XNYS:NNI Nelnet Inc Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:NNI (Nelnet Inc Class A): Fair Value Estimate
Premium
XNYS:NNI (Nelnet Inc Class A): Consider Buying
Premium
XNYS:NNI (Nelnet Inc Class A): Consider Selling
Premium
XNYS:NNI (Nelnet Inc Class A): Fair Value Uncertainty
Premium
XNYS:NNI (Nelnet Inc Class A): Economic Moat
Premium
XNYS:NNI (Nelnet Inc Class A): Stewardship
Premium
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  to .

 
COMMISSION FILE NUMBER 001-31924

NELNET, INC.
 
(Exact name of registrant as specified in its charter)
NEBRASKA
(State or other jurisdiction of incorporation or organization)
84-0748903
(I.R.S. Employer Identification No.)
121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
(Address of principal executive offices)
 
68508
(Zip Code)
 (402) 458-2370
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[  ] No[X]

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




NELNET, INC.
FORM 10-Q
INDEX
June 30, 2012








PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
 
As of
 
As of
 
June 30, 2012
 
December 31, 2011
 
(unaudited)
 
 
Assets:
 
 
 
Student loans receivable (net of allowance for loan losses of $49,657 and $48,482, respectively)
$
23,501,382

 
24,297,876

Cash and cash equivalents:
 

 
 

Cash and cash equivalents - not held at a related party
9,845

 
7,299

Cash and cash equivalents - held at a related party
46,410

 
35,271

Total cash and cash equivalents
56,255

 
42,570

Investments
74,055

 
50,780

Restricted cash and investments
912,955

 
614,322

Restricted cash - due to customers
63,753

 
109,809

Accrued interest receivable
286,133

 
308,401

Accounts receivable (net of allowance for doubtful accounts of $1,438 and $1,284, respectively)
67,001

 
63,654

Goodwill
117,118

 
117,118

Intangible assets, net
19,006

 
28,374

Property and equipment, net
33,105

 
34,819

Other assets
89,714

 
92,275

Fair value of derivative instruments
48,665

 
92,219

Total assets
$
25,269,142

 
25,852,217

Liabilities:
 

 
 

Bonds and notes payable
$
23,836,250

 
24,434,540

Accrued interest payable
18,187

 
19,634

Other liabilities
143,845

 
178,189

Due to customers
63,753

 
109,809

Fair value of derivative instruments
62,209

 
43,840

Total liabilities
24,124,244

 
24,786,012

Equity:
 
 
 
  Nelnet, Inc. shareholders' equity:
 

 
 

Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding

 

Common stock:
 
 
 
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 35,847,801 shares and 35,643,102 shares, respectively
358

 
356

Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,495,377 shares
115

 
115

Additional paid-in capital
52,194

 
49,245

Retained earnings
1,092,715

 
1,017,629

Accumulated other comprehensive loss
(409
)
 

Employee notes receivable
(368
)
 
(1,140
)
Total Nelnet, Inc. shareholders' equity
1,144,605

 
1,066,205

Noncontrolling interest
293

 

Total equity
1,144,898

 
1,066,205

Commitments and contingencies
 
 
 
Total liabilities and equity
$
25,269,142

 
25,852,217


See accompanying notes to consolidated financial statements.

2



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(unaudited)
 
Three months
 
Six months
 
ended June 30,
 
ended June 30,
 
2012
 
2011
 
2012
 
2011
Interest income:
 
 
 
 
 
 
 
Loan interest
$
150,988

 
138,934

 
304,046

 
276,292

Investment interest
1,055

 
856

 
2,150

 
1,582

Total interest income
152,043

 
139,790

 
306,196

 
277,874

Interest expense:
 

 
 

 
 

 
 

Interest on bonds and notes payable
67,476

 
51,054

 
136,773

 
103,361

Net interest income
84,567

 
88,736

 
169,423

 
174,513

Less provision for loan losses
7,000

 
5,250

 
13,000

 
9,000

Net interest income after provision for loan losses
77,567

 
83,486

 
156,423

 
165,513

Other income (expense):
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
52,391

