NELNET INC, 10-K filed on 2/27/2018
Annual Report
Document and Entity Information Document (USD $)
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Jan. 31, 2018
Common Class A [Member]
Jan. 31, 2018
Common Class B [Member]
Document Information [Line Items]
 
 
 
 
Entity Registrant Name
NELNET INC 
 
 
 
Document Type
10-K 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
29,343,603 
11,468,587 
Entity Public Float
 
$ 1,027,524,695 
 
 
Amendment Flag
false 
 
 
 
Entity Central Index Key
0001258602 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
Q4 
 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Assets:
 
 
Loans receivable (net of allowance for loan losses of $54,590 and $51,842, respectively)
$ 21,814,507 
$ 24,903,724 
Cash and cash equivalents:
 
 
Cash and cash equivalents - not held at a related party
6,982 
7,841 
Cash and cash equivalents - held at a related party
59,770 
61,813 
Total cash and cash equivalents
66,752 
69,654 
Investments and notes receivable
240,538 
254,144 
Restricted cash
688,193 
980,961 
Restricted cash - due to customers
187,121 
119,702 
Loan accrued interest receivable
430,385 
391,264 
Accounts receivable (net of allowance for doubtful accounts of $1,436 and $1,549, respectively)
54,410 
43,972 
Goodwill
138,759 
147,312 
Intangible assets, net
38,427 
47,813 
Property and equipment, net
248,051 
123,786 
Other assets
56,474 
23,232 
Fair value of derivative instruments
818 
87,531 
Total assets
23,964,435 
27,193,095 
Liabilities:
 
 
Bonds and notes payable
21,356,573 
24,668,490 
Accrued interest payable
50,039 
45,677 
Other liabilities
198,252 
210,475 
Due to customers
187,121 
119,702 
Fair value of derivative instruments
7,063 
77,826 
Total liabilities
21,799,048 
25,122,170 
Commitments and contingencies
   
   
Nelnet, Inc. shareholders' equity:
 
 
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding
Common stock:
 
 
Additional paid-in capital
521 
420 
Retained earnings
2,143,983 
2,056,084 
Accumulated other comprehensive earnings
4,617 
4,730 
Total Nelnet, Inc. shareholders' equity
2,149,529 
2,061,655 
Noncontrolling interests
15,858 
9,270 
Total equity
2,165,387 
2,070,925 
Total liabilities and equity
23,964,435 
27,193,095 
Common Class A [Member]
 
 
Common stock:
 
 
Common stock
293 
306 
Common Class B [Member]
 
 
Common stock:
 
 
Common stock
115 
115 
Variable Interest Entity, Primary Beneficiary [Member]
 
 
Assets:
 
 
Loans receivable (net of allowance for loan losses of $54,590 and $51,842, respectively)
21,909,476 
25,090,530 
Cash and cash equivalents:
 
 
Restricted cash
641,994 
970,306 
Other assets
431,934 
390,504 
Liabilities:
 
 
Bonds and notes payable
21,702,298 
25,105,704 
Other liabilities
168,637 
290,996 
Fair value of derivative instruments
66,453 
Common stock:
 
 
Net assets of consolidated education lending variable interest entities
$ 1,112,469 
$ 988,187 
Consolidated Balance Sheets (Parentheticals) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Allowance for loan losses
$ 54,590 
$ 51,842 
Allowance for doubtful accounts
$ 1,436 
$ 1,549 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, authorized shares (in shares)
50,000,000 
50,000,000 
Preferred stock, issued shares (in shares)
Preferred stock, outstanding shares (in shares)
Common Class A [Member]
 
 
Par value (in dollars per share)
$ 0.01 
$ 0.01 
Shares authorized (in shares)
600,000,000 
600,000,000 
Shares issued (in shares)
29,341,517 
30,628,112 
Shares outstanding (in shares)
29,341,517 
30,628,112 
Common Class B [Member]
 
 
Par value (in dollars per share)
$ 0.01 
$ 0.01 
Shares authorized (in shares)
60,000,000 
60,000,000 
Shares issued (in shares)
11,468,587 
11,476,932 
Shares outstanding (in shares)
11,468,587 
11,476,932 
Consolidated Statements of Income (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Interest income:
 
 
 
Loan interest
$ 757,731 
$ 751,280 
$ 726,258 
Investment interest
12,695 
9,466 
7,851 
Total interest income
770,426 
760,746 
734,109 
Interest expense:
 
 
 
Interest on bonds and notes payable
465,188 
388,183 
302,210 
Net interest income
305,238 
372,563 
431,899 
Less provision for loan losses
14,450 
13,500 
10,150 
Net interest income after provision for loan losses
290,788 
359,063 
421,749 
Other income:
 
 
 
Loan systems and servicing revenue
223,000 
214,846 
239,858 
Tuition payment processing, school information, and campus commerce revenue
145,751 
132,730 
120,365 
Communications revenue
25,700 
17,659 
Enrollment services revenue
4,326 
51,073 
Other income
52,826 
53,929 
47,262 
Gain on sale of loans and debt repurchases, net
2,902 
7,981 
5,153 
Derivative market value and foreign currency transaction adjustments and derivative settlements, net
(18,554)
49,795 
4,401 
Total other income
431,625 
481,266 
468,112 
Operating expenses:
 
 
 
Salaries and benefits
301,885 
255,924 
247,914 
Depreciation and amortization
39,541 
33,933 
26,343 
Loan servicing fees
22,734 
25,750 
30,213 
Cost to provide communications services
9,950 
6,866 
Cost to provide enrollment services
3,623 
41,733 
Other expenses
121,619 
115,419 
123,014 
Total operating expenses
495,729 
441,515 
469,217 
Income before income taxes
226,684 
398,814 
420,644 
Income tax expense
64,863 
141,313 
152,380 
Net income
161,821 
257,501 
268,264 
Net loss (income) attributable to noncontrolling interests
11,345 
(750)
(285)
Net income attributable to Nelnet, Inc.
$ 173,166 
$ 256,751 
$ 267,979 
Earnings per common share:
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted (in dollars per share)
$ 4.14 
$ 6.02 
$ 5.89 
Weighted average common shares outstanding - basic and diluted (in shares)
41,791,941 
42,669,070 
45,529,340 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2017
Sep. 30, 2017
Jun. 30, 2017
Mar. 31, 2017
Dec. 31, 2016
Sep. 30, 2016
Jun. 30, 2016
Mar. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
 
 
 
 
 
 
 
 
Net income
$ 45,714 
$ 43,535 
$ 24,651 
$ 47,920 
$ 98,931 
$ 84,363 
$ 26,178 
$ 48,029 
$ 161,821 
$ 257,501 
$ 268,264 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period, net
 
 
 
 
 
 
 
 
2,349 
5,789 
(1,570)
Reclassification adjustment for gains recognized in net income, net of losses
 
 
 
 
 
 
 
 
(2,528)
(1,907)
(2,955)
Income tax effect
 
 
 
 
 
 
 
 
66 
(1,436)
1,674 
Total other comprehensive (loss) income
 
 
 
 
 
 
 
 
(113)
2,446 
(2,851)
Comprehensive income
 
 
 
 
 
 
 
 
161,708 
259,947 
265,413 
Comprehensive loss (income) attributable to noncontrolling interests
 
 
 
 
 
 
 
 
11,345 
(750)
(285)
Comprehensive income attributable to Nelnet, Inc.
 
 
 
 
 
 
 
 
$ 173,053 
$ 259,197 
$ 265,128 
Consolidated Statements of Shareholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Preferred Stock [Member]
Common Stock [Member]
Common Class A [Member]
Common Stock [Member]
Common Class B [Member]
Additional paid-in capital [Member]
Retained earnings [Member]
Accumulated other comprehensive earnings [Member]
Noncontrolling interest [Member]
Beginning balance at Dec. 31, 2014
$ 1,725,678 
$ 0 
$ 348 
$ 115 
$ 17,290 
$ 1,702,560 
$ 5,135 
$ 230 
Beginning balance (in shares) at Dec. 31, 2014
 
34,756,384 
11,486,932 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of noncontrolling interests
7,443 
 
 
 
 
 
 
7,443 
Net income
268,264 
 
 
 
 
267,979 
 
285 
Other comprehensive income (loss)
(2,851)
 
 
 
 
 
(2,851)
 
Distribution to noncontrolling interests
(232)
 
 
 
 
 
 
(232)
Cash dividends on Class A and Class B common stock
(19,025)
 
 
 
 
(19,025)
 
 
Issuance of common stock, net of forfeitures (in shares)
 
 
159,303 
 
 
 
 
 
Issuance of common stock, net of forfeitures
3,862 
 
 
3,860 
 
 
 
Compensation expense for stock based awards
5,188 
 
 
 
5,188 
 
 
 
Repurchase of common stock (in shares)
 
 
(2,449,159)
 
 
 
 
 
Repurchase of common stock
(96,169)
 
(25)
 
(26,338)
(69,806)
 
 
Conversion of of common stock (in shares)
 
 
10,000 
(10,000)
 
 
 
 
Ending balance at Dec. 31, 2015
1,892,158 
325 
115 
1,881,708 
2,284 
7,726 
Ending balance (in shares) at Dec. 31, 2015
 
32,476,528 
11,476,932 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of noncontrolling interests
1,366 
 
 
 
 
 
 
1,366 
Net income
257,501 
 
 
 
 
256,751 
 
750 
Other comprehensive income (loss)
2,446 
 
 
 
 
 
2,446 
 
Distribution to noncontrolling interests
(572)
 
 
 
 
 
 
(572)
Cash dividends on Class A and Class B common stock
(21,188)
 
 
 
 
(21,188)
 
 
Issuance of common stock, net of forfeitures (in shares)
 
 
189,952 
 
 
 
 
 
