NNI-3.31.13-10Q


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 March 31, 2013
 
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 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 April 30, 2013, there were 34,995,083 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
March 31, 2013


 
 
Item 1.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 
 
 






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
 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
 
Assets:
 
 
 
Student loans receivable (net of allowance for loan losses of $49,409 and $51,902, respectively)
$
24,885,316

 
24,830,621

Cash and cash equivalents:
 

 
 

Cash and cash equivalents - not held at a related party
7,219

 
7,567

Cash and cash equivalents - held at a related party
42,847

 
58,464

Total cash and cash equivalents
50,066

 
66,031

Investments
159,498

 
83,312

Restricted cash and investments
814,767

 
815,462

Restricted cash - due to customers
47,445

 
96,516

Accrued interest receivable
305,177

 
307,518

Accounts receivable (net of allowance for doubtful accounts of $1,383 and $1,529, respectively)
73,239

 
63,638

Goodwill
117,118

 
117,118

Intangible assets, net
8,556

 
9,393

Property and equipment, net
31,107

 
31,869

Other assets
91,737

 
88,976

Fair value of derivative instruments
61,198

 
97,441

Total assets
$
26,645,224

 
26,607,895

Liabilities:
 

 
 

Bonds and notes payable
$
25,125,177

 
25,098,835

Accrued interest payable
15,861

 
14,770

Other liabilities
176,340

 
161,671

Due to customers
47,445

 
96,516

Fair value of derivative instruments
53,997

 
70,890

Total liabilities
25,418,820

 
25,442,682

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 35,029,341 shares and 35,116,913 shares, respectively
350

 
351

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
27,786

 
32,540

Retained earnings
1,192,822

 
1,129,389

Accumulated other comprehensive earnings
5,050

 
2,813

Total Nelnet, Inc. shareholders' equity
1,226,123

 
1,165,208

Noncontrolling interest
281

 
5

Total equity
1,226,404

 
1,165,213

Total liabilities and equity
$
26,645,224

 
26,607,895

 
 
 
 
Supplemental information - assets and liabilities of consolidated variable interest entities:
 
 
 
 
 
 
 
Student loans receivable
$
24,957,745

 
24,920,130

Restricted cash and investments
768,400

 
753,511

Fair value of derivative instruments
47,997

 
82,841

Other assets
256,832

 
306,454

Bonds and notes payable
(25,218,392
)
 
(25,209,341
)
Other liabilities
(319,248
)
 
(348,364
)
Net assets of consolidated variable interest entities
$
493,334

 
505,231


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 March 31,
 
2013
 
2012
Interest income:
 
 
 
Loan interest
$
155,539

 
153,058

Investment interest
1,617

 
1,095

Total interest income
157,156

 
154,153

Interest expense:
 

 
 

Interest on bonds and notes payable
58,358

 
69,297

Net interest income
98,798

 
84,856

Less provision for loan losses
5,000

 
6,000

Net interest income after provision for loan losses
93,798

 
78,856

Other income (expense):
 

 
 

Loan and guaranty servicing revenue
55,601

 
49,488

Tuition payment processing and campus commerce revenue
23,411

 
21,913

Enrollment services revenue
28,957

 
31,664

Other income
9,416

 
10,954

Gain on sale of loans and debt repurchases
1,407

 
—

Derivative market value and foreign currency adjustments and derivative settlements, net
1,072

 
(15,180
)
Total other income
119,864

 
98,839

Operating expenses:
 

 
 

Salaries and benefits
47,905

 
49,095

Cost to provide enrollment services
19,642

 
21,678

Depreciation and amortization
4,377

 
8,136

Other
34,941

 
32,263

Total operating expenses
106,865

 
111,172

Income before income taxes
106,797

 
66,523

Income tax expense
38,447

 
23,230

Net income
68,350

 
43,293

Net income attributable to noncontrolling interest
271

 
152

Net income attributable to Nelnet, Inc.
$
68,079

 
43,141

Earnings per common share:
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.46

 
0.91

Weighted average common shares outstanding - basic and diluted
46,658,031

 
47,298,195


 See accompanying notes to consolidated financial statements.

