Form 8-K NELNET INC For: May 07

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May 7, 2015 4:19 PM EDT


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)
May 7, 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 May 7, 2015, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended March 31, 2015. 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 March 31, 2015, which was made available on the Company's website at www.nelnetinvestors.com on May 7, 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 May 7, 2015 - “Nelnet Reports First Quarter 2015 Results”
99.2
 
Supplemental Financial Information for the Quarter Ended March 31, 2015







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: May 7, 2015
NELNET, INC.
By:     /s/ JAMES D. KRUGER     
Name:
James D. Kruger
Title:
Chief Financial Officer





Nelnet Reports First Quarter 2015 Results

•
GAAP net income $1.40 per share, $1.37 per share excluding adjustments
•
Servicing $140.8 billion student loans for 5.9 million borrowers under government contract
•
37 percent increase in payment processing revenue driven by RenWeb acquisition

LINCOLN, Neb., May 7, 2015-Nelnet (NYSE: NNI) today reported GAAP net income of $64.8 million, or $1.40 per share, for the first quarter of 2015, compared with GAAP net income of $73.8 million, or $1.59 per share, for the same period a year ago.

Excluding derivative market value and foreign currency adjustments, net income was $63.4 million, or $1.37 per share, for the first quarter of 2015, compared with $72.6 million, or $1.56 per share, for the same period in 2014. The company reported income from derivative market value and foreign currency adjustments of $1.3 million after tax, or $0.03 per share, for the first quarter of 2015, compared with income of $1.2 million after tax, or $0.03 per share, for the first quarter of 2014.

"As a result of our ongoing success, we are in a strong position financially and continue to generate significant cash flow," said Jeff Noordhoek, chief executive officer of Nelnet. "With our focus on delivering long-term value, we continue to accumulate capital for future investments in our core and other opportunities."

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

The decrease in earnings for the first quarter of 2015, compared with the same period in 2014, was due to expected decreases in earnings from the company’s Student Loan and Guaranty Servicing segment, a decrease in investment advisory service fees, and reduced gains from investments. This decrease was partially offset by an increase in net interest income earned from the company’s student loan portfolio as a result of recent loan purchases.

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 first quarter of 2015, Nelnet reported net interest income of $102.6 million, compared with $98.9 million for the same period a year ago.  Net interest income included $46.2 million and $37.8 million of fixed rate floor income in the first quarters of 2015 and 2014, respectively. As a result of recent acquisitions of lower margin but longer term consolidation loans, core student loan spread decreased to 1.41 percent for the three months ended March 31, 2015, compared with 1.44 percent for the same period in 2014.

The company intends to use its strong liquidity position to capitalize on market opportunities to acquire private education loans and additional legacy Federal Family Education Loan Program (FFELP) loans. The company acquired $836.1 million of student loans during the first quarter of 2015. As of March 31, 2015, Nelnet’s student loan portfolio was $27.9 billion.

Student Loan and Guaranty Servicing

The company was servicing $140.8 billion of loans for 5.9 million borrowers on behalf of the U.S. Department of Education as of March 31, 2015, compared with $120.6 billion of loans for 5.4 million borrowers as of March 31, 2014. Revenue from this contract increased 9 percent to $32.4 million for the first quarter of 2015, up from $29.9 million for the same period a year ago.

The growth in government servicing revenue partially offset the impact of federal legislative changes that reduced the collections revenue earned by guaranty agencies. As a result of these changes, total revenue from the company's Student Loan and Guaranty Servicing segment decreased 11 percent, or $7.0 million, to $57.8 million for the first quarter of 2015, compared with the same period in 2014.

Tuition Payment Processing and Campus Commerce

For the first quarter of 2015, revenue from the company's Tuition Payment Processing and Campus Commerce segment was $34.7 million, an increase of $9.4 million, or 37 percent, from the same period in 2014. 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.
     




Other Income

Other income decreased $11.2 million to $6.9 million for the first quarter of 2015, compared with $18.1 million for the same period in 2014. During the three months ended March 31, 2015, gains on investments and investment advisory fees were $1.2 million, compared with $12.4 million for the same period in 2014.

Board of Directors Approves Dividend and New Stock Repurchase Program

The Nelnet Board of Directors declared a second 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, June 15, 2015, to shareholders of record at the close of business on Monday, June 1, 2015.

