Edgar Filing: NELNET INC

NNI-6.30.13-10Q

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 June 30, 2013



¨	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, 2013, there were 34,870,722 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, 2013



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
	Item 4.	Controls and Procedures	52

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	52
	Item 1A.	Risk Factors	52
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
	Item 6.	Exhibits	54

Signatures			55

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, 2013			December 31, 2012
	(unaudited)
Assets:
Student loans receivable (net of allowance for loan losses of $51,611 and $51,902, respectively)	$	24,575,636		24,830,621
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	7,819			7,567
Cash and cash equivalents - held at a related party	60,765			58,464
Total cash and cash equivalents	68,584			66,031
Investments	177,241			83,312
Restricted cash and investments	679,727			815,462
Restricted cash - due to customers	84,182			96,516
Accrued interest receivable	296,538			307,518
Accounts receivable (net of allowance for doubtful accounts of $1,410 and $1,529, respectively)	66,016			63,638
Goodwill	117,118			117,118
Intangible assets, net	7,731			9,393
Property and equipment, net	34,392			31,869
Other assets	97,016			88,976
Fair value of derivative instruments	98,996			97,441
Total assets	$	26,303,177		26,607,895
Liabilities:
Bonds and notes payable	$	24,690,952		25,098,835
Accrued interest payable	14,760			14,770
Other liabilities	168,791			161,671
Due to customers	84,182			96,516
Fair value of derivative instruments	24,897			70,890
Total liabilities	24,983,582			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 34,988,110 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	27,004			32,540
Retained earnings	1,289,416			1,129,389
Accumulated other comprehensive earnings	2,597			2,813
Total Nelnet, Inc. shareholders' equity	1,319,482			1,165,208
Noncontrolling interest	113			5
Total equity	1,319,595			1,165,213
Total liabilities and equity	$	26,303,177		26,607,895

Supplemental information - assets and liabilities of consolidated variable interest entities:
Student loans receivable	$	24,647,724		24,920,130
Restricted cash and investments	677,245			753,511
Fair value of derivative instruments	62,745			82,841
Other assets	295,486			306,454
Bonds and notes payable	(24,900,550		)	(25,209,341	)
Other liabilities	(275,426		)	(348,364	)
Net assets of consolidated variable interest entities	$	507,224		505,231

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,
	2013		2012		2013	2012
Interest income:
Loan interest	$	158,063	150,988		313,602	304,046
Investment interest	1,483		1,055		3,100	2,150
Total interest income	159,546		152,043		316,702	306,196
Interest expense:
Interest on bonds and notes payable	58,127		67,476		116,485	136,773
Net interest income	101,419		84,567		200,217	169,423
Less provision for loan losses	5,000		7,000		10,000	13,000
Net interest income after provision for loan losses	96,419		77,567		190,217	156,423
Other income (expense):
Loan and guaranty servicing revenue	60,078		52,391		115,679	101,879
Tuition payment processing and campus commerce revenue	18,356		16,834		41,767	38,747
Enrollment services revenue	24,823		29,710		53,780	61,374
Other income	12,288		8,800		21,704	19,754
Gain on sale of loans and debt repurchases	7,355		935		8,762	935
Derivative market value and foreign currency adjustments and derivative settlements, net	40,188		(21,618	)	41,260	(36,798	)
Total other income	163,088		87,052		282,952	185,891
Operating expenses:
Salaries and benefits	47,432		48,703		95,337	97,798
Cost to provide enrollment services	16,787		20,374		36,429	42,052
Depreciation and amortization	4,320		8,226		8,697	16,362
Other	34,365		30,908		69,306	63,171
Total operating expenses	102,904		108,211		209,769	219,383
Income before income taxes	156,603		56,408		263,400	122,931
Income tax expense	54,746		14,878		93,193	38,108
Net income	101,857		41,530		170,207	84,823
Net income attributable to noncontrolling interest	614		136		885	288
Net income attributable to Nelnet, Inc.	$	101,243	41,394		169,322	84,535
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	2.17	0.87		3.63	1.78
Weighted average common shares outstanding - basic and diluted	46,626,853		47,434,915		46,642,356	47,369,776

