Edgar Filing: NELNET INC

NNI-9.30.13-10Q

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 September 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 October 31, 2013, there were 34,872,451 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

September 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
	September 30, 2013			December 31, 2012
	(unaudited)
Assets:
Student loans receivable (net of allowance for loan losses of $54,197 and $51,902, respectively)	$	24,701,112		24,830,621
Non-federally insured student loans receivable - held for sale	28,480			—
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	6,421			7,567
Cash and cash equivalents - held at a related party	44,970			58,464
Total cash and cash equivalents	51,391			66,031
Investments	232,663			83,312
Restricted cash and investments	674,926			815,462
Restricted cash - due to customers	93,695			96,516
Accrued interest receivable	303,350			307,518
Accounts receivable (net of allowance for doubtful accounts of $2,510 and $1,529, respectively)	62,951			63,638
Goodwill	117,118			117,118
Intangible assets, net	6,932			9,393
Property and equipment, net	33,013			31,869
Other assets	103,021			88,976
Fair value of derivative instruments	128,276			97,441
Total assets	$	26,536,928		26,607,895
Liabilities:
Bonds and notes payable	$	24,858,455		25,098,835
Accrued interest payable	14,218			14,770
Other liabilities	171,134			161,671
Due to customers	93,695			96,516
Fair value of derivative instruments	21,513			70,890
Total liabilities	25,159,015			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 34,876,145 shares and 35,116,913 shares, respectively	349			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	24,068			32,540
Retained earnings	1,347,609			1,129,389
Accumulated other comprehensive earnings	5,722			2,813
Total Nelnet, Inc. shareholders' equity	1,377,863			1,165,208
Noncontrolling interest	50			5
Total equity	1,377,913			1,165,213
Total liabilities and equity	$	26,536,928		26,607,895

Supplemental information - assets and liabilities of consolidated variable interest entities:
Student loans receivable	$	24,755,486		24,920,130
Restricted cash and investments	673,304			753,511
Fair value of derivative instruments	101,819			82,841
Other assets	305,546			306,454
Bonds and notes payable	(25,017,110		)	(25,209,341	)
Other liabilities	(311,541		)	(348,364	)
Net assets of consolidated variable interest entities	$	507,504		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					Nine months
	ended September 30,					ended September 30,
	2013			2012		2013	2012
Interest income:
Loan interest	$	158,675		150,528		472,277	454,574
Investment interest	1,562			1,140		4,662	3,290
Total interest income	160,237			151,668		476,939	457,864
Interest expense:
Interest on bonds and notes payable	55,315			66,402		171,800	203,175
Net interest income	104,922			85,266		305,139	254,689
Less provision for loan losses	5,000			5,000		15,000	18,000
Net interest income after provision for loan losses	99,922			80,266		290,139	236,689
Other income (expense):
Loan and guaranty servicing revenue	64,582			53,285		180,261	155,164
Tuition payment processing and campus commerce revenue	19,927			17,928		61,694	56,675
Enrollment services revenue	22,563			30,661		76,343	92,035
Other income	8,613			12,699		30,317	32,453
Gain on sale of loans and debt repurchases	2,138			195		10,900	1,130
Derivative market value and foreign currency adjustments and derivative settlements, net	(16,648		)	(31,275	)	24,612	(68,073	)
Total other income	101,175			83,493		384,127	269,384
Operating expenses:
Salaries and benefits	48,712			46,395		144,049	144,193
Cost to provide enrollment services	14,668			20,151		51,097	62,203
Depreciation and amortization	4,340			8,402		13,037	24,764
Other	39,887			29,989		109,193	93,160
Total operating expenses	107,607			104,937		317,376	324,320
Income before income taxes	93,490			58,822		356,890	181,753
Income tax expense	30,444			21,870		123,637	59,978
Net income	63,046			36,952		233,253	121,775
Net income attributable to noncontrolling interest	216			124		1,101	412
Net income attributable to Nelnet, Inc.	$	62,830		36,828		232,152	121,363
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.35		0.78		4.98	2.56
Weighted average common shares outstanding - basic and diluted	46,496,612			47,460,308		46,593,241	47,399,207

