Edgar Filing: NELNET INC

NNI-6.30.14-10Q

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, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

COMMISSION FILE NUMBER 001-31924

NELNET, INC.

(Exact name of registrant as specified in its charter)



NEBRASKA (State or other jurisdiction of incorporation or organization)	84-0748903 (I.R.S. Employer Identification No.)

121 SOUTH 13TH STREET SUITE 100 LINCOLN, NEBRASKA (Address of principal executive offices)	68508 (Zip Code)

(402) 458-2370

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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 [X] Accelerated filer [ ]

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, 2014, there were 34,807,168 and 11,491,932 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, 2014



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
	Item 4.	Controls and Procedures	53

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	53
	Item 1A.	Risk Factors	53
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
	Item 6.	Exhibits	55

Signatures			57

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



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

	As of			As of
	June 30, 2014			December 31, 2013
Assets:
Student loans receivable (net of allowance for loan losses of $52,467 and $55,122, respectively)	$	29,342,430		25,907,589
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party	29,863			8,537
Cash and cash equivalents - held at a related party	62,236			54,730
Total cash and cash equivalents	92,099			63,267
Investments	141,489			192,040
Restricted cash and investments	862,034			735,123
Restricted cash - due to customers	98,005			167,576
Accrued interest receivable	360,075			314,553
Accounts receivable (net of allowance for doubtful accounts of $1,490 and $3,845, respectively)	58,321			56,072
Goodwill	126,200			117,118
Intangible assets, net	44,849			6,132
Property and equipment, net	35,498			33,829
Other assets	141,989			115,043
Fair value of derivative instruments	68,033			62,507
Total assets	$	31,371,022		27,770,849
Liabilities:
Bonds and notes payable	$	29,492,560		25,955,289
Accrued interest payable	24,339			21,725
Other liabilities	160,444			164,300
Due to customers	98,005			167,576
Fair value of derivative instruments	15,546			17,969
Total liabilities	29,790,894			26,326,859
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 34,859,786 shares and 34,881,338 shares, respectively	349			349
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,491,932 shares and 11,495,377 shares, respectively	115			115
Additional paid-in capital	20,721			24,887
Retained earnings	1,552,988			1,413,492
Accumulated other comprehensive earnings	5,569			4,819
Total Nelnet, Inc. shareholders' equity	1,579,742			1,443,662
Noncontrolling interest	386			328
Total equity	1,580,128			1,443,990
Total liabilities and equity	$	31,371,022		27,770,849

Supplemental information - assets and liabilities of consolidated variable interest entities:
Student loans receivable	$	29,479,249		26,020,629
Restricted cash and investments	859,441			732,771
Fair value of derivative instruments	33,797			36,834
Other assets	358,646			313,748
Bonds and notes payable	(29,778,096		)	(26,244,222	)
Other liabilities	(335,992		)	(303,142	)
Net assets of consolidated variable interest entities	$	617,045		556,618

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,
	2014		2013	2014		2013
Interest income:
Loan interest	$	175,466	158,063	332,362		313,602
Investment interest	1,482		1,483	3,461		3,100
Total interest income	176,948		159,546	335,823		316,702
Interest expense:
Interest on bonds and notes payable	69,235		58,127	129,239		116,485
Net interest income	107,713		101,419	206,584		200,217
Less provision for loan losses	1,500		5,000	4,000		10,000
Net interest income after provision for loan losses	106,213		96,419	202,584		190,217
Other income:
Loan and guaranty servicing revenue	66,460		60,078	131,217		115,679
Tuition payment processing and campus commerce revenue	21,834		18,356	47,069		41,767
Enrollment services revenue	20,145		24,823	42,156		53,780
Other income	15,315		12,288	33,446		21,704
Gain on sale of loans and debt repurchases	18		7,355	57		8,762
Derivative market value and foreign currency adjustments and derivative settlements, net	1,570		40,188	(2,695	)	41,260
Total other income	125,342		163,088	251,250		282,952
Operating expenses:
Salaries and benefits	53,888		47,432	106,372		95,337
Cost to provide enrollment services	13,311		16,787	27,786		36,429
Depreciation and amortization	5,214		4,320	9,997		8,697
Other	40,377		34,365	76,004		69,306
Total operating expenses	112,790		102,904	220,159		209,769
Income before income taxes	118,765		156,603	233,675		263,400
Income tax expense	43,078		54,746	83,689		93,193
Net income	75,687		101,857	149,986		170,207
Net income attributable to noncontrolling interest	693		614	1,206		885
Net income attributable to Nelnet, Inc.	$	74,994	101,243	148,780		169,322
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.61	2.17	3.20		3.63
Weighted average common shares outstanding - basic and diluted	46,529,377		46,626,853	46,528,651		46,642,356

