NELNET INC - FORM 8-K - EX-99.2 - SUPPLEMENT

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8-K - 8-K - NELNET INC	nni11614form8-k.htm
EX-99.1 - EARNINGS RELEASE - NELNET INC	exhibit99111614earningsrel.htm

For Release: November 6, 2014

Media Contact: Ben Kiser, 402.458.3024

Investor Contact: Phil Morgan, 402.458.3038

Nelnet, Inc. supplemental financial information for the third 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 third quarter 2014 earnings, dated November 6, 2014, and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014.

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

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

•

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


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

•

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


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


•	uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; and


•	risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.

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

Consolidated Statements of Income

(unaudited)



	Three months ended							Nine months ended
	September 30, 2014			June 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Interest income:
Loan interest	$	187,862		175,466		158,675		520,224		472,277
Investment interest	1,562			1,482		1,562		5,023		4,662
Total interest income	189,424			176,948		160,237		525,247		476,939
Interest expense:
Interest on bonds and notes payable	71,937			69,235		55,315		201,176		171,800
Net interest income	117,487			107,713		104,922		324,071		305,139
Less provision for loan losses	2,000			1,500		5,000		6,000		15,000
Net interest income after provision for loan losses	115,487			106,213		99,922		318,071		290,139
Other income (expense):
Loan and guaranty servicing revenue	52,659			66,460		64,582		183,876		180,261
Tuition payment processing and campus commerce revenue	26,399			21,834		19,927		73,468		61,694
Enrollment services revenue	22,936			20,145		22,563		65,092		76,343
Other income	7,650			15,315		8,613		41,096		30,317
Gain on sale of loans and debt repurchases	—			18		2,138		57		10,900
Derivative settlements, net	(4,834		)	(6,214	)	(6,688	)	(17,277	)	(23,229	)
Derivative market value and foreign currency adjustments, net	29,037			7,784		(9,960	)	38,785		47,841
Total other income	133,847			125,342		101,175		385,097		384,127
Operating expenses:
Salaries and benefits	61,098			53,888		48,712		167,470		144,049
Cost to provide enrollment services	14,178			13,311		14,668		41,964		51,097
Depreciation and amortization	5,493			5,214		4,340		15,490		13,037
Other	36,676			40,377		39,887		112,680		109,193
Total operating expenses	117,445			112,790		107,607		337,604		317,376
Income before income taxes	131,889			118,765		93,490		365,564		356,890
Income tax expense	46,513			43,078		30,444		130,202		123,637
Net income	85,376			75,687		63,046		235,362		233,253
Net income attributable to noncontrolling interest	157			693		216		1,363		1,101
Net income attributable to Nelnet, Inc.	$	85,219		74,994		62,830		233,999		232,152
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.84		1.61		1.35		5.03		4.98
Weighted average common shares outstanding - basic and diluted	46,432,680			46,529,377		46,496,612		46,496,309		46,593,241

Condensed Consolidated Balance Sheets

(unaudited)



	As of		As of	As of
	September 30, 2014		December 31, 2013	September 30, 2013
Assets:
Student loans receivable, net	$	28,701,344	25,907,589	24,729,592
Cash, cash equivalents, and investments	222,359		255,307	284,054
Restricted cash and investments	940,343		902,699	768,621
Goodwill and intangible assets, net	169,076		123,250	124,050
Other assets	665,527		582,004	630,611
Total assets	$	30,698,649	27,770,849	26,536,928
Liabilities:
Bonds and notes payable	$	28,737,456	25,955,289	24,858,455
Other liabilities	303,636		371,570	300,560
Total liabilities	29,041,092		26,326,859	25,159,015
Equity:
Total Nelnet, Inc. shareholders' equity	1,657,289		1,443,662	1,377,863
Noncontrolling interest	268		328	50
Total equity	1,657,557		1,443,990	1,377,913
Total liabilities and equity	$	30,698,649	27,770,849	26,536,928

