Form 8-K NELNET INC For: Feb 26

FREE Breaking News Alerts from StreetInsider.com!

E-mail Address

StreetInsider.com Top Tickers, 8/13/2026

1. CSCO
2. CBRS
3. COHR
4. SPY
5. NVDA
6. WYFI
7. STUB
8. EAT
9. BTGO
10. GO

February 27, 2015 6:13 AM EST


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)
February 26, 2015

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 February 26, 2015, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended December 31, 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 December 31, 2014, which was made available on the Company's website at www.nelnetinvestors.com on February 26, 2015 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, 2014 filed with the SEC on February 26, 2015. 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 February 26, 2015 - “Nelnet Reports Fourth Quarter 2014 Results”
99.2
 
Supplemental Financial Information for the Quarter Ended December 31, 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: February 26, 2015
NELNET, INC.
By:     /s/ JAMES D. KRUGER     
Name:
James D. Kruger
Title:
Chief Financial Officer





Nelnet Reports Fourth Quarter 2014 Results

•
GAAP net income $1.59 per share, $1.60 per share excluding adjustments
•
Servicing $133.6 billion student loans for 5.9 million borrowers under government contract
•
30 percent increase in payment processing revenue driven by RenWeb acquisition
•
Purchased $6.1 billion of loans during 2014

LINCOLN, Neb., February 26, 2015-Nelnet (NYSE: NNI) today reported GAAP net income of $73.6 million, or $1.59 per share, for the fourth quarter of 2014, compared with GAAP net income of $70.5 million, or $1.52 per share, for the same period a year ago.

Excluding derivative market value and foreign currency adjustments, net income was $74.3 million, or $1.60 per share, for the fourth quarter of 2014, compared with $70.1 million, or $1.51 per share, for the same period in 2013. The company reported an expense from derivative market value and foreign currency adjustments of $0.7 million after tax, or $0.01 per share, for the fourth quarter of 2014, compared with income of $0.5 million after tax, or $0.01 per share, for the fourth quarter of 2013.

"We achieved record earnings in 2014 and are positioned well for success this year,” said Jeff Noordhoek, chief executive officer of Nelnet.  "Our focus continues to be on enhancing our customer experiences, growing in and around our servicing and payment processing businesses, and deploying capital effectively. In 2015, we expect to be able to make investments in diversification and private education loan partnerships, as well as continuing to find federal student loan portfolios to acquire.”

Nelnet operates three 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 and Tuition Payment Processing and Campus Commerce operating segments.

The increase in earnings for the fourth quarter of 2014 compared with the same period in 2013 was due to an increase in net interest income earned from the company’s student loan portfolio and an increase in income from repurchases of the company's debt. This increase was partially offset by the expected decrease in net income from the company’s Student Loan and Guaranty Servicing operating segment and a decrease in income from gains on investments and investment advisory fees.

Asset Generation and Management

Historically low interest rates continue to provide the opportunity for the company to generate substantial near-term value and cash flow from its student loan portfolio. For the fourth quarter of 2014, Nelnet reported net interest income of $112.5 million, compared with $108.7 million for the same period a year ago.  Net interest income included $49.2 million and $38.8 million of fixed rate floor income, net of settlements on derivatives, in the fourth quarters of 2014 and 2013, respectively.

In 2014, Nelnet purchased $6.1 billion of student loans, bringing its total student loan portfolio to $28.0 billion as of December 31, 2014.

The company intends to use its strong liquidity position to capitalize on market opportunities to acquire additional legacy Federal Family Education Loan Program (FFELP) and private education loans.

On January 29, 2015, the company acquired a $582.8 million portfolio of FFELP loans. In addition, Nelnet has entered into agreements to purchase private education loans originated from certain forward-flow loan partners.

Student Loan and Guaranty Servicing

Under the company's servicing contract with the U.S. Department of Education (Department), the volume of student loans serviced and the number of borrowers serviced increased 21 percent and 11 percent, respectively, as of December 31, 2014, when compared with the end of 2013. The company was servicing $133.6 billion of loans for 5.9 million borrowers on behalf of the Department as of December 31, 2014, compared with $110.5 billion of loans for 5.3 million borrowers as of December 31, 2013. Revenue from this contract increased 12 percent to $32.3 million for the fourth quarter of 2014, up from $28.9 million for the same period a year ago.

The growth in government servicing revenue partially offset the continued expected run off of the company’s commercial servicing portfolio and the impact of federal legislative changes that reduced the revenue earned by guaranty agencies for collections. As a result of these changes and run-off, total revenue from the company's Student Loan and Guaranty Servicing segment decreased 10 percent, or $6.6 million, to $56.5 million for the fourth quarter of 2014, from $63.2 million for the fourth quarter of 2013. As




the volume of loans serviced under the Department servicing contract continues to grow and loans serviced under the legacy commercial programs continue to run off, the company expects the operating margins to tighten.

Tuition Payment Processing and Campus Commerce

For the fourth quarter of 2014, revenue from the company's Tuition Payment Processing and Campus Commerce segment was $24.7 million, an increase of $5.7 million, or 30 percent, from the same period in 2013. The increase in revenue was the result of the acquisition of RenWeb in June 2014, in addition to growth in managed tuition payment plans, campus commerce transaction volume, and new school customers. Operating margin for this segment decreased in the fourth quarter of 2014, compared with the same period in 2013, due to lower margins on new services and the amortization of intangible assets from the acquisition of RenWeb. Amortization of intangible assets in this segment was $2.1 million and $0.8 million for the fourth quarters of 2014 and 2013, respectively.

Operating Expenses

The company reported consolidated operating expenses of $114.9 million for the fourth quarter of 2014, compared with $111.6 million for the same period in 2013.