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,
	2014			2013		2014		2013
Net income	$	75,687		101,857		149,986		170,207
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding gains (losses) arising during period, net	5,826			(3,335	)	9,501		1,185
Less reclassification adjustment for gains recognized in net income, net of losses	(1,238		)	(559	)	(8,311	)	(1,516	)
Income tax effect	(1,698		)	1,441		(440	)	115
Total other comprehensive income (loss)	2,890			(2,453	)	750		(216	)
Comprehensive income	78,577			99,404		150,736		169,991
Comprehensive income attributable to noncontrolling interest	693			614		1,206		885
Comprehensive income attributable to Nelnet, Inc.	$	77,884		98,790		149,530		169,106

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		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		Noncontrolling interest		Total equity
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 March 31, 2014	—	35,019,924		11,491,932		$	—	350		115	27,138		1,482,637		2,679		755		1,513,674
Net income	—	—		—		—		—		—	—		74,994		—		693		75,687
Other comprehensive income	—	—		—		—		—		—	—		—		2,890		—		2,890
Distribution to noncontrolling interest	—	—		—		—		—		—	—		—		—		(1,062	)	(1,062	)
Cash dividend on Class A and Class B common stock - $0.10 per share	—	—		—		—		—		—	—		(4,643	)	—		—		(4,643	)
Issuance of common stock, net of forfeitures	—	49,802		—		—		1		—	882		—		—		—		883
Compensation expense for stock based awards	—	—		—		—		—		—	1,135		—		—		—		1,135
Repurchase of common stock	—	(209,940	)	—		—		(2	)	—	(8,434	)	—		—		—		(8,436	)
Balance as of June 30, 2014	—	34,859,786		11,491,932		$	—	349		115	20,721		1,552,988		5,569		386		1,580,128
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 dividends 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
Balance as of December 31, 2013	—	34,881,338		11,495,377		$	—	349		115	24,887		1,413,492		4,819		328		1,443,990
Issuance of noncontrolling interest	—	—		—		—		—		—	—		—		—		201		201
Net income	—	—		—		—		—		—	—		148,780		—		1,206		149,986
Other comprehensive income	—	—		—		—		—		—	—		—		750		—		750
Distribution to noncontrolling interest	—	—		—		—		—		—	—		—		—		(1,349	)	(1,349	)
Cash dividends on Class A and Class B common stock - $0.20 per share	—	—		—		—		—		—	—		(9,284	)	—		—		(9,284	)
Issuance of common stock, net of forfeitures	—	205,507		—		—		2		—	3,126		—		—		—		3,128
Compensation expense for stock based awards	—	—		—		—		—		—	2,010		—		—		—		2,010
Repurchase of common stock	—	(230,504	)	—		—		(2	)	—	(9,302	)	—		—		—		(9,304	)
Conversion of common stock	—	3,445		(3,445	)	—		—		—	—		—		—		—		—
Balance as of June 30, 2014	—	34,859,786		11,491,932		$	—	349		115	20,721		1,552,988		5,569		386		1,580,128