In addition, the Board of Directors has authorized a new stock repurchase program to repurchase up to five million shares of the company's Class A common stock during the three-year period ending May 24, 2018. The current stock repurchase program is set to expire on May 24, 2015. Consistent with the current program, shares may be repurchased under the new program from time to time in the open market or private transactions, and the timing and amount of repurchases will depend on market conditions, share prices, trading volumes, and other factors, including compliance with credit agreements and securities laws.

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 first quarter ended March 31, 2015.  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
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Interest income:
 
 
 
 
 
Loan interest
$
171,944

 
182,783

 
156,896

Investment interest
2,205

 
1,770

 
1,979

Total interest income
174,149

 
184,553

 
158,875

Interest expense:
 
 
 
 
 
Interest on bonds and notes payable
71,554

 
72,061

 
60,004

Net interest income
102,595

 
112,492

 
98,871

Less provision for loan losses
2,000

 
3,500

 
2,500

Net interest income after provision for loan losses
100,595

 
108,992

 
96,371

Other income (expense):
 
 
 
 
 
Loan and guaranty servicing revenue
57,811

 
56,538

 
64,757

Tuition payment processing, school information, and campus commerce revenue
34,680

 
24,688

 
25,235

Enrollment services revenue
17,863

 
17,791

 
22,011

Other income
6,918

 
12,906

 
18,131

Gain on sale of loans and debt repurchases, net
2,875

 
3,594

 
39

Derivative settlements, net
(5,215
)
 
(4,566
)
 
(6,229
)
Derivative market value and foreign currency adjustments, net
2,137

 
(1,082
)
 
1,964

Total other income
117,069

 
109,869

 
125,908

Operating expenses:
 
 
 
 
 
Salaries and benefits
61,050

 
60,609

 
52,484

Cost to provide enrollment services
11,702

 
11,343

 
14,475

Loan servicing fees
7,685

 
7,606

 
5,421

Depreciation and amortization
5,662

 
5,644

 
4,783

Other
29,129

 
29,704

 
30,206

Total operating expenses
115,228

 
114,906

 
107,369

Income before income taxes
102,436

 
103,955

 
114,910

Income tax expense
37,630

 
30,036

 
40,611

Net income
64,806

 
73,919

 
74,299

Net income attributable to noncontrolling interest
41

 
308

 
513

Net income attributable to Nelnet, Inc.
$
64,765

 
73,611

 
73,786

Earnings per common share:
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.40

 
1.59

 
1.59

Weighted average common shares outstanding - basic and diluted
46,290,590

 
46,390,402

 
46,527,917








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

 
As of
 
As of
 
As of
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Assets:
 
 
 
 
 
Student loans receivable, net
$
27,897,949

 
28,005,195

 
25,607,143

Cash, cash equivalents, investments, and notes receivable
376,950

 
366,190

 
327,383

Restricted cash and investments
938,477

 
968,928

 
886,358

Goodwill and intangible assets, net
166,383

 
168,782

 
126,207

Other assets
576,035

 
589,048

 
539,916

Total assets
$
29,955,794

 
30,098,143

 
27,487,007

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
27,815,324

 
28,027,350

 
25,589,287

Other liabilities
358,977

 
345,115

 
384,046

Total liabilities
28,174,301

 
28,372,465

 
25,973,333

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
1,781,222

 
1,725,448

 
1,512,919

Noncontrolling interest
271

 
230

 
755

Total equity
1,781,493

 
1,725,678

 
1,513,674

Total liabilities and equity
$
29,955,794

 
30,098,143

 
27,487,007


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










For Release: May 7, 2015
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038

Nelnet, Inc. supplemental financial information for the first quarter 2015
(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 first quarter 2015 earnings, dated May 7, 2015, and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

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
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Interest income:
 
 
 
 
 
Loan interest
$
171,944

 
182,783

 
156,896

Investment interest
2,205

 
1,770

 
1,979

Total interest income
174,149

 
184,553

 
158,875

Interest expense:
 
 
 
 
 
Interest on bonds and notes payable
71,554

 
72,061

 
60,004

Net interest income
102,595

 
112,492

 
98,871

Less provision for loan losses
2,000

 
3,500

 
2,500

Net interest income after provision for loan losses
100,595

 
108,992

 
96,371

Other income (expense):
 
 
 
 
 
Loan and guaranty servicing revenue
57,811

 
56,538

 
64,757

Tuition payment processing, school information, and campus commerce revenue
34,680