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
	Three months					Nine months
	ended September 30,					ended September 30,
	2013			2012		2013		2012
Net income	$	63,046		36,952		233,253		121,775
Other comprehensive income:
Available-for-sale securities:
Unrealized holding gains arising during period, net of losses	5,689			133		6,875		1,745
Less reclassification adjustment for gains recognized in net income, net of losses	(730		)	(2,618	)	(2,246	)	(4,848	)
Income tax effect	(1,834		)	961		(1,720	)	1,170
Total other comprehensive income (loss)	3,125			(1,524	)	2,909		(1,933	)
Comprehensive income	66,171			35,428		236,162		119,842
Comprehensive income attributable to noncontrolling interest	216			124		1,101		412
Comprehensive income attributable to Nelnet, Inc.	$	65,955		35,304		235,061		119,430

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 June 30, 2012	—	35,847,801		11,495,377	$	—	358		115	52,194		1,092,715		(409	)	(368	)	293		1,144,898
Net income	—	—		—	—		—		—	—		36,828		—		—		124		36,952
Other comprehensive loss	—	—		—	—		—		—	—		—		(1,524	)	—		—		(1,524	)
Cash dividend on Class A and Class B common stock - $0.1 per share	—	—		—	—		—		—	—		(4,737	)	—		—		—		(4,737	)
Issuance of common stock, net of forfeitures	—	(180	)	—	—		—		—	271		—		—		—		—		271
Compensation expense for stock based awards	—	—		—	—		—		—	584		—		—		—		—		584
Repurchase of common stock	—	(8,545	)	—	—		—		—	(206	)	—		—		—		—		(206	)
Balance as of September 30, 2012	—	35,839,076		11,495,377	$	—	358		115	52,843		1,124,806		(1,933	)	(368	)	417		1,176,238
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
Net income	—	—		—	—		—		—	—		62,830		—		—		216		63,046
Other comprehensive income	—	—		—	—		—		—	—		—		3,125		—		—		3,125
Distribution to noncontrolling interest	—	—		—	—		—		—	—		—		—		—		(279	)	(279	)
Cash dividend on Class A and Class B common stock - $0.1 per share	—	—		—	—		—		—	—		(4,637	)	—		—		—		(4,637	)
Issuance of common stock, net of forfeitures	—	(745	)	—	—		—		—	264		—		—		—		—		264
Compensation expense for stock based awards	—	—		—	—		—		—	824		—		—		—		—		824
Repurchase of common stock	—	(111,220	)	—	—		(1	)	—	(4,024	)	—		—		—		—		(4,025	)
Balance as of September 30, 2013	—	34,876,145		11,495,377	$	—	349		115	24,068		1,347,609		5,722		—		50		1,377,913
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	—	—		—	—		—		—	—		121,363		—		—		412		121,775
Other comprehensive loss	—	—		—	—		—		—	—		—		(1,933	)	—		—		(1,933	)
Cash dividends on Class A and Class B common stock - $0.3 per share	—	—		—	—		—		—	—		(14,186	)	—		—		—		(14,186	)
Issuance of common stock, net of forfeitures	—	255,538		—	—		3		—	3,545		—		—		—		—		3,548
Compensation expense for stock based awards	—	—		—	—		—		—	1,573		—		—		—		—		1,573
Repurchase of common stock	—	(59,564	)	—	—		(1	)	—	(1,520	)	—		—		—		—		(1,521	)
Reduction of employee stock notes receivable	—	—		—	—		—		—	—		—		—		772		—		772
Balance as of September 30, 2012	—	35,839,076		11,495,377	$	—	358		115	52,843		1,124,806		(1,933	)	(368	)	417		1,176,238
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	—	—		—	—		—		—	—		232,152		—		—		1,101		233,253
Other comprehensive income	—	—		—	—		—		—	—		—		2,909		—		—		2,909
Distribution to noncontrolling interest	—	—		—	—		—		—	—		—		—		—		(1,061	)	(1,061	)
Cash dividends on Class A and Class B common stock - $0.3 per share	—	—		—	—		—		—	—		(13,932	)	—		—		—		(13,932	)
Issuance of common stock, net of forfeitures	—	149,608		—	—		2		—	2,231		—		—		—		—		2,233
Compensation expense for stock based awards	—	—		—	—		—		—	2,308		—		—		—		—		2,308
Repurchase of common stock	—	(390,376	)	—	—		(4	)	—	(13,011	)	—		—		—		—		(13,015	)
Balance as of September 30, 2013	—	34,876,145		11,495,377	$	—	349		115	24,068		1,347,609		5,722		—		50		1,377,913

See accompanying notes to consolidated financial statements.



