NELNET INC, 10-Q filed on 5/10/2012
Quarterly Report
Document And Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 30, 2012
Common Class B [Member]
Apr. 30, 2012
Common Class A [Member]
Entity Registrant Name
NELNET INC 
 
 
Document Type
10-Q 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Common Stock, Shares Outstanding
 
11,495,377 
35,818,110 
Amendment Flag
false 
 
 
Entity Central Index Key
0001258602 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Document Period End Date
Mar. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
Q1 
 
 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Assets:
 
 
Student loans receivable (net of allowance for loan losses of $48,435 and $48,482, respectively)
$ 23,836,832 
$ 24,297,876 
Cash and cash equivalents:
 
 
Cash and cash equivalents - not held at a related party
6,693 
7,299 
Cash and cash equivalents - held at a related party
54,007 
35,271 
Total cash and cash equivalents
60,700 
42,570 
Investments
70,552 
50,780 
Restricted cash and investments
705,953 
614,322 
Restricted cash - due to customers
38,642 
109,809 
Accrued interest receivable
296,378 
308,401 
Accounts receivable (net of allowance for doubtful accounts of $1,359 and $1,284, respectively)
64,215 
63,654 
Goodwill
117,118 
117,118 
Intangible assets, net
23,682 
28,374 
Property and equipment, net
34,119 
34,819 
Other assets
90,587 
92,275 
Fair value of derivative instruments
107,534 
92,219 
Total assets
25,446,312 
25,852,217 
Liabilities:
 
 
Bonds and notes payable
24,060,609 
24,434,540 
Accrued interest payable
19,281 
19,634 
Other liabilities
177,586 
178,189 
Due to customers
38,642 
109,809 
Fair value of derivative instruments
42,321 
43,840 
Total liabilities
24,338,439 
24,786,012 
Nelnet, Inc. shareholders' equity:
 
 
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding
Common stock: [Abstract]
 
 
Additional paid-in capital
50,948 
49,245 
Retained earnings
1,056,058 
1,017,629 
Accumulated other comprehensive income, net
605 
Employee notes receivable
(368)
(1,140)
Total Nelnet, Inc. shareholders' equity
1,107,716 
1,066,205 
Noncontrolling interest
157 
Total equity
1,107,873 
1,066,205 
Total liabilities and shareholders' equity
25,446,312 
25,852,217 
Common Class A [Member]
 
 
Common stock: [Abstract]
 
 
Common Stock
358 
356 
Common Class B [Member]
 
 
Common stock: [Abstract]
 
 
Common Stock
$ 115 
$ 115 
Consolidated Balance Sheet (Unaudited) (Parentheticals) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Allowance for loan losses (in Dollars)
$ 48,435 
$ 48,482 
Allowance for doubtful accounts (in Dollars)
$ 1,359 
$ 1,284 
Preferred stock, par value (in Dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, authorized shares
50,000,000.00 
50,000,000.00 
Preferred stock, issued shares
0.00 
0.00 
Preferred stock, outstanding shares
0.00 
0.00 
Common Class A [Member]
 
 
Par Value (in Dollars per share)
$ 0.01 
$ 0.01 
Shares Authorized
600,000,000 
600,000,000 
Shares Issued
35,821,057 
35,643,102 
Shares Outstanding
35,821,057 
35,643,102 
Common Class B [Member]
 
 
Par Value (in Dollars per share)
$ 0.01 
$ 0.01 
Shares Authorized
60,000,000 
60,000,000 
Shares Issued
11,495,377 
11,495,377 
Shares Outstanding
11,495,377 
11,495,377 
Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Interest income:
 
 
Loan interest
$ 153,058 
$ 137,358 
Investment interest
1,095 
726 
Total interest income
154,153 
138,084 
Interest expense:
 
 
Interest on bonds and notes payable
69,297 
52,307 
Net interest income
84,856 
85,777 
Less provision for loan losses
6,000 
3,750 
Net interest income after provision for loan losses
78,856 
82,027 
Other income (expense):
 
 
Loan and guaranty servicing revenue
49,488 
40,413 
Tuition payment processing and campus commerce revenue
21,913 
19,369 
Enrollment services revenue
31,664 
33,868 
Other income
10,954 
6,492 
Gain on sale of loans and debt repurchases
8,307 
Derivative market value and foreign currency adjustments and derivative settlements, net
(15,180)
(3,036)
Total other income
98,839 
105,413 
Operating expenses:
 
 
Salaries and benefits
49,095 
43,912 
Cost to provide enrollment services
21,678 
22,839 
Depreciation and amortization
8,136 
6,776 
Other
32,263 
26,105 
Total operating expenses
111,172 
99,632 
Income before income taxes
66,523 
87,808 
Income tax expense
(23,230)
(32,928)
Net income
43,293 
54,880 
Net income attributable to noncontrolling interest
152 
Net income attributable to Nelnet, Inc.
$ 43,141 
$ 54,880 
Earnings per common share:
 
 
Net income attributable to Nelnet, Inc. shareholders - basic
$ 0.91 
$ 1.13 
Net income attributable to Nelnet, Inc. shareholders - diluted
$ 0.91 
$ 1.13 
Weighted average common shares outstanding:
 
 
Basic
46,989,773 
48,171,317 
Diluted
47,184,079 
48,363,035 
Dividends paid per common share
$ 0.10 
$ 0.07 
Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Net income
$ 43,293 
$ 54,880 
Unrealized gains (losses) on securities:
 
 
Unrealized holding gains (losses) arising during period, net
934 
Income tax effect
(329)
Total other comprehensive income
605 
Comprehensive income
43,898 
54,880 
Comprehensive income attributable to noncontrolling interest
152 
Comprehensive income attributable to Nelnet, Inc.
$ 43,746 
$ 54,880 
Consolidated Statements of Shareholders' Equity (Unaudited) (USD $)
In Thousands, except Share data
Total
Preferred Stock [Member]
Common Class A [Member]
Common Class B [Member]
Additional paid-in capital [Member]
Retained earnings [Member]
Accumulated other comprehensive income, net [Member]
Employee notes receivable [Member]
Noncontrolling interest [Member]
Balance at Dec. 31, 2010
$ 906,633 
$ 0 
$ 368 
$ 115 
$ 76,263 
$ 831,057 
$ 0 
$ (1,170)
$ 0 
Balance (in Shares) at Dec. 31, 2010
 
36,846,353 
11,495,377 
 
 
 
 
 
Net income
54,880 
 
 
 
 
54,880 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Cash dividend on Class A and Class B common stock
(3,387)
 