Overview

The Company is an education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: asset management and finance, loan servicing, payment processing, and enrollment services (education planning). These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns net 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						Nine months ended
	September 30, 2014			June 30, 2014		September 30, 2013	September 30, 2014		September 30, 2013
GAAP net income attributable to Nelnet, Inc.	$	85,219		74,994		62,830	233,999		232,152
Derivative market value and foreign currency adjustments, net of tax	(18,003		)	(4,826	)	6,175	(24,047	)	(29,661	)
Net income, excluding derivative market value and foreign currency adjustments (a)	$	67,216		70,168		69,005	209,952		202,491

Earnings per share:
GAAP net income attributable to Nelnet, Inc.	$	1.84		1.61		1.35	5.03		4.98
Derivative market value and foreign currency adjustments, net of tax	(0.39		)	(0.10	)	0.13	(0.51	)	(0.63	)
Net income, excluding derivative market value and foreign currency adjustments (a)	$	1.45		1.51		1.48	4.52		4.35

(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 September 30, 2014, the Company had a $28.7 billion student loan portfolio that will amortize over the next approximately 25 years. The Company actively seeks to acquire additional FFELP loan portfolios to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

In addition, the Company earns fee-based revenue through the following reportable operating segments:


•	Student Loan and Guaranty Servicing ("LGS") - referred to as Nelnet Diversified Solutions ("NDS")


•	Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS")


•	Enrollment Services - commonly called Nelnet Enrollment Solutions ("NES")

For the three months ended September 30, 2014, the Company experienced strong performance from its student loan portfolio, which offset the expected decrease in net income from the Student Loan and Guaranty Servicing operating segment.

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


(a)	Revenue includes intersegment revenue of $13.4 million and $13.5 million for the three months ended September 30, 2014 and 2013, respectively, and $41.5 million and $42.4 million for the nine months ended September 30, 2014 and 2013, respectively, earned by LGS as a result of servicing loans for AGM.

(b)

Total revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments, which was income of $29.4 million and an expense of $12.7 million for the three months ended September 30, 2014 and 2013, respectively, and income of $41.8 million and $35.7 million for the nine months ended September 30, 2014 and 2013, respectively. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax, which was income of $18.2 million and an expense of $7.8 million for the three months ended September 30, 2014 and 2013, respectively, and income of $25.9 million and $22.1 million for the nine months ended September 30, 2014 and 2013, respectively.


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

Student Loan and Guaranty Servicing


•	As of September 30, 2014, the Company was servicing $158.7 billion in FFELP, private, and government owned student loans, as compared with $135.0 billion of loans as of September 30, 2013.

•

Federal budget provisions that became effective July 1, 2014 reduced payments by the Department to guaranty agencies for assisting student loan borrowers with the rehabilitation of defaulted loans under FFELP, and rehabilitation collection revenue has been negatively impacted by these provisions. Rehabilitation collection revenue recognized by the Company was $4.4 million and $13.7 million for the three months ended September 30, 2014 and 2013, respectively.


•	Revenue from the Department servicing contract increased to $31.2 million for the three months ended September 30, 2014, compared to $26.0 million for the same period in 2013. As of September 30, 2014, the Company was servicing $130.8 billion of loans for 5.8 million borrowers under this contract.

•

The Department exercised its option to extend the servicing contract an additional five years through June 2019. During the third quarter of 2014, the Department notified the four private sector servicers of several modifications to the servicing contract. These modifications became effective as of September 1, 2014 and included a revised pricing structure and loan allocation metrics and evaluation periods.

•

Before tax operating margin was 12.1% and 29.0% for the three months ended September 30, 2014 and 2013, respectively. Operating margin decreased as a result of the implementation of previously announced 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.