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,
	2014			2013
Net income attributable to Nelnet, Inc.	$	148,780		169,322
Net income attributable to noncontrolling interest	1,206			885
Net income	149,986			170,207
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:
Depreciation and amortization, including debt discounts and student loan premiums and deferred origination costs	49,206			39,160
Student loan discount accretion	(21,087		)	(17,769		)
Provision for loan losses	4,000			10,000
Derivative market value adjustment	(7,950		)	(43,729		)
Foreign currency transaction adjustment	(1,798		)	(14,072		)
Payments to terminate and/or amend derivative instruments, net of proceeds	—			(3,819		)
Gain on sale of loans	—			(34		)
Gain from debt repurchases	(57		)	(8,728		)
Gain from sales of available-for-sale securities, net	(8,311		)	(1,516		)
Deferred income tax expense	5,653			21,244
Non-cash compensation expense	2,082			1,558
Other	2,885			(27		)
(Increase) decrease in accrued interest receivable	(3,567		)	10,980
Increase in accounts receivable	(695		)	(2,378		)
Decrease in other assets	1,383			566
Increase (decrease) in accrued interest payable	1,432			(10		)
Decrease in other liabilities	(16,690		)	(8,447		)
Net cash provided by operating activities	156,472			153,186
Cash flows from investing activities, net of acquisitions:
Purchases of student loans and student loan residual interests	(2,843,061		)	(1,158,245		)
Purchase of student loans from a related party	(175		)	—
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	1,712,350			1,393,949
Proceeds from sale of student loans	6			11,287
Purchases of available-for-sale securities	(135,890		)	(132,496		)
Proceeds from sales of available-for-sale securities	195,938			37,656
Purchases of other investments	(27,011		)	(3,893		)
Repayments of notes and other receivables	3,821			—
Purchases of property and equipment, net	(9,022		)	(9,558		)
(Increase) decrease in restricted cash and investments, net	(27,247		)	135,735
Business acquisitions, net of cash acquired	(45,583		)	—
Net cash (used in) provided by investing activities	(1,175,874		)	274,435
Cash flows from financing activities, net of borrowings assumed:
Payments on bonds and notes payable	(1,821,723		)	(3,538,437		)
Proceeds from issuance of bonds and notes payable	2,901,639			3,143,612
Payments of debt issuance costs	(12,241		)	(11,485		)
Dividends paid	(9,284		)	(9,295		)
Repurchases of common stock	(9,304		)	(8,989		)
Proceeds from issuance of common stock	295			303
Issuance of noncontrolling interest	201			5
Distribution to noncontrolling interest	(1,349		)	(782		)
Net cash provided by (used in) financing activities	1,048,234			(425,068		)
Net increase in cash and cash equivalents	28,832			2,553
Cash and cash equivalents, beginning of period	63,267			66,031
Cash and cash equivalents, end of period	$	92,099		68,584
Cash disbursements made for:
Interest	$	97,668		100,292
Income taxes, net of refunds	$	83,706		69,866
Noncash activity:
Investing activity - student loans and other assets acquired	$	2,571,997		$	—
Financing activity - borrowings and other liabilities assumed in acquisition of student loans	$	2,444,874		$	—

Supplemental disclosures of noncash operating and investing activities regarding a business combination are contained in note 6.

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2013 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, 2014 are not necessarily indicative of the results for the year ending December 31, 2014. 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, 2013 (the "2013 Annual Report").

2. Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:



	As of			As of
	June 30, 2014			December 31, 2013
Federally insured loans
Stafford and other	$	6,479,493		6,686,626
Consolidation	23,032,622			19,363,577
Total	29,512,115			26,050,203
Non-federally insured loans	67,670			71,103
	29,579,785			26,121,306
Loan discount, net of unamortized loan premiums and deferred origination costs (a)	(184,888		)	(158,595	)
Allowance for loan losses – federally insured loans	(40,921		)	(43,440	)
Allowance for loan losses – non-federally insured loans	(11,546		)	(11,682	)
	$	29,342,430		25,907,589

(a)

For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. Remaining discounts and premiums for purchased loans are recognized in interest income over the remaining estimated lives of the loans. The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses. At June 30, 2014 and December 31, 2013, "loan discount, net of unamortized loan premiums and deferred origination costs" included $29.9 million and $20.2 million, respectively, of non-accretable discount associated with purchased loans.

Student Loan Residual Interests

On April 25, 2014, the Company acquired the ownership interest in three Federal Family Education Loan Program ("FFEL Program" or "FFELP") student loan securitization trusts giving the Company rights to the residual interest in a total of $2.6 billion of securitized federally insured loans and related assets. The three trusts include loans funded to term with $2.6 billion (par value) of notes payable that carry interest rates on a spread to LIBOR or are set and periodically reset via a "dutch auction".

The Company has consolidated these trusts on its consolidated balance sheet because management has determined the Company is the primary beneficiary of the trusts. Upon acquisition, the Company recorded all assets and liabilities of the trusts at fair value, resulting in the recognition of a student loan discount of $68.7 million and a notes payable discount of $163.7 million. These discounts will be accreted using the effective interest method over the lives of the underlying assets and liabilities. All other assets acquired and liabilities assumed (restricted cash, accrued interest receivable/payable, and other assets/liabilities) were recorded at cost, which approximates fair value.