 
 
 
(3,387)
 
 
 
Contingency payment related to business combination
(5,893)
 
 
 
(5,893)
 
 
 
 
Issuance of common stock, net of forfeitures
3,089 
 
3,087 
 
 
 
 
Issuance of common stock, net of forfeitures (in Shares)
 
 
151,669 
 
 
 
 
 
Compensation expense for stock based awards
355 
 
 
 
355 
 
 
 
 
Repurchase of common stock
(310)
 
(310)
 
 
 
 
Repurchase of common stock (in Shares)
 
 
(14,465)
 
 
 
 
 
Balance at Mar. 31, 2011
955,367 
370 
115 
73,502 
882,550 
(1,170)
Balance (in Shares) at Mar. 31, 2011
 
36,983,557 
11,495,377 
 
 
 
 
 
Balance at Dec. 31, 2011
1,066,205 
356 
115 
49,245 
1,017,629 
(1,140)
Balance (in Shares) at Dec. 31, 2011
 
35,643,102 
11,495,377 
 
 
 
 
 
Issuance of minority membership interest
 
 
 
 
 
 
 
Net income
43,293 
 
 
 
 
43,141 
 
 
152 
Other comprehensive income
605 
 
 
 
 
 
605 
 
 
Cash dividend on Class A and Class B common stock
(4,712)
 
 
 
 
(4,712)
 
 
 
Issuance of common stock, net of forfeitures
2,426 
 
2,424 
 
 
 
 
Issuance of common stock, net of forfeitures (in Shares)
 
 
220,584 
 
 
 
 
 
Compensation expense for stock based awards
395 
 
 
 
395 
 
 
 
 
Repurchase of common stock
(1,116)
 
(1,116)
 
 
 
 
Repurchase of common stock (in Shares)
 
 
(42,629)
 
 
 
 
 
Reduction of employee stock notes receivable
772 
 
 
 
 
 
 
772 
 
Balance at Mar. 31, 2012
$ 1,107,873 
$ 0 
$ 358 
$ 115 
$ 50,948 
$ 1,056,058 
$ 605 
$ (368)
$ 157 
Balance (in Shares) at Mar. 31, 2012
 
35,821,057 
11,495,377 
 
 
 
 
 
Consolidated Statements of Shareholders' Equity (Unaudited) (Parentheticals)
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Dividends paid per common share
$ 0.10 
$ 0.07 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Net income attributable to Nelnet, Inc.
$ 43,141 
$ 54,880 
Net income attributable to noncontrolling interest
152 
Net income
43,293 
54,880 
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
17,521 
18,964 
Provision for loan losses
6,000 
3,750 
Derivative market value adjustment
(16,835)
(66,450)
Foreign currency translation adjustment
32,242 
65,334 
Proceeds to terminate and/or amend derivative instruments
12,369 
Payments to terminate and/or amend derivative instruments
(141)
Gain on sale of loans
(1,345)
Gain from debt repurchases
(6,962)
Change in investments - trading securities, net
(752)
5,517 
Deferred income tax (benefit) expense
(7,190)
100 
Non-cash compensation expense
700 
557 
Other non-cash items
(697)
(189)
Decrease in accrued interest receivable
12,023 
9,668 
Increase in accounts receivable
(561)
(198)
Decrease in other assets
1,140 
1,016 
Decrease in accrued interest payable
(353)
(3,566)
Increase (decrease) in other liabilities
14,040 
(11,637)
Net cash provided by operating activities
100,571 
81,667 
Cash flows from investing activities
 
 
Originations and purchases of student loans
(176,212)
(235,599)
Purchases of student loans from a related party
(221)
(29)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
597,034 
630,606 
Proceeds from sale of student loans
32,592 
95,131 
Purchases of available-for-sale securities
(27,719)
Proceeds from sales of available-for-sale securities
6,843 
Purchases of property and equipment, net
(2,306)
(2,992)
Increase in restricted cash and investments, net
(91,631)
(127,472)
Business and asset acquisition contingency payments
(1,550)
(7,193)
Issuance of minority membership interest
Net cash provided by investing activities
336,835 
352,452 
Cash flows from financing activities:
 
 
Payments on bonds and notes payable
(692,408)
(1,090,797)
Proceeds from issuance of bonds and notes payable
279,667 
533,097 
Payments on bonds payable due to a related party
(107,050)
Payments of debt issuance costs
(1,595)
(1,460)
Dividends paid
(4,712)
(3,387)
Repurchases of common stock
(1,116)
(310)
Proceeds from issuance of common stock
116 
124 
Payments received on employee stock notes receivable
772 
Net cash used in financing activities
(419,276)
(669,783)
Net increase (decrease) in cash and cash equivalents
18,130 
(235,664)
Cash and cash equivalents, beginning of period
42,570 
283,801 
Cash and cash equivalents, end of period
60,700 
48,137 
Supplemental disclosures of cash flow information:
 
 
Interest paid
61,338 
53,674 
Income taxes paid, net of refunds
$ 2,920 
$ 32,293 
Note 1 - Basis of Financial Reporting
Basis of Accounting [Text Block]
Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of March 31, 2012 and for the three months ended March 31, 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 months ended March 31, 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.
Note 2 - Student Loans Receivable and Allowance for Loan Losses
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
 Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:
 
As of
 
As of
 
March 31, 2012
 
December 31, 2011
Federally insured loans
$
23,881,483

 
24,332,709

Non-federally insured loans
24,825

 
26,916

 
23,906,308

 
24,359,625

Unamortized loan premiums (discounts) and deferred origination costs, net
(21,041
)
 
(13,267
)
Allowance for loan losses – federally insured loans
(36,783
)
 
(37,205
)
Allowance for loan losses – non-federally insured loans
(11,652
)
 
(11,277
)
 
$
23,836,832

 
24,297,876

Allowance for federally insured loans as a percentage of such loans
0.15
%
 
0.15
%
Allowance for non-federally insured loans as a percentage of such loans
46.94
%
 
41.90
%
 
Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.
 