Tuition Payment Processing and Campus Commerce


•	Revenue increased in the three months ended September 30, 2014 compared to the same period in 2013 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 26.7% and 32.3% for the three months ended September 30, 2014 and 2013, respectively. The decrease in margin is primarily due to a change in the mix of products and services provided as a result of recent acquisitions.

Asset Generation and Management


•	The Company acquired $5.6 billion of student loans during the first nine months of 2014, including $0.4 billion during the third quarter. The average loan portfolio balance for the three months ended September 30, 2014 and 2013 was $29.3 billion and $24.5 billion, respectively.


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

•

Core student loan spread was 1.53% for the three months ended September 30, 2014, compared to 1.46% for the three months ended June 30, 2014 and 1.57% for the three months ended September 30, 2013. The year over year decrease in student loan spread was the result of recent acquisitions of consolidation loans, which have lower margins but longer terms. The increase in student loan spread for the three months ended September 30, 2014 compared to the three months ended June 30, 2014, was due to an increase in fixed rate floor income. Due to recent loan acquisitions, the Company is earning fixed rate floor income on a larger portfolio.

•

Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the three months ended September 30, 2014 and 2013, the Company earned $49.2 million and $37.8 million, respectively, of fixed rate floor income (net of $5.4 million and $7.2 million of derivative settlements, respectively, used to hedge such loans). As of September 30, 2014, the Company was earning fixed rate floor income on $13.1 billion of student loans.


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

Liquidity and Capital Resources


•	As of September 30, 2014, the Company had cash and investments of $222.4 million.


•	For the nine months ended September 30, 2014, the Company generated $263.1 million in net cash provided by operating activities.


•	The Company has a $350.0 million unsecured line of credit with a maturity date of June 30, 2019. As of September 30, 2014, no amounts were outstanding and $350.0 million was available for future use.


•	During the three months ended September 30, 2014, the Company repurchased a total of 96,792 shares of Class A common stock for $4.0 million ($41.67 per share).


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

Operating Segments

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

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

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

Corporate Activity and Overhead

Corporate Activity and Overhead includes the following items:


•	The operating results of Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisory subsidiary


•	Income earned on certain investment activities


•	Interest expense incurred on unsecured debt transactions


•	Other product and service offerings that are not considered operating segments

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

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 September 30, 2014
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	5		2		—		7		187,949		1,814		(346	)	189,424
Interest expense	—			—		—		—		71,037		1,246		(346	)	71,937
Net interest income	5			2		—		7		116,912		568		—		117,487
Less provision for loan losses	—			—		—		—		2,000		—		—		2,000
Net interest income after provision for loan losses	5			2		—		7		114,912		568		—		115,487
Other income:
Loan and guaranty servicing revenue	52,659			—		—		52,659		—		—		—		52,659
Intersegment servicing revenue	13,432			—		—		13,432		—		—		(13,432	)	—
Tuition payment processing and campus commerce revenue	—			26,399		—		26,399		—		—		—		26,399
Enrollment services revenue	—			—		22,936		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, net	—			—		—		—		29,430		(393	)	—		29,037
Derivative settlements, net	—			—		—		—		(4,575	)	(259	)	—		(4,834	)
Total other income	66,091			26,399		22,936		115,426		29,149		2,704		(13,432	)	133,847
Operating expenses:
Salaries and benefits	37,062			13,288		4,474		54,824		565		5,709		—		61,098
Cost to provide enrollment services	—			—		14,178		14,178		—		—		—		14,178
Depreciation and amortization	2,558			2,396		41		4,995		—		498		—		5,493
Other	15,028			3,312		1,624		19,964		8,636		8,076		—		36,676
Intersegment expenses, net	906			1,481		761		3,148		13,611		(3,327	)	(13,432	)	—
Total operating expenses	55,554			20,477		21,078		97,109		22,812		10,956		(13,432	)	117,445
Income (loss) before income taxes and corporate overhead allocation	10,542			5,924		1,858		18,324		121,249		(7,684	)	—		131,889
Corporate overhead allocation	(2,567		)	(856	)	(855	)	(4,278	)	(1,026	)	5,304		—		—
Income (loss) before income taxes	7,975			5,068		1,003		14,046		120,223		(2,380	)	—		131,889
Income tax (expense) benefit	(3,030		)	(1,926	)	(381	)	(5,337	)	(45,684	)	4,508		—		(46,513	)
Net income	4,945			3,142		622		8,709		74,539		2,128		—		85,376
Net income attributable to noncontrolling interest	—			—		—		—		—		157		—		157
Net income attributable to Nelnet, Inc.	$	4,945		3,142		622		8,709		74,539		1,971		—		85,219