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Nine months
	ended September 30,
	2013			2012
Net income attributable to Nelnet, Inc.	$	232,152		121,363
Net income attributable to noncontrolling interest	1,101			412
Net income	233,253			121,775
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	58,330			85,370
Student loan discount accretion	(26,333		)	(31,693	)
Provision for loan losses	15,000			18,000
Derivative market value adjustment	(73,743		)	67,349
Foreign currency transaction adjustment	25,902			(6,186	)
Payments to terminate and/or amend derivative instruments, net of proceeds	(6,469		)	(6,430	)
Gain on sale of loans	(34		)	(80	)
Gain from debt repurchases	(10,866		)	(1,050	)
Gain from sales of available-for-sale securities, net	(2,246		)	(4,848	)
Purchases of student loans - held for sale	(28,480		)	—
Deferred income tax expense (benefit)	13,279			(29,141	)
Other	2,557			763
Decrease in accrued interest receivable	4,168			40,545
Decrease (increase) in accounts receivable	687			(7,745	)
(Increase) decrease in other assets	(2,445		)	2,330
Decrease in accrued interest payable	(552		)	(2,998	)
Increase in other liabilities	598			14,636
Net cash provided by operating activities	202,606			260,597
Cash flows from investing activities:
Purchases of student loans	(1,696,253		)	(875,556	)
Purchase of student loans from a related party	(466,941		)	(299	)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	2,269,253			2,500,005
Proceeds from sale of student loans	11,287			92,149
Purchases of available-for-sale securities	(196,657		)	(155,057	)
Proceeds from sales of available-for-sale securities	52,733			112,854
Purchases of other investments	(8,316		)	—
Purchases of property and equipment, net	(11,720		)	(7,370	)
Decrease (increase) in restricted cash	140,536			(291,239	)
Net cash provided by investing activities	93,922			1,375,487
Cash flows from financing activities:
Payments on bonds and notes payable	(4,159,079		)	(2,795,019	)
Proceeds from issuance of bonds and notes payable	3,888,772			1,232,250
Payments of debt issuance costs	(13,295		)	(7,630	)
Dividends paid	(13,932		)	(14,186	)
Repurchases of common stock	(13,015		)	(1,521	)
Proceeds from issuance of common stock	437			349
Payments received on employee stock notes receivable	—			772
Issuance of noncontrolling interest	5			5
Distribution to noncontrolling interest	(1,061		)	—
Net cash used in financing activities	(311,168		)	(1,584,980	)
Net (decrease) increase in cash and cash equivalents	(14,640		)	51,104
Cash and cash equivalents, beginning of period	66,031			42,570
Cash and cash equivalents, end of period	$	51,391		93,674
Supplemental disclosures of cash flow information:
Interest paid	$	148,482		179,007
Income taxes paid, net of refunds	$	114,744		86,798

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of September 30, 2013 and for the three and nine months ended

September 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 September 30, 2013 and for the three and nine months ended September 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 nine months ended September 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
	September 30, 2013				December 31, 2012
	Held for investment			Held for sale	Held for investment
Federally insured loans
Stafford and other	$	6,884,348		—	7,261,114
Consolidation	17,908,229			—	17,708,732
Total	24,792,577			—	24,969,846
Non-federally insured loans	66,283			28,480	26,034
	24,858,860			28,480	24,995,880
Loan discount, net of unamortized loan premiums and deferred origination costs	(103,551		)	—	(113,357	)
Allowance for loan losses – federally insured loans	(42,406		)	—	(40,120	)
Allowance for loan losses – non-federally insured loans	(11,791		)	—	(11,782	)
	$	24,701,112		28,480	24,830,621
Allowance for federally insured loans as a percentage of such loans	0.17		%		0.16	%
Allowance for non-federally insured loans as a percentage of such loans	17.79		%		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 September 30,					Nine months ended September 30,
	2013			2012		2013		2012
Balance at beginning of period	$	51,611		49,657		51,902		48,482
Provision for loan losses:
Federally insured loans	5,000			5,000		16,000		18,000
Non-federally insured loans	—			—		(1,000	)	—
Total provision for loan losses	5,000			5,000		15,000		18,000
Charge-offs:
Federally insured loans	(3,142		)	(5,449	)	(12,472	)	(16,943	)
Non-federally insured loans	(906		)	(1,058	)	(2,270	)	(2,355	)
Total charge-offs	(4,048		)	(6,507	)	(14,742	)	(19,298	)
Recoveries - non-federally insured loans	363			399		1,173		1,104
Purchase (sale) of federally insured loans, net	700			(928	)	(1,243	)	(2,647	)
Transfer from repurchase obligation related to non-federally insured loans repurchased, net	571			588		2,107		2,568
Balance at end of period	$	54,197		48,209		54,197		48,209