Three months ended March 31,
 
2012
 
2011
Balance at beginning of period
$
48,482

 
43,626

Provision for loan losses:
 

 
 

Federally insured loans
6,000

 
3,500

Non-federally insured loans

 
250

Total provision for loan losses
6,000

 
3,750

Charge-offs:
 

 
 

Federally insured loans
(5,495
)
 
(4,855
)
Non-federally insured loans
(769
)
 
(994
)
Total charge-offs
(6,264
)
 
(5,849
)
Recoveries - non-federally insured loans
351

 
370

Purchase (sale) of loans, net:
 
 
 
Federally insured loans
(927
)
 

Non-federally insured loans

 

Transfer to/from repurchase obligation related to loans sold/purchased, net
793

 
(800
)
Balance at end of period
$
48,435

 
41,097

Allocation of the allowance for loan losses:
 

 
 

Federally insured loans
$
36,783

 
31,553

Non-federally insured loans
11,652

 
9,544

Total allowance for loan losses
$
48,435

 
41,097


Repurchase Obligations

As of March 31, 2012, the Company had participated a cumulative amount of $117.1 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 March 31,
 
2012
 
2011
Beginning balance
$
19,223

 
12,600

Transfer to/from the allowance for loan losses related to loans purchased/sold, net
(793
)
 
800

Repurchase obligation associated with loans sold on January 13, 2011

 
6,269

Ending balance
$
18,430

 
19,669



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 March 31, 2012
 
As of December 31, 2011
 
As of March 31, 2011
Federally Insured Loans:
 
 
 
 
 
 
 
 
 
 
 
Loans in-school/grace/deferment (a)
$
3,625,631

 
 
 
$
3,664,899

 
 
 
$
4,332,130

 
 
Loans in forbearance (b)
3,363,627

 
 
 
3,330,452

 
 
 
3,086,292

 
 
Loans in repayment status:
 
 
 
 
 
 
 
 
 
 
 
Loans current
14,696,906

 
87.0
%
 
14,600,372

 
84.2
%
 
13,933,107

 
87.3
%
Loans delinquent 31-60 days (c)
557,476

 
3.3

 
844,204

 
4.9

 
595,386

 
3.7

Loans delinquent 61-90 days (c)
337,791

 
2.0

 
407,094

 
2.3

 
392,008

 
2.5

Loans delinquent 91-270 days (c)
973,406

 
5.8

 
1,163,437

 
6.7

 
838,404

 
5.3

Loans delinquent 271 days or greater (c)(d)
326,646

 
1.9

 
322,251

 
1.9

 
190,380

 
1.2

Total loans in repayment
16,892,225

 
100.0
%
 
17,337,358

 
100.0
%
 
15,949,285

 
100.0
%
Total federally insured loans
$
23,881,483

 
 

 
$
24,332,709

 
 

 
$
23,367,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Federally Insured Loans:
 

 
 

 
 

 
 

 
 
 
 
Loans in-school/grace/deferment (a)
$
2,046

 
 

 
$
2,058

 
 

 
$
3,069

 
 
Loans in forbearance (b)
316

 
 

 
371

 
 

 
239

 
 
Loans in repayment status:
 
 
 

 
 
 
 

 
 
 
 
Loans current
15,144

 
67.4
%
 
16,776

 
68.5
%
 
16,564

 
82.1
%
Loans delinquent 31-60 days (c)
534

 
2.4

 
706

 
2.9

 
363

 
1.8

Loans delinquent 61-90 days (c)
1,820

 
8.1

 
1,987

 
8.1

 
692

 
3.4

Loans delinquent 91 days or greater (c)
4,965

 
22.1

 
5,018

 
20.5

 
2,562

 
12.7

Total loans in repayment
22,463

 
100.0
%
 
24,487

 
100.0
%
 
20,181

 
100.0
%
Total non-federally insured loans
$
24,825

 
 

 
$
26,916

 
 

 
$
23,489

 
 
 
(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.

Note 3 - Bonds and Notes Payable
Debt Disclosure [Text Block]
Bonds and Notes Payable

The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 
As of March 31, 2012
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes (a):
 
 
 
 
 
Bonds and notes based on indices
$
19,832,162

 
0.50% - 6.90%
 
11/25/15 - 7/27/48
Bonds and notes based on auction or remarketing
970,575

 
0.18% - 2.27%
 
5/1/28 - 5/25/42
Total variable-rate bonds and notes
20,802,737

 
 
 
 
FFELP warehouse facilities
959,978

 
0.18% - 0.35%
 
7/1/14 - 4/2/15
Department of Education Conduit
2,261,104

 
0.24%
 
5/8/14
Unsecured line of credit
50,000

 
1.74%
 
2/17/16
Unsecured debt - Junior Subordinated Hybrid Securities
100,697

 
3.86%
 
9/15/61
Other borrowings
40,154

 
3.73% - 5.72%
 
11/14/12 - 3/1/22
 
24,214,670

 
 
 
 
Discount on bonds and notes payable
(154,061
)
 
 
 
 
Total
$
24,060,609

 
 
 
 
 
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

 
0.24%
 
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.


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 March 31, 2012, the Company has three FFELP warehouse facilities as summarized below.
 
NFSLW-I (a)
 
NHELP-II (b)
 
NHELP-I (c)
 
Total
Maximum financing amount
$
500,000

 
250,000

 
500,000

 
1,250,000

Amount outstanding
(484,856
)
 
(229,667
)
 
(245,455
)
 
(959,978
)
Amount available
$
15,144

 
20,333

 
254,545

 
290,022

Expiration of liquidity provisions
July 1, 2012

 
January 31, 2013

 
October 2, 2013

 
 
Final maturity date
July 1, 2014

 
January 31, 2015

 
April 2, 2015

 
 
Maximum advance rates
85 - 95%

 
93.5%

 
93 - 95%

 
 
Minimum advance rates
84.5 - 90%

 
90.5%

 
80 - 95%

 
 
Advanced as equity support
$
37,138

 
21,125

 
14,922

 
73,185


(a)
The terms of this facility were amended on February 22, 2012. The table above reflects all amended terms.

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

(c)
The terms of this facility were amended on April 2, 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.

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 March 31, 2012, the $250.0 million unsecured line of credit had an outstanding balance of $50.0 million and $200.0 million was available for future use. The $250.0 million line of credit has a maturity date of February 17, 2016. Upon the maturity date in 2016, there can be no assurance that the Company will be able to renew this line of credit, increase the amount outstanding under the line, if necessary, or find alternative funding.

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 March 31, 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 new unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable.

Repurchase Agreement

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 12, 2014 and has covenants similar to the Company's $250.0 million unsecured line of credit.