Year End Results

GAAP net income for the year ended December 31, 2014 was $307.6 million, or $6.62 per share, compared with GAAP net income of $302.7 million or $6.50 per share, for 2013. Excluding derivative market value and foreign currency adjustments, net income in 2014 was $284.2 million, or $6.12 per share, compared with $272.5 million, or $5.85 per share, for 2013. The derivative market value and foreign currency adjustments were income of $23.4 million, or $0.50 per share, during 2014, compared with income of $30.1 million, or $0.65 per share, for 2013.

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 and initiatives to purchase additional FFELP and private education loans; 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 fourth quarter ended December 31, 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
 
Year ended
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31, 2014
 
December 31, 2013
Interest income:
 
 
 
 
 
 
 
 
 
Loan interest
$
182,783

 
187,862

 
165,865

 
703,007

 
638,142

Investment interest
1,770

 
1,562

 
2,006

 
6,793

 
6,668

Total interest income
184,553

 
189,424

 
167,871

 
709,800

 
644,810

Interest expense:
 
 
 
 
 
 
 
 
 
Interest on bonds and notes payable
72,061

 
71,937

 
59,135

 
273,237

 
230,935

Net interest income
112,492

 
117,487

 
108,736

 
436,563

 
413,875

Less provision for loan losses
3,500

 
2,000

 
3,500

 
9,500

 
18,500

Net interest income after provision for loan losses
108,992

 
115,487

 
105,236

 
427,063

 
395,375

Other income (expense):
 
 
 
 
 
 
 
 
 
Loan and guaranty servicing revenue
56,538

 
52,659

 
63,167

 
240,414

 
243,428

Tuition payment processing, school information, and campus commerce revenue
24,688

 
26,399

 
18,988

 
98,156

 
80,682

Enrollment services revenue
17,791

 
22,936

 
21,735

 
82,883

 
98,078

Other income
12,906

 
7,650

 
15,981

 
54,002

 
46,298

Gain on sale of loans and debt repurchases, net
3,594

 
—

 
799

 
3,651

 
11,699

Derivative settlements, net
(4,566
)
 
(4,834
)
 
(6,407
)
 
(21,843
)
 
(29,636
)
Derivative market value and foreign currency adjustments, net
(1,082
)
 
29,037

 
752

 
37,703

 
48,593

Total other income
109,869

 
133,847

 
115,015

 
494,966

 
499,142

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
60,609

 
61,098

 
52,120

 
228,079

 
196,169

Cost to provide enrollment services
11,343

 
14,178

 
13,864

 
53,307

 
64,961

Depreciation and amortization
5,644

 
5,493

 
5,274

 
21,134

 
18,311

Other
37,310

 
36,676

 
40,349

 
149,990

 
149,542

Total operating expenses
114,906

 
117,445

 
111,607

 
452,510

 
428,983

Income before income taxes
103,955

 
131,889

 
108,644

 
469,519

 
465,534

Income tax expense
30,036

 
46,513

 
37,556

 
160,238

 
161,193

Net income
73,919

 
85,376

 
71,088

 
309,281

 
304,341

Net income attributable to noncontrolling interest
308

 
157

 
568

 
1,671

 
1,669

Net income attributable to Nelnet, Inc.
$
73,611

 
85,219

 
70,520

 
307,610

 
302,672

Earnings per common share:
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.59

 
1.84

 
1.52

 
6.62

 
6.50

Weighted average common shares outstanding - basic and diluted
46,390,402

 
46,432,680

 
46,502,028

 
46,469,615

 
46,570,314








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

 
As of
 
As of
 
As of
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
Assets:
 
 
 
 
 
Student loans receivable, net
$
28,005,195

 
28,701,344

 
25,907,589

Cash, cash equivalents, and investments
279,604

 
222,359

 
255,307

Restricted cash and investments
968,928

 
940,343

 
902,699

Goodwill and intangible assets, net
168,782

 
169,076

 
123,250

Other assets
675,634

 
665,527

 
582,004

Total assets
$
30,098,143

 
30,698,649

 
27,770,849

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
28,027,350

 
28,737,456

 
25,955,289

Other liabilities
345,115

 
303,636

 
371,570

Total liabilities
28,372,465

 
29,041,092

 
26,326,859

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
1,725,448

 
1,657,289

 
1,443,662

Noncontrolling interest
230

 
268

 
328

Total equity
1,725,678

 
1,657,557

 
1,443,990

Total liabilities and equity
$
30,098,143

 
30,698,649

 
27,770,849



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










For Release: February 26, 2015
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038

Nelnet, Inc. supplemental financial information for the fourth 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 fourth quarter 2014 earnings, dated February 26, 2015, and the Company's Quarterly Report on Form 10-K for the quarter ended December 31, 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, 2014 (the "2014 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 initiatives to purchase additional FFELP and private education 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 U.S. Department of Education (the "Department"), which accounted for approximately 10 percent of the Company's revenue in 2014 and for which the loan allocation metrics were modified effective September 1, 2014, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of FFELP, Federal Direct Loan Program, and private education 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
(Dollars in thousands, except share data)
(unaudited)
 
Three months ended
 
Years ended December 31,
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
 
2014
 
2013
 
2012
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Loan interest
$
182,783

 
187,862

 
165,865

 
703,007

 
638,142

 
609,237

Investment interest
1,770

 
1,562

 
2,006

 
6,793

 
6,668

 
4,616

Total interest income
184,553

 
189,424

 
167,871

 
709,800

 
644,810

 
613,853

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Interest on bonds and notes payable
72,061

 
71,937

 
59,135

 
273,237

 
230,935

 
268,566

Net interest income
112,492

 
117,487

 
108,736

 
436,563

 
413,875

 
345,287

Less provision for loan losses
3,500

 
2,000

 
3,500

 
9,500

 
18,500

 
21,500

Net interest income after provision for loan losses
108,992

 
115,487

 
105,236

 
427,063

 
395,375

 
323,787

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Loan and guaranty servicing revenue
56,538