3


NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
 
Three months
 
ended March 31,
 
2013
 
2012
Net income
$
68,350

 
43,293

Other comprehensive income:
 
 
 
Available-for-sale securities:
 
 
 
Unrealized holding gains arising during period, net
4,520

 
2,182

Less reclassification adjustment for gains recognized in net income, net
(957
)
 
(1,248
)
Income tax effect
(1,326
)
 
(329
)
Total other comprehensive income
2,237

 
605

Comprehensive income
70,587

 
43,898

Comprehensive income attributable to noncontrolling interest
271

 
152

Comprehensive income attributable to Nelnet, Inc.
$
70,316

 
43,746


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 earnings
 
Employee notes receivable
 
Noncontrolling interest
 
Total equity
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
—

 
—

 
—

 
—

 
43,141

 
—

 
—

 
152

 
43,293

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
605

 
—

 
—

 
605

Cash dividend on Class A and Class B common stock - $0.10 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,712
)
 
—

 
—

 
—

 
(4,712
)
Issuance of common stock, net of forfeitures
—

 
220,584

 
—

 
—

 
2

 
—

 
2,424

 
—

 
—

 
—

 
—

 
2,426

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
395

 
—

 
—

 
—

 
—

 
395

Repurchase of common stock
—

 
(42,629
)
 
—

 
—

 
—

 
—

 
(1,116
)
 
—

 
—

 
—

 
—

 
(1,116
)
Reduction of employee stock notes receivable
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
772

 
—

 
772

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

Balance as of December 31, 2012
—

 
35,116,913

 
11,495,377

 
$
—

 
351

 
115

 
32,540

 
1,129,389

 
2,813

 
—

 
5

 
1,165,213

Issuance of minority membership interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5

 
5

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
68,079

 
—

 
—

 
271

 
68,350

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,237

 
—

 
—

 
2,237

Cash dividend on Class A and Class B common stock - $0.10 per share
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,646
)
 
—

 
—

 
—

 
(4,646
)
Issuance of common stock, net of forfeitures
—

 
125,963

 
—

 
—

 
1

 
—

 
1,272

 
—

 
—

 
—

 
—

 
1,273

Compensation expense for stock based awards
—

 
—

 
—

 
—

 
—

 
—

 
676

 
—

 
—

 
—

 
—

 
676

Repurchase of common stock
—

 
(213,535
)
 
—

 
—

 
(2
)
 
—

 
(6,702
)
 
—

 
—

 
—

 
—

 
(6,704
)
Balance as of March 31, 2013
—

 
35,029,341

 
11,495,377

 
$
—

 
350

 
115

 
27,786

 
1,192,822

 
5,050

 
—

 
281

 
1,226,404


 See accompanying notes to consolidated financial statements.

5



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 
Three months
 
ended March 31,
 
2013
 
2012
Net income attributable to Nelnet, Inc.
$
68,079

 
43,141

Net income attributable to noncontrolling interest
271

 
152

Net income
68,350

 
43,293

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization, including debt discounts and student loan premiums and deferred origination costs
20,079

 
28,072

Student loan discount accretion
(9,075
)
 
(10,551
)
Provision for loan losses
5,000

 
6,000

Derivative market value adjustment
19,507

 
(16,835
)
Foreign currency transaction adjustment
(28,763
)
 
32,242

Gain on sale of loans
(33
)
 
—

Gain from debt repurchases
(1,374
)
 
—

 Gain from sales of available-for-sale securities, net
(957
)
 
(1,248
)
Deferred income tax expense (benefit)
4,874

 
(7,190
)
Other
(355
)
 
499

Decrease in accrued interest receivable
2,341

 
12,023

Increase in accounts receivable
(9,601
)
 
(561
)
Decrease in other assets
293

 
1,140

Increase (decrease) in accrued interest payable
1,091

 
(353
)
Increase in other liabilities
13,614

 
14,040

Net cash provided by operating activities
84,991

 
100,571

Cash flows from investing activities:
 

 
 

Purchases of student loans
(758,508
)
 
(176,433
)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
688,387

 
597,034

Proceeds from sale of student loans
11,284

 
32,592

Purchases of available-for-sale securities
(86,776
)
 
(27,719
)
Proceeds from sales of available-for-sale securities
13,405

 
6,843

Purchases of property and equipment, net
(2,778
)
 
(2,306
)
Decrease (increase) in restricted cash
695

 
(91,631
)
Business acquisition contingency payment
—

 
(1,550
)
Net cash (used in) provided by investing activities
(134,291
)
 
336,830

Cash flows from financing activities:
 

 
 

Payments on bonds and notes payable
(2,244,266
)
 