 
24,688

 
25,235

Enrollment services revenue
17,863

 
17,791

 
22,011

Other income
6,918

 
12,906

 
18,131

Gain on sale of loans and debt repurchases, net
2,875

 
3,594

 
39

Derivative settlements, net
(5,215
)
 
(4,566
)
 
(6,229
)
Derivative market value and foreign currency adjustments, net
2,137

 
(1,082
)
 
1,964

Total other income
117,069

 
109,869

 
125,908

Operating expenses:
 
 
 
 
 
Salaries and benefits
61,050

 
60,609

 
52,484

Cost to provide enrollment services
11,702

 
11,343

 
14,475

Loan servicing fees
7,685

 
7,606

 
5,421

Depreciation and amortization
5,662

 
5,644

 
4,783

Other
29,129

 
29,704

 
30,206

Total operating expenses
115,228

 
114,906

 
107,369

Income before income taxes
102,436

 
103,955

 
114,910

Income tax expense
37,630

 
30,036

 
40,611

Net income
64,806

 
73,919

 
74,299

Net income attributable to noncontrolling interest
41

 
308

 
513

Net income attributable to Nelnet, Inc.
$
64,765

 
73,611

 
73,786

Earnings per common share:
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.40

 
1.59

 
1.59

 
 
 
 
 
 
Weighted average common shares outstanding - basic and diluted
46,290,590

 
46,390,402

 
46,527,917



2


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

 
As of
 
As of
 
As of
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Assets:
 
 
 
 
 
Student loans receivable, net
$
27,897,949

 
28,005,195

 
25,607,143

Cash, cash equivalents, investments, and notes receivable
376,950

 
366,190

 
327,383

Restricted cash and investments
938,477

 
968,928

 
886,358

Goodwill and intangible assets, net
166,383

 
168,782

 
126,207

Other assets
576,035

 
589,048

 
539,916

Total assets
$
29,955,794

 
30,098,143

 
27,487,007

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
27,815,324

 
28,027,350

 
25,589,287

Other liabilities
358,977

 
345,115

 
384,046

Total liabilities
28,174,301

 
28,372,465

 
25,973,333

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
1,781,222

 
1,725,448

 
1,512,919

Noncontrolling interest
271

 
230

 
755

Total equity
1,781,493

 
1,725,678

 
1,513,674

Total liabilities and equity
$
29,955,794

 
30,098,143

 
27,487,007




3


Overview

The Company provides educational products and 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
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
GAAP net income attributable to Nelnet, Inc.
$
64,765

 
73,611

 
73,786

Derivative market value and foreign currency adjustments, net of tax
(1,325
)
 
671

 
(1,218
)
Net income, excluding derivative market value and foreign currency adjustments (a)
$
63,440

 
74,282

 
72,568

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
GAAP net income attributable to Nelnet, Inc.
$
1.40

 
1.59

 
1.59

Derivative market value and foreign currency adjustments, net of tax
(0.03
)
 
0.01

 
(0.03
)
Net income, excluding derivative market value and foreign currency adjustments (a)
$
1.37

 
1.60

 
1.56


(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 March 31, 2015, the Company had a $27.9 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")

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities. Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.


4


The information below provides the operating results for each reportable operating segment and Corporate and Other Activities ("Corporate") for the three months ended March 31, 2015 and 2014 (dollars in millions).

(a)
Revenue includes intersegment revenue 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. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax.

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

Student Loan and Guaranty Servicing

•
As of March 31, 2015, the Company was servicing $168.8 billion in FFELP, private, and government owned student loans, as compared with $147.9 billion of loans as of March 31, 2014.

•
Revenue decreased in the first quarter of 2015 compared to the same period in 2014 due primarily to a decrease in rehabilitation collection revenue. Federal budget provisions that became effective July 1, 2014 have reduced payments by the Department to guaranty agencies for assisting student loan borrowers with the rehabilitation of defaulted loans under FFELP, and as a result, rehabilitation revenue has been negatively affected. Rehabilitation collection revenue recognized by the Company was $7.4 million and $13.4 million for the three months ended March 31, 2015 and 2014, respectively.

•
Revenue from the Department servicing contract increased to $32.4 million for the three months ended March 31, 2015, compared to $29.9 million for the same period in 2014. As of March 31, 2015, the Company was servicing $140.8 billion of loans for 5.9 million borrowers under this contract.

