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EX-32 - EXHIBIT 32 - NELNET INCnni-93018xex_32.htm
EX-31.2 - EXHIBIT 31.2 - NELNET INCnni-93018xex_312.htm
EX-31.1 - EXHIBIT 31.1 - NELNET INCnni-93018xex_311.htm
EX-10.4 - EXHIBIT 10.4 - NELNET INCredactedexhibit104to3q2018.htm
EX-10.3 - EXHIBIT 10.3 - NELNET INCredactedexhibit103to3q2018.htm
EX-10.2 - EXHIBIT 10.2 - NELNET INCredactedexhibit102to3q2018.htm
EX-10.1 - EXHIBIT 10.1 - NELNET INCexhibit101to3q201810-qxmas.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  to .

 
Commission File Number: 001-31924

NELNET, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA
(State or other jurisdiction of incorporation or organization)
84-0748903
(I.R.S. Employer Identification No.)
 
 
121 SOUTH 13TH STREET
SUITE 100
LINCOLN, NEBRASKA
(Address of principal executive offices)
 
68508
(Zip Code)
 (402) 458-2370
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]                                                      Accelerated filer [ ]
Non-accelerated filer [ ]                    Smaller reporting company [ ]
        Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[  ] No[X]

As of October 31, 2018, there were 29,257,880 and 11,468,587 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding a total of 11,305,731 shares of Class A Common Stock held by wholly owned subsidiaries).




NELNET, INC.
FORM 10-Q
INDEX
September 30, 2018









PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(unaudited)
 
As of

As of
 
September 30, 2018

December 31, 2017
Assets:
 
 
 
Loans receivable (net of allowance for loan losses of $60,217 and $54,590, respectively)
$
22,528,362

 
21,814,507

Cash and cash equivalents:
 

 
 

Cash and cash equivalents - not held at a related party
10,766

 
6,982

Cash and cash equivalents - held at a related party
72,771

 
59,770

Total cash and cash equivalents
83,537

 
66,752

Investments and notes receivable
246,815

 
240,538

Restricted cash
723,338

 
688,193

Restricted cash - due to customers
188,591

 
187,121

Loan accrued interest receivable
624,259

 
430,385

Accounts receivable (net of allowance for doubtful accounts of $2,426 and $1,436, respectively)
76,899

 
37,863

Goodwill
153,802

 
138,759

Intangible assets, net
95,660

 
38,427

Property and equipment, net
339,730

 
248,051

Other assets
41,889

 
73,021

Fair value of derivative instruments
2,043

 
818

Total assets
$
25,104,925

 
23,964,435

Liabilities:
 

 
 

Bonds and notes payable
$
22,251,433

 
21,356,573

Accrued interest payable
60,658

 
50,039

Other liabilities
272,891

 
198,252

Due to customers
188,591

 
187,121

Fair value of derivative instruments
4,224

 
7,063

Total liabilities
22,777,797

 
21,799,048

Commitments and contingencies


 


Equity:
 
 
 
  Nelnet, Inc. shareholders' equity:
 

 
 

Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding

 

Common stock:
 
 
 
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 29,341,791 shares and 29,341,517 shares, respectively
293

 
293

Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,468,587 shares
115

 
115

Additional paid-in capital
4,908

 
521

Retained earnings
2,307,573

 
2,143,983

Accumulated other comprehensive earnings
3,975

 
4,617

Total Nelnet, Inc. shareholders' equity
2,316,864

 
2,149,529

Noncontrolling interests
10,264

 
15,858

Total equity
2,327,128

 
2,165,387

Total liabilities and equity
$
25,104,925

 
23,964,435

 
 
 
 
Supplemental information - assets and liabilities of consolidated education lending variable interest entities:
 
 
 
Student loans receivable
$
22,536,434

 
21,909,476

Restricted cash
683,211

 
641,994

Loan accrued interest receivable and other assets
625,122

 
431,934

Bonds and notes payable
(22,337,987
)
 
(21,702,298
)
Accrued interest payable and other liabilities
(214,554
)
 
(168,637
)
Net assets of consolidated education lending variable interest entities
$
1,292,226

 
1,112,469

See accompanying notes to consolidated financial statements.