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,
	2013			2012		2013		2012
Net income	$	101,857		41,530		170,207		84,823
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding gains (losses) arising during period, net	(3,335		)	(586	)	1,185		1,596
Less reclassification adjustment for gains recognized in net income, net	(559		)	(966	)	(1,516	)	(2,214	)
Income tax effect	1,441			538		115		209
Total other comprehensive loss	(2,453		)	(1,014	)	(216	)	(409	)
Comprehensive income	99,404			40,516		169,991		84,414
Comprehensive income attributable to noncontrolling interest	614			136		885		288
Comprehensive income attributable to Nelnet, Inc.	$	98,790		40,380		169,106		84,126

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 earnings		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 earnings		Employee notes receivable		Noncontrolling interest		Total equity
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 March 31, 2013	—	35,029,341		11,495,377	$	—	350		115	27,786		1,192,822		5,050		—		281		1,226,404
Net income	—	—		—	—		—		—	—		101,243		—		—		614		101,857
Other comprehensive loss	—	—		—	—		—		—	—		—		(2,453	)	—		—		(2,453	)
Distribution to noncontrolling interest	—	—		—	—		—		—	—		—		—		—		(782	)	(782	)
Cash dividend on Class A and Class B common stock - $0.10 per share	—	—		—	—		—		—	—		(4,649	)	—		—		—		(4,649	)
Issuance of common stock, net of forfeitures	—	24,390		—	—		1		—	694		—		—		—		—		695
Compensation expense for stock based awards	—	—		—	—		—		—	808		—		—		—		—		808
Repurchase of common stock	—	(65,621	)	—	—		(1	)	—	(2,284	)	—		—		—		—		(2,285	)
Balance as of June 30, 2013	—	34,988,110		11,495,377	$	—	350		115	27,004		1,289,416		2,597		—		113		1,319,595
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 noncontrolling 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
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 noncontrolling interest	—	—		—	—		—		—	—		—		—		—		5		5
Net income	—	—		—	—		—		—	—		169,322		—		—		885		170,207
Other comprehensive loss	—	—		—	—		—		—	—		—		(216	)	—		—		(216	)
Distribution to noncontrolling interest	—	—		—	—		—		—	—		—		—		—		(782	)	(782	)
Cash dividend on Class A and Class B common stock - $0.20 per share	—	—		—	—		—		—	—		(9,295	)	—		—		—		(9,295	)
Issuance of common stock, net of forfeitures	—	150,353		—	—		2		—	1,967		—		—		—		—		1,969
Compensation expense for stock based awards	—	—		—	—		—		—	1,483		—		—		—		—		1,483
Repurchase of common stock	—	(279,156	)	—	—		(3	)	—	(8,986	)	—		—		—		—		(8,989	)
Balance as of June 30, 2013	—	34,988,110		11,495,377	$	—	350		115	27,004		1,289,416		2,597		—		113		1,319,595

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,
	2013			2012
Net income attributable to Nelnet, Inc.	$	169,322		84,535
Net income attributable to noncontrolling interest	885			288
Net income	170,207			84,823
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	39,160			58,381
Student loan discount accretion	(17,769		)	(22,857	)
Provision for loan losses	10,000			13,000
Derivative market value adjustment	(43,729		)	61,923
Foreign currency transaction adjustment	(14,072		)	(26,984	)
Payments to terminate and/or amend derivative instruments, net of proceeds	(3,819		)	—
Gain on sale of loans	(34		)	(33	)
Gain from debt repurchases	(8,728		)	(902	)
Gain from sales of available-for-sale securities, net	(1,516		)	(2,214	)
Deferred income tax expense (benefit)	21,244			(20,483	)
Other	1,531			1,886
Decrease in accrued interest receivable	10,980			22,268
Increase in accounts receivable	(2,378		)	(3,347	)
Decrease in other assets	566			2,264
Decrease in accrued interest payable	(10		)	(1,447	)
Decrease in other liabilities	(8,447		)	(5,011	)
Net cash provided by operating activities	153,186			161,267
Cash flows from investing activities:
Purchases of student loans	(1,158,245		)	(729,775	)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	1,393,949			1,449,610
Proceeds from sale of student loans	11,287			59,965
Purchases of available-for-sale securities	(132,496		)	(53,662	)
Proceeds from sales of available-for-sale securities	37,656			28,216
Purchases of cost-method investments	(3,893		)	—
Purchases of property and equipment, net	(9,558		)	(4,405	)
Decrease (increase) in restricted cash	135,735			(298,633	)
Net cash provided by investing activities	274,435			451,316
Cash flows from financing activities:
Payments on bonds and notes payable	(3,538,437		)	(1,520,127	)
Proceeds from issuance of bonds and notes payable	3,143,612			936,560
Payments of debt issuance costs	(11,485		)	(5,593	)
Dividends paid	(9,295		)	(9,449	)
Repurchases of common stock	(8,989		)	(1,315	)
Proceeds from issuance of common stock	303			249
Payments received on employee stock notes receivable	—			772
Issuance of noncontrolling interest	5			5
Distribution to noncontrolling interest	(782		)	—
Net cash used in financing activities	(425,068		)	(598,898	)
Net increase in cash and cash equivalents	2,553			13,685
Cash and cash equivalents, beginning of period	66,031			42,570
Cash and cash equivalents, end of period	$	68,584		56,255
Supplemental disclosures of cash flow information:
Interest paid	$	100,292		120,823
Income taxes paid, net of refunds	$	69,866		57,113