Issuance of common stock, net of forfeitures
4,219 
 
 
4,218 
 
 
 
Compensation expense for stock based awards
4,086 
 
 
 
4,086 
 
 
 
Repurchase of common stock (in shares)
 
 
(2,038,368)
 
 
 
 
 
Repurchase of common stock
(69,091)
 
(20)
 
(7,884)
(61,187)
 
 
Ending balance at Dec. 31, 2016
2,070,925 
306 
115 
420 
2,056,084 
4,730 
9,270 
Ending balance (in shares) at Dec. 31, 2016
 
30,628,112 
11,476,932 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of noncontrolling interests
19,578 
 
 
 
 
 
 
19,578 
Net income
161,821 
 
 
 
 
173,166 
 
(11,345)
Other comprehensive income (loss)
(113)
 
 
 
 
 
(113)
 
Distribution to noncontrolling interests
(1,645)
 
 
 
 
 
 
(1,645)
Cash dividends on Class A and Class B common stock
(24,097)
 
 
 
 
(24,097)
 
 
Issuance of common stock, net of forfeitures (in shares)
 
 
178,114 
 
 
 
 
 
Issuance of common stock, net of forfeitures
3,621 
 
 
3,619 
 
 
 
Compensation expense for stock based awards
4,193 
 
 
 
4,193 
 
 
 
Repurchase of common stock (in shares)
 
 
(1,473,054)
 
 
 
 
 
Repurchase of common stock
(68,896)
 
(15)
 
(7,711)
(61,170)
 
 
Conversion of of common stock (in shares)
 
 
8,345 
(8,345)
 
 
 
 
Ending balance at Dec. 31, 2017
$ 2,165,387 
$ 0 
$ 293 
$ 115 
$ 521 
$ 2,143,983 
$ 4,617 
$ 15,858 
Ending balance (in shares) at Dec. 31, 2017
 
29,341,517 
11,468,587 
 
 
 
 
Consolidated Statements of Shareholders' Equity (Parentheticals)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Common Class B [Member]
 
 
 
Cash dividend on Class A and Class B common stock - per share
$ 0.58 
$ 0.50 
$ 0.42 
Common Class A [Member]
 
 
 
Cash dividend on Class A and Class B common stock - per share
$ 0.58 
$ 0.50 
$ 0.42 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Cash Flows [Abstract]
 
 
 
Net income attributable to Nelnet, Inc.
$ 173,166 
$ 256,751 
$ 267,979 
Net (loss) income attributable to noncontrolling interests
11,345 
(750)
(285)
Net income
161,821 
257,501 
268,264 
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:
 
 
 
Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs
137,823 
122,547 
123,736 
Loan discount accretion
(44,812)
(40,617)
(43,766)
Provision for loan losses
14,450 
13,500 
10,150 
Derivative market value adjustment
(26,379)
(59,895)
15,150 
Unrealized foreign currency transaction adjustment
45,600 
(11,849)
(43,801)
(Payments) proceeds from termination of derivative instruments, net
(30,382)
3,999 
65,527 
Payments to enter into derivative instruments
(929)
(2,936)
Proceeds from clearinghouse to settle variation margin, net
48,985 
Gain on sale of loans, net
(351)
Gain from debt repurchases, net
(2,902)
(7,981)
(4,802)
Gain from sales of available-for-sale securities, net of losses
(2,528)
(1,907)
(2,955)
Deferred income tax (benefit) expense
(1,544)
27,005 
7,049 
Non-cash compensation expense
4,416 
4,348 
5,347 
Impairment expense
3,626 
Other
3,948 
4,215 
755 
Increase in loan accrued interest receivable
(39,203)
(7,439)
(3,819)
(Increase) decrease in accounts receivable
(12,046)
7,454 
1,061 
(Increase) decrease in other assets
(34,457)
(2,203)
375 
Increase in accrued interest payable
4,362 
14,170 
5,117 
(Decrease) increase in other liabilities
(2,341)
2,409 
(8,736)
Net cash provided by operating activities
227,508 
325,257 
391,365 
Cash flows from investing activities, net of acquisitions:
 
 
 
Purchases of loans
(325,476)
(349,144)
(2,189,450)
Net proceeds from loan repayments, claims, capitalized interest, and other
3,363,526 
3,735,772 
3,668,302 
Proceeds from sale of loans
53,203 
44,760 
3,996 
Purchases of available-for-sale securities
(128,523)
(94,673)
(100,476)
Proceeds from sales of available-for-sale securities
156,540 
144,252 
95,758 
Purchases of investments and issuance of notes receivable
(29,339)
(22,361)
(93,948)
Proceeds from investments and notes receivable
11,545 
15,898 
29,799 
Purchases of property and equipment
(156,005)
(67,602)
(16,761)
Decrease (increase) in restricted cash, net
320,108 
(147,487)
67,108 
Business and asset acquisitions, net of cash acquired
(46,966)
Proceeds from sale of business, net
4,511 
Net cash provided by investing activities
3,270,090 
3,259,415 
1,417,362 
Cash flows from financing activities, net of borrowings assumed:
 
 
 
Payments on bonds and notes payable
(5,403,224)
(4,134,890)
(4,368,180)
Proceeds from issuance of bonds and notes payable
1,984,558 
650,909 
2,614,595 
Payments of debt issuance costs
(6,497)
(5,845)
(11,162)
Payment of contingent consideration
(850)
Dividends paid
(24,097)
(21,188)
(19,025)
Repurchases of common stock
(68,896)
(69,091)
(96,169)
Proceeds from issuance of common stock
678 
889 
801 
Issuance of noncontrolling interests
19,473 
1,241 
3,693 
Distribution to noncontrolling interests
(1,645)
(572)
(232)
Net cash used in financing activities
(3,500,500)
(3,578,547)
(1,875,679)
Net (decrease) increase in cash and cash equivalents
(2,902)
6,125 
(66,952)
Cash and cash equivalents, beginning of year
69,654 
63,529 
130,481 
Cash and cash equivalents, end of year
66,752 
69,654 
63,529 
Cash disbursements made for:
 
 
 
Interest
390,278 
301,118 
228,248 
Income taxes, net of refunds
96,721 
115,415 
147,235 
Noncash investing and financing activities:
 
 
 
Loans and other assets acquired
2,025,453 
Borrowings and other liabilities assumed in acquisition of loans
1,885,453 
Issuance of noncontrolling interest
$ 0 
$ 20 
$ 3,750 
Description of Business
Description of Business
Description of Business

Nelnet, Inc. and its subsidiaries (“Nelnet” or the “Company”) is a diverse company with a focus on delivering education-related products and services and loan asset management. The largest operating businesses engage in loan servicing, tuition payment processing and school information systems, and communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate and start-up ventures. Substantially all revenue from external customers is earned, and all long-lived assets are located, in the United States.

The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the Federal Family Education Loan Program (“FFELP” or “FFEL Program”) of the U.S. Department of Education (the “Department”).

The Health Care and Education Reconciliation Act of 2010 (the "Reconciliation Act of 2010”) discontinued new loan originations under the FFEL Program, effective July 1, 2010, and requires that all new federal student loan originations be made directly by the Department through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions of existing FFELP loans. As a result of this law, the Company no longer originates new FFELP loans. To reduce its reliance on interest income on student loans, the Company has expanded its services and products. This expansion has been accomplished through internal growth and innovation as well as business acquisitions.

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

Loan Systems and Servicing
Tuition Payment Processing and Campus Commerce
Communications
Asset Generation and Management

A description of each reportable operating segment is included below. See note 15 for additional information on the Company's segment reporting.
Loan Systems and Servicing

The primary service offerings of the Loan Systems and Servicing operating segment include:

Servicing federally-owned student loans for the Department of Education
Servicing FFELP loans
Originating and servicing private education and consumer loans
Providing student loan servicing software and other information technology products and services
Providing outsourced services including call center, processing, and marketing services

In addition, this segment provided servicing and outsourcing services for FFELP guaranty agencies, including FFELP guaranty collection services, through June 30, 2016.

The Loan Systems and Servicing operating segment provides for the servicing of the Company's student loan portfolio and the portfolios of third parties. The loan servicing activities include loan conversion activities, application processing, borrower updates, customer service, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company's portfolio in addition to generating external fee revenue when performed for third-party clients.

The Company is one of four private sector companies (referred to as Title IV Additional Servicers, or "TIVAS") awarded a student loan servicing contract by the Department to provide additional servicing capacity for loans owned by the Department.

This operating segment also provides student loan servicing software, which is used internally by the Company and licensed to third-party student loan holders and servicers. These software systems have been adapted so that they can be offered as hosted servicing software solutions usable by third parties to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans.

This segment also provides business process outsourcing specializing in contact center management. The contact center solutions and services include taking inbound calls, helping with outreach campaigns and sales, and interacting with customers through multi-channels.

In addition, this operating segment provided servicing activities for guaranty agencies, which serve as intermediaries between the Department and FFELP lenders, and are responsible for paying the claims made on defaulted loans. The services provided by the Company included providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services. The Company's guaranty servicing and collection revenue was earned from two guaranty servicing clients. A contract with one client expired on October 31, 2015, and was not renewed. The remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016, and after this date the Company has no remaining guaranty servicing and collection revenue.

Tuition Payment Processing and Campus Commerce

The Company's Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education). In addition, this operating segment provides K-12 private and faith-based schools (i) school information system software that help schools automate administrative processes such as admissions, scheduling, student billing, attendance, and grade book management and (ii) professional development and educational instruction services. This segment also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.

In the K-12 market, the Company offers actively managed tuition payment plans and billing services, school information system and learning management software, professional development and educational instruction services, and assistance with financial needs assessment and donor management. In the higher education market, the Company primarily offers actively managed tuition payment plans and campus commerce technologies and payment processing.