Note 4 - Gain on Sale of Loans and Debt Repurchases
Additional Financial Information Disclosure [Text Block]
Gain on Sale of Loans and Debt Repurchases

During the first quarter of 2011, the Company sold a portfolio of non-federally insured student loans and recognized a gain of $1.4 million. In addition, during the first quarter of 2011, the Company purchased $62.6 million (notional amount) of its Junior Subordinated Hybrid Securities (unsecured debt) for $55.7 million and recognized a gain of $6.9 million. These items are included in "Gain on sale of loans and debt repurchases" in the consolidated statements of income.
Note 5 - Derivative Financial Instruments
Derivative Instruments and Hedging Activities Disclosure [Text Block]
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’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact the Company due to shifts in market interest rates. Because the Company generates a significant portion of its earnings from its student loan spread, the interest rate sensitivity of the balance sheet is a key profitability driver.  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 assessment of current and future market conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy.

Basis Swaps

The Company funds the majority of its student loan assets with one-month or three-month LIBOR indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets is indexed to commercial paper and treasury bill rates. 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. 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 March 31, 2012, the Company had $23.0 billion and $0.9 billion of FFELP loans indexed to the three-month financial commercial paper rate and the three-month treasury bill rate, respectively, both of which reset daily, and $19.2 billion of debt indexed to three-month LIBOR, which resets quarterly, and $0.9 billion of debt indexed to one-month LIBOR, which resets monthly.

The Company has used derivative instruments to hedge the repricing risk due to the timing of the interest rate resets on its assets and liabilities.  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 March 31, 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


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

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

The Company does not generally hedge the basis risk on those assets indexed to the commercial paper rate that are funded with liabilities in which the Company pays primarily on the LIBOR indice, since the derivatives needed to hedge this risk are generally illiquid or non-existent. On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This Act includes changes that permit student loan lenders to change the index on which the Special Allowance Payments (or "SAP") are calculated for FFELP loans from the commercial paper rate to the one-month LIBOR rate effective April 1, 2012. As of March 31, 2012, the Company had $23.0 billion of loans in which it elected to change the SAP calculation to the one-month LIBOR rate. This change mitigates the Company's exposure to basis risk and will allow the Company to better match borrowing and lending rates.

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.

As of March 31, 2012 and December 31, 2011, the Company had $9.0 billion and $10.9 billion, respectively, of student loan assets that were earning fixed rate floor income. The following table summarizes the outstanding derivative investments as of March 31, 2012 and December 31, 2011 used by the Company to economically hedge these loans.
 
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-months LIBOR.

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. As of March 31, 2012 and December 31, 2011, 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.
 
Notional amount (a)
 
Weighted average fixed rate paid by the Company (b)
 
$
75,000

 
4.28
%

(a)
The maturity date of these derivatives is September 29, 2036.

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

Foreign Currency Exchange Risk

During 2006, the Company completed separate debt offerings of student loan asset-backed securities that included €420.5 million and €352.7 million Euro Notes with interest rates based on a spread to the EURIBOR index. As a result of these transactions, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The principal and accrued interest on these notes are re-measured at each reporting period and recorded 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 “derivative market value and foreign currency adjustments and derivative settlements, net” 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 “derivative market value and foreign currency adjustments and derivative settlements, net” in the Company's consolidated statements of income.
 
Three months ended March 31,
 
2012
 
2011
Re-measurement of Euro Notes
$
(32,242
)
 
(65,334
)
Change in fair value of cross currency interest rate swaps
13,026

 
62,532

Total impact to statements of income - income (expense)
$
(19,216
)
 
(2,802
)

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 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 “derivative market value and foreign currency adjustments and derivative settlements, net” 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 “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income and are accounted for as a change in fair value of such derivative. During the three months ended March 31, 2011, the Company terminated and/or amended certain derivatives for net proceeds of $12.2 million. There were no terminations and/or amendments during the first quarter of 2012.
 
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
 
March 31, 2012
 
December 31, 2011
 
March 31, 2012
 
December 31, 2011
1:3 basis swaps
$
13,626

 
10,988

 
277

 
641

Interest rate swaps - floor income hedges

 
592

 
23,427

 
18,384

Interest rate swaps - hybrid debt hedges

 

 
18,617

 
24,814

Cross-currency interest rate swaps
93,657

 
80,631

 

 

Other
251

 
8

 

 
1

Total
$
107,534

 
92,219

 
42,321

 
43,840


The following table summarizes the effect of derivative instruments in the consolidated statements of income. All gains and losses recognized in income related to the Company’s derivative activity are included in “derivative market value and foreign currency and derivative settlements, net” on the consolidated statements of income.

 
 
Three months ended March 31,
 
 
2012
 
2011
Settlements:
 
 

 
 

1:3 basis swaps
 
$
1,381

 
208

Interest rate swaps - floor income hedges
 
(3,137
)
 
(6,218
)
Interest rate swaps - hybrid debt hedges
 

 
(246
)
Cross-currency interest rate swaps
 
2,109

 
2,109

Other
 
(126
)
 
(5
)
Total settlements - income (expense)
 
227

 
(4,152
)
Change in fair value:
 
 

 
 

1:3 basis swaps
 
3,002

 
(4,210
)
Interest rate swaps - floor income hedges
 
(5,634
)
 
6,395

Interest rate swaps - hybrid debt hedges
 
6,197

 
1,448

Cross-currency interest rate swaps
 
13,026

 
62,532

Other
 
244

 
285

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

 
66,450

Re-measurement of Euro Notes (foreign currency transaction adjustment) - income (expense)
 
(32,242
)
 
(65,334
)
Derivative market value and foreign currency adjustments and derivative settlements - income (expense)
 
$
(15,180
)
 
(3,036
)
Derivative Instruments - Credit and Market Risk

By using derivative instruments, the Company is exposed to credit and market risk.

The Company manages credit and market risks associated with interest rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken and by entering into transactions with high-quality counterparties that are reviewed periodically by the Company's risk committee. As of March 31, 2012, all of the Company's derivative counterparties had investment grade credit ratings. The Company also has a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

Credit Risk

When the fair value of a derivative contract is positive (an asset on the Company's balance sheet), this generally indicates that the counterparty would owe the Company if the derivative was settled. If the counterparty fails to perform, credit risk with such counterparty is equal to the extent of the fair value gain in the derivative less any collateral held by the Company. If the Company was unable to collect from a counterparty, it would have a loss equal to the amount the derivative is recorded on the consolidated balance sheet. As of March 31, 2012, the trustee for certain of the Company's asset-backed securities transactions held $59.7 million of collateral from the counterparty on the cross-currency interest rate swaps.

The Company considers counterparties' credit risk when determining the fair value of derivative positions on its exposure net of collateral. However, the Company does not use the collateral to offset fair value amounts recognized in the financial statements for derivative instruments.