	Three months ended June 30, 2014
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	9		3		—		12		175,562		2,036		(662	)	176,948
Interest expense	—			—		—		—		67,936		1,961		(662	)	69,235
Net interest income	9			3		—		12		107,626		75		—		107,713
Less provision for loan losses	—			—		—		—		1,500		—		—		1,500
Net interest income after provision for loan losses	9			3		—		12		106,126		75		—		106,213
Other income (expense):
Loan and guaranty servicing revenue	66,460			—		—		66,460		—		—		—		66,460
Intersegment servicing revenue	13,800			—		—		13,800		—		—		(13,800	)	—
Tuition payment processing and campus commerce revenue	—			21,834		—		21,834		—		—		—		21,834
Enrollment services revenue	—			—		20,145		20,145		—		—		—		20,145
Other income	—			—		—		—		4,496		10,819		—		15,315
Gain on sale of loans and debt repurchases	—			—		—		—		18		—		—		18
Derivative market value and foreign currency adjustments	—			—		—		—		8,848		(1,064	)	—		7,784
Derivative settlements, net	—			—		—		—		(5,958	)	(256	)	—		(6,214	)
Total other income (expense)	80,260			21,834		20,145		122,239		7,404		9,499		(13,800	)	125,342
Operating expenses:
Salaries and benefits	33,093			11,112		4,132		48,337		570		4,981		—		53,888
Cost to provide enrollment services	—			—		13,311		13,311		—		—		—		13,311
Depreciation and amortization	2,819			1,845		41		4,705		—		509		—		5,214
Other	19,815			2,956		1,844		24,615		8,845		6,917		—		40,377
Intersegment expenses, net	1,124			1,404		944		3,472		13,968		(3,640	)	(13,800	)	—
Total operating expenses	56,851			17,317		20,272		94,440		23,383		8,767		(13,800	)	112,790
Income (loss) before income taxes and corporate overhead allocation	23,418			4,520		(127	)	27,811		90,147		807		—		118,765
Corporate overhead allocation	(2,060		)	(687	)	(687	)	(3,434	)	(1,249	)	4,683		—		—
Income (loss) before income taxes	21,358			3,833		(814	)	24,377		88,898		5,490		—		118,765
Income tax (expense) benefit	(8,116		)	(1,456	)	309		(9,263	)	(33,781	)	(34	)	—		(43,078	)
Net income (loss)	13,242			2,377		(505	)	15,114		55,117		5,456		—		75,687
Net income attributable to noncontrolling interest	—			—		—		—		—		693		—		693
Net income (loss) attributable to Nelnet, Inc.	$	13,242		2,377		(505	)	15,114		55,117		4,763		—		74,994