 
52,659

 
63,167

 
240,414

 
243,428

 
209,748

Tuition payment processing, school information, and campus commerce revenue
24,688

 
26,399

 
18,988

 
98,156

 
80,682

 
74,410

Enrollment services revenue
17,791

 
22,936

 
21,735

 
82,883

 
98,078

 
117,925

Other income
12,906

 
7,650

 
15,981

 
54,002

 
46,298

 
39,476

Gain on sale of loans and debt repurchases, net
3,594

 
—

 
799

 
3,651

 
11,699

 
4,139

Derivative settlements, net
(4,566
)
 
(4,834
)
 
(6,407
)
 
(21,843
)
 
(29,636
)
 
(14,022
)
Derivative market value and foreign currency adjustments, net
(1,082
)
 
29,037

 
752

 
37,703

 
48,593

 
(47,394
)
Total other income
109,869

 
133,847

 
115,015

 
494,966

 
499,142

 
384,282

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries and benefits
60,609

 
61,098

 
52,120

 
228,079

 
196,169

 
192,826

Cost to provide enrollment services
11,343

 
14,178

 
13,864

 
53,307

 
64,961

 
78,375

Depreciation and amortization
5,644

 
5,493

 
5,274

 
21,134

 
18,311

 
33,625

Other
37,310

 
36,676

 
40,349

 
149,990

 
149,542

 
128,738

Total operating expenses
114,906

 
117,445

 
111,607

 
452,510

 
428,983

 
433,564

Income before income taxes
103,955

 
131,889

 
108,644

 
469,519

 
465,534

 
274,505

Income tax expense
30,036

 
46,513

 
37,556

 
160,238

 
161,193

 
96,077

Net income
73,919

 
85,376

 
71,088

 
309,281

 
304,341

 
178,428

Net income attributable to noncontrolling interest
308

 
157

 
568

 
1,671

 
1,669

 
431

Net income attributable to Nelnet, Inc.
$
73,611

 
85,219

 
70,520

 
307,610

 
302,672

 
177,997

Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.59

 
1.84

 
1.52

 
6.62

 
6.50

 
3.76

Weighted average common shares outstanding - basic and diluted
46,390,402

 
46,432,680

 
46,502,028

 
46,469,615

 
46,570,314

 
47,369,331


2


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

 
As of
 
As of
 
As of
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
Assets:
 
 
 
 
 
Student loans receivable, net
$
28,005,195

 
28,701,344

 
25,907,589

Cash, cash equivalents, and investments
279,604

 
222,359

 
255,307

Restricted cash and investments
968,928

 
940,343

 
902,699

Goodwill and intangible assets, net
168,782

 
169,076

 
123,250

Other assets
675,634

 
665,527

 
582,004

Total assets
$
30,098,143

 
30,698,649

 
27,770,849

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
28,027,350

 
28,737,456

 
25,955,289

Other liabilities
345,115

 
303,636

 
371,570

Total liabilities
28,372,465

 
29,041,092

 
26,326,859

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
1,725,448

 
1,657,289

 
1,443,662

Noncontrolling interest
230

 
268

 
328

Total equity
1,725,678

 
1,657,557

 
1,443,990

Total liabilities and equity
$
30,098,143

 
30,698,649

 
27,770,849




3


Overview

The Company provides educational services in loan servicing, payment processing, education planning, and asset management. 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
 
Year ended
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
 
December 31, 2014
 
December 31, 2013
GAAP net income attributable to Nelnet, Inc.
$
73,611

 
85,219

 
70,520

 
307,610

 
302,672

Derivative market value and foreign currency adjustments, net of tax
671

 
(18,003
)
 
(466
)
 
(23,376
)
 
(30,128
)
Net income, excluding derivative market value and foreign currency adjustments (a)
$
74,282

 
67,216

 
70,054

 
284,234

 
272,544

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
GAAP net income attributable to Nelnet, Inc.
$
1.59

 
1.84

 
1.52

 
6.62

 
6.50

Derivative market value and foreign currency adjustments, net of tax
0.01

 
(0.39
)
 
(0.01
)
 
(0.50
)
 
(0.65
)
Net income, excluding derivative market value and foreign currency adjustments (a)
$
1.60

 
1.45

 
1.51

 
6.12

 
5.85


(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.

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 December 31, 2014, the Company had a $28.0 billion student loan portfolio that will amortize over the next 25 years. The Company actively seeks to acquire 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")


4


The information below provides the operating results for each reportable operating segment for the years ended December 31, 2014, 2013, and 2012 (dollars in millions).

(a)
Revenue includes intersegment revenue of $55.1 million, $56.7 million, and $65.4 million for the years ended December 31, 2014, 2013, and 2012, respectively, earned by LGS as a result of servicing loans for AGM.

(b)
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 $42.9 million and $35.3 million for the years ended December 31, 2014 and 2013, respectively, and an expense of $51.8 million for the year ended December 31, 2012. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax, which was income of $26.6 million and $21.9 million for the years ended December 31, 2014 and 2013, respectively, and an expense of $32.1 million for the year ended December 31, 2012.

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

Student Loan and Guaranty Servicing

•
As of December 31, 2014, the Company was servicing $161.6 billion in FFELP, private, and government owned student loans, as compared with $138.2 billion and $97.5 billion of loans as of December 31, 2013 and 2012, respectively. The year over year increase was due to an increase in government servicing volume.

•
Revenue decreased in 2014 compared to 2013 due to decreases in rehabilitation collection revenue, traditional FFELP and guaranty servicing revenue, and software services revenue, which were partially offset by growth in servicing volume under the Company's contract with the Department. The increase in revenue in 2013 compared to 2012 was due primarily to the growth in servicing volume under the Department contract and an increase in rehabilitation collection revenue, which were partially offset by decreases in traditional FFELP and guaranty servicing revenue and software services revenue.