Market Risk

When the fair value of a derivative instrument is negative (a liability on the Company's balance sheet), the Company would owe the counterparty if the derivative was settled and, therefore, has no immediate credit risk.  If the negative fair value of derivatives with a counterparty exceeds a specified threshold, the Company may have to make a collateral deposit with the counterparty. The threshold at which the Company may be required to post collateral is dependent upon the Company's unsecured credit rating.  At the Company's current unsecured credit rating (Standard & Poor's: BBB- (stable outlook) and Moody's: Ba1 (stable outlook)), the Company has substantially collateralized its corporate derivative liability position with its counterparties. As such, any further downgrades would not result in additional collateral requirements of a material nature. In addition, no counterparty has the right to terminate its contracts in the event of further downgrades. However, some derivative contracts have mutual optional termination provisions that can be exercised in 2016 and 2021. As of March 31, 2012, the fair value of derivatives with early termination provisions was a positive $0.5 million (an asset on the Company's balance sheet). As of March 31, 2012, the Company had $35.4 million posted as collateral to derivative counterparties, which is included in “restricted cash and investments” in the Company's consolidated balance sheet.

Interest rate movements have an impact on the amount of collateral the Company is required to deposit with its derivative instrument counterparties. With the Company's current derivative portfolio, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor expects that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties. Due to the existing low interest rate environment, the Company's exposure to downward movements in interest rates on its interest rate swaps is limited.  In addition, the historical high correlation between 1-month and 3-month LIBOR and the limited notional amount of 1:3 Basis Swaps derivatives outstanding limits the Company's exposure to interest rate movements on these derivatives. 

The Company's cross-currency interest rate swaps are derivatives entered into as a result of certain asset-backed security financings. These derivatives are entered into at the trust level with the counterparty. Trust related derivatives do not contain credit contingent features related to the Company or the trust's credit ratings.
Note 6 - Investments
Investment Holdings [Text Block]
Investments

The Company's available-for-sale investment portfolio consists of student loan asset-backed securities and equity and debt securities. These securities are carried at fair value, with the temporary changes in fair value carried as a separate component of stockholders’ equity, net of taxes. The amortized cost of debt securities in this category (including the student loan asset-backed securities) is adjusted for amortization of premiums and accretion of discounts, which are amortized using the effective interest rate method. Other-than-temporary impairment is evaluated by considering several factors, including the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability to retain the investment to allow for an anticipated recovery in fair value. The entire fair value loss on a security that is other-than-temporary impairment is recorded in earnings if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell the security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and either of those two conditions does not exist, the portion of the impairment related to credit losses is recorded in earnings and the impairment related to other factors is recorded in other comprehensive income.

Securities classified as trading are accounted for at fair value with unrealized gains and losses included in "other income" on the consolidated statements of income.

Securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are accounted for at amortized cost unless the security is determined to have an other-than-temporary impairment. In that case, it is accounted for in the same manner as described above.

A summary of the Company's investments and restricted investments follows:
 
As of March 31, 2012
 
 
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair value
 
As of
 
 
 
 
 
December 31, 2011
Investments:
 
 
 
 
 
 
 
 
 
Available-for-sale investments (a):
 
 
 
 
 
 
 
 
 
Student loan asset-backed securities
$
54,595

 
618

 
(942
)
 
54,271

 

Equity securities
4,250

 
1,365

 
(107
)
 
5,508

 

Debt securities (b)
1,308

 

 

 
1,308

 

Total available-for-sale investments
$
60,153

 
1,983

 
(1,049
)
 
61,087

 

Trading investments (a):
 
 
 
 
 
 
 
 
 
Student loan asset-backed securities
 
 
 
 
 
 
$
9,465

 
42,412

Equity securities
 
 
 
 
 
 

 
6,847

Debt securities (b)
 
 
 
 
 
 

 
1,521

Total trading investments

 
 
 
 
 
$
9,465

 
50,780

Total available-for-sale and trading investments

 

 

 
$
70,552

 
50,780

Restricted Investments (c):
 
 
 
 
 
 
 
 
 
Guaranteed investment contracts - held-to-maturity
 
 
 
 
 
 
$
284,639

 
236,899


(a)
The Company transferred the majority of its investments from trading to available-for-sale on January 1, 2012 to reflect management's intention regarding such securities.

(b)
Debt securities include corporate bonds, mortgage-backed securities, U.S. government bonds, and U.S. Treasury securities.
    
(c)
Restricted investments are included in “Restricted cash and investments” on the Company's consolidated balance sheets. The Company's restricted investments include cash balances that the Company's indentured trusts deposit in guaranteed investment contracts that are held for the related note holders. These investments are classified as held-to-maturity and the Company accounts for them at amortized cost.

The Company sold available-for-sale securities with a fair value of $10.0 million during the three months ended March 31, 2012 and recognized $1.4 million and $0.2 million in gross realized gains and losses, respectively, which are included in “other income” in the Company's consolidated statement of income. The cost basis for these securities was determined through specific identification of the securities sold.

Maturities of student loan asset-backed securities and debt securities classified as available-for-sale were as follows at March 31, 2012.
Year of Maturity:
Amortized cost
 
Fair value
2013-2016
$
200

 
200

2017-2021
1,108

 
1,108

After 2021
54,595

 
54,271

Total
$
55,903

 
55,579


As of March 31, 2012, the stated maturities for the Company's restricted investments, which are classified as held-to-maturity, are shown in the following table:
Year of Maturity (a):
 
2017-2021
$
35,731

After 2021
248,908

Total
$
284,639


(a)
On May 1, 2012, the majority of the Company's remaining guaranteed investment contracts were terminated due to a downgrade in the credit rating of a guaranteed investment contract counterparty.  The sales of these investments were at par and had no income statement impact.  The proceeds from the sale of these investments were used to purchase permitted investments as specified by each underlying student loan asset-backed securitization trust indenture.  The new investments will continue to be classified as “restricted cash and investments” included on the consolidated balance sheet while otherwise remaining as assets within their respective trust estates.  As of May, 7, 2012, the Company has $28.1 million of guaranteed investment contracts outstanding.
Note 7 - Intangible Assets
Intangible Assets Disclosure [Text Block]
Intangible Assets

Intangible assets consist of the following:
 
Weighted average remaining useful life as of March 31, 2012 (months)
 
As of March 31, 2012
 
As of December 31, 2011
Customer relationships (net of accumulated amortization of $63,302 and $59,893, respectively)
66