 
41,735

 
101,879

 
82,148

Tuition payment processing and campus commerce revenue
16,834

 
14,761

 
38,747

 
34,130

Enrollment services revenue
29,710

 
32,315

 
61,374

 
66,183

Other income
8,800

 
6,826

 
19,754

 
13,318

Gain on sale of loans and debt repurchases
935

 

 
935

 
8,307

Derivative market value and foreign currency adjustments and derivative settlements, net
(21,618
)
 
(20,335
)
 
(36,798
)
 
(23,371
)
Total other income
87,052

 
75,302

 
185,891

 
180,715

Operating expenses:
 

 
 

 
 

 
 

Salaries and benefits
48,703

 
42,881

 
97,798

 
86,793

Cost to provide enrollment services
20,374

 
22,140

 
42,052

 
44,979

Depreciation and amortization
8,226

 
6,769

 
16,362

 
13,545

Other
30,908

 
28,767

 
63,171

 
54,872

Total operating expenses
108,211

 
100,557

 
219,383

 
200,189

Income before income taxes
56,408

 
58,231

 
122,931

 
146,039

Income tax expense
(14,878
)
 
(21,106
)
 
(38,108
)
 
(54,034
)
Net income
41,530

 
37,125

 
84,823

 
92,005

Net income attributable to noncontrolling interest
136

 

 
288

 

Net income attributable to Nelnet, Inc.
$
41,394

 
37,125

 
84,535

 
92,005

Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic
$
0.87

 
0.76

 
1.78

 
1.90

Net income attributable to Nelnet, Inc. shareholders - diluted
$
0.87

 
0.76

 
1.78

 
1.89

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
47,049,055

 
48,302,779

 
47,020,811

 
48,237,411

Diluted
47,292,147

 
48,488,046

 
47,240,659

 
48,425,886


 See accompanying notes to consolidated financial statements.

3



NELNET, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
 
Three months
 
Six months
 
ended June 30,
 
ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
41,530

 
37,125

 
84,823

 
92,005

Other comprehensive income (loss):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period, net
(586
)
 

 
1,596

 

Less reclassification adjustment for (gains) losses recognized in net income, net
(966
)
 

 
(2,214
)
 

Income tax effect
538

 

 
209

 

Total other comprehensive income (loss)
(1,014
)
 

 
(409
)
 

Comprehensive income
40,516

 
37,125

 
84,414

 
92,005

Comprehensive income attributable to noncontrolling interest
136

 

 
288

 

Comprehensive income attributable to Nelnet, Inc.
$
40,380

 
37,125

 
84,126

 
92,005


See accompanying notes to consolidated financial statements.


4




NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
(unaudited)
 
Nelnet, Inc. Shareholders
 
 
 
 
 
Preferred stock shares
 
Common stock shares
 
Preferred stock
 
Class A common stock
 
Class B common stock
 
Additional paid-in capital
 
 Retained earnings
 
Accumulated other comprehensive loss
 
Employee notes receivable
 
Noncontrolling interest
 
Total equity
 
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2011

 
36,983,557

 
11,495,377

 
$

 
370

 
115

 
73,502

 
882,550

 

 
(1,170
)
 

 
955,367

Net income

 

 

 

 

 

 

 
37,125

 

 

 

 
37,125

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

 

 

 

 

 

 

 
(4,852
)
 

 

 

 
(4,852
)
Issuance of common stock, net of forfeitures

 
70,794

 

 

 
1

 

 
1,027

 

 

 

 

 
1,028

Compensation expense for stock based awards

 

 

 

 

 

 
342

 

 

 

 

 
342

Repurchase of common stock

 
(9,979
)
 

 

 
(1
)
 

 
(225
)
 

 

 

 

 
(226
)
Balance as of June 30, 2011

 
37,044,372

 
11,495,377

 
$

 
370

 
115

 
74,646

 
914,823

 

 
(1,170
)
 

 
988,784

Balance as of March 31, 2012

 
35,821,057

 
11,495,377

 
$

 
358

 
115

 
50,948

 
1,056,058

 
605

 
(368
)
 