Outside of the education market, the Company also offers payment services including electronic transfer and credit card processing, reporting, billing and invoicing, mobile and virtual terminal solutions, and specialized integrations to business software.

Communications

On December 31, 2015, the Company purchased the majority of the ownership interests of ALLO Communications LLC (“ALLO”).  ALLO provides pure fiber optic service to homes and businesses for internet, broadband, television, and telephone services.  The acquisition of ALLO provides additional diversification of the Company's revenues and cash flows outside of education.  In addition, the acquisition leverages the Company's existing infrastructure, customer service capabilities and call centers, and financial strength and liquidity for continued growth.  For financial reporting purposes, the Company provides the operating results of ALLO as a separate reportable operating segment.  The ALLO assets acquired and liabilities assumed were recorded by the Company at their respective estimated fair values at the date of acquisition.  As such, ALLO’s assets and liabilities as of December 31, 2015 are included in the Company’s consolidated balance sheet.  However, ALLO had no impact on the consolidated statement of income for 2015.  Beginning January 1, 2016, the Company began to reflect the operations of ALLO in the consolidated statements of income. 

ALLO derives its revenue primarily from the sale of communication services to residential and business customers in Nebraska. Internet, broadband, and television services include revenue from residential and business customers for subscriptions to ALLO's video and data products.  ALLO data services provide high-speed internet access over ALLO's all-fiber network at various symmetrical speeds of up to 1 gigabit per second for residential customers and is capable of providing symmetrical speeds of over 1 gigabit per second for business customers. Local calling services include fiber telephone service and other basic services.  Long-distance services include traditional domestic and international long distance which enables customers to make calls that terminate outside their local calling area. 

Asset Generation and Management

The Company's Asset Generation and Management operating segment includes the acquisition, management, and ownership of the Company's loan assets. Substantially all loan assets included in this segment are student loans originated under the FFEL Program, including the Stafford Loan Program, the PLUS Loan program, and loans that reflect the consolidation into a single loan of certain previously separate borrower obligations (“Consolidation” loans). The Company also acquires private education and consumer loans. The Company generates a substantial portion of its earnings from the spread, referred to as the Company's loan spread, between the yield it receives on its loan portfolio and the associated costs to finance such portfolio. The student loan assets are held in a series of education lending subsidiaries and associated securitization trusts designed specifically for this purpose. In addition to the loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance, are included in this segment.

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 include the following items:

The operating results of Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary
Income earned on certain investment activities, including real estate and start-up ventures
Interest expense incurred on unsecured debt transactions
Other product and service offerings that are not considered reportable operating segments

Corporate and Other Activities also include certain corporate activities and overhead functions related to executive management, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.
Recent Developments
Recent Developments
Recent Developments

On February 7, 2018, the Company acquired 100 percent of the outstanding stock of Great Lakes Educational Loan Services, Inc. (“Great Lakes”) for a purchase price of $150.0 million in cash. The Company and Great Lakes are two of the four large private sector companies, or TIVAS, that have student loan servicing contracts with the Department of Education to provide servicing for loans owned by the Department. The operating results of Great Lakes will be included in the Company's Loan Systems and Servicing operating segment beginning February 7, 2018.
Summary of Significant Accounting Policies and Practices
Summary of Significant Accounting Policies and Practices
Summary of Significant Accounting Policies and Practices

Consolidation

The consolidated financial statements include the accounts of Nelnet, Inc. and its consolidated subsidiaries. In addition, the accounts of all variable interest entities (“VIEs”) of which the Company has determined that it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
Variable Interest Entities

The following entities are VIEs of which the Company has determined that it is the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE.
The Company's education lending subsidiaries are engaged in the securitization of education finance assets. These education lending subsidiaries hold beneficial interests in eligible loans, subject to creditors with specific interests. The liabilities of the Company's education lending subsidiaries are not the direct obligations of Nelnet, Inc. or any of its other subsidiaries. Each education lending subsidiary is structured to be bankruptcy remote, meaning that it should not be consolidated in the event of bankruptcy of the parent company or any other subsidiary. The Company is generally the administrator and master servicer of the securitized assets held in its education lending subsidiaries and owns the residual interest of the securitization trusts. As a result, for accounting purposes, the transfers of student loans to the securitization trusts do not qualify as sales. Accordingly, all the financial activities and related assets and liabilities, including debt, of the securitizations are reflected in the Company's consolidated financial statements and are summarized as supplemental information on the balance sheet.
The Company owns 91.5 percent of the economic rights of ALLO Communications LLC and has a disproportional 80 percent of the voting rights related to all operating decisions for ALLO's business. See note 1, “Description of Business,” for a description of ALLO, including the primary services offered. ALLO's management, as current minority members, has the opportunity to earn an additional 11.5 percent of the total ownership interests based on the financial performance of ALLO. In addition to the Company’s equity investment, Nelnet, Inc. (the parent) has issued a $270.0 million line of credit to ALLO. As of December 31, 2017 and 2016, the outstanding balance, including accrued interest, on the line of credit was $193.1 million and $58.0 million, respectively. Nelnet, Inc.’s maximum exposure to loss as a result of its involvement with ALLO is equal to its equity investment and the outstanding balance and accrued interest on the line of credit. The amounts owed by ALLO to Nelnet, Inc., including the interest costs incurred by ALLO and interest earnings recognized by Nelnet, Inc., are not reflected in the Company’s consolidated balance sheet as they were eliminated in consolidation. All of ALLO’s financial activities and related assets and liabilities, excluding the line of credit, are reflected in the Company’s consolidated financial statements. See note 15, “Segment Reporting,” for disclosure of ALLO’s total assets and results of operations (included in the "Communications" operating segment), note 10, "Goodwill," for disclosure of ALLO's goodwill, and note 11, “Property and Equipment,” for disclosure of ALLO’s fixed assets. ALLO's goodwill and property and equipment comprise the majority of its assets. The assets recognized as a result of consolidating ALLO are the property of ALLO and are not available for any other purpose, other than to Nelnet, Inc. as a secured lender under ALLO's line of credit.
Noncontrolling Interests

Amounts for noncontrolling interests reflect the proportionate share of membership interest (equity) and net income attributable to the holders of minority membership interests in the following entities:
Whitetail Rock Capital Management, LLC - WRCM is the Company’s SEC-registered investment advisor subsidiary.  WRCM issued 10 percent minority membership interests on January 1, 2012.

ALLO Communications LLC - On December 31, 2015, the Company purchased 92.5 percent of the ownership interests of ALLO. On January 1, 2016, the Company sold a 1.0 percent ownership interest in ALLO to a non-related third-party. The remaining 7.5 percent of the ownership interests of ALLO is owned by ALLO management, who has the opportunity to earn an additional 11.5 percent (up to 19 percent) of the total ownership interests based on the financial performance of ALLO.

401 Building, LLC (“401 Building”) - 401 Building is an entity established on October 19, 2015 for the sole purpose of acquiring, developing, and operating a commercial building. The Company owns 50 percent of 401 Building.

TDP Phase Three, LLC (“TDP”) and TDP Phase Three-NMTC ("TDP-NMTC") - TDP and TDP-NMTC are entities that were established in October 2015 for the sole purpose of developing and operating the new headquarters of Hudl. The Company owns 25 percent of each TDP and TDP-NMTC.

330-333 Building, LLC ("330-333 Building") - 330-333 Building is an entity established on January 14, 2016 for the sole purpose of acquiring, developing, and operating a commercial building. The Company owns 50 percent of 330-333 Building.

The Company is a tenant in the 401 Building, the headquarters of Hudl, and the 330-333 Building. Because the Company, as lessee, was involved in the asset construction, 401 Building, TDP, TDP-NMTC, and 330-333 Building are included in the Company's consolidated financial statements.

GreatNet Solutions, LLC ("GreatNet") - GreatNet is a joint venture created to respond to an initiative by the Department for the procurement of a contract for federal student loan servicing.  As of December 31, 2017, Nelnet Servicing, LLC ("Nelnet Servicing"), a subsidiary of the Company, and Great Lakes each owned 50 percent of the ownership interests in GreatNet.  For financial reporting purposes, the balance sheet and operating results of GreatNet are included in the Company's consolidated financial statements and presented in the Company's Loan Systems and Servicing operating segment.  On February 7, 2018, the Company purchased 100 percent of the outstanding stock of Great Lakes.  See note 2, “Recent Developments” for additional information on this business acquisition.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, reported amounts of revenues and expenses, and other disclosures. Actual results may differ from those estimates.

Loans Receivable

Loans consist of federally insured student loans, private education loans, and consumer loans. If the Company has the ability and intent to hold loans for the foreseeable future, such loans are held for investment and carried at amortized cost. Amortized cost includes the unamortized premium or discount and capitalized origination costs and fees, all of which are amortized to interest income. Loans which are held-for-investment also have an allowance for loan loss as needed. Any loans the Company has the ability and intent to sell are classified as held for sale and are carried at the lower of cost or fair value. Loans which are held for sale do not have the associated premium or discount and origination costs and fees amortized into interest income and there is also no related allowance for loan losses. There were no loans classified as held for sale as of December 31, 2017 and 2016.

Federally insured loans were originated under the FFEL Program by certain eligible lenders as defined by the Higher Education Act of 1965, as amended (the “Higher Education Act”). These loans, including related accrued interest, are guaranteed at their maximum level permitted under the Higher Education Act by an authorized guaranty agency, which has a contract of reinsurance with the Department. The terms of the loans, which vary on an individual basis, generally provide for repayment in monthly installments of principal and interest. Generally, Stafford and PLUS loans have repayment periods between five and ten years. Consolidation loans have repayment periods of twelve to thirty years. FFELP loans do not require repayment while the borrower is in-school, and during the grace period immediately upon leaving school. The borrower may also be granted a deferment or forbearance for a period of time based on need, during which time the borrower is not considered to be in repayment. Interest continues to accrue on loans in the in-school, deferment, and forbearance program periods. In addition, eligible borrowers may qualify for income-driven repayment plans offered by the Department. These plans determine the borrower's payment amount based on their discretionary income and may extend their repayment period. Interest rates on federally insured student loans may be fixed or variable, dependent upon the type of loan, terms of the loan agreements, and date of origination.

