Edgar Filing: NELNET INC

NNI-6.30.12-10Q

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 June 30, 2012



¨	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 201 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]

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

Large accelerated filer [ ] Accelerated filer [X]

Non-accelerated filer [ ] Smaller reporting company [ ]

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 July 31, 2012, there were 35,836,368 and 11,495,377 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,317,364 shares of Class A Common Stock held by wholly owned subsidiaries).

NELNET, INC.

FORM 10-Q

INDEX

June 30, 2012



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61
	Item 4.	Controls and Procedures	66

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	67
	Item 1A.	Risk Factors	67
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
	Item 6.	Exhibits	69

Signatures			70

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
	As of			As of
	June 30, 2012			December 31, 2011
	(unaudited)
Assets:
Student loans receivable (net of allowance for loan losses of $49,657 and $48,482, respectively)	$	23,501,382		24,297,876
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	9,845			7,299
Cash and cash equivalents - held at a related party	46,410			35,271
Total cash and cash equivalents	56,255			42,570
Investments	74,055			50,780
Restricted cash and investments	912,955			614,322
Restricted cash - due to customers	63,753			109,809
Accrued interest receivable	286,133			308,401
Accounts receivable (net of allowance for doubtful accounts of $1,438 and $1,284, respectively)	67,001			63,654
Goodwill	117,118			117,118
Intangible assets, net	19,006			28,374
Property and equipment, net	33,105			34,819
Other assets	89,714			92,275
Fair value of derivative instruments	48,665			92,219
Total assets	$	25,269,142		25,852,217
Liabilities:
Bonds and notes payable	$	23,836,250		24,434,540
Accrued interest payable	18,187			19,634
Other liabilities	143,845			178,189
Due to customers	63,753			109,809
Fair value of derivative instruments	62,209			43,840
Total liabilities	24,124,244			24,786,012
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 35,847,801 shares and 35,643,102 shares, respectively	358			356
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,495,377 shares	115			115
Additional paid-in capital	52,194			49,245
Retained earnings	1,092,715			1,017,629
Accumulated other comprehensive loss	(409		)	—
Employee notes receivable	(368		)	(1,140	)
Total Nelnet, Inc. shareholders' equity	1,144,605			1,066,205
Noncontrolling interest	293			—
Total equity	1,144,898			1,066,205
Commitments and contingencies
Total liabilities and equity	$	25,269,142		25,852,217

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
	Three months					Six months
	ended June 30,					ended June 30,
	2012			2011		2012		2011
Interest income:
Loan interest	$	150,988		138,934		304,046		276,292
Investment interest	1,055			856		2,150		1,582
Total interest income	152,043			139,790		306,196		277,874
Interest expense:
Interest on bonds and notes payable	67,476			51,054		136,773		103,361
Net interest income	84,567			88,736		169,423		174,513
Less provision for loan losses	7,000			5,250		13,000		9,000
Net interest income after provision for loan losses	77,567			83,486		156,423		165,513
Other income (expense):
Loan and guaranty servicing revenue	52,391			41,735		101,879		82,148
Tuition payment processing and campus commerce revenue	16,834			14,761		38,747		34,130
Enrollment services revenue	29,710			32,315		61,374		66,183
Other income	8,800			6,826		19,754		13,318
Gain on sale of loans and debt repurchases	935			—		935		8,307
Derivative market value and foreign currency adjustments and derivative settlements, net	(21,618		)	(20,335	)	(36,798	)	(23,371	)
Total other income	87,052			75,302		185,891		180,715
Operating expenses:
Salaries and benefits	48,703			42,881		97,798		86,793
Cost to provide enrollment services	20,374			22,140		42,052		44,979
Depreciation and amortization	8,226			6,769		16,362		13,545
Other	30,908			28,767		63,171		54,872
Total operating expenses	108,211			100,557		219,383		200,189
Income before income taxes	56,408			58,231		122,931		146,039
Income tax expense	(14,878		)	(21,106	)	(38,108	)	(54,034	)
Net income	41,530			37,125		84,823		92,005
Net income attributable to noncontrolling interest	136			—		288		—
Net income attributable to Nelnet, Inc.	$	41,394		37,125		84,535		92,005
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic	$	0.87		0.76		1.78		1.90
Net income attributable to Nelnet, Inc. shareholders - diluted	$	0.87		0.76		1.78		1.89
Weighted average common shares outstanding:
Basic	47,049,055			48,302,779		47,020,811		48,237,411
Diluted	47,292,147			48,488,046		47,240,659		48,425,886