 
$
19,831

 
23,240

Computer software (net of accumulated amortization of $5,806 and $5,103, respectively)
9

 
2,112

 
2,815

Trade names (net of accumulated amortization of $9,854 and $9,274, respectively)
9

 
1,739

 
2,319

 
57

 
$
23,682

 
28,374


The Company recorded amortization expense on its intangible assets of $4.7 million and $4.0 million for the three months ended March 31, 2012 and 2011, respectively. The Company will continue to amortize intangible assets over their remaining useful lives.  As of March 31, 2012, the Company estimates it will record amortization expense as follows:
 
2012 (April 1 - December 31)
$
13,941

2013
3,399

2014
2,102

2015
829

2016
639

2017 and thereafter
2,772

 
$
23,682

Note 8 - Goodwill
Goodwill Disclosure [Text Block]
Goodwill

The following table summarizes the Company’s allocation of goodwill by operating segment as of March 31, 2012 and December 31, 2011:
Student Loan and Guaranty Servicing
$
8,596

Tuition Payment Processing and Campus Commerce
58,086

Enrollment Services
8,553

Asset Generation and Management
41,883

 
$
117,118

Note 9 - Earnings per Common Share
Earnings Per Share [Text Block]
Earnings per Common Share

Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for unvested share-based awards and for common stock. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Earnings per share attributable to common stock and a reconciliation of weighted average shares outstanding are shown in the table below.
 
Three months ended March 31,
 
2012
 
2011
Net income attributable to Nelnet, Inc.
$
43,141

 
54,880

Less earnings allocated to holders of unvested restricted stock
279

 
346

Net income available to Nelnet, Inc. common shareholders
$
42,862

 
54,534

Weighted average common shares outstanding - basic
46,989,773

 
48,171,317

Dilutive effect of the assumed vesting of restricted stock awards
194,306

 
191,718

Weighted average common shares outstanding - diluted
47,184,079


48,363,035

Earnings per common share:
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic
$
0.91

 
1.13

Net income attributable to Nelnet, Inc. shareholders - diluted
$
0.91

 
1.13


There were no shares that were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation.
Note 10 - Segment Reporting
Segment Reporting Disclosure [Text Block]
Segment Reporting

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns net interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments based on their profitability.  Prior to 2012, management measured the profitability of the Company’s operating segments based on “base net income.”  The Company's "base net income" was not a defined term within U.S. generally accepted accounting principles ("GAAP") and was not necessarily comparable to similarly titled measures reported by other companies. However, “base net income,” which consisted of GAAP net income excluding the derivative market value and foreign currency adjustments, amortization of intangible assets, compensation related to business combinations, and variable rate floor income, net of settlements on derivatives, was the primary financial performance measure used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. Accordingly, information regarding the Company’s operating segments was historically provided based on “base net income.”  Due to the decrease in the number and dollar amount of differences between "base net income" and GAAP net income, during the first quarter of 2012, executive management determined to discontinue utilizing "base net income" and began to evaluate the performance and profitability of the Company's operating segments based on financial results prepared in conformity with GAAP. As such, the Company has changed its operating segment income measurement from "base net income" to GAAP net income. Prior period segment operating results have been restated to conform to the current period presentation.

The accounting policies of the Company’s operating segments are the same as those described in note 2 in the notes to the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report"). Intersegment revenues are charged by a segment to another segment that provides the product or service.  Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.  Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information. The Company allocates certain corporate overhead expenses to the individual operating segments.  These expenses include certain corporate activities related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services. In addition, income taxes are allocated based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.

The following describes the products and services of each operating segment. In addition, the tables below include the results of each of the Company's operating segments reconciled to the consolidated financial statements.

Fee-Based Operating Segments

Student Loan and Guaranty Servicing

The following are the primary product and service offerings the Company offers as part of its Student Loan and Guaranty Servicing segment:

Servicing FFELP loans
Origination and servicing of non-federally insured student loans
Servicing federally-owned student loans for the Department of Education
Servicing and support outsourcing for guaranty agencies
Student loan servicing software and other information technology products and services

The Student Loan and Guaranty Servicing operating segment provides for the servicing of the Company’s student loan portfolios and the portfolios of third parties. The loan servicing activities include loan origination activities, loan conversion activities, application processing, borrower updates, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating external fee revenue when performed for third party clients.

In June 2009, the Department of Education named the Company as one of four private sector companies awarded a servicing contract to service federally-owned student loans. In September 2009, the Company began servicing loans under this contract. The contract spans five years with one five-year renewal at the option of the Department.

This operating segment also provides servicing activities for guaranty agencies. These activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and managing third-party collection agencies.

This operating segment also develops student loan servicing software, which is used internally by the Company and also licensed to third party student loan holders and servicers. In addition, this operating segment provides information technology products and services with core areas of business in educational loan software solutions, technical consulting services, and enterprise content management solutions.

Tuition Payment Processing and Campus Commerce

The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education).  It also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.

In the K-12 market, this operating segment offers actively managed tuition payment plans as well as assistance with financial needs assessment and donor management. This operating segment offers two principal products to the higher education market: actively managed tuition payment plans and campus commerce technologies and payment processing.

Enrollment Services

The Enrollment Services operating segment offers products and services that are focused on helping colleges recruit and retain students and helping students plan and prepare for life after high school. The following are the primary service offerings the Company offers as part of the Enrollment Services segment:

Inquiry Generation - Inquiry generation services include delivering qualified inquiries or clicks to third-party customers, primarily for-profit schools.

Inquiry Management (Agency) - Agency services include managing the marketing activities for third-party customers, primarily for-profit schools, in order to provide qualified inquiries or clicks.

Inquiry Management (Software) -  Inquiry management services include the licensing of software to third-party customers, primarily for-profit schools. This software is also used internally by the Company. The inquiry management software has been adapted so that it can be offered as a hosted software solution that can be used by third-parties to manage and obtain qualified inquiries or clicks.

Digital Marketing (Peterson's Interactive) - Digital marketing services include on-line information about colleges and universities and are sold primarily based on subscriptions. Digital marketing services also include online editing services for admission essays.

Content Solutions - Content solutions includes test preparation study guides, school directories and databases, career exploration guides, on-line courses, scholarship search and selection data, career planning, and on-line information about colleges and universities. Content solutions also includes providing list marketing services to help higher education institutions and businesses reach the middle school, high school, college bound high school, college, and young adult market places.