	Three months ended September 30, 2013
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	10		—		—		10		158,793		2,201		(767	)	160,237
Interest expense	—			—		—		—		56,100		(18	)	(767	)	55,315
Net interest income	10			—		—		10		102,693		2,219		—		104,922
Less provision for loan losses	—			—		—		—		5,000		—		—		5,000
Net interest income after provision for loan losses	10			—		—		10		97,693		2,219		—		99,922
Other income:
Loan and guaranty servicing revenue	64,582			—		—		64,582		—		—		—		64,582
Intersegment servicing revenue	13,519			—		—		13,519		—		—		(13,519	)	—
Tuition payment processing and campus commerce revenue	—			19,927		—		19,927		—		—		—		19,927
Enrollment services revenue	—			—		22,563		22,563		—		—		—		22,563
Other income	—			—		—		—		3,981		4,632		—		8,613
Gain on sale of loans and debt repurchases	—			—		—		—		2,138		—		—		2,138
Derivative market value and foreign currency adjustments, net	—			—		—		—		(12,660	)	2,700		—		(9,960	)
Derivative settlements, net	—			—		—		—		(6,432	)	(256	)	—		(6,688	)
Total other income	78,101			19,927		22,563		120,591		(12,973	)	7,076		(13,519	)	101,175
Operating expenses:
Salaries and benefits	29,719			9,229		4,491		43,439		555		4,718		—		48,712
Cost to provide enrollment services	—			—		14,668		14,668		—		—		—		14,668
Depreciation and amortization	2,677			1,117		57		3,851		—		489		—		4,340
Other	19,752			1,908		1,556		23,216		7,939		8,732		—		39,887
Intersegment expenses, net	1,457			1,431		1,139		4,027		13,705		(4,213	)	(13,519	)	—
Total operating expenses	53,605			13,685		21,911		89,201		22,199		9,726		(13,519	)	107,607
Income (loss) before income taxes and corporate overhead allocation	24,506			6,242		652		31,400		62,521		(431	)	—		93,490
Corporate overhead allocation	(1,822		)	(607	)	(607	)	(3,036	)	(1,302	)	4,338		—		—
Income before income taxes	22,684			5,635		45		28,364		61,219		3,907		—		93,490
Income tax (expense) benefit	(8,620		)	(2,141	)	(17	)	(10,778	)	(23,263	)	3,597		—		(30,444	)
Net income	14,064			3,494		28		17,586		37,956		7,504		—		63,046
Net income attributable to noncontrolling interest	—			—		—		—		—		216		—		216
Net income attributable to Nelnet, Inc.	$	14,064		3,494		28		17,586		37,956		7,288		—		62,830



	Nine months ended September 30, 2014
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	25		5		—		30		520,514		6,508		(1,805	)	525,247
Interest expense	—			—		—		—		198,449		4,532		(1,805	)	201,176
Net interest income	25			5		—		30		322,065		1,976		—		324,071
Less provision for loan losses	—			—		—		—		6,000		—		—		6,000
Net interest income after provision for loan losses	25			5		—		30		316,065		1,976		—		318,071
Other income:
Loan and guaranty servicing revenue	183,876			—		—		183,876		—		—		—		183,876
Intersegment servicing revenue	41,453			—		—		41,453		—		—		(41,453	)	—
Tuition payment processing and campus commerce revenue	—			73,468		—		73,468		—		—		—		73,468
Enrollment services revenue	—			—		65,092		65,092		—		—		—		65,092
Other income	—			—		—		—		12,954		28,142		—		41,096
Gain on sale of loans and debt repurchases	—			—		—		—		57		—		—		57
Derivative market value and foreign currency adjustments, net	—			—		—		—		41,755		(2,970	)	—		38,785
Derivative settlements, net	—			—		—		—		(16,510	)	(767	)	—		(17,277	)
Total other income	225,329			73,468		65,092		363,889		38,256		24,405		(41,453	)	385,097
Operating expenses:
Salaries and benefits	102,462			34,427		12,986		149,875		1,744		15,851		—		167,470
Cost to provide enrollment services	—			—		41,964		41,964		—		—		—		41,964
Depreciation and amortization	8,166			5,669		129		13,964		—		1,526		—		15,490
Other	53,295			8,915		4,917		67,127		24,627		20,926		—		112,680
Intersegment expenses, net	3,113			4,305		2,711		10,129		41,950		(10,626	)	(41,453	)	—
Total operating expenses	167,036			53,316		62,707		283,059		68,321		27,677		(41,453	)	337,604
Income (loss) before income taxes and corporate overhead allocation	58,318			20,157		2,385		80,860		286,000		(1,296	)	—		365,564
Corporate overhead allocation	(6,487		)	(2,163	)	(2,162	)	(10,812	)	(3,604	)	14,416		—		—
Income before income taxes	51,831			17,994		223		70,048		282,396		13,120		—		365,564
Income tax (expense) benefit	(19,695		)	(6,837	)	(85	)	(26,617	)	(107,309	)	3,724		—		(130,202	)
Net income	32,136			11,157		138		43,431		175,087		16,844		—		235,362
Net income attributable to noncontrolling interest	—			—		—		—		—		1,363		—		1,363
Net income attributable to Nelnet, Inc.	$	32,136		11,157		138		43,431		175,087		15,481		—		233,999



