead allocation
47,776

 
14,233

 
527

 
62,536

 
164,751

 
6,388

 
—

 
233,675

Corporate overhead allocation
(3,920
)
 
(1,307
)
 
(1,307
)
 
(6,534
)
 
(2,578
)
 
9,112

 
—

 
—

Income before income taxes
43,856

 
12,926

 
(780
)
 
56,002

 
162,173

 
15,500

 
—

 
233,675

Income tax (expense) benefit
(16,665
)
 
(4,911
)
 
296

 
(21,280
)
 
(61,625
)
 
(784
)
 
—

 
(83,689
)
Net income
27,191

 
8,015

 
(484
)
 
34,722

 
100,548

 
14,716

 
—

 
149,986

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
1,206

 
—

 
1,206

Net income attributable to Nelnet, Inc.
$
27,191

 
8,015

 
(484
)
 
34,722

 
100,548

 
13,510

 
—

 
148,780

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

12


 
Six months ended June 30, 2013
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
19

 
—

 
—

 
19

 
313,829

 
4,507

 
(1,653
)
 
316,702

Interest expense
—

 
—

 
—

 
—

 
114,402

 
3,736

 
(1,653
)
 
116,485

Net interest income
19

 
—

 
—

 
19

 
199,427

 
771

 
—

 
200,217

Less provision for loan losses
—

 
—

 
—

 
—

 
10,000

 
—

 
—

 
10,000

Net interest income after provision for loan losses
19

 
—

 
—

 
19

 
189,427

 
771

 
—

 
190,217

Other income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
115,679

 
—

 
—

 
115,679

 
—

 
—

 
—

 
115,679

Intersegment servicing revenue
28,856

 
—

 
—

 
28,856

 
—

 
—

 
(28,856
)
 
—

Tuition payment processing and campus commerce revenue
—

 
41,767

 
—

 
41,767

 
—

 
—

 
—

 
41,767

Enrollment services revenue
—

 
—

 
53,780

 
53,780

 
—

 
—

 
—

 
53,780

Other income
—

 
—

 
—

 
—

 
7,226

 
14,478

 
—

 
21,704

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
8,762

 
—

 
—

 
8,762

Derivative market value and foreign currency adjustments, net
—

 
—

 
—

 
—

 
48,371

 
9,430

 
—

 
57,801

Derivative settlements, net
—

 
—

 
—

 
—

 
(15,384
)
 
(1,157
)
 
—

 
(16,541
)
Total other income
144,535

 
41,767

 
53,780

 
240,082

 
48,975

 
22,751

 
(28,856
)
 
282,952

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
56,535

 
18,786

 
10,576

 
85,897

 
1,154

 
8,286

 
—

 
95,337

Cost to provide enrollment services
—

 
—

 
36,429

 
36,429

 
—

 
—

 
—

 
36,429

Depreciation and amortization
5,520

 
2,270

 
122

 
7,912

 
—

 
785

 
—

 
8,697

Other
36,421

 
4,479

 
2,894

 
43,794

 
15,436

 
10,076

 
—

 
69,306

Intersegment expenses, net
1,786

 
2,919

 
2,279

 
6,984

 
29,250

 
(7,378
)
 
(28,856
)
 
—

Total operating expenses
100,262

 
28,454

 
52,300

 
181,016

 
45,840

 
11,769

 
(28,856
)
 
209,769

Income before income taxes and corporate overhead allocation
44,292

 
13,313

 
1,480

 
59,085

 
192,562

 
11,753

 
—

 
263,400

Corporate overhead allocation
(2,510
)
 
(836
)
 
(836
)
 
(4,182
)
 
(1,793
)
 
5,975

 
—

 
—

Income before income taxes
41,782

 
12,477

 
644

 
54,903

 
190,769

 
17,728

 
—

 
263,400

Income tax (expense) benefit
(15,878
)
 
(4,741
)
 
(244
)
 
(20,863
)
 
(72,492
)
 
162

 
—

 
(93,193
)
Net income
25,904

 
7,736

 
400

 
34,040

 
118,277

 
17,890

 
—

 
170,207

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
885

 
—

 
885

Net income attributable to Nelnet, Inc.
$
25,904

 
7,736

 
400

 
34,040

 
118,277

 
17,005

 
—

 
169,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


13


Net Interest Income, Net of Settlements on Derivatives

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income.

The following table summarizes the components of “net interest income” and “derivative settlements, net” included in the attached consolidated statements of income.
 