•
Operating margin decreased in 2014 compared to 2013 as a result of the implementation of federal budget reductions for guaranty agencies' revenue. In addition, as the volume of loans serviced under the Department servicing contract continues to grow and loans serviced under the legacy commercial programs continue to run off, the Company expects operating margins to tighten accordingly. Operating margin increased in 2013 compared to 2012 as a result of the investments made and certain costs incurred by the Company in 2012 to improve performance metrics under the Department servicing

5


contract and to implement and comply with the Department's special direct consolidation loan initiative. In addition, intangible assets for this segment were fully amortized in 2012.

Tuition Payment Processing and Campus Commerce

•
Revenue increased in 2014 and 2013, compared to 2013 and 2012, respectively, due to increases in the number of managed tuition payment plans, campus commerce customer transaction volume, and new school customers. In addition, the Company purchased RenWeb on June 3, 2014, which increased revenue in 2014.

•
Before tax operating margin excluding amortization of intangibles was 27.6%, 30.7%, and 28.7% for 2014, 2013, and 2012, respectively. The decrease in margin in 2014 compared to 2013 was primarily due to a change in the mix of products and services provided as a result of the acquisition of RenWeb. The increase in margin in 2013 compared to 2012 was the result of efficiencies gained in the operations of the business during 2013. In addition, certain investments were made by the Company during 2012 in new products and services to meet customer needs and expand product and service offerings.

Asset Generation and Management

•
The Company acquired $6.1 billion of FFELP student loans during 2014, compared to $4.1 billion in 2013 and $3.9 billion in 2012. The average loan portfolio balance for 2014, 2013, and 2012 was $28.0 billion, $25.0 billion, and $23.7 billion, respectively. During the fourth quarter of 2014, the Company acquired $0.5 billion of FFELP student loans.

•
Core student loan spread decreased to 1.48% for 2014, compared to 1.54% for 2013. This decrease was due to recent acquisitions of consolidation loans, which have lower margins, but longer terms.

•
Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During 2014, 2013, and 2012, the Company earned $179.9 million, $148.4 million, and $145.3 million, respectively, of fixed rate floor income (net of $24.4 million, $31.0 million, and $19.3 million of derivative settlements, respectively, used to hedge such loans).

Corporate and Other Activities

•
In 2014, management determined that the Company's Enrollment Services business no longer met the quantitative thresholds for which separate information about an operating segment is required. For segment reporting purposes, business activities and operating segments that are not reportable are combined and included in "Corporate and Other Activities." Beginning in 2014, the operating results of Enrollment Services are included with Corporate and Other Activities. Prior period segment operating results were restated to conform to the current period presentation. Revenue for Enrollment Services was $82.9 million, $98.1 million, and $117.9 million in 2014, 2013, and 2012, respectively. Net income (loss) for the Enrollment Services business was ($0.2 million), $0.6 million, and ($3.7 million) in 2014, 2013, and 2012, respectively. Revenues from these services have been affected by the ongoing 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.

•
Whitetail Rock Capital Management, LLC, the Company's SEC-registered investment advisory subsidiary, recognized revenue of $17.5 million, $17.4 million, and $9.3 million for 2014, 2013, and 2012, respectively. These amounts include performance fees earned from the sale of managed securities or managed securities being called prior to the full contractual maturity.

Liquidity and Capital Resources

•
As of December 31, 2014, the Company had cash and investments of $279.6 million.

•
For the year ended December 31, 2014, the Company generated $357.4 million in net cash provided by operating activities.

•
Forecasted undiscounted future cash flows from the Company's FFELP student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.29 billion as of December 31, 2014.

•
As of December 31, 2014, no amounts were outstanding on the Company's unsecured line of credit and $350.0 million was available for future use. The unsecured line of credit has a maturity date of June 30, 2019.

6



•
During 2014, the Company repurchased a total of 381,689 shares of Class A common stock for $15.7 million ($41.17 per share).

•
During 2014, the Company repurchased a total of $54.0 million (par value) of its own asset-backed and unsecured debt securities for a gain totaling $6.6 million.

•
During 2014, the Company paid cash dividends of $18.5 million.

•
The Company intends to use its strong liquidity position to capitalize on market opportunities, including FFELP and private education loan acquisitions; strategic acquisitions and investments in loan financing, loan servicing, and payment processing; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions.




7



Operating Segments

The Company has three reportable operating segments. The Company's reportable operating segments include:

• Student Loan and Guaranty Servicing
• Tuition Payment Processing and Campus Commerce
• Asset Generation and Management

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing and Tuition Payment Processing 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 2014 Annual Report for a description of each operating segment, including the primary products and services offered.

In 2014, management determined that the Company's Enrollment Services business no longer met the quantitative thresholds for which separate information about an operating segment is required. Prior period segment operating results were restated to conform to the current period presentation.

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 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 and Other Activities.

Corporate and Other Activities

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities. Corporate and Other Activities includes the following items:

•
Income earned on certain investment activities
•
Interest expense incurred on unsecured debt transactions
•
Other product and service offerings that are not considered reportable operating segments including, but not limited to, WRCM, the SEC-registered investment advisory subsidiary, and the Enrollment Services business

Corporate and Other Activities also includes certain corporate activities and overhead functions related to executive management, human resources, accounting, legal, enterprise risk management, 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 December 31, 2014
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
5

 
1

 
182,868

 
2,110

 
(431
)
 
184,553

Interest expense
—

 
—

 
71,293

 
1,199

 
(431
)
 