Substantially all FFELP loan principal and related accrued interest is guaranteed as provided by the Higher Education Act. These guarantees are subject to the performance of certain loan servicing due diligence procedures stipulated by applicable Department regulations. If these due diligence requirements are not met, affected student loans may not be covered by the guarantees in the event of borrower default. Such student loans are subject to “cure” procedures and reinstatement of the guarantee under certain circumstances.

Loans also include private education and consumer loans. Private education loans are loans to students or their families that are non-federal loans and loans not insured or guaranteed under the FFEL Program. These loans are used primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans, or borrowers' personal resources. The terms of the private education loans, which vary on an individual basis, generally provide for repayment in monthly installments of principal and interest over a period of up to 30 years. The private education loans are not covered by a guarantee or collateral in the event of borrower default. Consumer loans are unsecured loans to an individual for personal, family, or household purposes. The terms of the consumer loans, which vary on an individual basis, generally provide for repayment in weekly or monthly installments of principal and interest over a period of up to 6 years.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses on loans. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that the Company's management believes is appropriate to cover probable losses inherent in the loan portfolio. The Company evaluates the adequacy of the allowance for loan losses on its federally insured loan portfolio separately from its private education and consumer loan portfolios. These evaluation processes are subject to numerous judgments and uncertainties.

The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company's loan portfolios considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. The federal government guarantees 97 percent of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits the Company's loss exposure on the outstanding balance of the Company's federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured.

In determining the appropriate allowance for loan losses on the private education and consumer loans, the Company considers several factors, including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant factors. The Company places private education and consumer loans on nonaccrual status when the collection of principal and interest is 90 days past due, and charges off the loan when the collection of principal and interest is 120 days past due. Collections, if any, are reflected as a recovery through the allowance for loan losses.

Management has determined that each of the federally insured loan portfolio, private education loan portfolio, and consumer loan portfolio meets the definition of a portfolio segment, which is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses.  Accordingly, the portfolio segment disclosures are presented on this basis in note 4 for each of these portfolios.  The Company does not disaggregate its portfolio segment loan portfolios into classes of financing receivables. The Company collectively evaluates loans for impairment and as of December 31, 2017 and 2016, the Company did not have any impaired loans as defined in the Receivables Topic of the FASB Accounting Standards Codification.

For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. Remaining discounts and premiums for purchased loans are recognized in interest income over the remaining estimated lives of the loans. The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses.

Cash and Cash Equivalents and Statement of Cash Flows

For purposes of the consolidated statements of cash flows, the Company considers all investments with original maturities of three months or less to be cash equivalents.

Accrued interest on loans purchased and sold is included in cash flows from operating activities in the respective period. Net purchased loan accrued interest was $71.4 million in 2015. Net purchased loan accrued interest in 2017 and 2016 was insignificant.

Investments

The Company's available-for-sale investment portfolio consists of student loan and other asset-backed securities and equity and debt securities. These securities are carried at fair value, with the temporary changes in fair value, net of taxes, carried as a separate component of shareholders’ equity. The amortized cost of debt securities in this category (including the student loan and other asset-backed securities) is adjusted for amortization of premiums and accretion of discounts, which are amortized using the effective interest rate method. Other-than-temporary impairment is evaluated by considering several factors, including the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the issuer of the security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability of the Company to retain the investment to allow for any anticipated recovery in fair value. The entire fair value loss on a security that has experienced an other-than-temporary impairment is recorded in earnings if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell the security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and either of those two conditions does not exist, the portion of the impairment related to credit losses is recorded in earnings and the impairment related to other factors is recorded in other comprehensive income.

Securities classified as trading are accounted for at fair value, with unrealized gains and losses included in "other income" in the consolidated statements of income.

When an investment is sold, the cost basis is determined through specific identification of the security sold.

The Company accounts for investments in which it does not have significant influence or a controlling financial interest using the cost method of accounting.  Cost method investments are recorded at cost.  Cost method investments are evaluated for other-than-temporary impairment in the same manner as described above for available-for-sale investments.

The Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.  Equity method investments are recorded at cost and subsequently increased or decreased by the amount of the Company’s proportionate share of the net earnings or losses and other comprehensive income of the investee.  Equity method investments are evaluated for other-than-temporary impairment using certain impairment indicators such as a series of operating losses of an investee or other factors.  These factors may indicate that a decrease in value of the investment has occurred that is other-than-temporary and shall be recognized.

Restricted Cash

Restricted cash primarily includes amounts for student loan securitizations and other secured borrowings. This cash must be used to make payments related to trust obligations. Amounts on deposit in these accounts are primarily the result of timing differences between when principal and interest is collected on the student loans held as trust assets and when principal and interest is paid on the trust's asset-backed debt securities. Restricted cash also includes collateral deposits with derivative counterparties and third-party clearinghouses.

Restricted Cash - Due to Customers

As a servicer of student loans, the Company collects student loan remittances and subsequently disburses these remittances to the appropriate lending entities. In addition, as part of the Company's Tuition Payment Processing and Campus Commerce operating segment, the Company collects tuition payments and subsequently remits these payments to the appropriate schools. Cash collected for customers and the related liability are included in the accompanying consolidated balance sheets.

Accounts Receivable

Accounts receivable are presented at their net realizable values, which include allowances for doubtful accounts. Allowance estimates are based upon individual customer experience, as well as the age of receivables and likelihood of collection.

Business Combinations

The Company uses the acquisition method in accounting for acquired businesses. Under the acquisition method, the financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. All contingent consideration is measured at fair value on the acquisition date and included in the consideration transferred in the acquisition. Contingent consideration classified as a liability is remeasured to fair value at each reporting date until the contingency is resolved, and changes in fair value are recognized in earnings.

Goodwill

The Company reviews goodwill for impairment annually (in the fourth quarter) and whenever triggering events or changes in circumstances indicate its carrying value may not be recoverable. Goodwill is tested for impairment using a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics.
The Company tests goodwill for impairment in accordance with applicable accounting guidance. The guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
If the Company elects to not perform a qualitative assessment or if the Company determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company performs a quantitative impairment test on goodwill. In the quantitative test, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company would record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. Actual future results may differ from those estimates.
See note 10 for information regarding the Company's annual goodwill impairment review.
Intangible Assets

Intangible assets with finite lives are amortized over their estimated lives. Such assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, the Company uses a straight-line amortization method.

The Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.

Property and Equipment

Property and equipment are carried at cost, net of accumulated depreciation. Maintenance and repairs are charged to expense as incurred, and major improvements, including leasehold improvements, are capitalized. Gains and losses from the sale of property and equipment are included in determining net income. The Company uses the straight-line method for recording depreciation and amortization. Leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset.

Impairment of Long‑Lived Assets

The Company reviews its long-lived assets, such as property and equipment and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company uses estimates to determine the fair value of long-lived assets. Such estimates are generally based on estimated future cash flows or cost savings associated with particular assets and are discounted to present value using an appropriate discount rate. The estimates of future cash flows associated with assets are generally prepared using a cost savings method, a lost income method, or an excess return method, as appropriate. In utilizing such methods, management must make certain assumptions about the amount and timing of estimated future cash flows and other economic benefits from the assets, the remaining economic useful life of the assets, and general economic factors concerning the selection of an appropriate discount rate. The Company may also use replacement cost or market comparison approaches to estimating fair value if such methods are determined to be more appropriate.

Assumptions and estimates about future values and remaining useful lives of the Company's intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company's business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.

Fair Value Measurements

The Company uses estimates of fair value in applying various accounting standards for its financial statements.

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company's policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value, such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates, and credit spreads, relying first on observable data from active markets. Depending on current market conditions, additional adjustments to fair value may be based on factors such as liquidity, credit, and bid/offer spreads. In some cases fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Transaction costs are not included in the determination of fair value. When possible, the Company seeks to validate the model's output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates of current or future values.

The Company categorizes its fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring assets and liabilities at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels include:

Level 1: Quoted prices for identical instruments in active markets. The types of financial instruments included in Level 1 are highly liquid instruments with quoted prices.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose primary value drivers are observable.

Level 3: Instruments whose primary value drivers are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs.

The Company's accounting policy is to recognize transfers between levels of the fair value hierarchy at the end of the reporting period.

Revenue Recognition

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists between the Company and the customer, (ii) delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price to the customer is fixed or determinable, and (iv) collectability of the sales price is reasonably assured. Additional information related to the Company's revenue recognition of specific items is further provided below.

Loan interest income - Loan interest on federally insured student loans is paid by the Department or the borrower, depending on the status of the loan at the time of the accrual. In addition, the Department makes quarterly interest subsidy payments on certain qualified FFELP loans until the student is required under the provisions of the Higher Education Act to begin repayment. Borrower repayment of FFELP loans normally begins within six months after completion of the borrower's course of study, leaving school, or ceasing to carry at least one-half the normal full-time academic load, as determined by the educational institution. Borrower repayment of PLUS and Consolidation loans normally begins within 60 days from the date of loan disbursement. Borrower repayment of private education loans typically begins six months following the borrower's graduation from a qualified institution, and the interest is either paid by the borrower or capitalized annually or at repayment. Repayment of consumer loans typically starts upon origination of the loan.