Asset Generation and Management Operating Segment

The Asset Generation and Management Operating Segment includes the acquisition, management, and ownership of the Company’s student loan assets, which has historically been the Company’s largest product and service offering. The Company generates a substantial portion of its earnings from the spread, referred to as the Company’s student loan spread, between the yield it receives on its student loan portfolio and the associated costs to finance such portfolio. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose. In addition to the student loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance are included in this segment.

As a result of legislation effective July 1, 2010, all new federal loan originations are made by the Department of Education through the Direct Loan Program and the Company no longer originates FFELP loans. This legislation does not alter or affect the terms and conditions of existing FFELP loans.

Corporate Activity and Overhead

Corporate Activity and Overhead includes the following items:

The operating results of WRCM, the Company's SEC-registered investment advisory subsidiary
Income earned on certain investment activities
Interest expense incurred on unsecured debt transactions
Other products and service offerings that are not considered operating segments

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

Segment Results of Operations
 
Three months ended March 31, 2012
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
20

 
4

 

 
24

 
153,512

 
1,588

 
(971
)
 
154,153

Interest expense

 

 

 

 
68,829

 
1,439

 
(971
)
 
69,297

Net interest income
20

 
4

 

 
24

 
84,683

 
149

 

 
84,856

Less provision for loan losses

 

 

 

 
6,000

 

 

 
6,000

Net interest income after provision for loan losses
20

 
4

 

 
24

 
78,683

 
149

 

 
78,856

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
49,488

 

 

 
49,488

 

 

 

 
49,488

Intersegment servicing revenue
16,954

 

 

 
16,954

 

 

 
(16,954
)
 

Tuition payment processing and campus commerce revenue

 
21,913

 

 
21,913

 

 

 

 
21,913

Enrollment services revenue

 

 
31,664

 
31,664

 

 

 

 
31,664

Other income

 

 

 

 
5,000

 
5,954

 

 
10,954

Gain on sale of loans and debt repurchases

 

 

 

 

 

 

 

Derivative market value and foreign currency adjustments, net

 

 

 

 
(21,604
)
 
6,197

 

 
(15,407
)
Derivative settlements, net

 

 

 

 
227

 

 

 
227

Total other income (expense)
66,442

 
21,913

 
31,664

 
120,019

 
(16,377
)
 
12,151

 
(16,954
)
 
98,839

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
29,042

 
8,618

 
6,279

 
43,939

 
719

 
4,437

 

 
49,095

Cost to provide enrollment services

 

 
21,678

 
21,678

 

 

 

 
21,678

Depreciation and amortization
4,413

 
1,740

 
1,617

 
7,770

 

 
366

 

 
8,136

Other
18,666

 
2,816

 
1,956

 
23,438

 
3,632

 
5,193

 

 
32,263

Intersegment expenses, net
1,385

 
1,333

 
848

 
3,566

 
17,143

 
(3,755
)
 
(16,954
)
 

Total operating expenses
53,506

 
14,507

 
32,378

 
100,391

 
21,494

 
6,241

 
(16,954
)
 
111,172

Income (loss) before income taxes and corporate overhead allocation
12,956

 
7,410

 
(714
)
 
19,652

 
40,812

 
6,059

 

 
66,523

Corporate overhead allocation
(1,503
)
 
(501
)
 
(501
)
 
(2,505
)
 
(1,392
)
 
3,897

 

 

Income (loss) before income taxes
11,453

 
6,909

 
(1,215
)
 
17,147

 
39,420

 
9,956

 

 
66,523

Income tax (expense) benefit
(4,352
)
 
(2,625
)
 
462

 
(6,515
)
 
(14,979
)
 
(1,736
)
 

 
(23,230
)
Net income (loss)
7,101

 
4,284

 
(753
)
 
10,632

 
24,441

 
8,220

 

 
43,293

  Net income attributable to noncontrolling interest

 

 

 

 

 
152

 

 
152

Net income (loss) attributable to Nelnet, Inc.
$
7,101

 
4,284

 
(753
)
 
10,632

 
24,441

 
8,068

 

 
43,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2011
 
Fee-Based
 
 
 
 
 
 
 
 
 
 
 
Student Loan and Guaranty Servicing
 
Tuition Payment Processing and Campus Commerce
 
Enrollment
Services
 
Total Fee-
Based
 
Asset
Generation and
Management
 
Corporate
Activity
and
Overhead
 
Eliminations
 
Total
Total interest income
$
15

 
6

 

 
21

 
137,639

 
1,146

 
(722
)
 
138,084

Interest expense

 

 

 

 
49,716

 
3,313

 
(722
)
 
52,307

Net interest income (loss)
15

 
6

 

 
21

 
87,923

 
(2,167
)
 

 
85,777

Less provision for loan losses

 

 

 

 
3,750

 

 

 
3,750

Net interest income (loss) after provision for loan losses
15

 
6

 

 
21

 
84,173

 
(2,167
)
 

 
82,027

Other income (expense):
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Loan and guaranty servicing revenue
40,413

 

 

 
40,413

 

 

 

 
40,413

Intersegment servicing revenue
17,857

 

 

 
17,857

 

 

 
(17,857
)
 

Tuition payment processing and campus commerce revenue

 
19,369

 

 
19,369

 

 

 

 
19,369

Enrollment services revenue

 

 
33,868

 
33,868

 

 

 

 
33,868

Other income

 

 

 

 
4,136

 
2,356

 

 
6,492

Gain on sale of loans and debt repurchases

 

 

 

 
1,400

 
6,907

 

 
8,307

Derivative market value and foreign currency adjustments, net

 

 

 

 
(589
)
 
1,705

 

 
1,116

Derivative settlements, net

 

 

 

 
(4,038
)
 
(114
)
 

 
(4,152
)
Total other income (expense)
58,270

 
19,369

 
33,868

 
111,507

 
909

 
10,854

 
(17,857
)
 
105,413

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
25,388

 
7,152

 
6,257

 
38,797

 
778

 
4,337

 

 
43,912

Cost to provide enrollment services

 

 
22,839

 
22,839

 

 

 

 
22,839

Depreciation and amortization
3,406

 
1,334

 
1,691

 
6,431

 

 
345

 

 
6,776

Other
14,579

 
2,634

 
2,318

 
19,531

 
1,538

 
5,036

 

 
26,105

Intersegment expenses, net
1,369

 
1,093

 
818

 
3,280

 
18,147

 
(3,570
)
 
(17,857
)
 

Total operating expenses
44,742

 
12,213

 
33,923

 
90,878

 
20,463

 
6,148

 
(17,857
)
 