2



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Loan interest
$
232,320

 
193,087

 
653,414

 
564,173

Investment interest
7,628

 
3,800

 
18,581

 
9,616

Total interest income
239,948

 
196,887

 
671,995

 
573,789

Interest expense:
 
 
 

 
 
 
 
Interest on bonds and notes payable
180,175

 
121,650

 
487,174

 
341,787

Net interest income
59,773

 
75,237

 
184,821

 
232,002

Less provision for loan losses
10,500

 
6,700

 
18,000

 
10,700

Net interest income after provision for loan losses
49,273

 
68,537

 
166,821

 
221,302

Other income:
 
 
 

 
 
 
 
Loan servicing and systems revenue
112,579

 
55,950

 
327,265

 
167,079

Education technology, services, and payment processing revenue
58,409

 
50,358

 
167,372

 
149,862

Communications revenue
11,818

 
6,751

 
31,327

 
17,577

Other income
16,673

 
19,756

 
44,449

 
44,874

Gain from debt repurchases

 
116

 
359

 
5,537

Derivative market value and foreign currency transaction adjustments and derivative settlements, net
17,098

 
7,173

 
100,927

 
(25,568
)
Total other income
216,577

 
140,104

 
671,699

 
359,361

Cost of services:
 
 
 
 
 
 
 
Cost to provide education technology, services, and payment processing services
19,087

 
15,151

 
44,087

 
37,456

Cost to provide communications services
4,310

 
2,632

 
11,892

 
6,789

Total cost of services
23,397

 
17,783

 
55,979

 
44,245

Operating expenses:
 

 
 

 
 
 
 
Salaries and benefits
114,172

 
74,193

 
321,932

 
220,684

Depreciation and amortization
22,992

 
10,051

 
62,943

 
27,687

Loan servicing fees
3,087

 
8,017

 
9,428

 
19,670

Other expenses
45,194

 
29,500

 
119,020

 
81,923

Total operating expenses
185,445

 
121,761

 
513,323

 
349,964

Income before income taxes
57,008

 
69,097

 
269,218

 
186,454

Income tax expense
13,882

 
25,562

 
63,369

 
70,349

Net income
43,126

 
43,535

 
205,849

 
116,105

Net (income) loss attributable to noncontrolling interests
(199
)
 
2,768

 
438

 
8,960

Net income attributable to Nelnet, Inc.
$
42,927

 
46,303

 
206,287

 
125,065

Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.05

 
1.11

 
5.04

 
2.97

Weighted average common shares outstanding - basic and diluted
40,988,965

 
41,553,316

 
40,942,177

 
42,054,532


 See accompanying notes to consolidated financial statements.

3



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
43,126

 
43,535

 
205,849

 
116,105

Other comprehensive income (loss):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding losses arising during period, net
2,438

 
405

 
964

 
383

Reclassification adjustment for gains recognized in net income, net of losses
(765
)
 
(504
)
 
(817
)
 
(1,244
)
Income tax effect
(402
)
 
35

 
(46
)
 
318

Total other comprehensive income (loss)
1,271

 
(64
)
 
101

 
(543
)
Comprehensive income
44,397

 
43,471

 
205,950

 
115,562

Comprehensive (income) loss attributable to noncontrolling interests
(199
)
 
2,768

 
438

 
8,960

Comprehensive income attributable to Nelnet, Inc.
$
44,198

 
46,239

 
206,388

 
124,522


See accompanying notes to consolidated financial statements.


4


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
(unaudited)
 
Nelnet, Inc. Shareholders
 
 
 
 
Preferred stock shares
 
Common stock shares
 
Preferred stock
 
Class A common stock
 
Class B common stock
 
Additional paid-in capital
 
 Retained earnings
 
Accumulated other comprehensive (loss) earnings
 
Noncontrolling interests
 
Total equity
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
Balance as of June 30, 2017

 
30,373,691

 
11,476,932

 
$

 
304

 
115

 
366

 
2,110,158

 
4,251

 
15,215

 
2,130,409

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 
6,901

 
6,901

Net income (loss)

 

 

 

 

 

 

 
46,303

 

 
(2,768
)
 
43,535

Other comprehensive loss

 

 

 

 

 

 

 

 
(64
)
 

 
(64
)
Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 
(759
)
 
(759
)
Cash dividend on Class A and Class B common stock - $0.14 per share

 

 

 

 

 

 

 
(5,766
)
 

 

 
(5,766
)
Issuance of common stock, net of forfeitures

 
10,125

 

 

 

 

 
278

 

 

 

 
278

Compensation expense for stock based awards

 

 

 

 

 

 
1,042

 

 

 

 
1,042

Repurchase of common stock

 
(947,794
)
 

 

 
(10
)
 

 
(1,326
)
 