•
Before tax operating margin was 14.3% and 28.5% for the three months ended March 31, 2015 and 2014, respectively. Operating margin decreased 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.


5


Tuition Payment Processing and Campus Commerce

•
Revenue increased in the three months ended March 31, 2015 compared to the same period in 2014 due to the acquisition of RenWeb in the second quarter of 2014 and 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 40.5% and 40.1% for the three months ended March 31, 2015 and 2014, 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.

Asset Generation and Management

•
The Company acquired $836.1 million of student loans during the first three months of 2015. The average loan portfolio balance for the three months ended March 31, 2015 and 2014 was $28.3 billion and $25.9 billion, respectively.

•
Core student loan spread decreased to 1.41% for the three months ended March 31, 2015, compared to 1.49% and 1.44% for the three months ended December 31, 2014 and March 31, 2014, respectively. This decrease was the result of 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 the three months ended March 31, 2015 and 2014, the Company earned $46.2 million and $37.8 million, respectively, of fixed rate floor income (net of $5.0 million and $7.0 million of derivative settlements, respectively, used to hedge such loans).

Corporate and Other Activities

•
The Company recognized $0.5 million in net gains from investment activity during the three months ended March 31, 2015, compared to $7.2 million for the same period in 2014. The majority of gains recognized in 2014 were from sales of student loan asset-backed security investments.

•
Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisory subsidiary, recognized investment advisory revenue of $0.7 million for the three months ended March 31, 2015, compared to $5.2 million for the three months ended March 31, 2014. The decrease was the result of the reduction in performance fees earned in 2015.

•
During the three months ended March 31, 2015, the Company repurchased $11.9 million (par value) of its Junior Subordinated Hybrid Securities for a gain of $2.5 million. Gains from debt repurchases in the first quarter of 2014 were approximately $39,000.

Liquidity and Capital Resources

•
As of March 31, 2015, the Company had cash and cash equivalents of $100.0 million. In addition, the Company had a portfolio of available-for-sale and trading investments, consisting primarily of student loan asset-backed securities, with a fair value of $146.8 million as of March 31, 2015.

•
For the three months ended March 31, 2015, the Company generated $129.3 million in net cash provided by operating activities.

•
Forecasted future cash flows from the Company's FFELP student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.27 billion as of March 31, 2015.

•
As of March 31, 2015, 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.

•
During the three months ended March 31, 2015, the Company repurchased a total of 175,798 shares of Class A common stock for $7.9 million ($45.16 per share).

•
During the three months ended March 31, 2015, the Company paid cash dividends of $4.6 million ($0.10 per share).

6



•
The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP and private education loan acquisitions; strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. Dependent upon the timing and size of the opportunities, the Company may continue to accumulate additional cash and investments.

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.

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.

Effective January 1, 2015, internal reporting to executive management (the "chief operating decision maker") changed to reflect operational changes made within the organization. The operational and internal reporting changes included moving the majority of information technology infrastructure personnel and related functions to Corporate and Other Activities. The associated costs are allocated to the other operating segments based on those segments' actual use of information technology related products and services. Information technology infrastructure personnel and related functions were historically included within the Student Loan and Guaranty Servicing operating segment, and associated costs were allocated to the other operating segments based on those segments' actual use of the related products and services. Prior period segment operating results have been reclassified to reflect these changes; however, the reclassifications had no effect on any operating segment's net income.


7



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 March 31, 2015
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Asset
Generation and
Management
 
Corporate and Other Activities
 
Eliminations
 
Total
Total interest income
$
7

 
2

 
172,423

 
2,153

 
(436
)
 
174,149

Interest expense
—

 
—

 
70,540

 
1,450

 
(436
)
 
71,554

Net interest income
7

 
2

 
101,883

 
703

 
—

 
102,595

Less provision for loan losses
—

 
—

 
2,000

 
—

 
—

 
2,000

Net interest income after provision for loan losses
7

 
2

 
99,883

 
703

 
—

 
100,595

Other income:
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
57,811

 
—

 
—

 
—

 
—

 
57,811

Intersegment servicing revenue
12,871

 
—

 
—

 
—

 
(12,871
)
 
—

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

 
34,680

 
—

 
—

 
—

 
34,680

Enrollment services revenue
—

 
—

 
—

 
17,863

 
—

 
17,863

Other income
—

 
—

 
4,576

 
2,342

 
—

 
6,918

Gain on sale of loans and debt repurchases
—

 
—

 
351

 
2,524

 
—

 
2,875

Derivative market value and foreign currency adjustments, net
—

 
—

 
3,590

 
(1,453
)
 