99,632

Income (loss) before income taxes and corporate overhead allocation
13,543

 
7,162

 
(55
)
 
20,650

 
64,619

 
2,539

 

 
87,808

Corporate overhead allocation
(753
)
 
(251
)
 
(251
)
 
(1,255
)
 
(1,255
)
 
2,510

 

 

Income (loss) before income taxes
12,790

 
6,911

 
(306
)
 
19,395

 
63,364

 
5,049

 

 
87,808

Income tax (expense) benefit
(4,860
)
 
(2,626
)
 
117

 
(7,369
)
 
(24,078
)
 
(1,481
)
 

 
(32,928
)
Net income (loss)
7,930

 
4,285

 
(189
)
 
12,026

 
39,286

 
3,568

 

 
54,880

  Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

Net income (loss) attributable to Nelnet, Inc.
$
7,930

 
4,285

 
(189
)
 
12,026

 
39,286

 
3,568

 

 
54,880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 12 - Fair Value
Fair Value Disclosures [Text Block]
Fair Value

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis.
 
As of March 31, 2012
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Investments: (a)
 
 
 
 


Student loan asset-backed securities
$

 
63,736

 
63,736

Equity securities
5,508

 

 
5,508

Debt securities
1,308

 

 
1,308

Total investments
6,816

 
63,736

 
70,552

Fair value of derivative instruments (b)

 
107,534

 
107,534

Total assets
$
6,816

 
171,270

 
178,086

Liabilities:
 

 
 

 
 

Fair value of derivative instruments (b)
$

 
42,321

 
42,321

Total liabilities
$

 
42,321

 
42,321

 
As of December 31, 2011
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Investments: (a)
 
 
 
 
 
Student loan asset-backed securities
$

 
42,412

 
42,412

Equity securities
6,847

 

 
6,847

Debt securities
1,521

 

 
1,521

Total investments
8,368

 
42,412

 
50,780

Fair value of derivative instruments (b)

 
92,219

 
92,219

Total assets
$
8,368

 
134,631

 
142,999

Liabilities:
 
 
 
 
 
Fair value of derivative instruments (b)
$

 
43,840

 
43,840

Total liabilities
$

 
43,840

 
43,840


(a)
Investments represent investments recorded at fair value on a recurring basis. Level 1 investments are measured based upon quoted prices and include investments traded on an active exchange, such as the New York Stock Exchange, and corporate bonds, mortgage-backed securities, U.S. government bonds, and U.S. Treasury securities that trade in active markets. Level 2 investments include student loan asset-backed securities. The fair value for the student loan asset-backed securities is determined using indicative quotes from broker dealers or an income approach valuation technique (present value using the discount rate adjustment technique) that considers, among other things, rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.

(b)
All derivatives are accounted for at fair value on a recurring basis.  The fair value of derivative financial instruments is determined by derivative pricing models using the stated terms of the contracts and observable yield curves, forward foreign currency exchange rates, and volatilities from active markets.  

When determining the fair value of derivatives, the Company takes into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty.

There were no transfers into or out of level 1, level 2, or level 3 for the three months ended March 31, 2012.

The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets:
 
As of March 31, 2012
 
Fair value
 
Carrying value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
Student loans receivable
$
23,759,545

 
23,836,832

 

 

 
23,759,545

Cash and cash equivalents
60,700

 
60,700

 
60,700

 

 

Investments
70,552

 
70,552

 
6,816

 
63,736

 

Restricted cash
421,314

 
421,314

 
421,314

 

 

Restricted cash – due to customers
38,642

 
38,642

 
38,642

 

 

Restricted investments
284,639

 
284,639

 
284,639

 

 

Accrued interest receivable
296,378

 
296,378

 
296,378

 

 

Derivative instruments
107,534

 
107,534

 

 
107,534

 

Financial liabilities:
 

 
 

 
 
 
 
 
 
Bonds and notes payable
23,010,542

 
24,060,609

 

 
23,010,542

 

Accrued interest payable
19,281

 
19,281

 
19,281

 

 

Due to customers
38,642

 
38,642

 
38,642

 

 

Derivative instruments
42,321

 
42,321

 

 
42,321

 

 
As of December 31, 2011
 
Fair value
 
Carrying value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
Student loans receivable
$
23,894,005

 
24,297,876

 

 

 
23,894,005

Cash and cash equivalents
42,570

 
42,570

 
42,570

 

 

Investments
50,780

 
50,780

 
8,368

 
42,412

 

Restricted cash
377,423

 
377,423

 
377,423

 

 

Restricted cash – due to customers
109,809

 
109,809

 
109,809

 

 

Restricted investments
236,899

 
236,899

 
236,899

 

 

Accrued interest receivable
308,401

 
308,401

 
308,401

 

 

Derivative instruments
92,219

 
92,219

 

 
92,219

 

Financial liabilities:
 

 
 

 
 
 
 
 
 
Bonds and notes payable
23,003,453

 
24,434,540

 

 
23,003,453

 

Accrued interest payable
19,634

 
19,634

 
19,634

 

 

Due to customers
109,809

 
109,809

 
109,809

 

 

Derivative instruments
43,840

 
43,840

 

 
43,840

 

 
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring basis are discussed above.  The fair values of the remaining financial assets and liabilities were estimated using the following methods and assumptions:

Student Loans Receivable

If the Company has the ability and intent to hold loans for the foreseeable future, such loans are held for investment and carried at amortized cost. Fair values for student loan receivables were determined by modeling loan cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value, and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, required return on equity, and future interest rate and indice relationships. A number of significant inputs into the models are internally derived and not observable to market participants.

Cash and Cash Equivalents, Restricted Cash, Restricted Cash – Due to Customers, Restricted Investments, Accrued Interest Receivable/Payable and Due to Customers

The carrying amount approximates fair value due to the variable rate of interest and/or the short maturities of these instruments.

Bonds and Notes Payable

Bonds and notes payable are accounted for at cost in the financial statements except when denominated in a foreign currency. Foreign currency-denominated borrowings are re-measured at current spot rates in the financial statements. The fair value of bonds and notes payable was determined from quotes from broker dealers or through standard bond pricing models using the stated terms of the borrowings, observable yield curves, and market credit spreads. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades.

Limitations

The fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument.  Changes in assumptions could significantly affect the estimates.
Note 14 - Subsequent Events
Subsequent Events [Text Block]
Subsequent Events

Subsequent to March 31, 2012, state income tax laws were enacted that will reduce the Company's income tax expense by approximately $4.6 million for the quarter ending June 30, 2012.