(43,800
)
 

 

 
(45,136
)
Balance as of September 30, 2017

 
29,436,022

 
11,476,932

 
$

 
294

 
115

 
360

 
2,106,895

 
4,187

 
18,589

 
2,130,440

Balance as of June 30, 2018

 
29,331,002

 
11,468,587

 
$

 
293

 
115

 
2,586

 
2,271,171

 
2,704

 
9,834

 
2,286,703

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 
326

 
326

Net income

 

 

 

 

 

 

 
42,927

 

 
199

 
43,126

Other comprehensive income

 

 

 

 

 

 

 

 
1,271

 

 
1,271

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 
(95
)
 
(95
)
Cash dividend on Class A and Class B common stock - $0.16 per share

 

 

 

 

 

 

 
(6,525
)
 

 

 
(6,525
)
Issuance of common stock, net of forfeitures

 
14,086

 

 

 

 

 
580

 

 

 

 
580

Compensation expense for stock based awards

 

 

 

 

 

 
1,934

 

 

 

 
1,934

Repurchase of common stock

 
(3,297
)
 

 

 

 

 
(192
)
 

 

 

 
(192
)
Balance as of September 30, 2018

 
29,341,791

 
11,468,587

 
$

 
293

 
115

 
4,908

 
2,307,573

 
3,975

 
10,264

 
2,327,128

Balance as of December 31, 2016

 
30,628,112

 
11,476,932

 
$

 
306

 
115

 
420

 
2,056,084

 
4,730

 
9,270

 
2,070,925

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 
19,553

 
19,553

Net income (loss)

 

 

 

 

 

 

 
125,065

 

 
(8,960
)
 
116,105

Other comprehensive loss

 

 

 

 

 

 

 

 
(543
)
 

 
(543
)
Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 
(1,274
)
 
(1,274
)
Cash dividends on Class A and Class B common stock - $0.42 per share

 

 

 

 

 

 

 
(17,569
)
 

 

 
(17,569
)
Issuance of common stock, net of forfeitures

 
171,481

 

 

 
2

 

 
3,359

 

 

 

 
3,361

Compensation expense for stock based awards

 

 

 

 

 

 
3,213

 

 

 

 
3,213

Repurchase of common stock

 
(1,363,571
)
 

 

 
(14
)
 

 
(6,632
)
 
(56,685
)
 

 

 
(63,331
)
Balance as of September 30, 2017

 
29,436,022

 
11,476,932

 
$

 
294

 
115

 
360

 
2,106,895

 
4,187

 
18,589

 
2,130,440

Balance as of December 31, 2017

 
29,341,517

 
11,468,587

 
$

 
293

 
115

 
521

 
2,143,983

 
4,617

 
15,858

 
2,165,387

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 
847

 
847

Net income (loss)

 

 

 

 

 

 

 
206,287

 

 
(438
)
 
205,849

Other comprehensive income

 

 

 

 

 

 

 

 
101

 

 
101

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 
(351
)
 
(351
)
Cash dividends on Class A and Class B common stock - $0.48 per share

 

 

 

 

 

 

 
(19,539
)
 

 

 
(19,539
)
Issuance of common stock, net of forfeitures

 
319,365

 

 

 
3

 

 
4,662

 

 

 

 
4,665

Compensation expense for stock based awards

 

 

 

 

 

 
4,526

 

 

 

 
4,526

Repurchase of common stock

 
(319,091
)
 

 

 
(3
)
 

 
(4,801
)
 
(11,716
)
 

 

 
(16,520
)
Impact of adoption of new accounting standards

 

 

 

 

 

 

 
2,007

 
(743
)
 

 
1,264

Acquisition of noncontrolling interest

 

 

 

 

 

 

 
(13,449
)
 

 
(5,652
)
 
(19,101
)
Balance as of September 30, 2018

 
29,341,791

 
11,468,587

 
$

 
293

 
115

 
4,908

 
2,307,573

 
3,975

 
10,264

 
2,327,128

 
See accompanying notes to consolidated financial statements.