(692,408
)
Proceeds from issuance of bonds and notes payable
2,295,865

 
279,667

Payments of debt issuance costs
(7,093
)
 
(1,595
)
Dividends paid
(4,646
)
 
(4,712
)
Repurchases of common stock
(6,704
)
 
(1,116
)
Proceeds from issuance of common stock
174

 
116

Payments received on employee stock notes receivable
—

 
772

Issuance of noncontrolling interest
5

 
5

Net cash provided by (used in) financing activities
33,335

 
(419,271
)
Net (decrease) increase in cash and cash equivalents
(15,965
)
 
18,130

Cash and cash equivalents, beginning of period
66,031

 
42,570

Cash and cash equivalents, end of period
$
50,066

 
60,700

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
48,696

 
61,338

Income taxes paid, net of refunds
$
5,489

 
2,920


See accompanying notes to consolidated financial statements.

6


NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 2013 and for the three months ended
March 31, 2013 and 2012 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 March 31, 2013 and for the three months ended March 31, 2013 and 2012 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2012 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 months ended March 31, 2013 are not necessarily indicative of the results for the year ending December 31, 2013. 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, 2012 (the "2012 Annual Report").

2.    Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:
 
As of
 
As of
 
March 31, 2013
 
December 31, 2012
Federally insured loans
 
 
 
Stafford and other
$
7,145,693

 
7,261,114

Consolidation
17,852,598

 
17,708,732

Total
24,998,291

 
24,969,846

Non-federally insured loans
32,306

 
26,034

 
25,030,597

 
24,995,880

Loan discount, net of unamortized loan premiums and deferred origination costs
(95,872
)
 
(113,357
)
Allowance for loan losses – federally insured loans
(37,913
)
 
(40,120
)
Allowance for loan losses – non-federally insured loans
(11,496
)
 
(11,782
)
 
$
24,885,316

 
24,830,621

Allowance for federally insured loans as a percentage of such loans
0.15
%
 
0.16
%
Allowance for non-federally insured loans as a percentage of such loans
35.59
%
 
45.26
%


7


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 March 31,
 
2013
 
2012
Balance at beginning of period
$
51,902

 
48,482

Provision for loan losses:
 
 
 
Federally insured loans
6,000

 
6,000

Non-federally insured loans
(1,000
)
 
—

Total provision for loan losses
5,000

 
6,000

Charge-offs:
 

 
 

Federally insured loans
(5,990
)
 
(5,495
)
Non-federally insured loans
(772
)
 
(769
)
Total charge-offs
(6,762
)
 
(6,264
)
Recoveries - non-federally insured loans
368

 
351

Purchase (sale) of federally insured loans and other, net
(2,218
)
 
(927
)
Transfer from repurchase obligation related to non-federally insured loans purchased, net
1,119

 
793

Balance at end of period
$
49,409

 
48,435

 
 
 
 
Allocation of the allowance for loan losses:
 
 
 

Federally insured loans
$
37,913

 
36,783

Non-federally insured loans
11,496

 
11,652

Total allowance for loan losses
$
49,409

 
48,435


Repurchase Obligations

As of March 31, 2013, the Company had participated a cumulative amount of $98.7 million (par value) 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 in 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. As of March 31, 2013, the balance of this portfolio was $70.5 million (par value).

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 March 31,
 
2013
 
2012
Beginning balance
$
16,130

 
19,223

Repurchase obligation transferred to the allowance for loan losses related to loans purchased, net
(1,119
)
 
(793
)
Ending balance
$
15,011

 
18,430



8


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 percent of non-federally insured loans that were delinquent 31 days or greater as of March 31, 2013, December 31, 2012, and March 31, 2012 was 20.5 percent, 28.6 percent, and 29.5 percent, respectively. The table below shows the Company’s federally insured student loan delinquency amounts.

Rehabilitation Loans Purchased and Delinquent Loans Funded in FFELP Warehouse Facilities

Rehabilitation loans are student loans that have previously defaulted, but for which the borrower has made a specified number of on-time payments.  Although rehabilitation loans benefit from the same guarantees as other federally insured student loans, rehabilitation loans have generally experienced re-default rates that are higher than default rates for federally insured student loans that have not previously defaulted.  The Company has purchased a significant amount of rehabilitation loans during 2012 and 2013.  Upon purchase, these loans are recorded at fair value, which generally approximates the federal guarantee rate under the Federal Family Education Loan Program ("FFEL Program" or "FFELP").  As such, there is minimal credit risk related to rehabilitation loans purchased; therefore, these loans are presented separately in the following delinquency tables.