	Nine months ended September 30, 2013
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	29		—		—		29		472,622		6,708		(2,420	)	476,939
Interest expense	—			—		—		—		170,502		3,718		(2,420	)	171,800
Net interest income	29			—		—		29		302,120		2,990		—		305,139
Less provision for loan losses	—			—		—		—		15,000		—		—		15,000
Net interest income after provision for loan losses	29			—		—		29		287,120		2,990		—		290,139
Other income:
Loan and guaranty servicing revenue	180,261			—		—		180,261		—		—		—		180,261
Intersegment servicing revenue	42,375			—		—		42,375		—		—		(42,375	)	—
Tuition payment processing and campus commerce revenue	—			61,694		—		61,694		—		—		—		61,694
Enrollment services revenue	—			—		76,343		76,343		—		—		—		76,343
Other income	—			—		—		—		11,207		19,110		—		30,317
Gain on sale of loans and debt repurchases	—			—		—		—		10,900		—		—		10,900
Derivative market value and foreign currency adjustments, net	—			—		—		—		35,711		12,130		—		47,841
Derivative settlements, net	—			—		—		—		(21,816	)	(1,413	)	—		(23,229	)
Total other income	222,636			61,694		76,343		360,673		36,002		29,827		(42,375	)	384,127
Operating expenses:
Salaries and benefits	86,254			28,015		15,067		129,336		1,709		13,004		—		144,049
Cost to provide enrollment services	—			—		51,097		51,097		—		—		—		51,097
Depreciation and amortization	8,197			3,387		179		11,763		—		1,274		—		13,037
Other	56,173			6,387		4,450		67,010		23,375		18,808		—		109,193
Intersegment expenses, net	3,243			4,350		3,418		11,011		42,955		(11,591	)	(42,375	)	—
Total operating expenses	153,867			42,139		74,211		270,217		68,039		21,495		(42,375	)	317,376
Income before income taxes and corporate overhead allocation	68,798			19,555		2,132		90,485		255,083		11,322		—		356,890
Corporate overhead allocation	(4,332		)	(1,443	)	(1,443	)	(7,218	)	(3,095	)	10,313		—		—
Income before income taxes	64,466			18,112		689		83,267		251,988		21,635		—		356,890
Income tax (expense) benefit	(24,498		)	(6,882	)	(261	)	(31,641	)	(95,755	)	3,759		—		(123,637	)
Net income	39,968			11,230		428		51,626		156,233		25,394		—		233,253
Net income attributable to noncontrolling interest	—			—		—		—		—		1,101		—		1,101
Net income attributable to Nelnet, Inc.	$	39,968		11,230		428		51,626		156,233		24,293		—		232,152

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							Nine months ended
	September 30, 2014			June 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Variable student loan interest margin, net of settlements on derivatives	$	63,390		58,627		59,100		176,413		172,797
Fixed rate floor income, net of settlements on derivatives	49,206			43,607		37,810		130,657		109,582
Investment interest	1,562			1,482		1,562		5,023		4,662
Non-portfolio related derivative settlements	(259		)	(256	)	(256	)	(767	)	(1,413	)
Corporate debt interest expense	(1,246		)	(1,961	)	18		(4,532	)	(3,718	)
Net interest income (net of settlements on derivatives)	$	112,653		101,499		98,234		306,794		281,910