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
	Three months				Six months
	ended June 30,				ended June 30,
	2012			2011	2012		2011
Net income	$	41,530		37,125	84,823		92,005
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding gains (losses) arising during period, net	(586		)	—	1,596		—
Less reclassification adjustment for (gains) losses recognized in net income, net	(966		)	—	(2,214	)	—
Income tax effect	538			—	209		—
Total other comprehensive income (loss)	(1,014		)	—	(409	)	—
Comprehensive income	40,516			37,125	84,414		92,005
Comprehensive income attributable to noncontrolling interest	136			—	288		—
Comprehensive income attributable to Nelnet, Inc.	$	40,380		37,125	84,126		92,005

See accompanying notes to consolidated financial statements.



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		Employee notes receivable		Noncontrolling interest	Total equity
	Preferred stock shares	Class A		Class B	Preferred stock		Class A common stock		Class B common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Employee notes receivable		Noncontrolling interest	Total equity
Balance as of March 31, 2011	—	36,983,557		11,495,377	$	—	370		115	73,502		882,550		—		(1,170	)	—	955,367
Net income	—	—		—	—		—		—	—		37,125		—		—		—	37,125
Cash dividend on Class A and Class B common stock - $0.10 per share	—	—		—	—		—		—	—		(4,852	)	—		—		—	(4,852	)
Issuance of common stock, net of forfeitures	—	70,794		—	—		1		—	1,027		—		—		—		—	1,028
Compensation expense for stock based awards	—	—		—	—		—		—	342		—		—		—		—	342
Repurchase of common stock	—	(9,979	)	—	—		(1	)	—	(225	)	—		—		—		—	(226	)
Balance as of June 30, 2011	—	37,044,372		11,495,377	$	—	370		115	74,646		914,823		—		(1,170	)	—	988,784
Balance as of March 31, 2012	—	35,821,057		11,495,377	$	—	358		115	50,948		1,056,058		605		(368	)	157	1,107,873
Net income	—	—		—	—		—		—	—		41,394		—		—		136	41,530
Other comprehensive loss	—	—		—	—		—		—	—		—		(1,014	)	—		—	(1,014	)
Cash dividend on Class A and Class B common stock - $0.10 per share	—	—		—	—		—		—	—		(4,737	)	—		—		—	(4,737	)
Issuance of common stock, net of forfeitures	—	35,134		—	—		1		—	851		—		—		—		—	852
Compensation expense for stock based awards	—	—		—	—		—		—	593		—		—		—		—	593
Repurchase of common stock	—	(8,390	)	—	—		(1	)	—	(198	)	—		—		—		—	(199	)
Balance as of June 30, 2012	—	35,847,801		11,495,377	$	—	358		115	52,194		1,092,715		(409	)	(368	)	293	1,144,898
Balance as of December 31, 2010	—	36,846,353		11,495,377	$	—	368		115	76,263		831,057		—		(1,170	)	—	906,633
Net income	—	—		—	—		—		—	—		92,005		—		—		—	92,005
Cash dividend on Class A and Class B common stock - $0.17 per share	—	—		—	—		—		—	—		(8,239	)	—		—		—	(8,239	)
Contingency payment related to business combination	—	—		—	—		—		—	(5,893	)	—		—		—		—	(5,893	)
Issuance of common stock, net of forfeitures	—	222,463		—	—		3		—	4,113		—		—		—		—	4,116
Compensation expense for stock based awards	—	—		—	—		—		—	697		—		—		—		—	697
Repurchase of common stock	—	(24,444	)	—	—		(1	)	—	(534	)	—		—		—		—	(535	)
Balance as of June 30, 2011	—	37,044,372		11,495,377	$	—	370		115	74,646		914,823		—		(1,170	)	—	988,784
Balance as of December 31, 2011	—	35,643,102		11,495,377	$	—	356		115	49,245		1,017,629		—		(1,140	)	—	1,066,205
Issuance of minority membership interest	—	—		—	—		—		—	—		—		—		—		5	5
Net income	—	—		—	—		—		—	—		84,535		—		—		288	84,823
Other comprehensive loss	—	—		—	—		—		—	—		—		(409	)	—		—	(409	)
Cash dividend on Class A and Class B common stock - $0.20 per share	—	—		—	—		—		—	—		(9,449	)	—		—		—	(9,449	)
Issuance of common stock, net of forfeitures	—	255,718		—	—		3		—	3,275		—		—		—		—	3,278
Compensation expense for stock based awards	—	—		—	—		—		—	988		—		—		—		—	988
Repurchase of common stock	—	(51,019	)	—	—		(1	)	—	(1,314	)	—		—		—		—	(1,315	)
Reduction of employee stock notes receivable	—	—		—	—		—		—	—		—		—		772		—	772
Balance as of June 30, 2012	—	35,847,801		11,495,377	$	—	358		115	52,194		1,092,715		(409	)	(368	)	293	1,144,898