5



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 
Nine months ended
 
September 30,
 
2018
 
2017
Net income attributable to Nelnet, Inc.
$
206,287

 
125,065

Net loss attributable to noncontrolling interests
(438
)
 
(8,960
)
Net income
205,849

 
116,105

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
 

 
 

Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs
136,816

 
99,826

Loan discount accretion
(31,315
)
 
(32,820
)
Provision for loan losses
18,000

 
10,700

Derivative market value adjustment
(49,909
)
 
(22,381
)
Unrealized foreign currency transaction adjustment

 
45,635

Proceeds from clearinghouse - initial and variation margin, net
46,418

 
58,900

Gain from debt repurchases
(359
)
 
(5,537
)
Gain from equity securities, net of losses
(8,280
)
 

Deferred income tax expense (benefit)
23,574

 
(15,012
)
Non-cash compensation expense
4,781

 
3,370

Impairment expense
3,907

 

Other
(856
)
 
3,451

Increase in loan accrued interest receivable
(193,926
)
 
(5,572
)
Increase in accounts receivable
(15,328
)
 
(19,209
)
Decrease (increase) in other assets
49,255

 
(8,660
)
Increase in accrued interest payable
10,619

 
2,147

(Decrease) increase in other liabilities
(7,159
)
 
20,548

Increase (decrease) in due to customers
1,470

 
(14,403
)
Net cash provided by operating activities
193,557

 
237,088

Cash flows from investing activities, net of acquisition:
 

 
 

Purchases of loans
(3,231,956
)
 
(183,466
)
Net proceeds from loan repayments, claims, capitalized interest, and other
2,484,596

 
2,520,197

Proceeds from sale of loans
23,712

 

Purchases of available-for-sale securities
(38,064
)
 
(109,666
)
Proceeds from sales of available-for-sale securities
58,594

 
141,206

Purchases of investments and issuance of notes receivable
(49,216
)
 
(21,823
)
Proceeds from investments and notes receivable
21,461

 
6,174

Purchases of property and equipment
(96,480
)
 
(106,656
)
Business acquisition, net of cash acquired
(109,152
)
 

Net cash (used in) provided by investing activities
(936,505
)
 
2,245,966

Cash flows from financing activities:
 

 
 

Payments on bonds and notes payable
(2,149,449
)
 
(3,679,592
)
Proceeds from issuance of bonds and notes payable
3,004,848

 
1,178,027

Payments of debt issuance costs
(10,953
)
 
(4,411
)
Dividends paid
(19,539
)
 
(17,569
)
Repurchases of common stock
(16,520
)
 
(63,331
)
Proceeds from issuance of common stock
993

 
457

Acquisition of noncontrolling interest
(13,449
)
 

Issuance of noncontrolling interests
768

 
19,475

Distribution to noncontrolling interests
(351
)
 
(1,274
)
Net cash provided by (used in) financing activities
796,348

 
(2,568,218
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
53,400

 
(85,164
)
Cash, cash equivalents, and restricted cash, beginning of period
942,066

 
1,170,317

Cash, cash equivalents, and restricted cash, end of period
$
995,466

 
1,085,153


6



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(unaudited)
 
Nine months ended
 
September 30,
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 
 
Cash disbursements made for interest
$
425,782

 
287,265

Cash (refunds received) disbursements made for income taxes, net
$
(6,491
)
 
71,431


Supplemental disclosures of noncash operating and investing activities regarding the Company's business acquisition during the nine months ended September 30, 2018 are contained in note 7.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows.
 
As of
 
As of
 
As of
 
As of
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
December 31, 2016
Total cash and cash equivalents
$
83,537

 
66,752

 
254,391

 
69,654

Restricted cash
723,338

 
688,193

 
725,463

 
980,961

Restricted cash - due to customers
188,591

 
187,121

 
105,299

 
119,702

Cash, cash equivalents, and restricted cash
$
995,466

 
942,066

 
1,085,153

 
1,170,317


See accompanying notes to consolidated financial statements.



7



NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless otherwise noted)
(unaudited)

1.  Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2017 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").

Reporting Segment Name Changes

During the first quarter of 2018, the Company changed the name of the Tuition Payment Processing and Campus Commerce operating segment to Education Technology, Services, and Payment Processing to better describe the evolution of services this operating segment provides. In addition, the Loan Systems and Servicing segment was retitled as Loan Servicing and Systems. As a result, the line items "tuition payment processing, school information, and campus commerce revenue" and "loan systems and servicing revenue" on the consolidated statements of income were changed to "education technology, services, and payment processing revenue" and "loan servicing and systems revenue," respectively.

Reclassifications

Certain amounts previously reported within the Company's consolidated balance sheet, statements of income, and statements of cash flows have been reclassified to conform to the current period presentation. These reclassifications include:

Reclassifying certain non-customer receivables, which were previously included in "accounts receivable," to "other assets."