157

 
1,107,873

Net income

 

 

 

 

 

 

 
41,394

 

 

 
136

 
41,530

Other comprehensive loss

 

 

 

 

 

 

 

 
(1,014
)
 

 

 
(1,014
)
Cash dividend on Class A and Class B common stock - $0.10 per share

 

 

 

 

 

 

 
(4,737
)
 

 

 

 
(4,737
)
Issuance of common stock, net of forfeitures

 
35,134

 

 

 
1

 

 
851

 

 

 

 

 
852

Compensation expense for stock based awards

 

 

 

 

 

 
593

 

 

 

 

 
593

Repurchase of common stock

 
(8,390
)
 

 

 
(1
)
 

 
(198
)
 

 

 

 

 
(199
)
Balance as of June 30, 2012

 
35,847,801

 
11,495,377

 
$

 
358

 
115

 
52,194

 
1,092,715

 
(409
)
 
(368
)
 
293

 
1,144,898

Balance as of December 31, 2010

 
36,846,353

 
11,495,377

 
$

 
368

 
115

 
76,263

 
831,057

 

 
(1,170
)
 

 
906,633

Net income

 

 

 

 

 

 

 
92,005

 

 

 

 
92,005

Cash dividend on Class A and Class B common stock - $0.17 per share

 

 

 

 

 

 

 
(8,239
)
 

 

 

 
(8,239
)
Contingency payment related to business combination

 

 

 

 

 

 
(5,893
)
 

 

 

 

 
(5,893
)
Issuance of common stock, net of forfeitures

 
222,463

 

 

 
3

 

 
4,113

 

 

 

 

 
4,116

Compensation expense for stock based awards

 

 

 

 

 

 
697

 

 

 

 

 
697

Repurchase of common stock

 
(24,444
)
 

 

 
(1
)
 

 
(534
)
 

 

 

 

 
(535
)
Balance as of June 30, 2011

 
37,044,372

 
11,495,377

 
$

 
370

 
115

 
74,646

 
914,823

 

 
(1,170
)
 

 
988,784

Balance as of December 31, 2011

 
35,643,102

 
11,495,377

 
$

 
356

 
115

 
49,245

 
1,017,629

 

 
(1,140
)
 

 
1,066,205

Issuance of minority membership interest

 

 

 

 

 

 

 

 

 

 
5

 
5

Net income

 

 

 

 

 

 

 
84,535

 

 

 
288

 
84,823

Other comprehensive loss

 

 

 

 

 

 

 

 
(409
)
 

 

 
(409
)
Cash dividend on Class A and Class B common stock - $0.20 per share

 

 

 

 

 

 

 
(9,449
)
 

 

 

 
(9,449
)
Issuance of common stock, net of forfeitures

 
255,718

 

 

 
3

 

 
3,275

 

 

 

 

 
3,278

Compensation expense for stock based awards

 

 

 

 

 

 
988

 

 

 

 

 
988

Repurchase of common stock

 
(51,019
)
 

 

 
(1
)
 

 
(1,314
)
 

 

 

 

 
(1,315
)
Reduction of employee stock notes receivable

 

 

 

 

 

 

 

 

 
772

 

 
772

Balance as of June 30, 2012

 
35,847,801

 
11,495,377

 
$

 
358

 
115

 
52,194

 
1,092,715

 
(409
)
 
(368
)
 
293

 
1,144,898


 See accompanying notes to consolidated financial statements.

5



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 
Six months ended June 30,
 
2012
 
2011
Net income attributable to Nelnet, Inc.
$
84,535

 
92,005

Net income attributable to noncontrolling interest
288

 

Net income
84,823

 
92,005

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

 
 

Depreciation and amortization, including loan and debt premiums/discounts and deferred origination costs
35,524

 
35,841

Provision for loan losses
13,000

 
9,000

Derivative market value adjustment
61,923

 
(68,658
)
Foreign currency transaction adjustment
(26,984
)
 
84,354

Proceeds to terminate and/or amend derivative instruments, net

 
11,847

Gain on sale of loans
(33
)
 
(1,345
)
Gain from debt repurchases
(902
)
 