—

 
2,137

Derivative settlements, net
—

 
—

 
(4,963
)
 
(252
)
 
—

 
(5,215
)
Total other income
70,682

 
34,680

 
3,554

 
21,024

 
(12,871
)
 
117,069

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
33,703

 
13,321

 
541

 
13,485

 
—

 
61,050

Cost to provide enrollment services
—

 
—

 
—

 
11,702

 
—

 
11,702

Loan servicing fees
—

 
—

 
7,685

 
—

 
—

 
7,685

Depreciation and amortization
446

 
2,195

 
—

 
3,021

 
—

 
5,662

Other
14,600

 
3,802

 
1,068

 
9,659

 
—

 
29,129

Intersegment expenses, net
9,700

 
2,614

 
13,040

 
(12,483
)
 
(12,871
)
 
—

Total operating expenses
58,449

 
21,932

 
22,334

 
25,384

 
(12,871
)
 
115,228

Income (loss) before income taxes and corporate overhead allocation
12,240

 
12,750

 
81,103

 
(3,657
)
 
—

 
102,436

Corporate overhead allocation
(2,153
)
 
(862
)
 
(1,078
)
 
4,093

 
—

 
—

Income before income taxes
10,087

 
11,888

 
80,025

 
436

 
—

 
102,436

Income tax (expense) benefit
(3,834
)
 
(4,518
)
 
(30,409
)
 
1,131

 
—

 
(37,630
)
Net income
6,253

 
7,370

 
49,616

 
1,567

 
—

 
64,806

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
41

 
—

 
41

Net income attributable to Nelnet, Inc.
$
6,253

 
7,370

 
49,616

 
1,526

 
—

 
64,765

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

8


 
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 (expense):
 

 
 

 
 

 
 

 
 

 
 

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 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 (expense)
70,224

 
25,956

 
4,036

 
23,339

 
(13,686
)
 
109,869

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
32,737

 
14,026

 
572

 
13,274

 
—

 
60,609

Cost to provide enrollment services
—

 
—

 
—

 
11,343

 
—

 
11,343

Loan servicing fees
—

 
—

 
7,606

 
—

 
—

 
7,606

Depreciation and amortization
436

 
2,500

 
—

 
2,708

 
—

 
5,644

Other
14,252

 
4,091

 
1,378

 
9,983

 
—

 
29,704

Intersegment expenses, net
9,284

 
1,559

 
13,858

 
(11,015
)
 
(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 March 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
$
11

 
—

 
157,003

 
2,658

 
(797
)
 
158,875

Interest expense
—

 
—

 
59,476

 
1,325

 
(797
)
 
60,004

Net interest income
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

 
—

 
95,027

 
1,333

 
—

 
96,371

Other income:
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
64,757

 
—

 
—

 
—

 
—

 
64,757

Intersegment servicing revenue
14,221

 
—

 
—

 
—

 
(14,221
)
 
—

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

 
25,235

 
—

 
—

 
—

 
25,235

Enrollment services revenue
—

 
—

 
—

 
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, net
—

 
—

 
3,477

 
(1,513
)
 
—

 
1,964

Derivative settlements, net
—

 
—

 
(5,977
)
 
(252
)
 
—

 
(6,229
)
Total other income
78,978

 
25,235

 
1,703

 
34,213

 
(14,221
)
 
125,908

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
29,398

 
10,027

 
609

 
12,450

 
—

 
52,484

Cost to provide enrollment services
—

 
—

 
—

 
14,475

 
—

 
14,475

Loan servicing fees
—

 
—

 
5,421

 
—

 
—

 
5,421

Depreciation and amortization
419

 
1,428

 
—

 
2,936

 
—

 
4,783

Other
15,651

 
2,647

 
1,725

 
10,183

 
—

 
30,206

Intersegment expenses, net
9,163

 
1,420

 
14,371

 
(10,733
)
 
(14,221
)
 
—

Total operating expenses
54,631

 
15,522

 
22,126

 
29,311

 
(14,221
)
 
107,369

Income before income taxes and corporate overhead allocation
24,358

 
9,713

 
74,604

 
6,235

 
—

 
114,910

Corporate overhead allocation
(1,860
)
 