Reclassifying direct costs to provide services for education technology, services, and payment processing, which were previously included in "other expenses," to "cost to provide education technology, services, and payment processing services."

Reclassifying the line item "cost to provide communications services" on the consolidated statements of income from part of "operating expenses" and presenting such costs as part of "cost of services."

Reclassifying consumer loan activity on the consolidated statements of income, which was previously included in "investment interest" and "other expenses," to "loan interest" and "provision for loan losses" and "loan servicing fees," respectively, and reclassifying consumer loan activity on the consolidated statements of cash flows as appropriate. This did not result in a change in the Company's previously reported net cash provided by operating or investing activities.

Accounting Standards Adopted in 2018

In the first quarter of 2018, the Company adopted the following new accounting standards and other guidance:
Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"). Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

8



The Company adopted the standard effective January 1, 2018, using the full retrospective method, which required it to restate each prior reporting period presented. As a result, the Company changed its accounting policy for revenue recognition as detailed in note 2, “Summary of Significant Accounting Policies and Practices.”
The most significant impact of the standard relates to identifying the Company's fee-based Education Technology, Services, and Payment Processing operating segment as the principal in its payment services transactions. As a result of this change, the Company presents the payment services revenue gross, with the direct costs to provide these services presented separately. The Company’s other fee-based operating segments will recognize revenue consistent with historical revenue recognition patterns. The majority of the Company's revenue earned in its non-fee-based Asset Generation and Management operating segment, including loan interest and derivative activity, is explicitly excluded from the scope of the new standard.
Impacts to Previously Reported Results
Adoption of the revenue recognition standard impacted the Company’s previously reported results on the consolidated statements of income as follows:
 
Three months ended September 30, 2017
 
As previously reported
 
Impact of adoption
 
As restated
Education technology, services, and payment processing revenue
$
35,450

 
14,908

 
50,358

 
Cost to provide education technology, services, and payment processing services

 
14,908

 
14,908

(a)

 
Nine months ended September 30, 2017
 
As previously reported
 
Impact of adoption
 
As restated
Education technology, services, and payment processing revenue
$
113,293

 
36,569

 
149,862

 
Cost to provide education technology, services, and payment processing services

 
36,569

 
36,569

(a)


(a)
In addition to the impact of adopting the new revenue recognition standard, as discussed above, the Company reclassified other direct costs to provide education technology, services, and payment processing services which were previously reported as part of "other expenses" to "cost to provide education technology, services, and payment processing services."
Adoption of the new revenue recognition standard had no impact to the consolidated balance sheets or cash provided by or used in operating, investing, or financing activities on the consolidated statements of cash flows.
Equity Investments

In January 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. The guidance, including a related clarifying update, requires equity investments with readily determinable fair values to be measured at fair value, with changes in the fair value recognized through net income (other than those equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee). An entity may choose to measure equity investments without readily determinable fair values at fair value or use the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. In addition, the impairment assessment is simplified by requiring a qualitative assessment to identify impairment.

The guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities with readily determinable fair values previously recognized in accumulated other comprehensive income, and was adopted by the Company as of January 1, 2018. Upon adoption, the Company recorded an immaterial cumulative-effect adjustment to retained earnings, accumulated other comprehensive earnings, and investments and notes receivable. Subsequent to the adoption, the Company is accounting for the majority of its equity investments without readily determinable fair values using the measurement alternative.


9



Other Comprehensive Income

In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive earnings to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, which became effective on January 1, 2018. This guidance is effective for fiscal years beginning after December 15, 2018, but early adoption is permitted. The Company elected to early adopt this guidance as of January 1, 2018. Upon adoption, the Company recorded an immaterial reclassification between accumulated other comprehensive earnings and retained earnings.

Restricted Cash

In November 2016, the FASB issued accounting guidance related to restricted cash. The new guidance requires that the statement of cash flows present the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents, and a reconciliation of such total to amounts on the balance sheet. The Company adopted the standard effective January 1, 2018 using the retrospective transition method. Adoption of this standard impacted the Company's previously reported amounts on the consolidated statements of cash flows as follows:
 
Nine months ended September 30, 2017
 
As previously reported
 
Impact of adoption
 
As restated
Decrease in due to customers
$

 
(14,403
)
 
(14,403
)
Proceeds from clearinghouse - initial and variation margin, net
37,744

 
21,156

 
58,900

Net cash provided by operating activities
230,335

 
6,753

 
237,088

Decrease in restricted cash, net
276,654

 
(276,654
)
 

Net cash provided by investing activities
2,522,620

 
(276,654
)
 
2,245,966


2. Summary of Significant Accounting Policies and Practices

Except for the changes below, no significant changes have been made to the Company’s significant accounting policies and practices disclosed in note 3, Summary of Significant Accounting Policies and Practices, in the 2017 Annual Report.