(6,962
)
Change in investments - trading securities, net
(229
)
 
11,572

Deferred income tax benefit
(20,483
)
 
(8,715
)
Non-cash compensation expense
1,412

 
1,092

Other non-cash items
(1,302
)
 
108

Decrease in accrued interest receivable
22,268

 
15,671

(Increase) decrease in accounts receivable
(3,347
)
 
1,498

Decrease in other assets
2,264

 
3,258

Decrease in accrued interest payable
(1,447
)
 
(2,060
)
Decrease in other liabilities
(5,220
)
 
(10,290
)
Net cash provided by operating activities
161,267

 
168,216

Cash flows from investing activities:
 

 
 

Purchases of student loans
(729,485
)
 
(662,324
)
Purchases of student loans from a related party
(290
)
 
(29
)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
1,449,610

 
1,350,344

Proceeds from sale of student loans
59,965

 
95,131

Purchases of available-for-sale securities
(53,662
)
 

Proceeds from sales of available-for-sale securities
28,216

 

Purchases of property and equipment, net
(4,405
)
 
(8,281
)
(Increase) decrease in restricted cash and investments, net
(298,633
)
 
58,027

Business and asset acquisition contingency payments

 
(14,080
)
Net cash provided by investing activities
451,316

 
818,788

Cash flows from financing activities:
 

 
 

Payments on bonds and notes payable
(1,520,127
)
 
(1,782,953
)
Proceeds from issuance of bonds and notes payable
936,560

 
745,554

Payments on bonds payable due to a related party

 
(107,050
)
Payments of debt issuance costs
(5,593
)
 
(1,506
)
Dividends paid
(9,449
)
 
(8,239
)
Repurchases of common stock
(1,315
)
 
(535
)
Proceeds from issuance of common stock
249

 
265

Payments received on employee stock notes receivable
772

 

Issuance of minority membership interest
5

 

Net cash used in financing activities
(598,898
)
 
(1,154,464
)
Net increase (decrease) in cash and cash equivalents
13,685

 
(167,460
)
Cash and cash equivalents, beginning of period
42,570

 
283,801

Cash and cash equivalents, end of period
$
56,255

 
116,341

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
120,823

 
101,007

Income taxes paid, net of refunds
$
57,113

 
63,331


See accompanying notes to consolidated financial statements.

6



NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

1.    Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2012 and for the three and six month periods ended June 30, 2012 and 2011 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2011 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Noncontrolling Interest

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

Student loans receivable consisted of the following:
 
As of
 
As of
 
June 30, 2012
 
December 31, 2011
Federally insured loans
$
23,551,124

 
24,332,709

Non-federally insured loans
31,471

 
26,916

 
23,582,595

 
24,359,625

Unamortized loan premiums (discounts) and deferred origination costs, net
(31,556
)
 
(13,267
)
Allowance for loan losses – federally insured loans
(36,992
)
 
(37,205
)
Allowance for loan losses – non-federally insured loans
(12,665
)
 
(11,277
)
 
$
23,501,382

 
24,297,876

Allowance for federally insured loans as a percentage of such loans
0.16
%
 
0.15
%
Allowance for non-federally insured loans as a percentage of such loans
40.24
%
 
41.90
%
 

7



Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Balance at beginning of period
$
48,435

 
41,097

 
48,482

 
43,626

Provision for loan losses:
 

 
 

 
 

 
 

Federally insured loans
7,000

 
5,000

 
13,000

 
8,500

Non-federally insured loans

 
250

 

 
500

Total provision for loan losses
7,000

 
5,250

 
13,000

 
9,000

Charge-offs:
 

 
 

 
 

 
 

Federally insured loans
(5,999
)
 
(4,585
)
 
(11,494
)
 
(9,440
)
Non-federally insured loans
(528
)
 
(1,226
)
 
(1,297
)
 
(2,220
)
Total charge-offs
(6,527
)
 
(5,811
)
 
(12,791
)
 
(11,660
)
Recoveries - non-federally insured loans
354

 
283

 
705

 
653

Purchase (sale) of loans, net:
 