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Six months ended June 30,
	2012			2011
Net income attributable to Nelnet, Inc.	$	84,535		92,005
Net income attributable to noncontrolling interest	288			—
Net income	84,823			92,005
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including loan and debt premiums/discounts and deferred origination costs	35,524			35,841
Provision for loan losses	13,000			9,000
Derivative market value adjustment	61,923			(68,658	)
Foreign currency transaction adjustment	(26,984		)	84,354
Proceeds to terminate and/or amend derivative instruments, net	—			11,847
Gain on sale of loans	(33		)	(1,345	)
Gain from debt repurchases	(902		)	(6,962	)
Change in investments - trading securities, net	(229		)	11,572
Deferred income tax benefit	(20,483		)	(8,715	)
Non-cash compensation expense	1,412			1,092
Other non-cash items	(1,302		)	108
Decrease in accrued interest receivable	22,268			15,671
(Increase) decrease in accounts receivable	(3,347		)	1,498
Decrease in other assets	2,264			3,258
Decrease in accrued interest payable	(1,447		)	(2,060	)
Decrease in other liabilities	(5,220		)	(10,290	)
Net cash provided by operating activities	161,267			168,216
Cash flows from investing activities:
Purchases of student loans	(729,485		)	(662,324	)
Purchases of student loans from a related party	(290		)	(29	)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	1,449,610			1,350,344
Proceeds from sale of student loans	59,965			95,131
Purchases of available-for-sale securities	(53,662		)	—
Proceeds from sales of available-for-sale securities	28,216			—
Purchases of property and equipment, net	(4,405		)	(8,281	)
(Increase) decrease in restricted cash and investments, net	(298,633		)	58,027
Business and asset acquisition contingency payments	—			(14,080	)
Net cash provided by investing activities	451,316			818,788
Cash flows from financing activities:
Payments on bonds and notes payable	(1,520,127		)	(1,782,953	)
Proceeds from issuance of bonds and notes payable	936,560			745,554
Payments on bonds payable due to a related party	—			(107,050	)
Payments of debt issuance costs	(5,593		)	(1,506	)
Dividends paid	(9,449		)	(8,239	)
Repurchases of common stock	(1,315		)	(535	)
Proceeds from issuance of common stock	249			265
Payments received on employee stock notes receivable	772			—
Issuance of minority membership interest	5			—
Net cash used in financing activities	(598,898		)	(1,154,464	)
Net increase (decrease) in cash and cash equivalents	13,685			(167,460	)
Cash and cash equivalents, beginning of period	42,570			283,801
Cash and cash equivalents, end of period	$	56,255		116,341
Supplemental disclosures of cash flow information:
Interest paid	$	120,823		101,007
Income taxes paid, net of refunds	$	57,113		63,331

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of June 30, 2012 and for the three and six months ended

June 30, 2012 and 2011 is unaudited)

(Dollars in thousands, except per share amounts, unless otherwise noted)

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2012 and for the three and six month periods ended June 30, 2012 and 2011 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2011 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 six months ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012. 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, 2011.

Noncontrolling Interest

Noncontrolling interest reflects the proportionate share of membership interest (equity) and net income attributable to the holders of minority membership interests in Whitetail Rock Capital Management, LLC ("WRCM"), a subsidiary of the Company that issued minority membership interests on January 1, 2012.

2. Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:



	As of			As of
	June 30, 2012			December 31, 2011
Federally insured loans	$	23,551,124		24,332,709
Non-federally insured loans	31,471			26,916
	23,582,595			24,359,625
Unamortized loan premiums (discounts) and deferred origination costs, net	(31,556		)	(13,267	)
Allowance for loan losses – federally insured loans	(36,992		)	(37,205	)
Allowance for loan losses – non-federally insured loans	(12,665		)	(11,277	)
	$	23,501,382		24,297,876
Allowance for federally insured loans as a percentage of such loans	0.16		%	0.15	%
Allowance for non-federally insured loans as a percentage of such loans	40.24		%	41.90	%

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.