72,061

Net interest income
5

 
1

 
111,575

 
911

 
—

 
112,492

Less provision for loan losses
—

 
—

 
3,500

 
—

 
—

 
3,500

Net interest income after provision for loan losses
5

 
1

 
108,075

 
911

 
—

 
108,992

Other income:
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
56,538

 
—

 
—

 
—

 
—

 
56,538

Intersegment servicing revenue
13,686

 
—

 
—

 
—

 
(13,686
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
24,688

 
—

 
—

 
—

 
24,688

Enrollment services revenue
—

 
—

 
—

 
17,791

 
—

 
17,791

Other income
—

 
1,268

 
8,578

 
3,060

 
—

 
12,906

Gain (loss) on sale of loans and debt repurchases
—

 
—

 
(1,414
)
 
5,008

 
—

 
3,594

Derivative market value and foreign currency adjustments, net
—

 
—

 
1,180

 
(2,262
)
 
—

 
(1,082
)
Derivative settlements, net
—

 
—

 
(4,308
)
 
(258
)
 
—

 
(4,566
)
Total other income
70,224

 
25,956

 
4,036

 
23,339

 
(13,686
)
 
109,869

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
36,122

 
14,026

 
572

 
9,889

 
—

 
60,609

Cost to provide enrollment services
—

 
—

 
—

 
11,343

 
—

 
11,343

Depreciation and amortization
2,576

 
2,500

 
—

 
568

 
—

 
5,644

Other
16,916

 
4,091

 
8,984

 
7,319

 
—

 
37,310

Intersegment expenses, net
1,095

 
1,559

 
13,858

 
(2,826
)
 
(13,686
)
 
—

Total operating expenses
56,709

 
22,176

 
23,414

 
26,293

 
(13,686
)
 
114,906

Income (loss) before income taxes and corporate overhead allocation
13,520

 
3,781

 
88,697

 
(2,043
)
 
—

 
103,955

Corporate overhead allocation
(2,542
)
 
(847
)
 
(1,413
)
 
4,802

 
—

 
—

Income before income taxes
10,978

 
2,934

 
87,284

 
2,759

 
—

 
103,955

Income tax (expense) benefit
(4,172
)
 
(1,115
)
 
(33,168
)
 
8,419

 
—

 
(30,036
)
Net income
6,806

 
1,819

 
54,116

 
11,178

 
—

 
73,919

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
308

 
—

 
308

Net income attributable to Nelnet, Inc.
$
6,806

 
1,819

 
54,116

 
10,870

 
—

 
73,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9


 
Three months ended September 30, 2014
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
5

 
2

 
187,949

 
1,814

 
(346
)
 
189,424

Interest expense
—

 
—

 
71,037

 
1,246

 
(346
)
 
71,937

Net interest income
5

 
2

 
116,912

 
568

 
—

 
117,487

Less provision for loan losses
—

 
—

 
2,000

 
—

 
—

 
2,000

Net interest income after provision for loan losses
5

 
2

 
114,912

 
568

 
—

 
115,487

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
52,659

 
—

 
—

 
—

 
—

 
52,659

Intersegment servicing revenue
13,432

 
—

 
—

 
—

 
(13,432
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
26,399

 
—

 
—

 
—

 
26,399

Enrollment services revenue
—

 
—

 
—

 
22,936

 
—

 
22,936

Other income
—

 
—

 
4,294

 
3,356

 
—

 
7,650

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
—

 
—

Derivative market value and foreign currency adjustments
—

 
—

 
29,430

 
(393
)
 
—

 
29,037

Derivative settlements, net
—

 
—

 
(4,575
)
 
(259
)
 
—

 
(4,834
)
Total other income (expense)
66,091

 
26,399

 
29,149

 
25,640

 
(13,432
)
 
133,847

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
37,062

 
13,288

 
565

 
10,183

 
—

 
61,098

Cost to provide enrollment services
—

 
—

 
—

 
14,178

 
—

 
14,178

Depreciation and amortization
2,558

 
2,396

 
—

 
539

 
—

 
5,493

Other
15,028

 
3,312

 
8,636

 
9,700

 
—

 
36,676

Intersegment expenses, net
906

 
1,481

 
13,611

 
(2,566
)
 
(13,432
)
 
—

Total operating expenses
55,554

 
20,477

 
22,812

 
32,034

 
(13,432
)
 
117,445

Income (loss) before income taxes and corporate overhead allocation
10,542

 
5,924

 
121,249

 
(5,826
)
 
—

 
131,889

Corporate overhead allocation
(2,567
)
 
(856
)
 
(1,026
)
 
4,449

 
—

 
—

Income (loss) before income taxes
7,975

 
5,068

 
120,223

 
(1,377
)
 
—

 
131,889

Income tax (expense) benefit
(3,030
)
 
(1,926
)
 
(45,684
)
 
4,127

 
—

 
(46,513
)
Net income
4,945

 
3,142

 
74,539

 
2,750

 
—

 
85,376

Net income attributable to noncontrolling interest
—

 
—

 
—

 
157

 
—

 
157

Net income attributable to Nelnet, Inc.
$
4,945

 
3,142

 
74,539

 
2,593

 
—

 
85,219

 
 
 
 
 
 
 
 
 
 
 
 

10


 
Three months ended December 31, 2013
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
11

 
—

 
165,982

 
2,725

 
(847
)
 
167,871

Interest expense
—

 
—

 
59,031

 
951

 
(847
)
 
59,135

Net interest income
11

 
—

 
106,951

 
1,774

 
—

 
108,736

Less provision for loan losses
—

 
—

 
3,500

 
—

 
—

 
3,500

Net interest income after provision for loan losses
11

 
—

 
103,451

 
1,774

 
—

 
105,236

Other income:
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
63,167

 
—

 
—

 
—

 
—

 
63,167

Intersegment servicing revenue
14,369

 
—

 
—

 
—

 
(14,369
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
18,988

 
—

 
—

 
—

 
18,988

Enrollment services revenue
—

 
—

 
—

 
21,735

 
—

 
21,735

Other income
—

 
—

 
4,016

 
13,108

 
(1,143
)
 