 
 
 
 
 
 
Federally insured loans
(792
)
 

 
(1,719
)
 

Non-federally insured loans

 

 

 

Total purchase (sale) of loans, net
(792
)
 

 
(1,719
)
 

Transfer (to) from repurchase obligation related to loans (sold) purchased, net
1,187

 
1,481

 
1,980

 
681

Balance at end of period
$
49,657

 
42,300

 
49,657

 
42,300

Allocation of the allowance for loan losses:
 
 
 

 
 

 
 

Federally insured loans
$
36,992

 
31,968

 
36,992

 
31,968

Non-federally insured loans
12,665

 
10,332

 
12,665

 
10,332

Total allowance for loan losses
$
49,657

 
42,300

 
49,657

 
42,300


Repurchase Obligations

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

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

The Company’s estimate related to its obligation to repurchase these loans is included in “other liabilities” in the Company’s consolidated balance sheets. The activity related to this accrual is detailed below.
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Beginning balance
$
18,430

 
19,670

 
19,223

 
12,600

Transfer (to) from the allowance for loan losses related to loans (purchased) sold, net
(1,187
)
 
(1,481
)
 
(1,980
)
 
(681
)
Repurchase obligation associated with loans sold on January 13, 2011

 

 

 
6,270

Current period expense

 
2,500

 

 
2,500

Ending balance
$
17,243

 
20,689

 
17,243

 
20,689


8



Student Loan Status and Delinquencies

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.  The table below shows the Company’s student loan delinquencies.
 
As of June 30, 2012
 
As of December 31, 2011
 
As of June 30, 2011
Federally Insured Loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment (a)
$
3,379,586

 
 
 
$
3,664,899

 
 
 
$
4,061,955

 
 
Loans in forbearance (b)
3,223,004

 
 
 
3,330,452

 
 
 
3,263,802

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
14,647,003

 
86.5
%
 
14,600,372

 
84.2
%
 
13,748,083

 
87.2
%
Loans delinquent 31-60 days (c)
667,766

 
3.9

 
844,204

 
4.9

 
583,443

 
3.7

Loans delinquent 61-90 days (c)
409,288

 
2.4

 
407,094

 
2.3

 
358,539

 
2.3

Loans delinquent 91-270 days (c)
918,587

 
5.4

 
1,163,437

 
6.7

 
854,095

 
5.4

Loans delinquent 271 days or greater (c)(d)
305,890

 
1.8

 
322,251

 
1.9

 
213,240

 
1.4

Total loans in repayment
16,948,534

 
100.0
%
 
17,337,358

 
100.0
%
 
15,757,400

 
100.0
%
Total federally insured loans
$
23,551,124

 
 

 
$
24,332,709

 
 

 
$
23,083,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Federally Insured Loans:
 

 
 

 
 

 
 

 
 
 
 
Loans in-school/grace/deferment (a)
$
2,795

 
 

 
$
2,058

 
 

 
$
3,749

 
 
Loans in forbearance (b)
451

 
 

 
371

 
 

 
510

 
 
Loans in repayment status:
 
 
 

 
 
 
 

 
 
 
 
Loans current
21,094

 
74.8
%
 
16,776

 
68.5
%
 
22,221

 
84.2
%
Loans delinquent 31-60 days (c)
690

 
2.4

 
706

 
2.9

 
624

 
2.4

Loans delinquent 61-90 days (c)
1,546

 
5.5

 
1,987

 
8.1

 
587

 
2.2

Loans delinquent 91 days or greater (c)
4,895

 
17.3

 
5,018

 
20.5

 
2,964

 
11.2

Total loans in repayment
28,225

 
100.0
%
 
24,487

 
100.0
%
 
26,396

 
100.0
%
Total non-federally insured loans
$
31,471

 
 

 
$
26,916

 
 

 
$
30,655

 
 
 
(a)
Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation for law students.

(b)
Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the servicer consistent with the established loan program servicing procedures and policies.

(c)
The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is, receivables not charged off, and not in school, grace, deferment, or forbearance.

(d)
A portion of loans included in loans delinquent 271 days or greater includes federally insured loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency.