Revenue Recognition

The Company applies the provisions of ASC Topic 606 to its fee-based operating segments. The majority of the Company’s revenue earned in its Asset Generation and Management operating segment, including loan interest and derivative activity, is explicitly excluded from the scope of ASC Topic 606. The Company recognizes revenue under the core principle of ASC Topic 606 to depict the transfer of control of products and services to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. Additional information related to the Company's revenue recognition of specific items is provided below.

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Loan servicing and systems revenue - Loan servicing and systems revenue consists of the following items:

Loan servicing revenue - Loan servicing revenue consideration is determined from individual contracts with customers and is calculated monthly based on the dollar value of loans, number of loans, number of borrowers serviced for each customer, or number of transactions. Loan servicing requires a significant level of integration and the individual components are not considered distinct. The Company will perform various services, including, but not limited to, (i) application processing, (ii) monthly servicing, (iii) conversion processing, and (iv) fulfillment services, during each distinct service period. Even though the mix and quantity of activities that the Company performs each period may differ, the nature of the activities are substantially the same. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits.


10



Software services revenue - Software services revenue consideration is determined from individual contracts with customers and includes license and maintenance fees associated with loan software products, generally in a remote hosted environment, and computer and software consulting. Usage-based revenue from remote hosted licenses is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits. Revenue from any non-refundable up-front fee is recognized ratably over the contract period, as the fee relates to set-up activities that provide no incremental benefit to the customers. Computer and software consulting is also capable of being distinct and accounted for as a separate performance obligation. Revenue allocated to computer and software consulting is recognized as services are provided.

Outsourced services revenue - Outsourced services revenue consideration is determined from individual contracts with customers and is calculated monthly based on the volume of services. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits.

The following table provides disaggregated revenue by service offering:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Government servicing - Nelnet
$
38,907

 
38,594

 
118,015

 
117,409

Government servicing - Great Lakes (a)
45,671

 

 
122,107

 

FFELP servicing
7,422

 
3,979

 
24,259

 
11,693

Private education and consumer loan servicing
10,007

 
7,596

 
31,990

 
20,535

Software services
8,201

 
4,430

 
24,461

 
13,093

 Outsourced services and other
2,371

 
1,351

 
6,433

 
4,349

Loan servicing and systems revenue
$
112,579

 
55,950

 
327,265

 
167,079


(a)
Great Lakes Educational Loan Services, Inc. ("Great Lakes") was acquired by the Company on February 7, 2018. For additional information about the acquisition, see note 7.

Education technology, services, and payment processing revenue - Education technology, services, and payment processing revenue consists of the following items:

Tuition payment plan services - Tuition payment plan services consideration is determined from individual plan agreements, which are governed by plan service agreements, and includes access to a remote hosted environment and management of payment processing. The management of payment processing is considered a distinct performance obligation when sold with the remote hosted environment. Revenue for each performance obligation is allocated to the distinct service period, the academic school term, and recognized ratably over the service period as customers simultaneously receive and consume benefits.

Payment processing - Payment processing consideration is determined from individual contracts with customers and includes electronic transfer and credit card processing, reporting, virtual terminal solutions, and specialized integrations to business software for education and non-education markets. Volume-based revenue from payment processing is allocated and recognized to the distinct service period, based on when each transaction is completed, and recognized as control transfers as customers simultaneously receive and consume benefits.

Education technology and services - Education technology and services consideration is determined from individual contracts with customers and is based on the services selected by the customer. Services in K-12 private and faith based schools include (i) assistance with financial needs assessment, (ii) automating administrative processes such as admissions, online applications and enrollment services, scheduling, student billing, attendance, and grade book management, and (iii) professional development and educational instruction services. Revenue for these services is recognized for the consideration the Company has a right to invoice, the amount of which corresponds directly with the value provided to the customer based on the performance completed. Services provided to the higher education market include innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data. These services are considered distinct performance obligations. Revenue for each performance obligation is allocated to the distinct service period, typically a month or based on when each transaction is completed, and recognized as control transfers as customers simultaneously receive and consume benefits.