The Department provides a special allowance to lenders participating in the FFEL Program. The special allowance is accrued based upon the fiscal quarter average rate of 13-week Treasury Bill auctions (for loans originated prior to January 1, 2000), the fiscal quarter average rate of the daily three-month financial commercial paper rates (for loans originated on and after January 1, 2000) or the fiscal quarter average rate of daily one-month LIBOR rates (for loans originated on and after January 1, 2000, and for lenders which elected to change the special allowance index to one-month LIBOR effective April 1, 2012) relative to the yield of the student loan.

The Company recognizes loan interest income as earned, net of amortization of loan premiums and deferred origination costs and the accretion of loan discounts. Loan interest income is recognized based upon the expected yield of the loan after giving effect to interest rate reductions resulting from borrower utilization of incentives such as timely payments ("borrower benefits") and other yield adjustments. Loan premiums or discounts, deferred origination costs, and borrower benefits are amortized/accreted over the estimated life of the loans, which includes an estimate of forecasted payments in excess of contractually required payments. The Company periodically evaluates the assumptions used to estimate the life of the loans and prepayment rates. In instances where there are changes to the assumptions, amortization/accretion is adjusted on a cumulative basis to reflect the change since the acquisition of the loan.
  
In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and deferred origination costs and accrete discounts on its loan portfolio. Previously, the Company amortized premiums and deferred origination costs and accreted discounts by including in its prepayment assumption forecasted payments in excess of contractually required payments as well as forecasted defaults. The Company has determined that only payments in excess of contractually required payments (excluding forecasted defaults) should be included in the prepayment assumption. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete loan premiums/discounts was decreased. The constant prepayment rates under the Company's revised policy are 5 percent for Stafford loans and 3 percent for Consolidation loans. The constant prepayment rates under the Company's prior policy in effect before this correction were 6 percent and 4 percent, respectively. During the third quarter of 2016, the Company recorded an adjustment to reflect the cumulative net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding pre-tax increase to interest income. The Company concluded this error had an immaterial impact on 2016 results as well as the results for prior periods.
The Company also pays the Department an annual 105 basis point rebate fee on Consolidation loans. These rebate fees are netted against loan interest income.
Loan systems and servicing revenue – Loan systems and servicing revenue consists of the following items:

Loan and guaranty servicing fees – Loan servicing fees are determined according to individual agreements with customers and are calculated based on the dollar value of loans, number of loans, or number of borrowers serviced for each customer. Guaranty servicing fees were generally calculated based on the number of loans serviced, volume of loans serviced, or amounts collected. Revenue is recognized over the period in which services are provided to customers, and when ultimate collection is assured.

Software services revenue – Software services revenue is determined from individual agreements with customers and includes license and maintenance fees associated with student loan software products.  Computer and software consulting and remote hosting revenues are recognized over the period in which services are provided to customers.

Outsourced services revenue - Outsourced services revenue is determined from individual agreements with customers and generally recognized over the period in which services are provided to customers.

Guaranty collections revenue – Guaranty collections revenue was earned when collected. Collection costs paid to third parties associated with this revenue was expensed upon successful collection.

Tuition payment processing, school information, and campus commerce revenue - Tuition payment processing, school information, and campus commerce revenue includes actively managed tuition payment solutions, remote hosted school information systems and learning management software, professional development and educational instruction services, assistance with financial needs assessment and donor management, and payment processing services. Fees for these services are recognized over the period in which services are provided to customers. Cash received in advance of the delivery of services is included in deferred revenue.

Communications revenue - Communications revenue based on a flat fee, derived principally from internet, television, and telephone services are billed in advance and recognized in subsequent periods when the services are provided. Revenues for usage-based services, such as access charges billed to other telephone carriers for originating and terminating long-distance calls on the Company's network, are billed in arrears. The Company recognizes revenue from these services in the period the services are rendered rather than billed. Earned but unbilled usage-based services are recorded in accounts receivable.

Costs to provide communication services is primarily associated with television programming costs.  The Company has various contracts to obtain video programming from programming vendors whose compensation is typically based on a flat fee per customer. The cost of the right to exhibit network programming under such arrangements is recorded in the month the programming is available for exhibition.  Programming costs are paid each month based on calculations performed by the Company and are subject to periodic audits performed by the programmers.  Other costs included in costs to provide communication services include connectivity, franchise, and other regulatory costs directly related to providing internet and voice services.

Enrollment services revenue - Enrollment services revenue was derived from fees which were earned through the delivery of qualified inquiries or clicks. Delivery was deemed to have occurred at the time a qualified inquiry or click was delivered to the customer, provided that no significant obligations remained.

For a portion of this revenue, the Company had agreements with providers of online media or traffic ("inquiry generation vendors") used in the generation of inquiries or clicks. The Company received a fee from its customers and paid a fee to the inquiry generation vendors either on a cost per inquiry, cost per click, or cost per number of impressions basis. The Company was the primary obligor in the transaction. As a result, the fees paid by the Company's customers were recognized as revenue and the fees paid to its inquiry generation vendors are included in "cost to provide enrollment services" in the Company's consolidated statements of income.

On February 1, 2016, the Company sold 100 percent of the membership interests in Sparkroom LLC, which included the Company's inquiry management products and services. After this sale, the Company no longer earns enrollment services revenue.

Other income - Other income consists primarily of the following items:

Realized and unrealized gains and losses on investments

Borrower late fee income - Late fee income is earned by the education lending subsidiaries and is recognized when payments are collected from the borrower.

Investment advisory income - Investment advisory services are provided by the Company through an SEC-registered investment advisor subsidiary under various arrangements. The Company earns annual fees based on the outstanding balance of investments and certain performance measures, which are recognized monthly as earned.

Digital marketing and content solutions - The Company earned revenue related to digital marketing and content solution products and services under the brand name Peterson's. These products and services included test preparation study guides, school directories and databases, career exploration guides, on-line courses and test preparation, scholarship search and selection data, career planning information and guides, and on-line information about colleges and universities. Several content solutions services included services to connect students to colleges and universities, and were sold based on subscriptions. Revenue from sales of subscription services was recognized ratably over the term of the contract as it was earned. Subscription revenue received or receivable in advance of the delivery of services was included in deferred revenue. Revenue from the sale of print products was generally earned and recognized, net of estimated returns, upon shipment or delivery. All other digital marketing and content solutions revenue was recognized over the period in which services were provided to customers. On December 31, 2017, the Company sold Peterson's. See note 10 for additional information regarding this sale.

Interest Expense

Interest expense is based upon contractual interest rates, adjusted for the amortization of debt issuance costs and the accretion of discounts. The amortization of debt issuance costs and accretion of discounts are recognized using the effective interest method.

Transfer of Financial Assets and Extinguishments of Liabilities

The Company accounts for loan sales and debt repurchases in accordance with applicable accounting guidance. If a transfer of loans qualifies as a sale, the Company derecognizes the loan and recognizes a gain or loss as the difference between the carrying basis of the loan sold and the consideration received. The Company from time to time repurchases its outstanding debt and records a gain or loss on the early extinguishment of debt based upon the difference between the carrying amount of the debt and the amount paid to the third party. The Company recognizes the results of a transfer of loans and the extinguishment of debt based upon the settlement date of the transaction.

Derivative Accounting

Effective June 10, 2013, all over-the-counter derivative contracts executed by the Company are cleared post-execution at the Chicago Mercantile Exchange (“CME”), a regulated clearinghouse.  Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default. 

Prior to January 3, 2017, the Company accounted for variation margin payments to the CME as collateral against its derivative position.  As such, these payments were treated as a separate unit of account from the derivative instrument and reported as a liability for cash collateral received and an asset (restricted cash) for cash collateral paid.  Effective January 3, 2017, the CME amended its rulebooks to legally characterize variation margin payments for over-the-counter derivatives they clear as settlements of the derivatives’ exposure rather than collateral against the exposure.  Based on these rulebook changes, for accounting and presentation purposes, the Company considers variation margin and the corresponding derivative instrument as a single unit of account.  As such, effective January 3, 2017, the variation margin received or paid is no longer accounted for separately as a liability or asset ("collateralized-to-market").  Instead, these payments are considered in determining the fair value of the centrally cleared derivative portfolio ("settled-to-market").  The principal difference for accounting and presentation purposes is that prior to January 3, 2017, the Company recorded the fair value of collateralized-to-market derivative contracts on its balance sheet as "fair value of derivative instruments" with an equal amount of variation margin collateral accounted for separately as an asset or liability. Subsequent to January 3, 2017, the Company records settled-to-market derivative contracts on its balance sheet with a fair value of zero and no collateral posted due to the payment or receipt of variation margin between the Company and the CME settling the outstanding mark-to-market exposure on such derivatives to a balance of zero on a daily basis, and records the underlying daily changes in the market value of such derivative contracts that result in such receipts or payments on its income statement as realized derivative market value adjustments in "Derivative market value and foreign currency transaction adjustments and derivative settlements, net."

The new clearinghouse requirements did not alter or affect the accounting and presentation of the Company’s derivative instruments executed prior to June 10, 2013 and those derivatives that are not required to be cleared at a clearinghouse (non-centrally cleared derivatives). The Company records these derivative instruments in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain non-centrally cleared derivatives are subject to right of offset provisions with counterparties.  For these derivatives, the Company does not offset fair value amounts executed with the same counterparty under a master netting arrangement. In addition, the Company does not offset fair value amounts recognized for derivative instruments with respect to the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable).

The Company determines the fair value for its derivative instruments using either (i) pricing models that consider current market conditions and the contractual terms of the derivative instrument or (ii) counterparty valuations. The factors that impact the fair value of the Company's derivatives include interest rates, time value, forward interest rate curve, and volatility factors, as well as foreign exchange rates. Pricing models and their underlying assumptions impact the amount and timing of realized and unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. Management has structured all of the Company's derivative transactions with the intent that each is economically effective; however, the Company's derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings. Changes or shifts in the forward yield curve and fluctuations in currency rates can significantly impact the valuation of the Company’s derivatives, and therefore impact the financial position and results of operations of the Company. Any proceeds received or payments made by the Company to terminate a derivative in advance of its expiration date, or to amend the terms of an existing derivative, are included in the Company's consolidated statements of income and are accounted for as a change in fair value of such derivative. The changes in fair value of derivative instruments, as well as the settlement payments made on such derivatives, are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income.