In addition, the Company has purchased delinquent federally insured loans that are funded in the Company's FFELP warehouse facilities. Upon purchase, these loans are recorded at fair value, which generally approximates the federal guarantee rate. As such, there is minimal credit risk related to these loans. Loans delinquent 121 days or greater and funded in the Company's FFELP warehouse facilities are included with rehabilitated loans purchased in the following delinquency tables.

 
As of March 31, 2013
 
As of December 31, 2012
 
As of March 31, 2012
Federally insured loans, excluding rehabilitation loans purchased:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
2,933,416

 
 
 
$
2,949,320

 
 
 
$
3,568,310

 
 
Loans in forbearance
2,890,574

 
 
 
2,992,023

 
 
 
3,279,854

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
14,501,802

 
87.8
%
 
14,583,044

 
87.6
%
 
14,456,472

 
87.5
%
Loans delinquent 31-60 days
621,296

 
3.8

 
652,351

 
3.9

 
531,045

 
3.2

Loans delinquent 61-90 days
409,209

 
2.5

 
330,885

 
2.0

 
320,817

 
1.9

Loans delinquent 91-120 days
241,113

 
1.5

 
247,381

 
1.5

 
201,811

 
1.2

Loans delinquent 121-270 days
512,875

 
3.1

 
603,942

 
3.6

 
712,173

 
4.3

Loans delinquent 271 days or greater
211,461

 
1.3

 
220,798

 
1.4

 
306,970

 
1.9

Total loans in repayment
16,497,756

 
100.0
%
 
16,638,401

 
100.0
%
 
16,529,288

 
100.0
%
Total federally insured loans, excluding rehabilitation loans purchased
$
22,321,746

 
 

 
$
22,579,744

 
 

 
$
23,377,452

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rehabilitation loans purchased:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment
$
213,101

 
 
 
$
150,317

 
 
 
$
57,321

 
 
Loans in forbearance
394,733

 
 
 
330,278

 
 
 
83,773

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
877,800

 
42.4
%
 
670,205

 
35.1
%
 
240,435

 
66.2
%
Loans delinquent 31-60 days
138,249

 
6.7

 
113,795

 
6.0

 
26,431

 
7.3

Loans delinquent 61-90 days
109,129

 
5.3

 
79,691

 
4.2

 
16,973

 
4.7

Loans delinquent 91-120 days
121,468

 
5.9

 
186,278

 
9.8

 
14,026

 
3.9

Loans delinquent 121-270 days
573,054

 
27.7

 
633,001

 
33.1

 
45,396

 
12.5

Loans delinquent 271 days or greater
249,011

 
12.0

 
226,537

 
11.8

 
19,676

 
5.4

Total loans in repayment
2,068,711

 
100.0
%
 
1,909,507

 
100.0
%
 
362,937

 
100.0
%
Total rehabilitation loans purchased
2,676,545

 
 
 
2,390,102

 
 
 
504,031

 
 
Total federally insured loans
$
24,998,291

 
 
 
$
24,969,846

 
 
 
$
23,881,483

 
 



9


3.    Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
As of March 31, 2013
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
 
 
 
 
 
Bonds and notes based on indices
$
22,116,616

 
0.30% - 6.90%
 
11/25/15 - 8/25/52
Bonds and notes based on auction or remarketing
962,200

 
0.14% - 2.18%
 
5/1/28 - 5/25/42
Total variable-rate bonds and notes
23,078,816

 
 
 
 
FFELP warehouse facilities
1,942,239

 
0.20% - 0.28%
 
4/2/15 - 2/28/16
Unsecured line of credit
115,000

 
1.70%
 
3/28/18
Unsecured debt - Junior Subordinated Hybrid Securities
99,232

 
3.66%
 
9/15/61
Other borrowings
61,878

 
1.70% - 5.10%
 
11/14/13 - 11/11/15
 
25,297,165

 
 
 
 
Discount on bonds and notes payable
(171,988
)
 
 
 
 
Total
$
25,125,177

 
 
 
 
 
As of December 31, 2012
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
 
 
 
 
 
Bonds and notes based on indices
$
21,185,140

 
0.32% - 6.90%
 
11/25/15 - 8/25/52
Bonds and notes based on auction or remarketing
969,925

 
0.15% - 2.14%
 
5/1/28 - 5/25/42
Total variable-rate bonds and notes
22,155,065

 
 