Student Loan Servicing Volumes (dollars in millions)



Company owned	$23,727	$22,650	$21,237	$20,820	$20,629	$20,715	$21,397	$21,192	$21,110	$20,511
% of total	38.6%	29.8%	21.8%	18.5%	17.7%	15.3%	15.5%	14.3%	14.1%	12.9%
Number of servicing borrowers:
Government servicing:	2,804,502	3,036,534	3,892,929	4,261,637	4,396,341	5,145,901	5,305,498	5,438,933	5,465,395	5,824,743
FFELP servicing:	1,912,748	1,799,484	1,626,146	1,586,312	1,529,203	1,507,452	1,462,122	1,426,435	1,390,541	1,404,619
Private servicing:	155,947	164,554	173,948	170,224	173,588	178,935	195,580	191,606	186,863	200,095
Total:	4,873,197	5,000,572	5,693,023	6,018,173	6,099,132	6,832,288	6,963,200	7,056,974	7,042,799	7,429,457

Number of remote hosted borrowers:	545,456	9,566,296	6,912,204	5,001,695	3,218,896	1,986,866	1,915,203	1,796,287	1,735,594	1,677,547

Other Income

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



	Three months ended					Nine months ended
	September 30, 2014			June 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013
Borrower late fee income	$	3,676		3,557	2,927	10,920	9,665
Investment advisory fees	1,815			7,008	2,352	14,043	11,516
Realized and unrealized gains/(losses) on investments, net	(267		)	2,081	1,154	9,024	2,150
Other	2,426			2,669	2,180	7,109	6,986
Other income	$	7,650		15,315	8,613	41,096	30,317

Derivative Settlements

The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.



	Three months ended							Nine months ended
	September 30, 2014			June 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
1:3 basis swaps	$	808		858		781		2,547		2,474
Interest rate swaps - floor income hedges	(5,421		)	(6,974	)	(7,178	)	(19,345	)	(24,017	)
Interest rate swaps - hybrid debt hedges	(259		)	(256	)	(256	)	(767	)	(1,413	)
Cross-currency interest rate swaps	38			158		(35	)	288		(273	)
Total settlements - expense	$	(4,834	)	(6,214	)	(6,688	)	(17,277	)	(23,229	)

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						Nine months ended
	September 30, 2014			June 30, 2014	September 30, 2013		September 30, 2014		September 30, 2013
Change in fair value of derivatives - income (expense)	$	(8,381	)	5,033	30,014		(431	)	73,743
Foreign currency transaction adjustment - income (expense)	37,418			2,751	(39,974	)	39,216		(25,902	)
Derivative market value and foreign currency adjustments - income (expense)	$	29,037		7,784	(9,960	)	38,785		47,841

Student Loans Receivable

The table below outlines the components of the Company’s student loan portfolio:



	As of			As of		As of
	September 30, 2014			December 31, 2013		September 30, 2013
Federally insured loans
Stafford and other	$	6,218,910		6,686,626		6,884,348
Consolidation	22,632,689			19,363,577		17,908,229
Total	28,851,599			26,050,203		24,792,577
Non-federally insured loans	77,623			71,103		94,763
	28,929,222			26,121,306		24,887,340
Loan discount, net of unamortized loan premiums and deferred origination costs	(175,910		)	(158,595	)	(103,551	)
Allowance for loan losses – federally insured loans	(39,470		)	(43,440	)	(42,406	)
Allowance for loan losses – non-federally insured loans	(12,498		)	(11,682	)	(11,791	)
	$	28,701,344		25,907,589		24,729,592

Loan Activity

The following table sets forth the activity of loans:



	Three months ended September 30,					Nine months ended September 30,
	2014			2013		2014		2013
Beginning balance	$	29,579,785		24,718,368		26,121,306		24,995,880
Loan acquisitions	367,816			1,053,972		5,555,714		2,200,756
Repayments, claims, capitalized interest, participations, and other	(730,654		)	(750,422	)	(2,104,724	)	(1,896,771	)
Consolidation loans lost to external parties	(287,723		)	(134,578	)	(643,066	)	(400,874	)
Loans sold	(2		)	—		(8	)	(11,651	)
Ending balance	$	28,929,222		24,887,340		28,929,222		24,887,340

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							Nine months ended
	September 30, 2014			June 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Variable student loan yield, gross	2.58		%	2.54	%	2.58	%	2.55	%	2.57	%
Consolidation rebate fees	(0.83		)	(0.82	)	(0.76	)	(0.82	)	(0.77	)
Discount accretion, net of premium and deferred origination costs amortization	0.05			0.06		0.02		0.05		0.03
Variable student loan yield, net	1.80			1.78		1.84		1.78		1.83
Student loan cost of funds - interest expense	(0.95		)	(0.95	)	(0.89	)	(0.94	)	(0.90	)
Student loan cost of funds - derivative settlements	0.01			0.01		0.01		0.01		0.01
Variable student loan spread	0.86			0.84		0.96		0.85		0.94
Fixed rate floor income, net of settlements on derivatives	0.67			0.62		0.61		0.63		0.59
Core student loan spread	1.53		%	1.46	%	1.57	%	1.48	%	1.53	%

Average balance of student loans	$	29,328,743		28,163,626		24,491,516		27,802,474		24,690,493
Average balance of debt outstanding	29,485,652			28,229,140		24,470,096		27,860,552		24,707,389

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

(a)

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

Variable student loan spread decreased during the three and nine months ended September 30, 2014 as compared to the same periods in 2013 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							Nine months ended
	September 30, 2014			June 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Fixed rate floor income, gross	$	54,627		50,581		44,988		150,002		133,599
Derivative settlements (a)	(5,421		)	(6,974	)	(7,178	)	(19,345	)	(24,017	)
Fixed rate floor income, net	$	49,206		43,607		37,810		130,657		109,582
Fixed rate floor income contribution to spread, net	0.67		%	0.62	%	0.61	%	0.63	%	0.59	%


(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.

Fixed Rate Floor Income

The following table shows the Company’s student loan assets that are earning fixed rate floor income as of September 30, 2014:



Fixed interest rate range	Borrower/lender weighted average yield	Estimated variable conversion rate (a)	Loan balance
Fixed interest rate range	Borrower/lender weighted average yield	Estimated variable conversion rate (a)	Loan balance
< 3.0%	2.88%	0.24%	$	1,903,488
3.0 - 3.49%	3.20%	0.56%	2,381,809
3.5 - 3.99%	3.65%	1.01%	2,338,828
4.0 - 4.49%	4.20%	1.56%	1,789,966
4.5 - 4.99%	4.72%	2.08%	1,109,361
5.0 - 5.49%	5.22%	2.58%	695,994
5.5 - 5.99%	5.67%	3.03%	401,272
6.0 - 6.49%	6.18%	3.54%	469,818
6.5 - 6.99%	6.71%	4.07%	448,273
7.0 - 7.49%	7.17%	4.53%	186,016
7.5 - 7.99%	7.71%	5.07%	324,296
8.0 - 8.99%	8.18%	5.54%	724,664
> 9.0%	9.04%	6.40%	286,501
			$	13,060,286


(a)	The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of September 30, 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 September 30, 2014 used by the Company to economically hedge loans earning fixed rate floor income.



Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2015	$	1,100,000	0.89
2016	750,000		0.85
2017	1,250,000		0.86
	$	3,100,000	0.87	%


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

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