Foreign Currency

During 2006, the Company issued Euro-denominated bonds, which were included in “bonds and notes payable” on the consolidated balance sheets. Transaction gains and losses resulting from exchange rate changes when re-measuring these bonds to U.S. dollars at the balance sheet date were included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income. On October 25, 2017, the Company completed a remarketing of its Euro notes which reset the principal amount outstanding on the notes to U.S. dollars.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Income tax expense includes deferred tax expense, which represents the net change in the deferred tax asset or liability balance during the year, plus any change made in the valuation allowance, and current tax expense, which represents the amount of tax currently payable to or receivable from a tax authority plus amounts for expected tax deficiencies.

Compensation Expense for Stock Based Awards

The Company has a restricted stock plan that is intended to provide incentives to attract, retain, and motivate employees in order to achieve long term growth and profitability objectives. The restricted stock plan provides for the grant to eligible employees of awards of restricted shares of Class A common stock. The fair value of restricted stock awards is determined on the grant date based on the Company's stock price and is amortized to compensation cost over the related vesting periods, which range up to ten years. For those awards with only service conditions that have graded vesting schedules, the Company recognizes compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in substance, multiple awards. Holders of restricted stock are entitled to receive dividends from the date of grant whether or not vested.

The Company also has a directors stock compensation plan pursuant to which non-employee directors can elect to receive their annual retainer fees in the form of fully vested shares of Class A common stock, and also elect to defer receipt of such shares until the termination of their service on the board of directors. The fair value of grants under this plan is determined on the grant date based on the Company's stock price, and is expensed over the board member's annual service period.

Stock Repurchases

In accordance with the corporate laws of the state in which the Company is incorporated, all shares repurchased by the Company are legally retired upon acquisition by the Company.
Loans Receivable and Allowance for Loan Losses
Loans Receivable and Allowance for Loan Losses
Loans Receivable and Allowance for Loan Losses

Loans receivable consisted of the following:
 
As of December 31,
 
2017
 
2016
Federally insured student loans:
 
 
 
Stafford and other
$
4,418,881

 
5,186,047

Consolidation
17,302,725

 
19,643,937

Total
21,721,606

 
24,829,984

Private education loans
212,160

 
273,659

Consumer loans
62,111

 

 
21,995,877

 
25,103,643

Loan discount, net of unamortized loan premiums and deferred origination costs
(113,695
)
 
(129,507
)
Non-accretable discount (a)
(13,085
)
 
(18,570
)
Allowance for loan losses:
 
 
 
Federally insured loans
(38,706
)
 
(37,268
)
Private education loans
(12,629
)
 
(14,574
)
Consumer loans
(3,255
)
 

 
$
21,814,507

 
24,903,724


(a)
At December 31, 2017 and 2016, the non-accretable discount related to purchased loan portfolios of $5.8 billion and $8.3 billion, respectively.

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.
 
Year ended December 31,
 
2017
 
2016
 
2015
Balance at beginning of period
$
51,842

 
50,498

 
48,900

Provision for loan losses:
 
 
 
 
 
Federally insured loans
13,000

 
14,000

 
8,000

Private education loans
(2,000
)
 
(500
)
 
2,150

Consumer loans
3,450

 

 

Total provision for loan losses
14,450

 
13,500

 
10,150

Charge-offs:
 

 
 

 
 
Federally insured loans
(11,562
)
 
(12,292
)
 
(11,730
)
Private education loans
(1,313
)
 
(1,728
)
 
(2,414
)
Consumer loans
(195
)
 

 

Total charge-offs
(13,070
)
 
(14,020
)
 
(14,144
)
Recoveries - private education loans
768

 
954

 
1,050

Purchase (sale) of loans, net:
 
 
 
 
 
Federally insured loans

 
70

 
50

Private education loans

 
480

 
(140
)
Transfer from repurchase obligation related to private education loans repurchased, net (a)
600

 
360

 
4,632

Balance at end of period
$
54,590

 
51,842

 
50,498

 
 
 
 
 
 
Allocation of the allowance for loan losses:
 

 
 

 
 
Federally insured loans
$
38,706

 
37,268

 
35,490

Private education loans
12,629

 
14,574

 
15,008

Consumer loans
3,255

 

 

Total allowance for loan losses
$
54,590

 
51,842

 
50,498


(a) The Company sold various portfolios of private education loans to third-parties. Per the terms of the servicing agreements, the Company’s servicing operations were obligated to repurchase loans subject to the sale agreements in the event such loans became 60 or 90 days delinquent. As of December 31, 2016, the balance of loans subject to these repurchase obligations was $39.5 million. The Company's estimate related to its obligation to repurchase these loans is included in "other liabilities" in the Company's consolidated balance sheet and was $2.3 million as of December 31, 2016. On November 3, 2017, the loans subject to the repurchase obligations were sold by the owner of the loans to an unrelated third-party and the Company's repurchase obligation was terminated.

Student Loan Status and Delinquencies

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.  The table below shows the Company’s loan delinquency amounts for federally insured and private education loans.
 
As of December 31,
 
2017
 
2016
 
2015
Federally insured loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment (a)
$
1,260,394

 
 
 
$
1,606,468

 
 
 
$
2,292,941

 
 
Loans in forbearance (b)
1,774,405

 
 
 
2,295,367

 
 
 
2,979,357

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
16,477,004

 
88.2
%
 
18,125,768

 
86.6
%
 
19,447,541

 
84.4
%
Loans delinquent 31-60 days (c)
682,586

 
3.7

 
818,976

 
3.9

 
1,028,396

 
4.5

Loans delinquent 61-90 days (c)
374,534

 
2.0

 
487,647

 
2.3

 
566,953

 
2.5

Loans delinquent 91-120 days (c)
287,922

 
1.5

 
335,291

 
1.6

 
415,747

 
1.8

Loans delinquent 121-270 days (c)
629,480

 
3.4

 
854,432

 
4.1

 
1,166,940

 
5.1

Loans delinquent 271 days or greater (c)(d)
235,281

 
1.2

 
306,035

 
1.5

 
390,232

 
1.7

Total loans in repayment
18,686,807

 
100.0
%
 
20,928,149

 
100.0
%
 
23,015,809

 
100.0
%
Total federally insured loans
$
21,721,606

 
 

 
$
24,829,984

 
 

 
$
28,288,107

 
 
Private education loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment (a)
$
6,053

 
 
 
$
35,146

 
 
 
$
30,795

 
 
Loans in forbearance (b)
2,237

 
 
 
3,448

 
 
 
350

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
196,720

 
96.5
%
 
228,612

 
97.2
%
 
228,464

 
96.7
%
Loans delinquent 31-60 days (c)
1,867

 
0.9

 
1,677

 
0.7

 
1,771

 
0.7

Loans delinquent 61-90 days (c)
1,052

 
0.5

 
1,110

 
0.5

 
1,283

 
0.5

Loans delinquent 91 days or greater (c)
4,231

 
2.1

 
3,666

 
1.6

 
4,979

 
2.1

Total loans in repayment
203,870

 
100.0
%
 
235,065

 
100.0
%
 
236,497

 
100.0
%
Total private education loans
$
212,160

 
 

 
$
273,659

 
 

 
$
267,642

 
 

(a)
Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation for law students.

(b)
Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the servicer consistent with the established loan program servicing procedures and policies.

(c)
The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is, receivables not charged off, and not in school, grace, deferment, or forbearance.

(d)
A portion of loans included in loans delinquent 271 days or greater includes loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency.
Bonds and Notes Payable
Bonds and Notes Payable
Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
 
As of December 31, 2017
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations:
 
 
 
 
 
Bonds and notes based on indices
$
20,352,045

 
1.47% - 3.37%
 
8/25/21 - 2/25/66
Bonds and notes based on auction
780,829

 
2.09% - 2.69%
 
3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes
21,132,874

 
 
 
 
FFELP warehouse facilities
335,992

 
1.55% / 1.56%
 
11/19/19 / 5/31/20
Variable-rate bonds and notes issued in private education loan asset-backed securitization
74,717

 
3.30%
 
12/26/40
 Fixed-rate bonds and notes issued in private education loan asset-backed securitization
82,647

 
3.60% / 5.35%
 
12/26/40 / 12/28/43
Unsecured line of credit
10,000

 
2.98%
 
12/12/21
Unsecured debt - Junior Subordinated Hybrid Securities
20,381

 
5.07%
 
9/15/61
Other borrowings
70,516

 
2.44% - 3.38%
 
1/12/18 - 12/15/45
 
21,727,127

 
 
 
 
Discount on bonds and notes payable and debt issuance costs
(370,554
)
 
 
 
 
Total
$
21,356,573

 
 
 
 
 
 
As of December 31, 2016
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations:
 
 
 
 
 
Bonds and notes based on indices
$
22,130,063

 
0.24% - 6.90%
 
6/25/21 - 9/25/65
Bonds and notes based on auction
998,415

 
1.61% - 2.28%
 
3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes
23,128,478

 
 
 
 
FFELP warehouse facilities
1,677,443

 
0.63% - 1.09%
 
9/7/18 - 12/13/19
Variable-rate bonds and notes issued in private education loan asset-backed securitization
112,582

 
2.60%
 
12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization
113,378

 
3.60% / 5.35%
 
12/26/40 / 12/28/43
Unsecured line of credit

 
 
12/12/21
Unsecured debt - Junior Subordinated Hybrid Securities
50,184

 
4.37%
 
9/15/61
Other borrowings
18,355

 
3.38%
 
3/31/23 / 12/15/45
 
25,100,420

 
 
 
 
Discount on bonds and notes payable and debt issuance costs
(431,930
)
 
 
 
 
Total
$
24,668,490

 
 
 
 


Secured Financing Transactions

The Company has historically relied upon secured financing vehicles as its most significant source of funding for loans. The net cash flow the Company receives from the securitized loans generally represents the excess amounts, if any, generated by the underlying loans over the amounts required to be paid to the bondholders, after deducting servicing fees and any other expenses relating to the securitizations. The Company’s rights to cash flow from securitized loans are subordinate to bondholder interests, and the securitized loans may fail to generate any cash flow beyond what is due to bondholders. The Company’s secured financing vehicles during the periods presented include loan warehouse facilities and asset-backed securitizations.