Three months ended
 
Six months ended
 
June 30, 2014
 
March 31,
2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Variable student loan interest margin, net of settlements on derivatives
$
58,627

 
54,396

 
58,076

 
113,023

 
113,697

Fixed rate floor income, net of settlements on derivatives
43,607

 
37,844

 
36,056

 
81,451

 
71,772

Investment interest
1,482

 
1,979

 
1,483

 
3,461

 
3,100

Non-portfolio related derivative settlements
(256
)
 
(252
)
 
(512
)
 
(508
)
 
(1,157
)
Corporate debt interest expense
(1,961
)
 
(1,325
)
 
(2,041
)
 
(3,286
)
 
(3,736
)
Net interest income (net of settlements on derivatives)
$
101,499

 
92,642

 
93,062

 
194,141

 
183,676



14



Student Loan Servicing Volumes (dollars in millions)
Company owned
 
$23,727
 
$22,650
 
$21,237
 
$20,820
 
$20,629
 
$20,715
 
$21,397
 
$21,192
 
$21,110
% of total
 
38.6%
 
29.8%
 
21.8%
 
18.5%
 
17.7%
 
15.3%
 
15.5%
 
14.3%
 
14.1%
Number of servicing borrowers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government servicing:
 
2,804,502

 
3,036,534

 
3,892,929

 
4,261,637

 
4,396,341

 
5,145,901

 
5,305,498

 
5,438,933

 
5,465,395

FFELP servicing:
 
1,912,748

 
1,799,484

 
1,626,146

 
1,586,312

 
1,529,203

 
1,507,452

 
1,462,122

 
1,426,435

 
1,390,541

Private servicing:
 
155,947

 
164,554

 
173,948

 
170,224

 
173,588

 
178,935

 
195,580

 
191,606

 
186,863

Total:
 
4,873,197

 
5,000,572

 
5,693,023

 
6,018,173

 
6,099,132

 
6,832,288

 
6,963,200

 
7,056,974

 
7,042,799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of remote hosted borrowers:
 
545,456

 
9,566,296

 
6,912,204

 
5,001,695

 
3,218,896

 
1,986,866

 
1,915,203

 
1,796,287

 
1,735,594



Other Income

The following table summarizes the components of "other income" included in the attached consolidated statements of income.

 
Three months ended
 
Six months ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Borrower late fee income
$
3,557

 
3,673

 
3,233

 
7,244

 
6,738

Investment advisory fees
7,008

 
5,220

 
6,334

 
12,228

 
9,164

Realized and unrealized gains/(losses) on investments, net
2,081

 
7,210

 
(158
)
 
9,291

 
996

Other
2,669

 
2,028

 
2,879

 
4,683

 
4,806

Other income
$
15,315

 
18,131

 
12,288

 
33,446

 
21,704



15


Derivative Settlements

The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
 
Three months ended
 
Six months ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
1:3 basis swaps
$
858

 
881

 
782

 
1,739

 
1,692

Interest rate swaps - floor income hedges
(6,974
)
 
(6,950
)
 
(8,534
)
 
(13,924
)
 
(16,839
)
Interest rate swaps - hybrid debt hedges
(256
)
 
(252
)
 
(512
)
 
(508
)
 
(1,157
)
Cross-currency interest rate swaps
158

 
92

 
(93
)
 
250

 
(237
)
Total settlements - expense
$
(6,214
)
 
(6,229
)
 
(8,357
)
 
(12,443
)
 
(16,541
)

Derivative Market Value and Foreign Currency Adjustments

"Derivative market value and foreign currency adjustments" include (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.

The following table summarizes the components of “derivative market value and foreign currency adjustments” included in the attached consolidated statements of income.
 
Three months ended
 
Six months ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Change in fair value of derivatives - income (expense)
$
5,033

 
2,916

 
63,236

 
7,950

 
43,729

Foreign currency transaction adjustment - income (expense)
2,751

 
(952
)
 
(14,691
)
 
1,798

 
14,072

Derivative market value and foreign currency adjustments - income (expense)
$
7,784

 
1,964

 
48,545

 
9,748

 
57,801



Student Loans Receivable

The table below outlines the components of the Company’s student loan portfolio:
 
As of
 
As of
 
As of
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Federally insured loans
 
 
 
 
 
Stafford and other
$
6,479,493

 
6,686,626

 
7,010,404

Consolidation
23,032,622

 
19,363,577

 
17,678,330

Total
29,512,115

 
26,050,203

 
24,688,734

Non-federally insured loans
67,670

 
71,103

 
29,634

 
29,579,785

 
26,121,306

 
24,718,368

Loan discount, net of unamortized loan premiums and deferred origination costs
(184,888
)
 
(158,595
)
 
(91,121
)
Allowance for loan losses – federally insured loans
(40,921
)
 
(43,440
)
 
(39,848
)
Allowance for loan losses – non-federally insured loans
(11,546
)
 
(11,682
)
 
(11,763
)
 
$
29,342,430

 
25,907,589

 
24,575,636

 
 
 


 




16


Loan Activity

The following table sets forth the activity of loans:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
25,814,195

 
25,030,597

 
26,121,306

 
24,995,880

Loan acquisitions
4,800,640

 
403,018

 
5,187,898

 
1,146,784

Repayments, claims, capitalized interest, participations, and other
(825,365
)
 
(592,099
)
 
(1,374,070
)
 
(1,146,349
)
Consolidation loans lost to external parties
(209,679
)
 
(123,145
)
 
(355,343
)
 
(266,296
)
Loans sold
(6
)
 
(3
)
 
(6
)
 
(11,651
)
Ending balance
$
29,579,785

 
24,718,368

 
29,579,785

 
24,718,368



Student Loan Spread

The following table analyzes the student loan spread on the Company’s portfolio of student loans, which represents the spread between the yield earned on student loan assets and the costs of the liabilities and derivative instruments used to fund those assets.
 