(620
)
 
(1,329
)
 
3,809

 
—

 
—

Income before income taxes
22,498

 
9,093

 
73,275

 
10,044

 
—

 
114,910

Income tax (expense) benefit
(8,549
)
 
(3,455
)
 
(27,844
)
 
(763
)
 
—

 
(40,611
)
Net income
13,949

 
5,638

 
45,431

 
9,281

 
—

 
74,299

  Net income attributable to noncontrolling interest
—

 
—

 
—

 
513

 
—

 
513

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

 
5,638

 
45,431

 
8,768

 
—

 
73,786

 
 
 
 
 
 
 
 
 
 
 
 


10


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
 
March 31, 2015
 
December 31,
2014
 
March 31, 2014
Variable student loan interest margin, net of settlements on derivatives
$
50,633

 
58,401

 
54,396

Fixed rate floor income, net of settlements on derivatives
46,244

 
49,213

 
37,844

Investment interest
2,205

 
1,770

 
1,979

Non-portfolio related derivative settlements
(252
)
 
(259
)
 
(252
)
Corporate debt interest expense
(1,450
)
 
(1,199
)
 
(1,325
)
Net interest income (net of settlements on derivatives)
$
97,380

 
107,926

 
92,642


Student Loan Servicing Volumes (dollars in millions)
Company owned
 
$22,650
 
$21,237
 
$21,397
 
$21,192
 
$21,110
 
$20,511
 
$19,742
 
$19,369
% of total
 
29.8%
 
21.8%
 
15.5%
 
14.3%
 
14.1%
 
12.9%
 
12.2%
 
11.5%
Number of servicing borrowers:
 
 
 
 
 
 
 
 
 
 
 
 
 
Government servicing:
 
3,036,534

 
3,892,929

 
5,305,498

 
5,438,933

 
5,465,395

 
5,824,743

 
5,915,449

 
5,882,446

FFELP servicing:
 
1,799,484

 
1,626,146

 
1,462,122

 
1,426,435

 
1,390,541

 
1,404,619

 
1,397,295

 
1,358,551

Private servicing:
 
164,554

 
173,948

 
195,580

 
191,606

 
186,863

 
200,095

 
202,529

 
205,926

Total:
 
5,000,572

 
5,693,023

 
6,963,200

 
7,056,974

 
7,042,799

 
7,429,457

 
7,515,273

 
7,446,923

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of remote hosted borrowers:
 
9,566,296

 
6,912,204

 
1,915,203

 
1,796,287

 
1,735,594

 
1,677,547

 
1,611,654

 
1,592,813



11


Other Income

The following table summarizes the components of "other income" included in the attached consolidated statements of income.
 
Three months ended
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Borrower late fee income
$
4,131

 
3,840

 
3,688

Investment advisory fees
657

 
3,487

 
5,228

Realized and unrealized gains/(losses) on investments, net
516

 
(1,972
)
 
7,210

Reduction of repurchase obligation
—

 
4,235

 
—

Other
1,614

 
3,316

 
2,005

Other income
$
6,918

 
12,906

 
18,131


Derivative Settlements

The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
 
Three months ended
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
1:3 basis swaps
$
266

 
842

 
881

Interest rate swaps - floor income hedges
(5,015
)
 
(5,035
)
 
(6,950
)
Interest rate swaps - hybrid debt hedges
(252
)
 
(258
)
 
(252
)
Cross-currency interest rate swaps
(214
)
 
(115
)
 
92

Total settlements - expense
$
(5,215
)
 
(4,566
)
 
(6,229
)

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
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Change in fair value of derivatives - income (expense)
$
(46,072
)
 
(19,879
)
 
2,916

Foreign currency transaction adjustment - income (expense)
48,209

 
18,797

 
(952
)
Derivative market value and foreign currency adjustments - income (expense)
$
2,137

 
(1,082
)
 
1,964




12


Student Loans Receivable

The table below outlines the components of the Company’s student loan portfolio:
 
As of
 
As of
 
As of
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Federally insured loans
 
 
 
 
 
Stafford and other
$
6,287,829

 
6,030,825

 
6,606,814

Consolidation
21,687,746

 
22,165,605

 
19,138,841

Total
27,975,575

 
28,196,430

 
25,745,655

Private education loans
131,513

 
27,478

 
68,540

 
28,107,088

 
28,223,908

 
25,814,195

Loan discount, net of unamortized loan premiums and deferred origination costs
(157,978
)
 