	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012		2011
Balance at beginning of period	$	48,435		41,097		48,482		43,626
Provision for loan losses:
Federally insured loans	7,000			5,000		13,000		8,500
Non-federally insured loans	—			250		—		500
Total provision for loan losses	7,000			5,250		13,000		9,000
Charge-offs:
Federally insured loans	(5,999		)	(4,585	)	(11,494	)	(9,440	)
Non-federally insured loans	(528		)	(1,226	)	(1,297	)	(2,220	)
Total charge-offs	(6,527		)	(5,811	)	(12,791	)	(11,660	)
Recoveries - non-federally insured loans	354			283		705		653
Purchase (sale) of loans, net:
Federally insured loans	(792		)	—		(1,719	)	—
Non-federally insured loans	—			—		—		—
Total purchase (sale) of loans, net	(792		)	—		(1,719	)	—
Transfer (to) from repurchase obligation related to loans (sold) purchased, net	1,187			1,481		1,980		681
Balance at end of period	$	49,657		42,300		49,657		42,300
Allocation of the allowance for loan losses:
Federally insured loans	$	36,992		31,968		36,992		31,968
Non-federally insured loans	12,665			10,332		12,665		10,332
Total allowance for loan losses	$	49,657		42,300		49,657		42,300

Repurchase Obligations

As of June 30, 2012, the Company had participated a cumulative amount of $107.7 million of non-federally insured loans to third parties. Loans participated under these agreements have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Per the terms of the servicing agreements, the Company’s servicing operations are obligated to repurchase loans subject to the participation interests in the event such loans become 60 or 90 days delinquent.

In addition, on January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% of par value). The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent.

The Company’s estimate related to its obligation to repurchase these loans is included in “other liabilities” in the Company’s consolidated balance sheets. The activity related to this accrual is detailed below.



	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012		2011
Beginning balance	$	18,430		19,670		19,223		12,600
Transfer (to) from the allowance for loan losses related to loans (purchased) sold, net	(1,187		)	(1,481	)	(1,980	)	(681	)
Repurchase obligation associated with loans sold on January 13, 2011	—			—		—		6,270
Current period expense	—			2,500		—		2,500
Ending balance	$	17,243		20,689		17,243		20,689

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 student loan delinquencies.



	As of June 30, 2012				As of December 31, 2011				As of June 30, 2011
Federally Insured Loans:
Loans in-school/grace/deferment (a)	$	3,379,586			$	3,664,899			$	4,061,955
Loans in forbearance (b)	3,223,004				3,330,452				3,263,802
Loans in repayment status:
Loans current	14,647,003		86.5	%	14,600,372		84.2	%	13,748,083		87.2	%
Loans delinquent 31-60 days (c)	667,766		3.9		844,204		4.9		583,443		3.7
Loans delinquent 61-90 days (c)	409,288		2.4		407,094		2.3		358,539		2.3
Loans delinquent 91-270 days (c)	918,587		5.4		1,163,437		6.7		854,095		5.4
Loans delinquent 271 days or greater (c)(d)	305,890		1.8		322,251		1.9		213,240		1.4
Total loans in repayment	16,948,534		100.0	%	17,337,358		100.0	%	15,757,400		100.0	%
Total federally insured loans	$	23,551,124			$	24,332,709			$	23,083,157

Non-Federally Insured Loans:
Loans in-school/grace/deferment (a)	$	2,795			$	2,058			$	3,749
Loans in forbearance (b)	451				371				510
Loans in repayment status:
Loans current	21,094		74.8	%	16,776		68.5	%	22,221		84.2	%
Loans delinquent 31-60 days (c)	690		2.4		706		2.9		624		2.4
Loans delinquent 61-90 days (c)	1,546		5.5		1,987		8.1		587		2.2
Loans delinquent 91 days or greater (c)	4,895		17.3		5,018		20.5		2,964		11.2
Total loans in repayment	28,225		100.0	%	24,487		100.0	%	26,396		100.0	%
Total non-federally insured loans	$	31,471			$	26,916			$	30,655


(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 federally insured loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency.

3. Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:



	As of June 30, 2012
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes (a):
Bonds and notes based on indices	$	19,852,956		0.48% - 6.90%	11/25/15 - 7/27/48
Bonds and notes based on auction or remarketing	970,075			0.17% - 2.10%	5/1/28 - 5/25/42
Total variable-rate bonds and notes	20,823,031
FFELP warehouse facilities	829,449			0.22% - 0.35%	1/31/15 - 6/30/15
Department of Education Conduit	2,140,492			0.79%	5/8/14
Secured line of credit	50,000			1.75%	4/11/14
Unsecured line of credit	10,000			1.75%	2/17/16
Unsecured debt - Junior Subordinated Hybrid Securities	100,697			3.84%	9/15/61
Other borrowings	33,653			3.72% - 5.72%	11/14/12 - 3/1/22
	23,987,322
Discount on bonds and notes payable	(151,072		)
Total	$	23,836,250



	As of December 31, 2011
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes (a):
Bonds and notes based on indices	$	20,252,403		0.42% - 6.90%	11/25/15 - 7/27/48
Bonds and notes based on auction or remarketing	970,575			0.11% - 2.19%	5/1/28 - 5/25/42
Total variable-rate bonds and notes	21,222,978
FFELP warehouse facilities	824,410			0.26% - 0.70%	7/1/14
Department of Education Conduit	2,339,575			0.74%	5/8/14
Unsecured line of credit	64,390			0.69%	5/8/12
Unsecured debt - Junior Subordinated Hybrid Securities	100,697			3.95%	9/15/61
Other borrowings	43,119			3.78% - 5.72%	11/14/12 - 3/1/22
	24,595,169
Discount on bonds and notes payable	(160,629		)
Total	$	24,434,540


(a)	Issued in asset-backed securitizations

Secured Financing Transactions

The Company has historically relied upon secured financing vehicles as its most significant source of funding for student loans. The net cash flow the Company receives from the securitized student loans generally represents the excess amounts, if any, generated by the underlying student 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 student loans are subordinate to bondholder interests and may fail to generate any cash flow beyond what is due to bondholders. The Company’s secured student loan financing vehicles during the periods presented above include loan warehouse facilities, asset-backed securitizations, and the government’s Conduit Program.

The majority of the bonds and notes payable are primarily secured by the student loans receivable, related accrued interest, and by the amounts on deposit in the accounts established under the respective bond resolutions or financing agreements. Certain variable rate bonds and notes are secured by a letter of credit and reimbursement agreement issued by a third-party liquidity provider.

FFELP warehouse facilities

The Company funds a portion of its Federal Family Education Loan Program (the “FFEL Program” or “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 June 30, 2012, the Company has three FFELP warehouse facilities as summarized below.



	NHELP-II (a)		NHELP-I (b)	NFSLW-I (c)	Total
Maximum financing amount	$	250,000	500,000	500,000	1,250,000
Amount outstanding	160,149		331,412	337,888	829,449
Amount available	$	89,851	168,588	162,112	420,551
Expiration of liquidity provisions	January 31, 2013		October 2, 2013	June 28, 2013
Final maturity date	January 31, 2015		April 2, 2015	June 30, 2015
Maximum advance rates	90.5 - 93.5%		93 - 95%	90 - 95%
Minimum advance rates	90.5 - 93.5%		80 - 95%	84.5 - 90%
Advanced as equity support	$	15,150	19,505	26,723	61,378


(a)	The Company entered into this facility on February 1, 2012.


(b)	The terms of this facility were amended on April 2, 2012. The table above reflects all amended terms.


(c)	The terms of this facility were amended on June 29, 2012. The table above reflects all amended terms.

Each FFELP warehouse facility is supported by 364-day liquidity provisions, which are subject to the respective expiration date shown in the table above. 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 warehouse facilities provide 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 FFELP warehouse facilities contain financial covenants relating to levels of the Company’s consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, 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

On May 4, 2012 and June 11, 2012, the Company completed asset-backed securitizations of $343.9 million and $333.0 million, respectively. Notes issued in the June securitization were issued at a $3.6 million discount. The discount is being accreted using the effective interest method over the expected term of the notes issued in the securitization. The notes issued in these asset-backed securities transactions carry interest rates based on a spread to one-month LIBOR. As part of the Company's issuance of these asset-backed securities, the Company purchased the Class B subordinated notes of $17.6 million (par value). These notes are not included on the Company's consolidated balance sheet. If the Company sells these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. Upon sale, these notes would be shown as “bonds and notes payable” on the Company's consolidated balance sheet. The Company believes the market value of such notes is currently less than par value. Any excess of the par value over the market value on the date of sale would be recognized by the Company as interest expense over the life of the bonds.