9



3.    Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
As of June 30, 2012
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes (a):
 
 
 
 
 
Bonds and notes based on indices
$
19,852,956

 
0.48% - 6.90%
 
11/25/15 - 7/27/48
Bonds and notes based on auction or remarketing
970,075

 
0.17% - 2.10%
 
5/1/28 - 5/25/42
Total variable-rate bonds and notes
20,823,031

 
 
 
 
FFELP warehouse facilities
829,449

 
0.22% - 0.35%
 
1/31/15 - 6/30/15
Department of Education Conduit
2,140,492

 
0.79%
 
5/8/14
Secured line of credit
50,000

 
1.75%
 
4/11/14
Unsecured line of credit
10,000

 
1.75%
 
2/17/16
Unsecured debt - Junior Subordinated Hybrid Securities
100,697

 
3.84%
 
9/15/61
Other borrowings
33,653

 
3.72% - 5.72%
 
11/14/12 - 3/1/22
 
23,987,322

 
 
 
 
Discount on bonds and notes payable
(151,072
)
 
 
 
 
Total
$
23,836,250

 
 
 
 
 
As of December 31, 2011
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes (a):
 
 
 
 
 
Bonds and notes based on indices
$
20,252,403

 
0.42% - 6.90%
 
11/25/15 - 7/27/48
Bonds and notes based on auction or remarketing
970,575

 
0.11% - 2.19%
 
5/1/28 - 5/25/42
Total variable-rate bonds and notes
21,222,978

 
 
 
 
FFELP warehouse facilities
824,410

 
0.26% - 0.70%
 
7/1/14
Department of Education Conduit
2,339,575

 
0.74%
 
5/8/14
Unsecured line of credit
64,390

 
0.69%
 
5/8/12
Unsecured debt - Junior Subordinated Hybrid Securities
100,697

 
3.95%
 
9/15/61
Other borrowings
43,119

 
3.78% - 5.72%
 
11/14/12 - 3/1/22
 
24,595,169

 
 
 
 
Discount on bonds and notes payable
(160,629
)
 
 
 
 
Total
$
24,434,540

 
 
 
 
(a)
Issued in asset-backed securitizations

Secured Financing Transactions

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

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


10



FFELP warehouse facilities

The Company funds a portion of its Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements.

As of June 30, 2012, the Company has three FFELP warehouse facilities as summarized below.
 
NHELP-II (a)
 
NHELP-I (b)
 
NFSLW-I (c)
 
Total
Maximum financing amount
$
250,000

 
500,000

 
500,000

 
1,250,000

Amount outstanding
160,149

 
331,412

 
337,888

 
829,449

Amount available
$
89,851

 
168,588

 
162,112

 
420,551

Expiration of liquidity provisions
January 31, 2013

 
October 2, 2013

 
June 28, 2013

 
 
Final maturity date
January 31, 2015

 
April 2, 2015

 
June 30, 2015

 
 
Maximum advance rates
90.5 - 93.5%

 
93 - 95%

 
90 - 95%

 
 
Minimum advance rates
90.5 - 93.5%

 
80 - 95%

 
84.5 - 90%

 
 
Advanced as equity support
$
15,150

 
19,505

 
26,723

 
61,378


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

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

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

Each FFELP warehouse facility is supported by 364-day liquidity provisions, which are subject to the respective expiration date shown in the table above. In the event the Company is unable to renew the liquidity provisions by such date, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's final maturity date. The warehouse facilities provide for formula-based advance rates, depending on FFELP loan type, up to a maximum of the principal and interest of loans financed as shown in the table above. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to minimums as disclosed above.

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

Asset-backed securitizations

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

Secured line of credit

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


11



Unsecured Line of Credit

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

The new line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the agreement.  The covenants include maintaining:

A minimum consolidated net worth
A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters)
A limitation on subsidiary indebtedness
A limitation on the percentage of non-federally insured loans in the Company’s portfolio
As of June 30, 2012, the Company was in compliance with all of these requirements. Many of these covenants are duplicated in the Company’s other lending facilities, including its FFELP warehouse facilities.