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of June 30, 2013 and for the three and six months ended

June 30, 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 June 30, 2013 and for the three and six months ended June 30, 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 and six months ended June 30, 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
	June 30, 2013			December 31, 2012
Federally insured loans
Stafford and other	$	7,010,404		7,261,114
Consolidation	17,678,330			17,708,732
Total	24,688,734			24,969,846
Non-federally insured loans	29,634			26,034
	24,718,368			24,995,880
Loan discount, net of unamortized loan premiums and deferred origination costs	(91,121		)	(113,357	)
Allowance for loan losses – federally insured loans	(39,848		)	(40,120	)
Allowance for loan losses – non-federally insured loans	(11,763		)	(11,782	)
	$	24,575,636		24,830,621
Allowance for federally insured loans as a percentage of such loans	0.16		%	0.16	%
Allowance for non-federally insured loans as a percentage of such loans	39.69		%	45.26	%

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance appropriate 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,
	2013			2012		2013		2012
Balance at beginning of period	$	49,409		48,435		51,902		48,482
Provision for loan losses:
Federally insured loans	5,000			7,000		11,000		13,000
Non-federally insured loans	—			—		(1,000	)	—
Total provision for loan losses	5,000			7,000		10,000		13,000
Charge-offs:
Federally insured loans	(3,340		)	(5,999	)	(9,330	)	(11,494	)
Non-federally insured loans	(592		)	(528	)	(1,364	)	(1,297	)
Total charge-offs	(3,932		)	(6,527	)	(10,694	)	(12,791	)
Recoveries - non-federally insured loans	442			354		810		705
Purchase (sale) of federally insured loans, net	275			(792	)	(1,943	)	(1,719	)
Transfer from repurchase obligation related to non-federally insured loans purchased, net	417			1,187		1,536		1,980
Balance at end of period	$	51,611		49,657		51,611		49,657

Allocation of the allowance for loan losses:
Federally insured loans	$	39,848		36,992		39,848		36,992
Non-federally insured loans	11,763			12,665		11,763		12,665
Total allowance for loan losses	$	51,611		49,657		51,611		49,657

Repurchase Obligations

As of June 30, 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, in 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 June 30, 2013, the balance of this portfolio was $68.3 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 June 30,					Six months ended June 30,
	2013			2012		2013		2012
Beginning balance	$	15,011		18,430		16,130		19,223
Repurchase obligation transferred to the allowance for loan losses related to loans purchased, net	(417		)	(1,187	)	(1,536	)	(1,980	)
Ending balance	$	14,594		17,243		14,594		17,243

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 June 30, 2013, December 31, 2012, and June 30, 2012 was 27.1 percent, 28.6 percent, and 22.7 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 June 30, 2013				As of December 31, 2012				As of June 30, 2012
Federally insured loans, excluding rehabilitation loans purchased:
Loans in-school/grace/deferment	$	2,753,719			$	2,949,320			$	3,299,197
Loans in forbearance	2,930,795				2,992,023				3,095,648
Loans in repayment status:
Loans current	14,357,812		87.7	%	14,583,044		87.6	%	14,238,827		87.1	%
Loans delinquent 31-60 days	599,846		3.7		652,351		3.9		612,302		3.7
Loans delinquent 61-90 days	404,256		2.5		330,885		2.0		371,558		2.3
Loans delinquent 91-120 days	204,975		1.3		247,381		1.5		195,926		1.2
Loans delinquent 121-270 days	600,018		3.7		603,942		3.6		649,113		4.0
Loans delinquent 271 days or greater	187,615		1.1		220,798		1.4		279,926		1.7
Total loans in repayment	16,354,522		100.0	%	16,638,401		100.0	%	16,347,652		100.0	%
Total federally insured loans, excluding rehabilitation loans purchased	$	22,039,036			$	22,579,744			$	22,742,497