Secured line of credit

On April 12, 2012, the Company entered into a $50.0 million line of credit, which is collateralized by asset-backed security investments. The line of credit has a maturity date of April 11, 2014 and has covenants and cross default provisions similar to those under the Company's unsecured line of credit discussed below. As of June 30, 2012, $50.0 million was outstanding on this line of credit.

Unsecured Line of Credit

As of December 31, 2011, the Company had a $750.0 million unsecured line of credit with a maturity date of May 8, 2012. As of December 31, 2011, there was $64.4 million outstanding on this line. On February 17, 2012, the Company entered into a new $250.0 million unsecured line of credit. In conjunction with entering into this new agreement, the outstanding balance on the $750.0 million unsecured line of credit of $64.4 million was paid off in full and the agreement was terminated. As of June 30, 2012, the $250.0 million unsecured line of credit had an outstanding balance of $10.0 million and $240.0 million was available for future use. The $250.0 million line of credit has a maturity date of February 17, 2016.

The new 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 subsidiary indebtedness


•	A limitation on the percentage of non-federally insured loans in the Company’s portfolio

As of June 30, 2012, 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 FFELP warehouse facilities.

The Company’s new 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 funding.

A default on the Company’s FFELP 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.

4. Gain on Sale of Loans and Debt Repurchases

During the three months ended June 30, 2012, the Company recognized a gain of $0.9 million from the purchase of $17.6 million (par value) of the Company's asset-backed debt securities. During the three months ended March 31, 2011, the Company recognized a gain of $6.9 million from the purchase of $62.6 million (par value) of Junior Subordinated Hybrid Securities and $1.4 million from the sale of non-federally insured loans.

5. Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are 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

Prior to April 1, 2012, the interest earned on the majority of the Company's FFELP student loan assets were indexed to the three-month commercial paper index. As allowed by recent legislation, effective April 1, 2012, the Company elected to change the index on which the Special Allowance Payments ("SAP") are calculated for the majority of the Company's' FFELP loans from the commercial paper rate to the one-month LIBOR rate. Meanwhile, the Company funds the majority of its 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. In a declining interest rate environment, this may cause the Company’s student loan spread to compress, while in a rising rate environment, it may cause the spread to increase.

As of June 30, 2012, the Company had $22.7 billion and $0.9 billion of FFELP loans indexed to the one-month LIBOR rate and the three-month treasury bill rate, respectively, both of which reset daily, and $18.6 billion of debt indexed to three-month LIBOR, which resets quarterly, and $1.6 billion of debt indexed to one-month LIBOR, which resets 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 both June 30, 2012 and December 31, 2011:



Maturity		Notional amount
2021		$	250,000
2023		1,250,000
2024		250,000
2026		800,000
2028		100,000
2036		700,000
2039	(a)	150,000
2040	(b)	200,000
		$	3,700,000	(c)

(a)This derivative has a forward effective start date in 2015.

(b)This derivative has a forward effective start date in 2020.


(c)	As of June 30, 2012, the weighted average rate paid by the Company was one-month LIBOR plus 1.2 basis points.

Interest rate swaps – floor income hedges

FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the SAP formula set by the Department of Education (the "Department") and the borrower rate, which is fixed over a period of time. The SAP formula is based on an applicable indice plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline. 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. In accordance with legislation enacted in 2006, lenders are required to rebate fixed rate floor income and variable rate floor income to the Department for all FFELP loans first originated on or after April 1, 2006.

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 June 30, 2012 and December 31, 2011, the Company had $8.9 billion and $10.9 billion, respectively, of 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 2.09% and 1.79%, respectively. The following tables summarize the outstanding derivative instruments used by the Company to economically hedge these loans.



As of June 30, 2012
	Maturity		Notional amount		Weighted average fixed rate paid by the Company (a)
	Maturity		Notional amount		Weighted average fixed rate paid by the Company (a)
	2013		$	2,150,000	0.85	%
	2014		750,000		0.85
	2015	(b)	1,100,000		0.89
	2016		750,000		0.85
	2017		750,000		0.99
	2020		50,000		3.23
			$	5,550,000	0.90	%



As of December 31, 2011
	Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
	Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
	2013	$	2,150,000	0.85	%
	2014	750,000		0.85
	2015	100,000		2.26
	2020	50,000		3.23
		$	3,050,000	0.93	%


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


(b)	$500 million of these derivatives have a forward effective start date in 2013.