The Company’s new operating line of credit does not have any covenants related to unsecured debt ratings.  However, changes in the Company’s ratings (as well as the amounts the Company borrows) have modest implications on the pricing level at which the Company obtains funding.

A default on the Company’s FFELP warehouse facilities would result in an event of default on the Company’s unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable.
  
4. Gain on Sale of Loans and Debt Repurchases

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

5.   Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and foreign currency exchange risk.

Interest Rate Risk

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

Basis Swaps

Prior to April 1, 2012, the interest earned on the majority of the Company's FFELP student loan assets were indexed to the three-month commercial paper index.  As allowed by recent legislation, effective April 1, 2012, the Company elected to change the index on which the Special Allowance Payments ("SAP") are calculated for the majority of the Company's' FFELP loans from the commercial paper rate to the one-month LIBOR rate.  Meanwhile, the Company funds the majority of its assets with three-month LIBOR indexed floating rate securities.  The different interest rate characteristics of the Company's loan assets and liabilities funding these assets results in basis risk.

12



The Company also faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the interest rate resets on its assets, which generally occur daily. In a declining interest rate environment, this may cause the Company’s student loan spread to compress, while in a rising rate environment, it may cause the spread to increase.

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

The Company has used derivative instruments to hedge its basis risk and repricing risk.  The Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the 1:3 Basis Swaps).

The following table summarizes the Company’s 1:3 Basis Swaps outstanding as of both June 30, 2012 and December 31, 2011:
 
 
Maturity
 
Notional amount
 
 
2021
 
 
$
250,000

 
 
2023
 
 
1,250,000

 
 
2024
 
 
250,000

 
 
2026
 
 
800,000

 
 
2028
 
 
100,000

 
 
2036
 
 
700,000

 
 
2039
(a)
 
150,000

 
 
2040
(b)
 
200,000

 
 
 
 
 
$
3,700,000

(c)

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

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

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

Interest rate swaps – floor income hedges

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

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

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




13



As of June 30, 2012 and December 31, 2011, the Company had $8.9 billion and $10.9 billion, respectively, of student loan assets that were earning fixed rate floor income of which the weighted average estimated variable conversion rate for these loans, which is the estimated short-term interest rate at which loans would convert to a variable rate, was 2.09% and 1.79%, respectively. The following tables summarize the outstanding derivative instruments used by the Company to economically hedge these loans.
As of June 30, 2012
 
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
 
 
2013
 
 
$
2,150,000

 
0.85
%
 
2014
 
 
750,000

 
0.85

 
2015
(b)
 
1,100,000

 
0.89

 
2016
 
 
750,000

 
0.85

 
2017
 
 
750,000

 
0.99

 
2020
 
 
50,000

 
3.23

 
 
 
 
$
5,550,000

 
0.90
%
As of December 31, 2011
 
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
 
 
 
 
2013
 
$
2,150,000

 
0.85
%
 
2014
 
750,000

 
0.85

 
2015
 
100,000

 
2.26

 
2020
 
50,000

 
3.23

 
 
 
$
3,050,000

 
0.93
%

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

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

Interest rate swaps – unsecured debt hedges

The Company has $100.7 million of unsecured Junior Subordinated Hybrid Securities debt outstanding. The interest rate on the Hybrid Securities through September 29, 2036 is equal to three-month LIBOR plus 3.375%, payable quarterly. The Company had the following derivatives outstanding that are used to effectively convert the variable interest rate on the Hybrid Securities to a fixed rate.
As of June 30, 2012
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
2036
 
$
75,000

 
4.28
%
2042
 
25,000

 
2.42

 
 
$
100,000

 
3.82
%
 
As of December 31, 2011
Maturity
 
Notional amount
 
Weighted average fixed rate paid by the Company (a)
2036
 
$
75,000

 
4.28
%

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


14



Foreign Currency Exchange Risk

During 2006, the Company completed separate debt offerings of student loan asset-backed securities that included €420.5 million and €352.7 million Euro Notes with interest rates based on a spread to the EURIBOR index. As a result of these transactions, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes are re-measured at each reporting period and recorded on the Company’s balance sheet in U.S. dollars based on the foreign currency exchange rate on that date. Changes in the principal and accrued interest amounts as a result of foreign currency exchange rate fluctuations are included in the Company’s consolidated statements of income.