(169,813
)
 
(152,424
)
Allowance for loan losses – federally insured loans
(38,021
)
 
(39,170
)
 
(42,909
)
Allowance for loan losses – private education loans
(13,140
)
 
(9,730
)
 
(11,719
)
 
$
27,897,949

 
28,005,195

 
25,607,143

 
 
 


 



Loan Activity

The following table sets forth the activity of loans:
 
Three months ended March 31,
 
2015
 
2014
Beginning balance
$
28,223,908

 
26,121,306

Loan acquisitions
836,112

 
387,258

Repayments, claims, capitalized interest, participations, and other
(628,360
)
 
(548,705
)
Consolidation loans lost to external parties
(320,576
)
 
(145,664
)
Loans sold
(3,996
)
 
—

Ending balance
$
28,107,088

 
25,814,195



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
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Variable student loan yield, gross
2.53
 %
 
2.56
 %
 
2.50
 %
Consolidation rebate fees
(0.84
)
 
(0.84
)
 
(0.80
)
Discount accretion, net of premium and deferred origination costs amortization
0.04

 
0.05

 
0.05

Variable student loan yield, net
1.73

 
1.77

 
1.75

Student loan cost of funds - interest expense
(0.98
)
 
(0.97
)
 
(0.92
)
Student loan cost of funds - derivative settlements
—

 
0.01

 
0.02

Variable student loan spread
0.75

 
0.81

 
0.85

Fixed rate floor income, net of settlements on derivatives
0.66

 
0.68

 
0.59

Core student loan spread
1.41
 %

1.49
 %

1.44
 %
 
 
 
 
 
 
Average balance of student loans
$
28,289,420

 
28,738,887

 
25,915,053

Average balance of debt outstanding
28,460,627

 
28,877,939

 
25,826,656


13



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 months ended March 31, 2015 as compared to the same period in 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
 
March 31, 2015
 
December 31,
2014
 
March 31, 2014
Fixed rate floor income, gross
$
51,259

 
54,248

 
44,794

Derivative settlements (a)
(5,015
)
 
(5,035
)
 
(6,950
)
Fixed rate floor income, net
$
46,244

 
49,213

 
37,844

 
 
 
 
 
 
Fixed rate floor income contribution to spread, net
0.66
%
 
0.68
%
 
0.59
%
 
(a)
Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.


14


Fixed Rate Floor Income

The following table shows the Company’s student loan assets that are earning fixed rate floor income as of March 31, 2015:
 
 
Borrower/
 
Estimated
 
 
Fixed
 
lender
 
variable
 
 
interest
 
weighted
 
conversion
 
Loan
rate range
 
average yield
 
rate (a)
 
balance
< 3.0%
 
2.88%
 
0.24%
 
$
1,805,151

3.0 - 3.49%
 
3.19%
 
0.55%
 
2,266,800

3.5 - 3.99%
 
3.65%
 
1.01%
 
2,219,177

4.0 - 4.49%
 
4.20%
 
1.56%
 
1,696,214

4.5 - 4.99%
 
4.72%
 
2.08%
 
1,050,092

5.0 - 5.49%
 
5.22%
 
2.58%
 
661,683

5.5 - 5.99%
 
5.67%
 
3.03%
 
383,874

6.0 - 6.49%
 
6.18%
 
3.54%
 
447,053

6.5 - 6.99%
 
6.70%
 
4.06%
 
426,004

7.0 - 7.49%
 
7.17%
 
4.53%
 
178,772

7.5 - 7.99%
 
7.71%
 
5.07%
 
305,639

8.0 - 8.99%
 
8.18%
 
5.54%
 
689,526

> 9.0%
 
9.04%
 
6.40%
 
268,771

 
 
 
 
 
 
$
12,398,756

 
(a)
The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of March 31, 2015, the weighted average estimated variable conversion rate was 1.84% and the short-term interest rate was 17 basis points.

The following table summarizes the outstanding derivative instruments as of March 31, 2015 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)
 
 
2015
 
$
1,100,000

 
0.89
%
2016
 
750,000

 
0.85

2017
 
1,350,000

 
0.85

2018
 
100,000

 
1.02

2025
 
100,000

 
2.32

2045
 
25,000

 
2.46

 
 
$
3,425,000

 
0.92
%
(a)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.

15

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