Interest rate swaps – unsecured debt hedges

The Company has $100.7 million of unsecured Junior Subordinated Hybrid Securities debt outstanding. The interest rate on the Hybrid Securities through September 29, 2036 is equal to three-month LIBOR plus 3.375%, payable quarterly. The Company had the following derivatives outstanding that are used to effectively convert the variable interest rate on the Hybrid Securities to a fixed rate.



As of June 30, 2012
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2036	$	75,000	4.28	%
2042	25,000		2.42
	$	100,000	3.82	%



As of December 31, 2011
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2036	$	75,000	4.28	%


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

Foreign Currency Exchange Risk

During 2006, the Company completed separate debt offerings of student loan asset-backed securities that included €420.5 million and €352.7 million Euro Notes with interest rates based on a spread to the EURIBOR index. As a result of these transactions, the Company is 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 are re-measured at each reporting period and recorded on the Company’s 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 are included in the Company’s consolidated statements of income.

The Company entered into cross-currency interest rate swaps in connection with the issuance of the Euro Notes. Under the terms of these derivative instrument agreements, the Company receives from a counterparty a spread to the EURIBOR indice based on notional amounts of €420.5 million and €352.7 million and pays a spread to the LIBOR indice based on notional amounts of $500.0 million and $450.0 million, respectively. In addition, under the terms of these agreements, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect between the U.S. dollar and Euro as of the issuance of the notes.

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. These items are included in the Company's consolidated statements of income.



	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012		2011
Re-measurement of Euro Notes	$	59,226		(19,020	)	26,984		(84,355	)
Change in fair value of cross currency interest rate swaps	(62,546		)	18,734		(49,520	)	81,266
Total impact to statements of income - income (expense) (a)	$	(3,320	)	(286	)	(22,536	)	(3,089	)


(a)	The financial statement impact of the above items are included in "Derivative market value and foreign currency adjustments and derivative settlements, net" in the Company's consolidated statements of income.

The re-measurement of the Euro-denominated bonds generally correlates with the change in fair value of the cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying indices (and related forward curve) do not move in parallel. Management currently intends to hold the cross-currency interest rate swaps through the maturity of the Euro-denominated bonds.

Accounting for Derivative Financial Instruments

The Company records derivative instruments on the consolidated balance sheets as either an asset or liability measured at its fair value. Management has structured the majority 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 the Company’s derivatives at each reporting date are included in the Company’s consolidated statements of income. Changes or shifts in the forward yield curve and fluctuations in currency rates can significantly impact the valuation of the Company’s derivatives. Accordingly, changes or shifts to the forward yield curve and fluctuations in currency rates will 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 following table summarizes the fair value of the Company’s derivatives:



	Fair value of asset derivatives			Fair value of liability derivatives
	As of		As of	As of	As of
	June 30, 2012		December 31, 2011	June 30, 2012	December 31, 2011
1:3 basis swaps	$	13,595	10,988	674	641
Interest rate swaps - floor income hedges	—		592	29,571	18,384
Interest rate swaps - hybrid debt hedges	377		—	27,777	24,814
Cross-currency interest rate swaps	33,616		80,631	2,505	—
Other	1,077		8	1,682	1
Total	$	48,665	92,219	62,209	43,840

The following table summarizes the effect of derivative instruments in the consolidated statements of income.



	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012		2011
Settlements:
1:3 basis swaps	$	1,169		373		2,551		581
T-Bill/LIBOR basis swaps	—			(64	)	—		(194	)
Interest rate swaps - floor income hedges	(3,505		)	(6,345	)	(6,642	)	(12,563	)
Interest rate swaps - hybrid debt hedges	(723		)	(248	)	(746	)	(494	)
Cross-currency interest rate swaps	1,055			2,770		3,163		4,880
Other	(82		)	(8	)	(185	)	116
Total settlements - income (expense)	(2,086		)	(3,522	)	(1,859	)	(7,674	)
Change in fair value:
1:3 basis swaps	(428		)	(1,228	)	2,574		(5,438	)
T-Bill/LIBOR basis swaps	—			92		—		121
Interest rate swaps - floor income hedges	(6,143		)	(11,109	)	(11,778	)	(4,714	)
Interest rate swaps - hybrid debt hedges	(8,783		)	(3,897	)	(2,585	)	(2,449	)
Cross-currency interest rate swaps	(62,546		)	18,734		(49,520	)	81,266
Other	(858		)	(385	)	(614	)	(128	)
Total change in fair value - income (expense)	(78,758		)	2,207		(61,923	)	68,658
Re-measurement of Euro Notes (foreign currency transaction adjustment) - income (expense)	59,226			(19,020	)	26,984		(84,355	)
Derivative market value and foreign currency adjustments and derivative settlements, net - income (expense)	$	(21,618	)	(20,335	)	(36,798	)	(23,371	)

Derivative Instruments - Credit and Market Risk

By using derivative instruments, the Company is exposed to credit and market risk.