Rehabilitation loans purchased:
Loans in-school/grace/deferment	$	230,076			$	150,317			$	80,405
Loans in forbearance	389,306				330,278				127,377
Loans in repayment status:
Loans current	997,567		49.1	%	670,205		35.1	%	408,224		68.0	%
Loans delinquent 31-60 days	176,731		8.7		113,795		6.0		55,470		9.2
Loans delinquent 61-90 days	127,083		6.3		79,691		4.2		37,733		6.3
Loans delinquent 91-120 days	86,757		4.3		186,278		9.8		20,953		3.5
Loans delinquent 121-270 days	416,553		20.5		633,001		33.1		52,501		8.7
Loans delinquent 271 days or greater	225,625		11.1		226,537		11.8		25,964		4.3
Total loans in repayment	2,030,316		100.0	%	1,909,507		100.0	%	600,845		100.0	%
Total rehabilitation loans purchased	2,649,698				2,390,102				808,627
Total federally insured loans	$	24,688,734			$	24,969,846			$	23,551,124

3. Bonds and Notes Payable

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



	As of June 30, 2013
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
Bonds and notes based on indices	$	22,773,607		0.28% - 6.90%	11/25/15 - 8/26/52
Bonds and notes based on auction or remarketing	905,850			0.09% - 2.10%	5/1/28 - 5/25/42
Total variable-rate bonds and notes	23,679,457
FFELP warehouse facilities	1,029,005			0.19% - 0.27%	4/2/15 - 6/12/16
Unsecured line of credit	—			—	3/28/18
Unsecured debt - Junior Subordinated Hybrid Securities	99,232			3.65%	9/15/61
Other borrowings	61,853			1.69% - 5.10%	11/14/13 - 11/11/15
	24,869,547
Discount on bonds and notes payable	(178,595		)
Total	$	24,690,952



	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 - 8/26/52
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

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 June 30, 2013, the Company had four FFELP warehouse facilities as summarized below.



	NHELP-I		NHELP-III (a)	NHELP-II (b)	NFSLW-I (c)	Total
Maximum financing amount	$	500,000	500,000	500,000	500,000	2,000,000
Amount outstanding	172,486		315,730	257,556	283,233	1,029,005
Amount available	$	327,514	184,270	242,444	216,767	970,995
Expiration of liquidity provisions	October 2, 2013		January 16, 2014	February 28, 2014	June 12, 2014
Final maturity date	April 2, 2015		January 17, 2016	February 28, 2016	June 12, 2016
Maximum advance rates	80.0 - 100.0%		92.2 - 95.0%	84.5 - 94.5%	92.0 - 98.0%
Minimum advance rates	80.0 - 95.0%		92.2 - 95.0%	84.5 - 94.5%	84.0 - 90.0%
Advanced as equity support	$	4,866	16,346	26,524	13,543	61,279


(a)	The Company entered into this facility on January 16, 2013.


(b)	On June 3, 2013, the Company amended this facility to change the terms of the advance rates.


(c)	On June 13, 2013, the Company amended this facility to change the terms of the advance rates and extend the expiration of the liquidity provisions and its final maturity date.

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 securitization transactions completed during the six months ended June 30, 2013.



	2013-1			2013-2 (a)		2013-3		2013-4		Total
Date securities issued	1/31/13			2/28/13		4/30/13		6/21/13
Total original principal amount	$	437,500		1,122,000		765,000		453,000		$	2,777,500

Class A senior notes:
Total original principal amount	$	428,000		1,122,000		745,000		440,000		2,735,000
Bond discount	—			(3,325	)	—		(1,690	)	(5,015		)
Issue price	$	428,000		1,118,675		745,000		438,310		2,729,985
Cost of funds (1-month LIBOR plus:)	0.60		%	0.50	%	0.50	%	0.50	%
Final maturity date	6/25/41			7/25/40		2/25/37		12/26/42

Class B subordinated notes:
Total original principal amount	$	9,500				20,000		13,000		42,500
Bond discount	(1,525		)			(1,762	)	(1,804	)	(5,091		)
Issue price	$	7,975				18,238		11,196		37,409
Cost of funds (1-month LIBOR plus:)	1.50		%			1.50	%	1.50	%
Final maturity date	3/25/48					7/25/47		1/25/47


(a)	Total original principal amount excludes the Class B subordinated tranche totaling $34.0 million that was retained at issuance.