 
 
FFELP warehouse facilities
1,554,151

 
0.21% - 0.29%
 
1/31/15 - 6/30/15
Department of Education Conduit
1,344,513

 
0.82%
 
1/19/14
Unsecured line of credit
55,000

 
1.71%
 
2/17/16
Unsecured debt - Junior Subordinated Hybrid Securities
99,232

 
3.68%
 
9/15/61
Other borrowings
62,904

 
1.50% - 5.10%
 
11/14/13 - 11/11/15
 
25,270,865

 
 
 
 
Discount on bonds and notes payable
(172,030
)
 
 
 
 
Total
$
25,098,835

 
 
 
 


10


FFELP Warehouse Facilities

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

As of March 31, 2013, the Company had four FFELP warehouse facilities as summarized below.
 
 
NHELP-I
 
NFSLW-I
 
NHELP-III (a)
 
NHELP-II
 
Total
Maximum financing amount
 
$
500,000

 
500,000

 
500,000

 
500,000

 
2,000,000

Amount outstanding
 
487,584

 
499,196

 
477,033

 
478,426

 
1,942,239

Amount available
 
$
12,416

 
804

 
22,967

 
21,574

 
57,761

Expiration of liquidity provisions
 
October 2, 2013

 
June 28, 2013

 
January 14, 2014

 
February 28, 2014

 
 
Final maturity date
 
April 2, 2015

 
June 30, 2015

 
January 17, 2016

 
February 28, 2016

 
 
Maximum advance rates
 
80.0 - 100.0%

 
90.0 - 98.0%

 
92.2 - 95.0%

 
88.5 - 93.5%

 
 
Minimum advance rates
 
80.0 - 95.0%

 
84.5 - 90.0%

 
92.2 - 95.0%

 
88.5 - 93.5%

 
 
Advanced as equity support
 
$
18,986

 
39,363

 
26,429

 
45,904

 
130,682

(a)
The Company entered into this facility on January 16, 2013.
Each FFELP warehouse facility is supported by 364-day liquidity provisions, which are subject to the respective expiration date shown in the previous table. In the event the Company is unable to renew the liquidity provisions by such date, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's final maturity date. The NHELP-I and NFSLW-I 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 NHELP-III and NHELP-II warehouse facilities have static advance rates that require initial equity for loan funding, but do not require increased equity based on market movements.

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

Asset-backed Securitizations

The following table summarizes the asset-backed securities transactions completed during the first quarter of 2013.
 
 
2013-1
 
2013-2 (a)
 
Total
Date securities issued
 
1/31/13
 
2/28/13
 
 
Total original principal amount
 
$
437,500

 
1,122,000

 
$
1,559,500

 
 
 
 
 
 
 
Class A:
 
 
 
 
 
 
Total original principal amount
 
$
428,000

 
1,122,000

 
1,550,000

Bond discount
 
—

 
(3,325
)
 
(3,325
)
Issue price
 
$
428,000

 
1,118,675

 
1,546,675

Cost of funds (1-month LIBOR plus:)
 
0.60
%
 
0.50
%
 
 
Final maturity date
 
6/25/41

 
7/25/40

 
 
 
 
 
 
 
 
 
Class B:
 
 
 
 
 
 
Total original principal amount
 
$
9,500

 
 
 
9,500

Bond discount
 
(1,525
)
 
 
 
(1,525
)
Issue price
 
$
7,975

 
 
 
7,975

Cost of funds (1-month LIBOR plus:)
 
1.50
%
 
 
 
 
Final maturity date
 
3/25/48

 
 
 
 

11



(a)
Total original principal amount excludes the Class B subordinated tranche that was retained at issuance totaling $34.0 million.  These notes are not included in 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” in 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.

On April 30, 2013, the Company completed an asset-backed securities transaction totaling $765.0 million. The Company used the proceeds from the sale of these notes to purchase student loans, including loans previously financed in the FFELP warehouse facilities.

Department of Education Conduit

In May 2009, the U.S. Department of Education (the "Department") implemented a program under which it financed eligible FFELP loans in a conduit vehicle established to provide funding for student lenders (the "Conduit Program").  As of December 31, 2012, the Company had $1.3 billion borrowed under this facility. On February 28, 2013, all student loans funded in the Conduit Program were refinanced in the 2013-2 asset-backed securitization and the Company's FFELP warehouse facilities. After these transactions, no loans remained financed by the Company in the Conduit Program and the facility was paid down in full. Per the terms of the agreement, no additional loans can be financed in this facility and the facility expired for future use by the Company.