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,
	2014			2013		2014		2013
Balance at beginning of period	$	54,628		49,409		55,122		51,902
Provision for loan losses:
Federally insured loans	2,000			5,000		5,000		11,000
Non-federally insured loans	(500		)	—		(1,000	)	(1,000	)
Total provision for loan losses	1,500			5,000		4,000		10,000
Charge-offs:
Federally insured loans	(4,138		)	(3,340	)	(7,769	)	(9,330	)
Non-federally insured loans	(598		)	(592	)	(1,019	)	(1,364	)
Total charge-offs	(4,736		)	(3,932	)	(8,788	)	(10,694	)
Recoveries - non-federally insured loans	339			442		710		810
Purchase (sale) of federally insured loans, net	150			275		250		(1,943	)
Transfer from repurchase obligation related to non-federally insured loans repurchased, net	586			417		1,173		1,536
Balance at end of period	$	52,467		51,611		52,467		51,611

Allocation of the allowance for loan losses:
Federally insured loans	$	40,921		39,848		40,921		39,848
Non-federally insured loans	11,546			11,763		11,546		11,763
Total allowance for loan losses	$	52,467		51,611		52,467		51,611

Repurchase Obligations

As of June 30, 2014, the Company had participated a cumulative amount of $117.1 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 days 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, 2014, the balance of this portfolio was $58.9 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,
	2014			2013		2014		2013
Beginning balance	$	15,413		15,011		16,143		16,130
Loans repurchased	(586		)	(417	)	(1,316	)	(1,536	)
Ending balance	$	14,827		14,594		14,827		14,594

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, 2014, December 31, 2013, and June 30, 2013 was 12.6 percent, 12.7 percent, and 27.1 percent, respectively. The table below shows the Company’s federally insured student loan delinquency amounts.



	As of June 30, 2014				As of December 31, 2013				As of June 30, 2013
Federally insured loans:
Loans in-school/grace/deferment	$	3,095,741			$	2,872,505			$	2,983,795
Loans in forbearance	3,593,891				3,370,025				3,320,101
Loans in repayment status:
Loans current	19,164,660		84.0	%	16,337,922		82.5	%	15,355,379		83.6	%
Loans delinquent 31-60 days	1,026,046		4.5		967,318		4.9		776,577		4.2
Loans delinquent 61-90 days	674,918		3.0		550,333		2.8		531,339		2.9
Loans delinquent 91-120 days	376,068		1.5		390,791		2.0		291,732		1.6
Loans delinquent 121-270 days	1,133,527		5.0		1,117,936		5.6		1,016,571		5.5
Loans delinquent 271 days or greater	447,264		2.0		443,373		2.2		413,240		2.2
Total loans in repayment	22,822,483		100.0	%	19,807,673		100.0	%	18,384,838		100.0	%
Total federally insured loans	$	29,512,115			$	26,050,203			$	24,688,734

3. Bonds and Notes Payable

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



	As of June 30, 2014
	Carrying amount			Interest rate range	Final maturity
Variable-rate bonds and notes issued in asset-backed securitizations:
Bonds and notes based on indices	$	26,983,517		0.24% - 6.90%	5/25/18 - 8/26/52
Bonds and notes based on auction or remarketing	1,562,325			0.06% - 2.09%	5/1/28 - 11/26/46
Total variable-rate bonds and notes	28,545,842
FFELP warehouse facilities	1,139,750			0.15% - 0.25%	1/17/16 - 6/11/17
Unsecured line of credit	65,000			1.65%	6/30/19
Unsecured debt - Junior Subordinated Hybrid Securities	96,457			3.61%	9/15/61
Other borrowings	63,068			1.66% - 5.10%	10/31/14 - 11/11/15
	29,910,117
Discount on bonds and notes payable	(417,557		)
Total	$	29,492,560



	As of December 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	$	23,479,893		0.25% - 6.90%	5/25/18 - 8/26/52
Bonds and notes based on auction or remarketing	1,134,250			0.07% - 2.17%	5/1/28 - 11/26/46
Total variable-rate bonds and notes	24,614,143
FFELP warehouse facilities	1,396,344			0.17% - 0.25%	1/17/16 - 6/12/16
Unsecured line of credit	45,000			1.67%	3/28/18
Unsecured debt - Junior Subordinated Hybrid Securities	96,457			3.62%	9/15/61
Other borrowings	61,401			1.67% - 5.10%	4/11/14 - 11/11/15
	26,213,345
Discount on bonds and notes payable	(258,056		)
Total	$	25,955,289

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, 2014, the Company had three FFELP warehouse facilities as summarized below.