15,981

Gain on sale of loans and debt repurchases
—

 
—

 
104

 
695

 
—

 
799

Derivative market value and foreign currency adjustments, net
—

 
—

 
(455
)
 
1,207

 
—

 
752

Derivative settlements, net
—

 
—

 
(6,150
)
 
(257
)
 
—

 
(6,407
)
Total other income
77,536

 
18,988

 
(2,485
)
 
36,488

 
(15,512
)
 
115,015

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
32,838

 
9,560

 
583

 
9,139

 
—

 
52,120

Cost to provide enrollment services
—

 
—

 
—

 
13,864

 
—

 
13,864

Depreciation and amortization
3,222

 
1,131

 
—

 
921

 
—

 
5,274

Other
22,943

 
2,760

 
7,570

 
8,219

 
(1,143
)
 
40,349

Intersegment expenses, net
1,116

 
1,639

 
14,617

 
(3,003
)
 
(14,369
)
 
—

Total operating expenses
60,119

 
15,090

 
22,770

 
29,140

 
(15,512
)
 
111,607

Income before income taxes and corporate overhead allocation
17,428

 
3,898

 
78,196

 
9,122

 
—

 
108,644

Corporate overhead allocation
(1,818
)
 
(514
)
 
(801
)
 
3,133

 
—

 
—

Income before income taxes
15,610

 
3,384

 
77,395

 
12,255

 
—

 
108,644

Income tax expense
(5,932
)
 
(1,286
)
 
(29,410
)
 
(928
)
 
—

 
(37,556
)
Net income
9,678

 
2,098

 
47,985

 
11,327

 
—

 
71,088

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
568

 
—

 
568

Net income attributable to Nelnet, Inc.
$
9,678

 
2,098

 
47,985

 
10,759

 
—

 
70,520

 
 
 
 
 
 
 
 
 
 
 
 

11


 
Year ended December 31, 2014
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
30

 
6

 
703,382

 
8,618

 
(2,236
)
 
709,800

Interest expense
—

 
—

 
269,742

 
5,731

 
(2,236
)
 
273,237

Net interest income
30

 
6

 
433,640

 
2,887

 
—

 
436,563

Less provision for loan losses
—

 
—

 
9,500

 
—

 
—

 
9,500

Net interest income after provision for loan losses
30

 
6

 
424,140

 
2,887

 
—

 
427,063

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
240,414

 
—

 
—

 
—

 
—

 
240,414

Intersegment servicing revenue
55,139

 
—

 
—

 
—

 
(55,139
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
98,156

 
—

 
—

 
—

 
98,156

Enrollment services revenue
—

 
—

 
—

 
82,883

 
—

 
82,883

Other income
—

 
1,268

 
21,532

 
31,202

 
—

 
54,002

Gain on sale of loans and debt repurchases, net
—

 
—

 
(1,357
)
 
5,008

 
—

 
3,651

Derivative market value and foreign currency adjustments, net
—

 
—

 
42,935

 
(5,232
)
 
—

 
37,703

Derivative settlements, net
—

 
—

 
(20,818
)
 
(1,025
)
 
—

 
(21,843
)
Total other income (expense)
295,553

 
99,424

 
42,292

 
112,836

 
(55,139
)
 
494,966

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
138,584

 
48,453

 
2,316

 
38,726

 
—

 
228,079

Cost to provide enrollment services
—

 
—

 
—

 
53,307

 
—

 
53,307

Depreciation and amortization
10,742

 
8,169

 
—

 
2,223

 
—

 
21,134

Other
70,211

 
13,006

 
33,611

 
33,162

 
—

 
149,990

Intersegment expenses, net
4,208

 
5,864

 
55,808

 
(10,741
)
 
(55,139
)
 
—

Total operating expenses
223,745

 
75,492

 
91,735

 
116,677

 
(55,139
)
 
452,510

Income (loss) before income taxes and corporate overhead allocation
71,838

 
23,938

 
374,697

 
(954
)
 
—

 
469,519

Corporate overhead allocation
(9,029
)
 
(3,010
)
 
(5,017
)
 
17,056

 
—

 
—

Income before income taxes
62,809

 
20,928

 
369,680

 
16,102

 
—

 
469,519

Income tax (expense) benefit
(23,867
)
 
(7,952
)
 
(140,477
)
 
12,058

 
—

 
(160,238
)
Net income
38,942

 
12,976

 
229,203

 
28,160

 
—

 
309,281

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
1,671

 
—

 
1,671

Net income attributable to Nelnet, Inc.
$
38,942

 
12,976

 
229,203

 
26,489

 
—

 
307,610

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

12


 
Year ended December 31, 2013
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
40

 
—

 
638,604

 
9,433

 
(3,267
)
 
644,810

Interest expense
—

 
—

 
229,533

 
4,669

 
(3,267
)
 
230,935

Net interest income
40

 
—

 
409,071

 
4,764

 
—

 
413,875

Less provision for loan losses
—

 
—

 
18,500

 
—

 
—

 
18,500

Net interest income after provision for loan losses
40

 
—

 
390,571

 
4,764

 
—

 
395,375

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
243,428

 
—

 
—

 
—

 
—

 
243,428

Intersegment servicing revenue
56,744

 
—

 
—

 
—

 
(56,744
)
 
—

Tuition payment processing, school information, and campus commerce revenue
—

 
80,682

 
—

 
—

 
—

 
80,682

Enrollment services revenue
—

 
—

 
—

 
98,078

 
—

 
98,078

Other income
—

 
—

 
15,223

 
32,218

 
(1,143
)
 
46,298

Gain on sale of loans and debt repurchases
—

 
—

 
11,004

 
695

 
—

 
11,699

Derivative market value and foreign currency adjustments, net
—

 
—

 
35,256

 
13,337

 
—

 
48,593

Derivative settlements, net
—

 
—

 
(27,966
)
 