11



The following table provides disaggregated revenue by service offering:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Tuition payment plan services
$
19,771

 
17,885

 
63,209

 
58,543

Payment processing
26,956

 
22,541

 
62,908

 
55,371

Education technology and services
11,419

 
9,831

 
40,411

 
35,804

Other
263

 
101

 
844

 
144

Education technology, services, and payment processing revenue
$
58,409

 
50,358

 
167,372

 
149,862


Cost to provide education technology, services, and payment processing services is primarily associated with providing payment processing services. Interchange and payment network fees are charged by the card associations or payment networks. Depending upon the transaction type, the fees are a percentage of the transaction’s dollar value, a fixed amount, or a combination of the two methods. Other items included in cost to provide education technology, services, and payment processing services include salaries and benefits and third-party professional service costs directly related to providing professional development and educational instruction services to teachers, school leaders, and students.

Communications revenue - Communications revenue is derived principally from internet, television, and telephone services and is billed as a flat fee in advance of providing the service. 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. These are each considered distinct performance obligations. Revenue is recognized monthly for the consideration the Company has a right to invoice, the amount of which corresponds directly with the value provided to the customer based on the performance completed. The Company recognizes revenue from these services in the period the services are rendered rather than billed. Revenue received or receivable in advance of the delivery of services is included in deferred revenue. Earned but unbilled usage-based services are recorded in accounts receivable.

The following table provides disaggregated revenue by service offering and customer type:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Internet
$
6,456

 
3,205

 
16,547

 
7,978

Television
3,385

 
2,115

 
9,250

 
5,498

Telephone
1,957

 
1,413

 
5,471

 
4,018

Other
20

 
18

 
59

 
83

Communications revenue
$
11,818

 
6,751

 
31,327

 
17,577

 
 
 
 
 
 
 
 
Residential revenue
$
8,896

 
4,680

 
23,367

 
11,851

Business revenue
2,861

 
2,013

 
7,779

 
5,525

Other
61

 
58

 
181

 
201

Communications revenue
$
11,818

 
6,751

 
31,327

 
17,577


Cost to provide communications services is primarily associated with television programming costs.  The Company has various contracts to obtain television 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 items in cost to provide communications services include connectivity, franchise, and other regulatory costs directly related to providing internet and telephone services.






12



Other income - The following table provides the components of "other income" on the consolidated statements of income:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Realized and unrealized gains on investments, net
$
1,288

 
2,201

 
11,505

 
3,818

Borrower late fee income
3,253

 
2,731

 
8,994

 
9,098

Investment advisory fees
1,183

 
5,852

 
4,169

 
11,661

Management fee revenue
1,756

 

 
4,673

 

Peterson's revenue

 
3,402

 

 
9,282

Other
9,193

 
5,570

 
15,108

 
11,015

Other income
$
16,673

 
19,756

 
44,449

 
44,874


Borrower late fee income - Late fee income is earned by the education lending subsidiaries. Revenue is allocated to the distinct service period, based on when each transaction is completed.

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

Management fee revenue - Management fee revenue is earned for technology and certain administrative support services provided to Great Lakes' former parent company. Revenue is allocated to the distinct service period, based on when each transaction is completed.

Peterson's revenue - 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. The Company applied a practical expedient allowed for the retrospective comparative period which does not require the Company to restate revenue from contracts that began and were completed within the same annual reporting period.

Contract Balances - The following table provides information about liabilities from contracts with customers:
 
As of September 30, 2018
 
As of December 31, 2017
Deferred revenue, which is included in "other liabilities" on the consolidated balance sheets
$
42,831

 
32,276


Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records deferred revenue when revenue is received or receivable in advance of the delivery of service. For multi-year contracts, the Company generally invoices customers annually at the beginning of each annual coverage period. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant financing component.


13



Activity in the deferred revenue balance is shown below:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
25,660

 
25,954

 
32,276

 
33,141

Deferral of revenue
45,174

 
38,705

 
97,726

 
79,435

Recognition of revenue
(27,992
)
 
(22,181
)
 
(87,303
)
 
(70,128
)
Other
(11
)
 
27

 
132

 
57

Balance, end of period
$
42,831

 
42,505

 
42,831

 
42,505


Assets Recognized from the Costs to Obtain a Contract with a Customer - The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in “other assets” on the consolidated balance sheets.