	NHELP-III		NHELP-II	NFSLW-I (a)	Total
Maximum financing amount	$	750,000	500,000	500,000	1,750,000
Amount outstanding	659,668		92,803	387,279	1,139,750
Amount available	$	90,332	407,197	112,721	610,250
Expiration of liquidity provisions	February 5, 2015		September 30, 2014	June 11, 2015
Final maturity date	January 17, 2016		September 30, 2016	June 11, 2017
Maximum advance rates	92.2 - 95.0%		84.5 - 94.5%	92.0 - 98.0%
Minimum advance rates	92.2 - 95.0%		84.5 - 94.5%	84.0 - 90.0%
Advanced as equity support	$	39,496	8,264	18,870	66,630

(a) On April 15, 2014, the Company amended the agreement for this warehouse facility to temporarily increase the maximum financing amount to $1.0 billion, change the expiration date for the liquidity provisions to June 11, 2015, and change the maturity date to June 11, 2017. As a result of the completion of the 2014-3 asset-backed securitization summarized in the table below, on April 30, 2014, the Company determined that it no longer needed the increased capacity on this warehouse facility, and the $500.0 million temporary increase was terminated on May 22, 2014.

Asset-backed Securitizations

The following table summarizes the asset-backed securitization transactions completed during the six months ended June 30, 2014.



	2014-1			2014-2								2014-3		2014-4						2014-5		Total
				Class A-1 notes		Class A-2 notes		Class A-3 notes		2014-2 total				Class A-1 notes		Class A-2 notes		2014-4 total
Date securities issued	2/6/14			3/12/14		3/12/14		3/12/14		3/12/14		4/30/14		5/23/14		5/23/14		5/23/14		6/18/14
Total original principal amount	$	458,500								509,000		719,800						384,500		603,000		$	2,674,800

Class A senior notes:
Total original principal amount	$	445,000		191,000		222,000		84,000		497,000		700,700		267,500		107,500		375,000		587,000		2,604,700
Bond discount	—			—		—		(535	)	(535	)	—		—		—		—		—		(535		)
Issue price	$	445,000		191,000		222,000		83,465		496,465		700,700		267,500		107,500		375,000		587,000		2,604,165
Cost of funds (1-month LIBOR plus:)	0.57		%	0.28	%	0.60	%	0.85	%			0.58	%	0.54	%	0.95	%			0.55	%
Final maturity date	9/25/41			6/25/21		3/25/30		7/27/37				6/25/41		11/27/34		11/25/43				7/25/41

Class B subordinated notes:
Total original principal amount	$	13,500								12,000		19,100						9,500		16,000		70,100
Bond discount	(1,132		)							(1,046	)	(1,467	)					(1,138	)	(1,232	)	(6,015		)
Issue price	$	12,368								10,954		17,633						8,362		14,768		64,085
Cost of funds (1-month LIBOR plus:)	1.50		%							1.50	%	1.50	%					1.50	%	1.50	%
Final maturity date	10/25/47									6/25/41		10/25/50						9/25/51		5/25/49

Unsecured Line of Credit

On June 30, 2014, the Company's unsecured line of credit was amended to increase the line of credit from $275.0 million to $350.0 million and extend the maturity date from March 28, 2018 to June 30, 2019. In addition, the amendment revised certain covenants related to maintenance of a minimum consolidated net worth, limitations on recourse indebtedness and liens, and a limitation on the amount of non-federally insured student loans in the Company’s portfolio. As of June 30, 2014, the $350.0 million unsecured line of credit had an outstanding balance of $65.0 million and $285.0 million available for future use.

Debt Repurchases

The Company repurchased $0.2 million (par value) and $56.4 million (par value) of its own asset-backed debt securities during the three months ended June 30, 2014 and 2013, respectively, and recognized gains on such purchases of approximately $18,000 and $7.4 million, respectively. During the six months ended June 30, 2014 and 2013, the Company repurchased $1.6 million (par value) and $69.4 million (par value), respectively, of its own asset-backed debt securities and recognized gains on such purchases of approximately $57,000 and $8.7 million, respectively.