(1,670
)
 
—

 
(29,636
)
Total other income (expense)
300,172

 
80,682

 
33,517

 
142,658

 
(57,887
)
 
499,142

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
119,092

 
37,575

 
2,292

 
37,210

 
—

 
196,169

Cost to provide enrollment services
—

 
—

 
—

 
64,961

 
—

 
64,961

Depreciation and amortization
11,419

 
4,518

 
—

 
2,374

 
—

 
18,311

Other
79,116

 
9,147

 
30,945

 
31,477

 
(1,143
)
 
149,542

Intersegment expenses, net
4,359

 
5,989

 
57,572

 
(11,176
)
 
(56,744
)
 
—

Total operating expenses
213,986

 
57,229

 
90,809

 
124,846

 
(57,887
)
 
428,983

Income before income taxes and corporate overhead allocation
86,226

 
23,453

 
333,279

 
22,576

 
—

 
465,534

Corporate overhead allocation
(6,150
)
 
(1,957
)
 
(3,896
)
 
12,003

 
—

 
—

Income before income taxes
80,076

 
21,496

 
329,383

 
34,579

 
—

 
465,534

Income tax (expense) benefit
(30,430
)
 
(8,168
)
 
(125,165
)
 
2,570

 
—

 
(161,193
)
Net income
49,646

 
13,328

 
204,218

 
37,149

 
—

 
304,341

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
1,669

 
—

 
1,669

Net income attributable to Nelnet, Inc.
$
49,646

 
13,328

 
204,218

 
35,480

 
—

 
302,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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
 
Year ended
 
December 31, 2014
 
September 30,
2014
 
December 31, 2013
 
December 31, 2014
 
December 31, 2013
Variable student loan interest margin, net of settlements on derivatives
$
58,401

 
63,390

 
62,683

 
234,814

 
235,480

Fixed rate floor income, net of settlements on derivatives
49,213

 
49,206

 
38,849

 
179,870

 
148,431

Investment interest
1,770

 
1,562

 
2,006

 
6,793

 
6,668

Non-portfolio related derivative settlements
(259
)
 
(259
)
 
(258
)
 
(1,026
)
 
(1,671
)
Corporate debt interest expense
(1,199
)
 
(1,246
)
 
(951
)
 
(5,731
)
 
(4,669
)
Net interest income (net of settlements on derivatives)
$
107,926

 
112,653

 
102,329

 
414,720

 
384,239



14



Student Loan Servicing Volumes (dollars in millions)
Company owned
 
$22,650
 
$21,237
 
$20,820
 
$20,629
 
$20,715
 
$21,397
 
$21,192
 
$21,110
 
$20,511
 
$19,742
% of total
 
29.8%
 
21.8%
 
18.5%
 
17.7%
 
15.3%
 
15.5%
 
14.3%
 
14.1%
 
12.9%
 
12.2%
Number of servicing borrowers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government servicing
 
3,036,534

 
3,892,929

 
4,261,637

 
4,396,341

 
5,145,901

 
5,305,498

 
5,438,933

 
5,465,395

 
5,824,743

 
5,915,449

FFELP servicing
 
1,799,484

 
1,626,146

 
1,586,312

 
1,529,203

 
1,507,452

 
1,462,122

 
1,426,435

 
1,390,541

 
1,404,619

 
1,397,295

Private servicing
 
164,554

 
173,948

 
170,224

 
173,588

 
178,935

 
195,580

 
191,606

 
186,863

 
200,095

 
202,529

Total:
 
5,000,572

 
5,693,023

 
6,018,173

 
6,099,132

 
6,832,288

 
6,963,200

 
7,056,974

 
7,042,799

 
7,429,457

 
7,515,273

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of remote hosted borrowers
 
9,566,296

 
6,912,204

 
5,001,695

 
3,218,896

 
1,986,886

 
1,915,203

 
1,796,287

 
1,735,594

 
1,677,547

 
1,611,654


Other Income

The following table summarizes the components of "other income" included in the attached consolidated statements of income.
 
Three months ended
 
Year ended
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31,
2014
 
December 31,
2013
Borrower late fee income
$
3,840

 
3,676

 
3,021

 
14,760

 
12,686

Investment advisory fees
3,487

 
1,815

 
5,685

 
17,530

 
17,422

Realized and unrealized gains/(losses) on investments, net
(1,972
)
 
(267
)
 
4,166

 
7,052

 
6,094

Reduction of repurchase obligation
4,235

 
—

 
—

 
4,235

 
—

Other
3,316

 
2,426

 
3,109

 
10,425

 
10,096

Other income
$
12,906

 
7,650

 
15,981

 
54,002

 
46,298



15


Derivative Settlements

The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
 
Three months ended
 
Year ended
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31,
2014
 
December 31,
2013
1:3 basis swaps
$
842

 
808

 
827

 
3,389

 
3,301

Interest rate swaps - floor income hedges
(5,035
)
 
(5,421
)
 
(7,005
)
 
(24,380
)
 
(31,022
)
Interest rate swaps - hybrid debt hedges
(258
)
 
(259
)
 
(257
)
 
(1,025
)
 
(1,670
)
Cross-currency interest rate swaps
(115
)
 
38

 
28

 
173

 
(245
)
Total settlements - expense
$
(4,566
)
 
(4,834
)
 
(6,407
)
 
(21,843
)
 
(29,636
)

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
 
Year ended
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31,
2014
 
December 31,
2013
Change in fair value of derivatives - income (expense)
$
(19,879
)
 
(8,381
)
 
10,135

 
(20,310
)
 
83,878

Foreign currency transaction adjustment - income (expense)
18,797

 
37,418

 
(9,383
)
 
58,013

 
(35,285
)
Derivative market value and foreign currency adjustments - income (expense)
$
(1,082
)
 