During the second quarter 2013, the Company sold $61.6 million (face amount) of its Class B subordinated notes that were retained at issuance from prior completed asset-backed securitizations for total proceeds of $55.2 million. Upon sale, these notes were recognized in the consolidated balance sheet in an amount equal to the cash proceeds received. The difference between the face amount and the proceeds received for these bonds ($6.4 million) was recorded as bond discount and will be recognized as interest expense over the remaining life of the bonds. After the completion of these sales, the Company has $76.5 million (face amount) of its own Class B subordinated notes remaining that are not included in the Company's consolidated balance sheet.

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. No additional loans can be financed in this facility, and the Conduit Program has 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 June 30, 2013, no amounts were outstanding on the unsecured line of credit and $275.0 million was available for future use.

Debt Repurchases

The Company repurchased $56.4 million (face amount) and $69.4 million (face amount) of its own asset-backed debt securities during the three and six months ended June 30, 2013, respectively, and recognized gains on such purchases of $7.4 million and $8.7 million, respectively. During the three and six months ended June 30, 2012, the Company repurchased $17.6 million (face amount) of its own asset-backed debt securities and recognized a gain of $0.9 million.

4. Derivative Financial Instruments

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

Interest Rate Risk

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

Basis Swaps

Interest earned on the majority of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. Meanwhile, the Company funds 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 June 30, 2013, the Company had $23.7 billion and $1.0 billion of FFELP loans indexed to the one-month LIBOR rate and the three-month treasury bill rate, respectively, the indices for which reset daily, and $15.6 billion of debt indexed to three-month LIBOR, the indices for which reset quarterly, and $7.7 billion of debt indexed to one-month LIBOR, the indices for which reset monthly.

The Company has used derivative instruments to economically 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 June 30, 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 June 30, 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 index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its student loan portfolio with variable rate debt. In low and/or 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. 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, 2013 and December 31, 2012, the Company had $11.1 billion and $11.3 billion, respectively, of student loan assets that were earning fixed rate floor income. The weighted average estimated variable conversion rate for these loans, which is the estimated short-term interest rate at which the loans would convert to a variable rate, was 1.82%.

The following table summarizes the outstanding derivative instruments used by the Company to economically hedge a majority of loans earning fixed rate floor income.



	As of June 30, 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)
Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)		Notional amount		Weighted average fixed rate paid by the Company (a)
2013	$	2,000,000	0.71	%	$	3,150,000	0.71	%
2014	1,750,000		0.71		1,750,000		0.71
2015	1,100,000		0.89		1,100,000		0.89
2016	750,000		0.85		750,000		0.85
2017	1,250,000		0.86		750,000		0.99
	$	6,850,000	0.78	%	$	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 June 30, 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 a substantial portion of the Hybrid Securities to a fixed rate of 7.7%.



	As of June 30, 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	$	50,000	4.32	%	$	75,000	4.28	%


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

Foreign Currency Exchange Risk

In 2006, the Company issued €420.5 million and €352.7 million of student loan asset-backed 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 index based on notional amounts of €420.5 million and €352.7 million and pays a spread to the LIBOR index 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 between the U.S. dollar and Euro in effect 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.



	Three months ended June 30,					Six months ended June 30,
	2013			2012		2013		2012
Re-measurement of Euro Notes	$	(14,691	)	59,226		14,072		26,984
Change in fair value of cross currency interest rate swaps	14,748			(62,546	)	(20,096	)	(49,520	)
Total impact to consolidated statements of income - income (expense) (a)	$	57		(3,320	)	(6,024	)	(22,536	)


(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.

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
	June 30, 2013		December 31, 2012	June 30, 2013	December 31, 2012
1:3 basis swaps	$	22,587	12,239	—	1,215
Interest rate swaps - floor income hedges	13,664		—	16,220	45,913
Interest rate swaps - hybrid debt hedges	—		—	8,677	23,762
Cross-currency interest rate swaps	62,745		82,841	—	—