Unsecured Line of Credit

On February 17, 2012, the Company entered into a $250.0 million unsecured line of credit. On March 28, 2013, the facility was amended to increase the line of credit to $275.0 million and extend the maturity date from February 17, 2016 to March 28, 2018. There were no significant financial covenant changes made as part of this amendment. As of March 31, 2013, the unsecured line of credit had $115.0 million outstanding and $160.0 million was available for future use.

Debt Repurchases

The Company repurchased $13.0 million (notional amount) of its own asset-backed debt securities during the three months ended March 31, 2013 and recognized a gain on such purchases of $1.4 million.

4.   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

Interest earned on the majority of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.  Meanwhile, the Company funds 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.

As of March 31, 2013, the Company had $23.9 billion and $1.1 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 $16.0 billion of debt indexed to three-month LIBOR, which resets quarterly, and $7.1 billion of debt indexed to one-month LIBOR, which resets monthly.

12



The Company has used derivative instruments to hedge its basis 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 March 31, 2013
 
As of December 31, 2012
 
 
Maturity
 
Notional amount
 
Notional amount
 
 
2021
 
 
$
250,000

 
$
250,000

 
 
2022
 
 
1,900,000

 
1,900,000

 
 
2023
 
 
3,650,000

 
3,150,000

 
 
2024
 
 
250,000

 
250,000

 
 
2026
 
 
800,000

 
800,000

 
 
2028
 
 
100,000

 
100,000

 
 
2036
 
 
700,000

 
700,000

 
 
2039
(a)
 
150,000

 
150,000

 
 
2040
(b)
 
200,000

 
200,000

 
 
 
 
 
$
8,000,000

(c)
$
7,500,000

(c)
(a)This derivative has a forward effective start date in 2015.
(b)This derivative has a forward effective start date in 2020.
(c)
The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2013 and December 31, 2012, was one-month LIBOR plus 3.5 basis points and one-month LIBOR plus 3.3 basis points, respectively.
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 Special Allowance Payments ("SAP") formula set by 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 March 31, 2013 and December 31, 2012, the Company had $11.2 billion and $11.3 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 1.82%.


13


The following table summarizes the outstanding derivative instruments used by the Company as of both March 31, 2013 and December 31, 2012 to economically hedge loans earning fixed rate floor income.

Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
2013
 
$
3,150,000

 
0.71
%
2014
 
1,750,000

 
0.71

2015
 
1,100,000

 
0.89

2016
 
750,000

 
0.85

2017
 
750,000

 
0.99

 
 
$
7,500,000

 
0.78
%

(a)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.
Interest Rate Swaps – Unsecured Debt Hedges

As of both March 31, 2013 and December 31, 2012, the Company had $99.2 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 of 7.66%.
 
 
 
As of March 31, 2013
 
As of December 31, 2012
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
2036
 
$
65,000

 
4.29
%
 
$
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 in the Company’s consolidated balance sheet in U.S. dollars based on the foreign currency exchange rate on that date. Changes in the principal and accrued interest amounts as a result of foreign currency exchange rate fluctuations 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 March 31,
 
2013
 
2012
Re-measurement of Euro Notes
$
28,763

 
(32,242
)
Change in fair value of cross currency interest rate swaps
(34,844
)
 
13,026

Total impact to consolidated statements of income - income (expense) (a)
$
(6,081
)
 
(19,216
)
(a)
The financial statement impact of the above items is included in "Derivative market value and foreign currency adjustments and derivative settlements, net" in the Company's consolidated statements of income.

14


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.

Consolidated Financial Statement Impact Related to Derivatives

The following table summarizes the fair value of the Company’s derivatives as reflected in the consolidated balance sheet:
 
Fair value of asset derivatives
 
Fair value of liability derivatives
 
As of
 
As of
 
As of
 
As of
 
March 31,
2013
 
December 31,
2012
 
March 31,
2013
 
December 31,
2012
1:3 basis swaps
$
13,201

 
12,239

 
244

 
1,215

Interest rate swaps - floor income hedges
—

 
—

 
36,491

 
45,913

Interest rate swaps - hybrid debt hedges
—

 
—

 
17,262

 
23,762

Cross-currency interest rate swaps
47,997

(a)
82,841

 
—

 
—

Other
—

 
2,361

 
—

 
—

Total
$
61,198

 
97,441

 
53,997

(b)
70,890


(a)
As of March 31, 2013, the trustee for certain of the Company's asset-backed securities transactions held $19.5 million of collateral from the counterparty on the cross-currency interest rate swaps.