4. Derivative Financial Instruments

The Company uses derivative financial instruments primarily to manage interest rate risk and foreign currency exchange risk. Derivative instruments used as part of the Company's risk management strategy are further described in note 6 of the notes to consolidated financial statements included in the 2013 Annual Report. A tabular presentation of such derivatives outstanding as of June 30, 2014 and December 31, 2013 is presented below.

Basis Swaps

The following table summarizes the Company’s basis swaps outstanding as of June 30, 2014 and December 31, 2013 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").



Maturity		Notional amount
2021		$	250,000
2022		1,900,000
2023		3,650,000
2024		250,000
2026		800,000
2028		100,000
2036		700,000
2039	(a)	150,000
2040	(b)	200,000
		$	8,000,000	(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, 2014 and December 31, 2013 was one-month LIBOR plus 3.5 basis points.

Interest Rate Swaps – Floor Income Hedges

The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income as of June 30, 2014 and December 31, 2013.



	As of June 30, 2014				As of December 31, 2013
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)
2014	$	1,250,000	0.67	%	$	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		1,250,000		0.86
	$	4,350,000	0.81	%	$	4,850,000	0.81	%


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

Interest Rate Swaps – Unsecured Debt Hedges

The Company had the following derivatives outstanding as of June 30, 2014 and December 31, 2013 that are used to effectively convert the variable interest rate on a portion of the Junior Subordinated Hybrid Securities ("Hybrid Securities") to a fixed rate.



Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2036	$	25,000	4.28	%


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

Foreign Currency Exchange Risk

In 2006, the Company issued €352.7 million of student loan asset-backed Euro Notes (the "Euro Notes") with an interest rate based on a spread to the EURIBOR index. As a result of the Euro Notes, 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.

The Company entered into a cross-currency interest rate swap in connection with the issuance of the Euro Notes. Under the terms of the cross-currency interest rate swap, the Company receives from the counterparty a spread to the EURIBOR index based on a notional amount of €352.7 million and pays a spread to the LIBOR index based on a notional amount of $450.0 million. In addition, under the terms of this agreement, 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 instrument.



	Three months ended June 30,					Six months ended June 30,
	2014			2013 (b)		2014		2013 (b)
Re-measurement of Euro Notes	$	2,751		(14,691	)	1,798		14,072
Change in fair value of cross-currency interest rate swaps	(2,999		)	14,748		(3,037	)	(20,096	)
Total impact to consolidated statements of income - income (expense) (a)	$	(248	)	57		(1,239	)	(6,024	)


(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.

(b)

The 2013 operating results include the re-measurement of an additional €420.5 million of student loan asset-backed Euro notes and the change in fair value of a related cross-currency interest rate swap entered into in connection with the issuance of such notes. In November 2013, the principal amount outstanding on the notes was changed to U.S. dollars and the cross-currency interest swap was terminated.

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

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 sheets:



	Fair value of asset derivatives			Fair value of liability derivatives
	As of		As of	As of	As of
	June 30, 2014		December 31, 2013	June 30, 2014	December 31, 2013
1:3 basis swaps	$	31,510	18,490	—	—
Interest rate swaps - floor income hedges	2,726		7,183	10,849	15,849
Interest rate swaps - hybrid debt hedges	—		—	4,697	2,120
Cross-currency interest rate swap	33,797		36,834	—	—
Total	$	68,033	62,507	15,546	17,969

During the six months ended June 30, 2013, the Company terminated certain derivatives for gross proceeds and payments of $2.7 million and $6.5 million, respectively. There were no derivative terminations during the first six months of 2014.

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 related to the Company's derivative portfolio recognized in the consolidated balance sheets, 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 sheets
Derivative assets	Gross amounts of recognized assets presented in the consolidated balance sheets		Derivatives subject to enforceable master netting arrangement		Cash collateral received		Net asset (liability)
Balance as of June 30, 2014	$	68,033	(15,546	)	(323	)	52,164
Balance as of December 31, 2013	62,507		(15,437	)	(15,959	)	31,111



				Gross amounts not offset in the consolidated balance sheets
Derivative liabilities	Gross amounts of recognized liabilities presented in the consolidated balance sheets			Derivatives subject to enforceable master netting arrangement	Cash collateral pledged	Net asset (liability)
Balance as of June 30, 2014	$	(15,546	)	15,546	—	—
Balance as of December 31, 2013	(17,969		)	15,437	3,630	1,098

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

Three months ended June 30,