Allocation of the allowance for loan losses:
Federally insured loans	$	42,406		35,614		42,406		35,614
Non-federally insured loans	11,791			12,595		11,791		12,595
Total allowance for loan losses	$	54,197		48,209		54,197		48,209

Repurchase Obligations

As of September 30, 2013, the Company had participated a cumulative amount of $98.5 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 September 30, 2013, the balance of this portfolio was $66.0 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 September 30,					Nine months ended September 30,
	2013			2012		2013		2012
Beginning balance	$	14,594		17,243		16,130		19,223
Repurchase obligation transferred to the allowance for loan losses related to loans repurchased, net	(571		)	(588	)	(2,107	)	(2,568	)
Ending balance	$	14,023		16,655		14,023		16,655

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 held for investment that were delinquent 31 days or greater as of September 30, 2013, December 31, 2012, and September 30, 2012 was 13.4 percent, 28.6 percent, and 26.0 percent, respectively. The table below shows the Company’s federally insured student loan delinquency amounts.

Rehabilitation Loans 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 September 30, 2013				As of December 31, 2012				As of September 30, 2012
Federally insured loans, excluding rehabilitation loans:
Loans in-school/grace/deferment	$	2,780,442			$	2,949,320			$	3,163,918
Loans in forbearance	2,953,119				2,992,023				2,868,168
Loans in repayment status:
Loans current	14,157,330		87.2	%	14,583,044		87.6	%	13,673,217		87.2	%
Loans delinquent 31-60 days	662,814		4.1		652,351		3.9		586,021		3.7
Loans delinquent 61-90 days	354,975		2.2		330,885		2.0		308,377		2.0
Loans delinquent 91-120 days	235,681		1.5		247,381		1.5		237,941		1.5
Loans delinquent 121-270 days	624,042		3.8		603,942		3.6		628,697		4.0
Loans delinquent 271 days or greater	195,853		1.2		220,798		1.4		253,438		1.6
Total loans in repayment	16,230,695		100.0	%	16,638,401		100.0	%	15,687,691		100.0	%
Total federally insured loans, excluding rehabilitation loans	$	21,964,256			$	22,579,744			$	21,719,777

Rehabilitation loans:
Loans in-school/grace/deferment	$	259,377			$	150,317			$	90,836
Loans in forbearance	443,629				330,278				129,257
Loans in repayment status:
Loans current	1,078,730		50.7	%	670,205		35.1	%	418,584		61.9	%
Loans delinquent 31-60 days	188,583		8.9		113,795		6.0		52,053		7.7
Loans delinquent 61-90 days	125,310		5.9		79,691		4.2		35,104		5.2
Loans delinquent 91-120 days	137,016		6.4		186,278		9.8		33,931		5.0
Loans delinquent 121-270 days	354,192		16.7		633,001		33.1		99,041		14.7
Loans delinquent 271 days or greater	241,484		11.4		226,537		11.8		37,025		5.5
Total loans in repayment	2,125,315		100.0	%	1,909,507		100.0	%	675,738		100.0	%
Total rehabilitation loans	2,828,321				2,390,102				895,831
Total federally insured loans	$	24,792,577			$	24,969,846			$	22,615,608