(b)
As of March 31, 2013, the Company had $47.1 million posted as collateral to derivative counterparties, which is included in “restricted cash and investments” in the Company's consolidated balance sheet.


During the three months ended March 31, 2013, the Company terminated certain derivatives for gross proceeds and payments of $2.7 million and $2.9 million, respectively. Any proceeds received or payments made to terminate a derivative in advance of its expiration date are accounted for as a change in fair value of such derivative. There were no terminations of derivatives during the first quarter of 2012.

Offsetting of Derivative Assets/Liabilities

The Company records derivative instruments in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain of the Company's derivative instruments are subject to right of offset provisions with counterparties. The following tables include the gross amounts recognized in the consolidated balance sheets related to the Company's derivative portfolio reconciled to the net amount when excluding derivatives subject to enforceable master netting arrangements and cash collateral received/pledged:
 
 
 
 
Gross amounts not offset in the consolidated balance sheet
 
 
Derivative assets
 
Gross amounts of recognized assets presented in the consolidated balance sheet
 
Derivatives subject to enforceable master netting arrangement
 
Cash collateral received
 
Net amount
Balance as of March 31, 2013
 
$
61,198

 
(1,321
)
 
(19,473
)
 
40,404

Balance as of December 31, 2012
 
97,441

 
(1,803
)
 
(19,993
)
 
75,645



15


 
 
 
 
Gross amounts not offset in the consolidated balance sheet
 
 
Derivative liabilities
 
Gross amounts of recognized liabilities presented in the consolidated balance sheet
 
Derivatives subject to enforceable master netting arrangement
 
Cash collateral pledged
 
Net amount
Balance as of March 31, 2013
 
$
53,997

 
(1,321
)
 
(47,148
)
 
5,528

Balance as of December 31, 2012
 
70,890

 
(1,803
)
 
(63,128
)
 
5,959


The following table summarizes the effect of derivative instruments in the consolidated statements of income.
 
Three months ended March 31,
 
2013
 
2012
Settlements:
 

 
 

1:3 basis swaps
$
911

 
1,381

Interest rate swaps - floor income hedges
(8,304
)
 
(3,137
)
Interest rate swaps - hybrid debt hedges
(645
)
 
—

Cross-currency interest rate swaps
(146
)
 
2,109

Other
—

 
(126
)
Total settlements - income (expense)
(8,184
)
 
227

Change in fair value:
 

 
 

1:3 basis swaps
1,933

 
3,002

Interest rate swaps - floor income hedges
9,422

 
(5,634
)
Interest rate swaps - hybrid debt hedges
3,640

 
6,197

Cross-currency interest rate swaps
(34,844
)
 
13,026

Other
342

 
244

Total change in fair value - income (expense)
(19,507
)
 
16,835

Re-measurement of Euro Notes (foreign currency transaction adjustment) - income (expense)
28,763

 
(32,242
)
Derivative market value and foreign currency adjustments and derivative settlements, net - income (expense)
$
1,072

 
(15,180
)

5.    Investments

A summary of the Company's investments and restricted investments follows:
 
As of March 31, 2013
 
As of December 31, 2012
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses (a)
 
Fair value
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Student loan asset-backed and other debt securities (b)
$
139,544

 
7,703

 
(1,060
)
 
146,187

 
64,970

 
3,187

 
(179
)
 
67,978

Equity securities
1,389

 
1,377

 
(4
)
 
2,762

 
3,449

 
1,604

 
(180
)
 
4,873

Total available-for-sale investments
$
140,933

 
9,080

 
(1,064
)
 
148,949

 
68,419

 
4,791

 
(359
)
 
72,851

Trading investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Student loan asset-backed and other debt securities (b)
 
 
 
 
 
 
10,549

 
 
 
 
 
 
 
10,461

Total available-for-sale and trading investments

 

 

 
$
159,498

 
 
 
 
 


 
83,312

Restricted Investments (c):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed investment contracts - held-to-maturity
 
 
 
 
 
 
$
8,166

 
 
 
 
 
 
 
8,830

    

16


(a)
As of March 31, 2013, the Company considered the decline in market value of its available-for-sale investments to be temporary in nature and did not consider any of its investments other-than-temporarily impaired.