3.  Loans Receivable and Allowance for Loan Losses

Loans receivable consisted of the following:
 
As of
 
As of
 
September 30, 2018
 
December 31, 2017
Federally insured student loans:
 
 
 
Stafford and other
$
4,956,324

 
4,418,881

Consolidation
17,434,419

 
17,302,725

Total
22,390,743

 
21,721,606

Private education loans
169,467

 
212,160

Consumer loans
112,547

 
62,111

 
22,672,757

 
21,995,877

Loan discount, net of unamortized loan premiums and deferred origination costs
(63,566
)
 
(113,695
)
Non-accretable discount
(20,612
)
 
(13,085
)
Allowance for loan losses:
 
 
 
Federally insured loans
(43,053
)
 
(38,706
)
Private education loans
(11,253
)
 
(12,629
)
Consumer loans
(5,911
)
 
(3,255
)
 
$
22,528,362

 
21,814,507


14



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 loans. Activity in the allowance for loan losses is shown below.
 
Three months ended September 30, 2018
 
Balance at beginning of period
 
Provision for loan losses
 
Charge-offs
 
Recoveries
 
Other
 
Balance at end of period
Federally insured loans
$
37,263

 
8,000

 
(2,210
)
 

 

 
43,053

Private education loans
11,664

 

 
(535
)
 
124

 

 
11,253

Consumer loans
4,788

 
2,500

 
(1,403
)
 
26

 

 
5,911

 
$
53,715

 
10,500

 
(4,148
)
 
150

 

 
60,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2017
Federally insured loans
$
35,862

 
7,000

 
(3,464
)
 

 

 
39,398

Private education loans
13,846

 
(1,000
)
 
(491
)
 
161

 
50

 
12,566

Consumer loans
1,000

 
700

 
(33
)
 

 

 
1,667

 
$
50,708

 
6,700

 
(3,988
)
 
161

 
50

 
53,631

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
Federally insured loans
$
38,706

 
12,000

 
(8,653
)
 

 
1,000

 
43,053

Private education loans
12,629

 

 
(1,846
)
 
470

 

 
11,253

Consumer loans
3,255

 
6,000

 
(3,376
)
 
32

 

 
5,911

 
$
54,590

 
18,000

 
(13,875
)
 
502

 
1,000

 
60,217

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
Federally insured loans
$
37,268

 
11,000

 
(8,870
)
 

 

 
39,398

Private education loans
14,574

 
(2,000
)
 
(861
)
 
603

 
250

 
12,566

Consumer loans

 
1,700

 
(33
)
 

 

 
1,667

 
$
51,842

 
10,700

 
(9,764
)
 
603

 
250

 
53,631



15



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 September 30, 2018
 
As of December 31, 2017
 
As of September 30, 2017
Federally insured loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
1,410,902

 
 
 
$
1,260,394

 
 
 
$
1,448,172

 
 
Loans in forbearance
1,487,107

 
 
 
1,774,405

 
 
 
2,406,346

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
16,921,119

 
86.8
%
 
16,477,004

 
88.2
%
 
16,534,795

 
88.7
%
Loans delinquent 31-60 days
689,454

 
3.5

 
682,586

 
3.7

 
579,665

 
3.1

Loans delinquent 61-90 days
412,639

 
2.1

 
374,534

 
2.0

 
334,085

 
1.8

Loans delinquent 91-120 days
347,013

 
1.8

 
287,922

 
1.5

 
255,567

 
1.4

Loans delinquent 121-270 days
853,224

 
4.4

 
629,480

 
3.4

 
700,319

 
3.8

Loans delinquent 271 days or greater
269,285

 
1.4

 
235,281

 
1.2

 
228,335

 
1.2

Total loans in repayment
19,492,734

 
100.0
%
 
18,686,807

 
100.0
%
 
18,632,766

 
100.0
%
Total federally insured loans
$
22,390,743

 
 

 
$
21,721,606

 
 

 
$
22,487,284

 
 
Private education loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
3,550

 
 
 
$
6,053

 
 
 
$
27,188

 
 
Loans in forbearance
1,577

 
 
 
2,237

 
 
 
2,904

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
156,383

 
95.2
%
 
196,720

 
96.5
%
 
190,153

 
96.8
%
Loans delinquent 31-60 days
1,796

 
1.1

 
1,867

 
0.9

 
1,200

 
0.6

Loans delinquent 61-90 days
1,155

 
0.7

 
1,052

 
0.5

 
1,195

 
0.6

Loans delinquent 91 days or greater
5,006

 
3.0

 
4,231

 
2.1

 
3,989

 
2.0

Total loans in repayment
164,340

 
100.0
%
 
203,870

 
100.0
%