29,037

 
752

 
37,703

 
48,593



Student Loans Receivable

The table below outlines the components of the Company’s student loan portfolio:
 
As of
 
As of
 
As of
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
Federally insured loans
 
 
 
 
 
Stafford and other
$
6,030,825

 
6,218,910

 
6,686,626

Consolidation
22,165,605

 
22,632,689

 
19,363,577

Total
28,196,430

 
28,851,599

 
26,050,203

Private education loans
27,478

 
77,623

 
71,103

 
28,223,908

 
28,929,222

 
26,121,306

Loan discount, net of unamortized loan premiums and deferred origination costs
(169,813
)
 
(175,910
)
 
(158,595
)
Allowance for loan losses – federally insured loans
(39,170
)
 
(39,470
)
 
(43,440
)
Allowance for loan losses – private education loans
(9,730
)
 
(12,498
)
 
(11,682
)
 
$
28,005,195

 
28,701,344

 
25,907,589

 
 
 


 




16


Loan Activity

The following table sets forth the activity of loans:
 
Three months ended December 31,
 
Year ended December 31,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
28,929,222

 
24,887,340

 
26,121,306

 
24,995,880

Loan acquisitions
543,535

 
1,858,241

 
6,099,249

 
4,058,997

Repayments, claims, capitalized interest, participations, and other
(640,617
)
 
(479,035
)
 
(2,745,341
)
 
(2,375,806
)
Consolidation loans lost to external parties
(347,894
)
 
(113,234
)
 
(990,960
)
 
(514,108
)
Loans sold
(260,338
)
 
(32,006
)
 
(260,346
)
 
(43,657
)
Ending balance
$
28,223,908

 
26,121,306

 
28,223,908

 
26,121,306



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
 
Year ended
 
December 31,
2014
 
September 30,
2014
 
December 31,
2013
 
December 31,
2014
 
December 31,
2013
Variable student loan yield, gross
2.56
 %
 
2.58
 %
 
2.58
 %
 
2.55
 %
 
2.58
 %
Consolidation rebate fees
(0.84
)
 
(0.83
)
 
(0.78
)
 
(0.82
)
 
(0.77
)
Discount accretion, net of premium and deferred origination costs amortization
0.05

 
0.05

 
0.05

 
0.05

 
0.03

Variable student loan yield, net
1.77

 
1.80

 
1.85

 
1.78

 
1.84

Student loan cost of funds - interest expense
(0.97
)
 
(0.95
)
 
(0.90
)
 
(0.95
)
 
(0.91
)
Student loan cost of funds - derivative settlements
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Variable student loan spread
0.81

 
0.86

 
0.96

 
0.84

 
0.94

Fixed rate floor income, net of settlements on derivatives
0.68

 
0.67

 
0.60

 
0.64

 
0.60

Core student loan spread
1.49
 %

1.53
 %

1.56
 %
 
1.48
 %
 
1.54
 %
 
 
 
 
 
 
 
 
 
 
Average balance of student loans
$
28,738,887

 
29,328,743

 
25,770,607

 
28,036,577

 
24,960,521

Average balance of debt outstanding
28,877,939

 
29,485,652

 
25,687,958

 
28,116,989

 
24,954,546



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 in 2014 as compared to 2013 as a result of recent acquisitions of consolidation loans, which have lower margins but longer terms. Variable student loan spread increased in 2013 as compared to 2012 as a result of the tightening of the Asset/Liability Base Rate spread reflected in the previous table.

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
 
Year ended
 
December 31, 2014
 
September 30,
2014
 
December 31, 2013
 
December 31, 2014
 
December 31, 2013
Fixed rate floor income, gross
$
54,248

 
54,627

 
45,854

 
204,250

 
179,453

Derivative settlements (a)
(5,035
)
 
(5,421
)
 
(7,005
)
 
(24,380
)
 
(31,022
)
Fixed rate floor income, net
$
49,213

 
49,206

 
38,849

 
179,870

 
148,431

Fixed rate floor income contribution to spread, net
0.68
%
 
0.67
%
 
0.60
%
 
0.64
%
 
0.60
%
 
(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 December 31, 2014:
Fixed interest rate range
 
Borrower/lender weighted average yield
 
Estimated variable conversion rate (a)
 
Loan balance
 
 
 
< 3.0%
 
2.88%
 
0.24%
 
$
1,848,518

3.0 - 3.49%
 
3.19%
 
0.55%
 
2,319,425

3.5 - 3.99%
 
3.65%
 
1.01%
 
2,276,397

4.0 - 4.49%
 
4.20%
 
1.56%
 
1,741,174

4.5 - 4.99%
 
4.72%
 
2.08%
 
1,078,574

5.0 - 5.49%
 
5.22%
 
2.58%
 
677,589

5.5 - 5.99%
 
5.67%
 
3.03%
 
393,750

6.0 - 6.49%
 
6.18%
 
3.54%
 
457,441

6.5 - 6.99%
 
6.71%
 
4.07%
 
434,295

7.0 - 7.49%
 
7.17%
 
4.53%
 
182,627

7.5 - 7.99%
 
7.71%
 
5.07%
 
312,589

8.0 - 8.99%
 
8.18%
 
5.54%
 
703,712

> 9.0%
 
9.04%
 
6.40%
 
274,403

 
 
 
 
 
 
$
12,700,494

 
(a)
The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of December 31, 2014, the weighted average estimated variable conversion rate was 1.84% and the short-term interest rate was 16 basis points.

The following table summarizes the outstanding derivative instruments as of December 31, 2014 used by the Company to economically hedge loans earning fixed rate floor income.
 
 
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
Maturity
 
 
 
 
 
 
 
 
 
2015
 
$
1,100,000

 
0.89
%
 
2016
 
750,000

 
0.85

 
2017
 
1,250,000

 
0.86

 
 
 
$
3,100,000

 
0.87
%

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


19

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

SEC Filings