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

The following table shows the income statement impact as a result of the re-measurement of the Euro Notes and the change in the fair value of the related derivative instruments. These items are included in the Company's consolidated statements of income.
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Re-measurement of Euro Notes
$
59,226

 
(19,020
)
 
26,984

 
(84,355
)
Change in fair value of cross currency interest rate swaps
(62,546
)
 
18,734

 
(49,520
)
 
81,266

Total impact to statements of income - income (expense) (a)
$
(3,320
)
 
(286
)
 
(22,536
)
 
(3,089
)

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

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

Accounting for Derivative Financial Instruments

The Company records derivative instruments on the consolidated balance sheets as either an asset or liability measured at its fair value. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting.  As a result, the change in fair value of the Company’s derivatives at each reporting date are included in the Company’s consolidated statements of income. Changes or shifts in the forward yield curve and fluctuations in currency rates can significantly impact the valuation of the Company’s derivatives. Accordingly, changes or shifts to the forward yield curve and fluctuations in currency rates will impact the financial position and results of operations of the Company.

Any proceeds received or payments made by the Company to terminate a derivative in advance of its expiration date, or to amend the terms of an existing derivative, are included in the Company's consolidated statements of income and are accounted for as a change in fair value of such derivative.
 
The following table summarizes the fair value of the Company’s derivatives:
 
Fair value of asset derivatives
 
Fair value of liability derivatives
 
As of
 
As of
 
As of
 
As of
 
June 30, 2012
 
December 31, 2011
 
June 30, 2012
 
December 31, 2011
1:3 basis swaps
$
13,595

 
10,988

 
674

 
641

Interest rate swaps - floor income hedges

 
592

 
29,571

 
18,384

Interest rate swaps - hybrid debt hedges
377

 

 
27,777

 
24,814

Cross-currency interest rate swaps
33,616

 
80,631

 
2,505

 

Other
1,077

 
8

 
1,682

 
1

Total
$
48,665

 
92,219

 
62,209

 
43,840


15



The following table summarizes the effect of derivative instruments in the consolidated statements of income.
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Settlements:
 

 
 

 
 

 
 

1:3 basis swaps
$
1,169

 
373

 
2,551

 
581

T-Bill/LIBOR basis swaps

 
(64
)
 

 
(194
)
Interest rate swaps - floor income hedges
(3,505
)
 
(6,345
)
 
(6,642
)
 
(12,563
)
Interest rate swaps - hybrid debt hedges
(723
)
 
(248
)
 
(746
)
 
(494
)
Cross-currency interest rate swaps
1,055

 
2,770

 
3,163

 
4,880

Other
(82
)
 
(8
)
 
(185
)
 
116

Total settlements - income (expense)
(2,086
)
 
(3,522
)
 
(1,859
)
 
(7,674
)
Change in fair value:
 

 
 

 
 

 
 

1:3 basis swaps
(428
)
 
(1,228
)
 
2,574

 
(5,438
)
T-Bill/LIBOR basis swaps

 
92

 

 
121

Interest rate swaps - floor income hedges
(6,143
)
 
(11,109
)
 
(11,778
)
 
(4,714
)
Interest rate swaps - hybrid debt hedges
(8,783
)
 
(3,897
)
 
(2,585
)
 
(2,449
)
Cross-currency interest rate swaps
(62,546
)
 
18,734

 
(49,520
)
 
81,266

Other
(858
)
 
(385
)
 
(614
)
 
(128
)
Total change in fair value - income (expense)
(78,758
)
 
2,207

 
(61,923
)
 
68,658

Re-measurement of Euro Notes (foreign currency transaction adjustment) - income (expense)
59,226

 
(19,020
)
 
26,984

 
(84,355
)
Derivative market value and foreign currency adjustments and derivative settlements, net - income (expense)
$
(21,618
)
</