(b)
As of March 31, 2013, the stated maturities of the majority of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years.

(c)
Restricted investments are included in "restricted cash and investments" in the Company's consolidated balance sheets.

The amounts reclassified from accumulated other comprehensive income related to the realized gains and losses on available-for-sale-securities is summarized below.
 
 
Three months ended March 31,
Affected line item in the consolidated statements of income - income (expense):
 
2013
 
2012
Other income
 
$
957

 
1,248

Income tax expense
 
(354
)
 
(440
)
Net
 
$
603

 
808


6.   Earnings per Common Share

Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate earnings per share amounts for common stock and unvested share based awards. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock.
 
Three months ended March 31, 2013
 
Three months ended March 31, 2012
 
Common shareholders
 
Unvested restricted stock shareholders
 
Total
 
Common shareholders
 
Unvested restricted stock shareholders
 
Total
Numerator:
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc.
$
67,517

 
562

 
68,079

 
42,862

 
279

 
43,141

 
 
 
 
 


 
 
 
 
 
 
Denominator:


 


 


 
 
 
 
 
 
Weighted-average common shares outstanding - basic and diluted
46,272,324

 
385,707

 
46,658,031

 
46,989,773

 
308,422

 
47,298,195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic and diluted
$
1.46

 
1.46

 
1.46

 
0.91

 
0.91

 
0.91


Unvested restricted stock awards are the Company's only potential common shares and, accordingly, there were no awards that were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation.

As of March 31, 2013, a cumulative amount of 122,528 shares have been deferred by directors under the Non-employee Directors Compensation Plan and will be issued upon a member's termination from the board of directors. These shares are included in the Company's weighted average shares outstanding calculation.

7.    Segment Reporting

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns net interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. See note 1 of the notes to the consolidated financial statements included in the 2012 Annual Report for a description of each operating segment, including the primary products and services offered.


17


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

The accounting policies of the Company’s operating segments are the same as those described in note 2 of the notes to the consolidated financial statements included in the 2012 Annual Report. Intersegment revenues are charged by the segment that provides a product or service to another segment.  Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.  Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information. Income taxes are allocated based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.

Corporate Activity and Overhead

Corporate Activity and Overhead includes the following items:

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

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


18


Segment Results of Operations

The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.
 
Three months ended March 31, 2013
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
10

 
—

 
—

 
10

 
155,654

 
2,311

 
(819
)
 
157,156

Interest expense
—

 
—

 
—

 
—

 
57,482

 
1,695

 
(819
)
 
58,358

Net interest income
10

 
—

 
—

 
10

 
98,172

 
616

 
—

 
98,798

Less provision for loan losses
—

 
—

 
—

 
—

 
5,000

 
—

 
—

 
5,000

Net interest income after provision for loan losses
10

 
—

 
—

 
10

 
93,172

 
616

 
—

 
93,798

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
55,601

 
—

 
—

 
55,601

 
—

 
—

 
—

 
55,601

Intersegment servicing revenue
14,953

 
—

 
—

 
14,953

 
—

 
—

 
(14,953
)
 
—

Tuition payment processing and campus commerce revenue
—

 
23,411

 
—

 
23,411

 
—

 
—

 
—

 
23,411

Enrollment services revenue
—

 
—

 
28,957

 
28,957

 
—

 
—

 
—

 
28,957

Other income
—

 
—

 
—

 
—

 
4,196

 
5,220

 
—

 
9,416

Gain on sale of loans and debt repurchases
—

 
—

 
—

 
—

 
1,407

 
—

 
—

 
1,407

Derivative market value and foreign currency adjustments, net
—

 
—

 
—

 
—

 
5,275

 
3,981

 
—

 
9,256

Derivative settlements, net
—

 
—

 
—

 
—

 
(7,539
)
 
(645
)
 
—

 
(8,184
)
Total other income (expense)
70,554

 
23,411

 
28,957

 
122,922

 
3,339

 
8,556

 
(14,953
)
 
119,864

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
28,444

 
9,359

 
5,767

 
43,570

 
562

 
3,773

 
—

 
47,905

Cost to provide enrollment services
—

 
—

 
19,642

 
19,642

 
—

 
—

 
—