The majority of the bonds and notes payable are primarily secured by the loans receivable, related accrued interest, and by the amounts on deposit in the accounts established under the respective bond resolutions or financing agreements.

FFELP warehouse facilities

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.

As of December 31, 2017, the Company had two FFELP warehouse facilities as summarized below.
 
NFSLW-I
 
NHELP-II
 
Total
Maximum financing amount
$
500,000

 
500,000

 
1,000,000

Amount outstanding
189,502

 
146,490

 
335,992

Amount available
$
310,498

 
353,510

 
664,008

Expiration of liquidity provisions
September 20, 2019

 
May 31, 2018
 
 
Final maturity date
November 19, 2019

 
May 31, 2020
 
 
Maximum advance rates
92.0 - 98.0%

 
85.0 - 95.0%

 
 
Minimum advance rates
84.0 - 90.0%

 
85.0 - 95.0%

 
 
Advanced as equity support
$
9,513

 
12,876

 
22,389


The FFELP warehouse facilities are supported by 364-day liquidity provisions, which are subject to the respective expiration date shown in the previous table. In the event the Company is unable to renew the liquidity provisions by such date, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's final maturity date. The NFSLW-I warehouse facility provides for formula-based advance rates, depending on FFELP loan type, up to a maximum of the principal and interest of loans financed as shown in the table above. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to minimums as disclosed above. The NHELP-II warehouse facility has a static advance rate that requires initial equity for loan funding, but does not require increased equity based on market movements.

The FFELP warehouse facilities contain financial covenants relating to levels of the Company’s consolidated net worth, ratio of recourse indebtedness to adjusted EBITDA, and unencumbered cash. Any noncompliance with these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facilities.


Asset-backed securitizations

The following tables summarize the asset-backed securitization transactions completed in 2017 and 2016.
 
 
Securitizations completed during the year ended December 31, 2017
 
 
NSLT 2017-1
 
NSLT 2017-2
 
NSLT 2017-3
 
 
 
Total
Date securities issued
 
5/24/17
 
7/26/17
 
12/14/17
 
 
 
 
Total original principal amount
 
$
535,000

 
399,390

 
539,400

 
 
 
1,473,790

Bond discount
 

 
(2,002
)
 

 
 
 
(2,002
)
Issue price
 
$
535,000

 
397,388


539,400

 
 
 
1,471,788

Cost of funds:
 
1-month LIBOR plus 0.78%
 
1-month LIBOR plus 0.77%
 
1-month LIBOR plus 0.85%
 
 
 
 
Final maturity date
 
6/25/65
 
9/25/65
 
2/25/66
 
 
 
 

 
 
Securitizations completed during the year ended December 31, 2016
 
 
FFELP 2016-1
 
Private education loan 2016-A (a)
 
Total
 
 
 
 
Class A-1A notes
 
Class A-1B notes
 
2016-A total
 
 
Date securities issued
 
10/12/16
 
12/21/16
 
12/21/16
 
12/21/16
 
 
Total original principal amount
 
$
426,000

 
112,582

 
91,378

 
225,960

 
$
651,960

 
 
 
 
 
 
 
 
 
 
 
Class A senior notes:
 
 
 
 
 
 
 
 
 
 
Total original principal amount
 
$
426,000

 
112,582

 
91,378

 
203,960

 
629,960

Bond discount
 

 

 
(609
)
 
(609
)
 
(609
)
Issue price
 
$
426,000

 
112,582

 
90,769

 
203,351

 
629,351

Cost of funds:
 
1-month LIBOR plus 0.80%
 
1-month LIBOR plus 1.75%
 
3.60%
 
 
 
 
Final maturity date
 
9/25/65
 
12/26/40
 
12/26/40
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class B subordinated notes:
 
 
 
 
 
 
 
 
 
 
Total original principal amount
 
 
 
 
 
 
 
$
22,000

 
22,000

Bond discount
 
 
 
 
 
 
 
(285
)
 
(285
)
Issue price
 
 
 
 
 
 
 
$
21,715

 
21,715

Cost of funds:
 
 
 
 
 
 
 
5.35
%
 
 
Final maturity date
 
 
 
 
 
 
 
12/28/43

 
 

(a)
On June 26, 2015, the Company entered into a $275.0 million private education loan warehouse facility. The Company funded all loans that were included in this warehouse in the Private Education Loan 2016-A securitization and terminated the private education loan warehouse facility on December 21, 2016.

Auction Rate Securities

The interest rates on certain of the Company's FFELP asset-backed securities are set and periodically reset via a "dutch auction" ("Auction Rate Securities"). As of December 31, 2017, the Company is currently the sponsor on $780.8 million of Auction Rate Securities. The Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents. Based on the relative levels of these indices as of December 31, 2017, the rates expected to be paid by the Company range from LIBOR plus 100 basis points, on the low end, to LIBOR plus 250 basis points, on the high end. These maximum rates are subject to increase if the credit ratings on the bonds are downgraded.
Unsecured Line of Credit

The Company has a $350.0 million unsecured line of credit that has a maturity date of December 12, 2021. As of December 31, 2017, $10.0 million was outstanding on the line of credit and $340.0 million was available for future use. Interest on amounts borrowed under the line of credit is payable, at the Company's election, at an alternate base rate or a Eurodollar rate, plus a variable rate (LIBOR), in each case as defined in the credit agreement. The initial margin applicable to Eurodollar borrowings is 150 basis points and may vary from 100 to 200 basis points depending on the Company's credit rating.

The line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the agreement.  The covenants include maintaining:

A minimum consolidated net worth
A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters)
A limitation on recourse indebtedness
A limitation on the amount of unsecuritized private education and consumer loans in the Company’s portfolio
A limitation on permitted investments, including business acquisitions that are not in one of the Company's existing lines of business

As of December 31, 2017, the Company was in compliance with all of these requirements. Many of these covenants are duplicated in the Company's other lending facilities, including its warehouse facilities.

The Company's operating line of credit does not have any covenants related to unsecured debt ratings. However, changes in the Company's ratings (as well as the amounts the Company borrows) have modest implications on the pricing level at which the Company obtains funds

A default on the Company's warehouse facilities would result in an event of default on the Company's unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable.

Junior Subordinated Hybrid Securities

On September 27, 2006, the Company issued $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities ("Hybrid Securities"). The Hybrid Securities are unsecured obligations of the Company. The interest rate on the Hybrid Securities through September 29, 2036 ("the scheduled maturity date") is equal to three-month LIBOR plus 3.375%, payable quarterly, which was 5.07% at December 31, 2017. The principal amount of the Hybrid Securities will become due on the scheduled maturity date only to the extent that prior to such date the Company has received proceeds from the sale of certain qualifying capital securities (as defined in the Hybrid Securities' indenture). If any amount is not paid on the scheduled maturity date, it will remain outstanding and bear interest at a floating rate as defined in the indenture, payable monthly. On September 15, 2061, the Company must pay any remaining principal and interest on the Hybrid Securities in full whether or not the Company has sold qualifying capital securities. At the Company's option, the Hybrid Securities are redeemable in whole or in part at their principal amount plus accrued and unpaid interest.

During the first quarter of 2017, the Company initiated a cash tender offer to purchase any and all of its outstanding Hybrid Securities, including a related consent solicitation to effect certain amendments to the indenture governing the notes to eliminate a provision requiring a minimum principal amount of the notes to remain outstanding after a partial redemption. The aggregate principal amount of notes tendered to the Company was $29.7 million. The Company paid $25.3 million to redeem these notes, and the amendments described above were made to the indenture.

Other Borrowings

During 2017, the Company entered into a repurchase agreement, the proceeds of which are collateralized by FFELP asset-backed security investments. Included in "other borrowings" as of December 31, 2017 was $50.4 million subject to this repurchase agreement.

The Company also has three notes payable, which were each issued by TDP Phase Three, LLC ("TDP") in connection with the development of a commercial building in Lincoln, Nebraska that is the new corporate headquarters for Hudl, a related party. TDP is an entity established during 2015 for the sole purpose of developing and operating this building. The Company owns 25 percent of TDP. However, because the Company was the developer of and a current tenant in this building, the operating results of TDP are included in the Company's consolidated financial statements. Recourse to the Company on the outstanding balance of these notes is equal to its ownership percentage of TDP. A summary of the TDP notes outstanding as of December 31, 2017 is summarized below:
Issue
date
 
Debt
outstanding
 
Maturity
date
 
Interest
rate
December 30, 2015
 
$
12,000

 
March 31, 2023
 
3.38% - fixed
December 30, 2015
 
6,355

 
December 15, 2045
 
3.38% - fixed
October 31, 2017
 
1,743

 
March 31, 2023
 
1-month LIBOR plus 2.00%


Debt Covenants

Certain bond resolutions and related credit agreements contain, among other requirements, covenants relating to restrictions on additional indebtedness, limits as to direct and indirect administrative expenses, and maintaining certain financial ratios. Management believes the Company is in compliance with all covenants of the bond indentures and related credit agreements as of December 31, 2017.