Three months ended
 
Six months ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Variable student loan yield, gross
2.54
 %
 
2.50
 %
 
2.58
 %
 
2.52
 %
 
2.57
 %
Consolidation rebate fees
(0.82
)
 
(0.80
)
 
(0.77
)
 
(0.81
)
 
(0.77
)
Discount accretion, net of premium and deferred origination costs amortization
0.06

 
0.05

 
0.03

 
0.06

 
0.03

Variable student loan yield, net
1.78

 
1.75

 
1.84

 
1.77

 
1.83

Student loan cost of funds - interest expense
(0.95
)
 
(0.92
)
 
(0.91
)
 
(0.94
)
 
(0.91
)
Student loan cost of funds - derivative settlements
0.01

 
0.02

 
0.01

 
0.01

 
0.01

Variable student loan spread
0.84

 
0.85

 
0.94

 
0.84

 
0.93

Fixed rate floor income, net of settlements on derivatives
0.62

 
0.59

 
0.58

 
0.61

 
0.58

Core student loan spread
1.46
 %
 
1.44
 %
 
1.52
 %
 
1.45
 %
 
1.51
 %
 
 
 
 
 
 
 
 
 
 
Average balance of student loans
$
28,163,626

 
25,915,053

 
24,798,537

 
27,039,339

 
24,789,981

Average balance of debt outstanding
28,229,140

 
25,826,656

 
24,832,555

 
27,034,535

 
24,828,001



17


A trend analysis of the Company's core and variable student loan spreads is summarized below.

(a)
The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.  The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities.  The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread.  This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter.

Variable student loan spread decreased during the three and six months ended June 30, 2014 as a result of recent acquisitions of consolidation loans, which have lower margins but longer terms.

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income.  A summary of fixed rate floor income and its contribution to core student loan spread follows:
 
Three months ended
 
Six months ended
 
June 30, 2014
 
March 31,
2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Fixed rate floor income, gross
$
50,581

 
44,794

 
44,590

 
95,375

 
88,611

Derivative settlements (a)
(6,974
)
 
(6,950
)
 
(8,534
)
 
(13,924
)
 
(16,839
)
Fixed rate floor income, net
$
43,607

 
37,844

 
36,056

 
81,451

 
71,772

Fixed rate floor income contribution to spread, net
0.62
%
 
0.59
%
 
0.58
%
 
0.61
%
 
0.58
%
 
(a)
Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.



18


Fixed Rate Floor Income

The following table shows the Company’s student loan assets that are earning fixed rate floor income as of June 30, 2014:
Fixed interest rate range
 
Borrower/lender weighted average yield
 
Estimated variable conversion rate (a)
 
Loan balance
 
 
 
< 3.0%
 
2.87%
 
0.23%
 
$
1,867,914

3.0 - 3.49%
 
3.20%
 
0.56%
 
2,424,505

3.5 - 3.99%
 
3.65%
 
1.01%
 
2,303,132

4.0 - 4.49%
 
4.20%
 
1.56%
 
1,755,038

4.5 - 4.99%
 
4.72%
 
2.08%
 
1,083,052

5.0 - 5.49%
 
5.22%
 
2.58%
 
691,949

5.5 - 5.99%
 
5.67%
 
3.03%
 
410,536

6.0 - 6.49%
 
6.18%
 
3.54%
 
463,625

6.5 - 6.99%
 
6.71%
 
4.07%
 
448,223

7.0 - 7.49%
 
7.17%
 
4.53%
 
197,403

7.5 - 7.99%
 
7.71%
 
5.07%
 
322,499

8.0 - 8.99%
 
8.17%
 
5.53%
 
726,538

> 9.0%
 
9.04%
 
6.40%
 
295,305

 
 
 
 
 
 
$
12,989,719

 
(a)
The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of June 30, 2014, the weighted average estimated variable conversion rate was 1.85% and the short-term interest rate was 15 basis points.

The following table summarizes the outstanding derivative instruments as of June 30, 2014 used by the Company to economically hedge loans earning fixed rate floor income.

Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
2014
 
$
1,250,000

 
0.67
%
2015
 
1,100,000

 
0.89

2016
 
750,000

 
0.85

2017
 
1,250,000

 
0.86

 
 
$
4,350,000

 
0.81
%
(a)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.



19