The Company manages credit and market risks associated with interest rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken and by entering into transactions with high-quality counterparties that are reviewed periodically by the Company's risk committee. As of June 30, 2012, all of the Company's derivative counterparties had investment grade credit ratings. The Company also has a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

Credit Risk

When the fair value of a derivative contract is positive (an asset on the Company's balance sheet), this generally indicates that the counterparty would owe the Company if the derivative was settled. If the counterparty fails to perform, credit risk with such counterparty is equal to the extent of the fair value gain in the derivative less any collateral held by the Company. If the Company was unable to collect from a counterparty, it would have a loss equal to the amount the derivative is recorded on the consolidated balance sheet. As of June 30, 2012, the trustee for certain of the Company's asset-backed securities transactions held $33.8 million of collateral from the counterparty on the cross-currency interest rate swaps.

The Company considers counterparties' credit risk when determining the fair value of derivative positions on its exposure net of collateral. However, the Company does not use the collateral to offset fair value amounts recognized in the financial statements for derivative instruments.

Market Risk

When the fair value of a derivative instrument is negative (a liability on the Company's balance sheet), the Company would owe the counterparty if the derivative was settled and, therefore, has no immediate credit risk. If the negative fair value of derivatives with a counterparty exceeds a specified threshold, the Company may have to make a collateral deposit with the counterparty. The threshold at which the Company may be required to post collateral is dependent upon the Company's unsecured credit rating. At the Company's current unsecured credit rating (Standard & Poor's: BBB- (stable outlook) and Moody's: Ba1 (stable outlook)), the Company has substantially collateralized its corporate derivative liability position with its counterparties. As such, any downgrades from the current rating would not result in additional collateral requirements of a material nature. In addition, no counterparty

has the right to terminate its contracts in the event of downgrades from the current rating. However, some derivative contracts have mutual optional termination provisions that can be exercised in 2016, 2017, and 2021. As of June 30, 2012, the fair value of derivatives with early termination provisions was a positive $1.6 million (an asset on the Company's balance sheet). As of June 30, 2012, the Company had $55.7 million posted as collateral to derivative counterparties, which is included in “restricted cash and investments” in the Company's consolidated balance sheet.

Interest rate movements have an impact on the amount of collateral the Company is required to deposit with its derivative instrument counterparties. With the Company's current derivative portfolio, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor expects that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties. Due to the existing low interest rate environment, the Company's exposure to downward movements in interest rates on its interest rate swaps is limited. In addition, the historical high correlation between one-month and three-month LIBOR and the limited notional amount of 1:3 Basis Swaps derivatives outstanding limits the Company's exposure to interest rate movements on these derivatives.

The Company's cross-currency interest rate swaps are derivatives entered into as a result of certain asset-backed security financings. These derivatives are entered into at the securitization trust level with the counterparty. Trust related derivatives do not contain credit contingent features related to the Company or the trust's credit ratings.

6. Investments

The Company's available-for-sale investment portfolio consists of student loan asset-backed securities and equity and debt securities. These securities are carried at fair value, with the temporary changes in fair value carried as a separate component of stockholders’ equity, net of taxes. The amortized cost of debt securities in this category (including the student loan 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 security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability to retain the investment to allow for an anticipated recovery in fair value. The entire fair value loss on a security that is 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" on the consolidated statements of income.

Securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are accounted for at amortized cost unless the security is determined to have an other-than-temporary impairment. In that case, it is accounted for in the same manner as described above for available-for-sale investments.

A summary of the Company's investments and restricted investments follows:



	As of June 30, 2012
	Amortized cost		Gross unrealized gains	Gross unrealized losses		Fair value	As of
	Amortized cost		Gross unrealized gains	Gross unrealized losses		Fair value	December 31, 2011
Investments:
Available-for-sale investments (a):
Student loan asset-backed securities	$	61,428	288	(2,040	)	59,676	—
Equity securities	3,452		1,304	(170	)