Maturity Schedule

Bonds and notes outstanding as of December 31, 2017 are due in varying amounts as shown below.
2018
 
$
50,418

2019
 
189,502

2020
 
146,490

2021
 
33,410

2022
 

2023 and thereafter
 
21,307,307

 
 
$
21,727,127


Generally, the Company's secured financing instruments can be redeemed on any interest payment date at par plus accrued interest. Subject to certain provisions, all bonds and notes are subject to redemption prior to maturity at the option of certain education lending subsidiaries.

Debt Repurchases

The following table summarizes the Company's repurchases of its own debt. Gains (losses) recorded by the Company from the repurchase of debt are included in "gain on sale of loans and debt repurchases, net" on the Company’s consolidated statements of income.

 
Par value
 
Purchase price
 
Gain (loss)
 
Par value
 
Purchase price
 
Gain (loss)
 
Par value
 
Purchase price
 
Gain (loss)
 
Year ended December 31,
 
2017
 
2016
 
2015
Unsecured debt - Hybrid Securities
$
29,803

 
25,357

 
4,446

 
7,000

 
4,865

 
2,135

 
14,504

 
11,374

 
3,130

Asset-backed securities
154,407

 
155,951

 
(1,544
)
 
78,412

 
72,566

 
5,846

 
32,026

 
30,354

 
1,672

 
$
184,210

 
181,308

 
2,902

 
85,412

 
77,431

 
7,981

 
46,530

 
41,728

 
4,802

Derivative Financial Instruments
Derivative Financial Instruments
Derivative Financial Instruments

The Company uses derivative financial instruments primarily to manage interest rate risk and foreign currency exchange risk.

Interest Rate Risk

The Company is exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company's assets do not match the interest rate characteristics of the funding for those assets. The Company has adopted a policy of periodically reviewing the mismatch related to the interest rate characteristics of its assets and liabilities together with the Company's outlook as to current and future market conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy. Derivative instruments used as part of the Company's interest rate risk management strategy currently include basis swaps and interest rate swaps.

Basis Swaps

Interest earned on the majority of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.  Meanwhile, the Company funds a majority of its FFELP loan assets with three-month LIBOR indexed floating rate securities.  The different interest rate characteristics of the Company's loan assets and liabilities funding these assets results in basis risk.

The Company also faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the interest rate resets on its assets, which generally occur daily. As of December 31, 2017, the Company had $20.0 billion, $1.1 billion, and $0.6 billion of FFELP loans indexed to the one-month LIBOR rate, three-month commercial paper rate, and the three-month treasury bill rate, respectively, the indices for which reset daily, and $11.7 billion of debt indexed to three-month LIBOR, the indices for which reset quarterly, and $8.6 billion of debt indexed to one-month LIBOR, the indices for which reset monthly.

The Company has used derivative instruments to hedge its basis risk and repricing risk. The Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the 1:3 Basis Swaps).

The following table summarizes the Company’s 1:3 Basis Swaps outstanding:
 
 
 
 
As of December 31,
 
 
 
2017
 
2016
 
Maturity
 
Notional amount
 
Notional amount
 
2018
 
 
$
4,250,000

 

 
2019
 
 
3,500,000

 

 
2022
 
 
1,000,000

 

 
2024
 
 
250,000

 

 
2026
 
 
1,150,000

 
1,150,000

 
2027
 
 
375,000

 

 
2028
 
 
325,000

 
325,000

 
2029
 
 
100,000

 

 
2031
 
 
300,000

 
300,000

 
 
 
 
$
11,250,000

 
1,775,000


The weighted average rate paid by the Company on the 1:3 Basis Swaps as of December 31, 2017 and 2016, was one-month LIBOR plus 12.5 basis points and 10.1 basis points, respectively.
Interest rate swaps – floor income hedges

FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its student loan portfolio with variable rate debt. In low and/or certain declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.

Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for these loans to the Department.

Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

As of December 31, 2017 and 2016, the Company had $4.8 billion and $8.4 billion, respectively, of FFELP student loan assets that were earning fixed rate floor income, of which the weighted average estimated variable conversion rate for these loans, which is the estimated short-term interest rate at which loans would convert to a variable rate, was 3.17% and 2.42%, respectively.

The following tables summarize the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income.
 
 
 
As of December 31, 2017
 
As of December 31, 2016
 
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
 
 
 
 
2017
 
$

 
%
 
$
750,000

 
0.99
%
 
2018
 
1,350,000

 
1.07

 
1,350,000

 
1.07

 
2019
 
3,250,000

 
0.97

 
3,250,000

 
0.97

 
2020
 
1,500,000

 
1.01

 
1,500,000

 
1.01

 
2023
 
750,000

 
2.28

 

 

 
2024
 
300,000

 
2.28

 

 

 
2025
 
100,000

 
2.32

 
100,000

 
2.32

 
2027
 
50,000

 
2.32

 

 

 
 
 
$
7,300,000

 
1.21
%
 
$
6,950,000

 
1.02
%
 
(a)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.
On August 20, 2014, the Company paid $9.1 million for an interest rate swap option to economically hedge loans earning fixed rate floor income. The interest rate swap option gives the Company the right, but not the obligation, to enter into a $250.0 million notional interest rate swap in which the Company would pay a fixed amount of 3.30% and receive discrete one-month LIBOR. If the interest rate swap option is exercised, the swap would become effective in 2019 and mature in 2024.

Interest Rate Caps

In June 2015, in conjunction with the entry into a $275.0 million private education loan warehouse facility, the Company paid $2.9 million for two interest rate cap contracts with a total notional amount of $275.0 million. The first interest rate cap has a notional amount of $125.0 million and a one-month LIBOR strike rate of 2.50%, and the second interest rate cap has a notional amount of $150.0 million and a one-month LIBOR strike rate of 4.99%. In the event that the one-month LIBOR rate rises above the applicable strike rate, the Company would receive monthly payments related to the spread difference. Both interest rate cap contracts have a maturity date of July 15, 2020. The private education loan warehouse facility was terminated by the Company on December 21, 2016. During the first quarter of 2017, the Company received $913,000 to terminate the interest rate cap contracts that were held in the private education loan warehouse legal entity and paid $929,000 to enter into new interest rate cap contracts with identical terms at Nelnet, Inc. (the parent company). The Company currently intends to keep these derivatives outstanding to partially mitigate a rise in interest rates and its impact on earnings related to its student loan portfolio earning a fixed rate.

Interest rate swaps – unsecured debt hedges

As of December 31, 2017 and 2016, the Company had $20.4 million and $50.2 million, respectively, of unsecured Hybrid Securities outstanding. The interest rate on the Hybrid Securities through September 29, 2036 is equal to three-month LIBOR plus 3.375%, payable quarterly. As of December 31, 2017 and 2016, the Company had the following derivatives outstanding that are used to effectively convert the variable interest rate on a portion of the Hybrid Securities to a fixed rate of 7.66%.
 
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
2036
 
$
25,000

 
4.28%
(a)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.

Foreign Currency Exchange Risk

In 2006, the Company issued €352.7 million of student loan asset-backed Euro Notes (the "Euro Notes") with an interest rate based on a spread to the EURIBOR index. On October 25, 2017, the Company completed a remarketing of the Euro Notes which reset principal amount outstanding on the Euro Notes to $450.0 million U.S. dollars with an interest rate based on the 3-month LIBOR index. As a result of the Euro Notes, the Company was exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes were re-measured at each reporting period and recorded in the Company’s consolidated balance sheet in U.S. dollars based on the foreign currency exchange rate on that date. Changes in the principal and accrued interest amounts as a result of foreign currency exchange rate fluctuations were included in the Company’s consolidated statements of income.

The Company entered into a cross-currency interest rate swap in connection with the issuance of the Euro Notes. On October 25, 2017, the Company terminated the cross-currency swap when the Euro Notes were remarketed. Under the terms of the cross-currency interest rate swap, the Company received from the counterparty a spread to the EURIBOR index based on a notional amount of €352.7 million and paid a spread to the LIBOR index based on a notional amount of $450.0 million.

The following table shows the income statement impact as a result of the re-measurement of the Euro Notes and the change in the fair value of the related derivative instruments.
 
Year ended December 31,
 
2017
 
2016
 
2015
Re-measurement of Euro Notes
$
(45,600
)
 
11,849

 
43,801

Change in fair value of cross currency interest rate swap
34,208

 
(1,954
)
 
(45,195
)
Total impact to consolidated statements of income - (expense) income (a)
$
(11,392
)
 
9,895

 
(1,394
)

(a)
The financial statement impact of the above items is included in "Derivative market value and foreign currency adjustments and derivative settlements, net" in the Company's consolidated statements of income.
Management structured the cross-currency interest rate swap to economically hedge the Euro Notes to effectively convert the Euro Notes to U.S. dollars and pay a spread on these notes based on the LIBOR index. However, the cross-currency interest rate swap did not qualify for hedge accounting. The re-measurement of the Euro-denominated bonds generally correlated with the change in the fair value of the corresponding cross-currency interest rate swap. However, the Company experienced unrealized gains and losses between these financial instruments due to the principal and accrued interest on the Euro Notes being re-measured to U.S. dollars at each reporting date based on the foreign currency exchange rate on that date, while the cross-currency interest rate swap was measured at fair value at each reporting date with the change in fair value recognized in the current period earnings.
Consolidated Financial Statement Impact Related to Derivatives

Balance Sheet

The following table summarizes the fair value of the Company’s derivatives as reflected on the consolidated balance sheets.
 
Fair value of asset derivatives
 
Fair value of liability derivatives
 
As of
 
As of
 
As of
 
As of
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
1:3 basis swaps
$

 

 

 
2,624

Interest rate swaps - floor income hedges

 
81,159

 

 
256

Interest rate swap option - floor income hedge