3. Bonds and Notes Payable

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



	As of September 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	$	22,632,522		0.27% - 6.90%	11/25/15 - 8/26/52
Bonds and notes based on auction or remarketing	890,500			0.08% - 2.13%	5/1/28 - 5/25/42
Total variable-rate bonds and notes	23,523,022
FFELP warehouse facilities	1,277,650			0.18% - 0.28%	1/17/16 - 6/12/16
Unsecured line of credit	75,000			1.68%	3/28/18
Unsecured debt - Junior Subordinated Hybrid Securities	99,232			3.62%	9/15/61
Other borrowings	61,828			1.68% - 5.10%	11/14/13 - 11/11/15
	25,036,732
Discount on bonds and notes payable	(178,277		)
Total	$	24,858,455



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



	NHELP-I (a)		NHELP-III (b)	NHELP-II (c)	NFSLW-I (d)	Total
Maximum financing amount	$	500,000	750,000	500,000	500,000	2,250,000
Amount outstanding	—		637,770	373,258	266,622	1,277,650
Amount available	$	500,000	112,230	126,742	233,378	972,350
Expiration of liquidity provisions			January 16, 2014	February 28, 2014	June 12, 2014
Final maturity date			January 17, 2016	February 28, 2016	June 12, 2016
Maximum advance rates			92.2 - 95%	84.5 - 94.5%	92 - 98%
Minimum advance rates			92.2 - 95%	84.5 - 94.5%	84 - 90%
Advanced as equity support	$	—	36,926	33,863	11,647	82,436


(a)	On October 1, 2013, the Company terminated this facility. All loans previously financed in this facility were financed in other warehouse facilities during the third quarter of 2013.


(b)	The Company entered into this facility on January 16, 2013. On September 16, 2013, the Company amended this facility to increase the maximum financing amount from $500 million to $750 million.


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


(d)	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 NFSLW-I warehouse facility provides for formula-based advance rates, depending on FFELP loan type, up to a maximum of the principal and interest of loans financed as shown in the table above. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to minimums as disclosed above. The NHELP-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 nine months ended September 30, 2013.



	2013-1			2013-2 (a)		2013-3		2013-4		2013-5 (a)		Total
Date securities issued	1/31/13			2/28/13		4/30/13		6/21/13		9/30/13
Total original principal amount	$	437,500		1,122,000		765,000		453,000		399,000		$	3,176,500

Class A senior notes:
Total original principal amount	$	428,000		1,122,000		745,000		440,000		399,000		3,134,000
Bond discount	—			(3,325	)	—		(1,690	)	(4,881	)	(9,896		)
Issue price	$	428,000		1,118,675		745,000		438,310		394,119		3,124,104
Cost of funds (1-month LIBOR plus:)	0.60		%	0.50	%	0.50	%	0.50	%	0.63	%
Final maturity date	6/25/41			7/25/40		2/25/37		12/26/42		1/25/37

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 tranches for the 2013-2 and 2013-5 transactions totaling $34.0 million and $9.0 million, respectively, that were retained at issuance. As of September 30, 2013, the Company has a total of $85.5 million (face amount) of its own Class B subordinated notes remaining from prior completed asset-backed securitizations 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 September 30, 2013, $75.0 million was outstanding on the unsecured line of credit and $200.0 million was available for future use.

Debt Repurchases

The Company repurchased $15.4 million (face amount) and $4.1 million (face amount) of its own asset-backed debt securities during the three months ended September 30, 2013 and 2012, respectively, and recognized gains on such purchases of $2.1 million and $0.2 million, respectively. During the nine months ended September 30, 2013 and 2012, the Company repurchased $84.7 million (face amount) and $21.7 million (face amount) of its own asset-backed debt securities and recognized gains of $10.9 million and $1.1 million, respectively.

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 September 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 $15.2 billion of debt indexed to three-month LIBOR, the indices for which reset quarterly, and $8.1 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 September 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 September 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 the borrower rate, which is fixed over a period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its student loan portfolio with variable rate debt. In low and/or certain declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.

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

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

As of September 30, 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. 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 loans earning fixed rate floor income.



	As of September 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	$	—	—	%	$	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
	$	4,850,000	0.81	%	$	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 September 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 portion of the Hybrid Securities to a fixed rate of 7.7%.



	As of September 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	$	25,000	4.28	%	$	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 September 30,					Nine months ended September 30,
	2013			2012		2013	2012
Re-measurement of Euro Notes	$	(39,974	)	(20,799	)	(25,902