NELNET INC, 10-Q filed on 11/8/2011
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 30, 2011
Oct. 31, 2011
Common Class B [Member]
Oct. 31, 2011
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 
35,632,225 
Amendment Flag
FALSE 
 
 
Entity Central Index Key
0001258602 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Document Period End Date
Sep. 30, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q3 
 
 
Consolidated Balance Sheet (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Assets:
 
 
Student loans receivable (net of allowance for loan losses of $45,773 and $43,626, respectively)
$ 24,641,614 
$ 23,948,014 
Student loans receivable - held for sale
0 
84,987 
Cash and cash equivalents:
 
 
Cash and cash equivalents - not held at a related party
10,465 
6,952 
Cash and cash equivalents - held at a related party
81,629 
276,849 
Total cash and cash equivalents
92,094 
283,801 
Investments - trading securities
49,834 
43,236 
Restricted cash and investments
601,218 
668,757 
Restricted cash - due to customers
52,300 
88,528 
Accrued interest receivable
331,071 
318,152 
Accounts receivable (net of allowance for doubtful accounts of $1,495 and $1,221, respectively)
58,894 
52,614 
Goodwill
117,118 
117,118 
Intangible assets, net
33,074 
38,712 
Property and equipment, net
33,335 
30,573 
Other assets
95,055 
101,054 
Fair value of derivative instruments
130,620 
118,346 
Total assets
26,236,227 
25,893,892 
Liabilities:
 
 
Bonds and notes payable
24,926,512 
24,672,472 
Accrued interest payable
16,965 
19,153 
Other liabilities
179,620 
191,017 
Due to customers
52,300 
88,528 
Fair value of derivative instruments
49,347 
16,089 
Total liabilities
25,224,744 
24,987,259 
Shareholders' equity:
 
 
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding
0 
0 
Common stock: [Abstract]
 
 
Additional paid-in capital
54,685 
76,263 
Retained earnings
957,463 
831,057 
Employee notes receivable
(1,140)
(1,170)
Total shareholders' equity
1,011,483 
906,633 
Commitments and contingencies
 
 
Total liabilities and shareholders' equity
26,236,227 
25,893,892 
Common Class A [Member]
 
 
Common stock: [Abstract]
 
 
Common Stock
360 
368 
Common Class B [Member]
 
 
Common stock: [Abstract]
 
 
Common Stock
$ 115 
$ 115 
Consolidated Balance Sheet (Parentheticals) (USD $)
In Thousands, except Share data
Sep. 30, 2011
Dec. 31, 2010
Allowance for loan losses (in Dollars)
$ 45,773 
$ 43,626 
Allowance for doubtful accounts (in Dollars)
$ 1,495 
$ 1,221 
Preferred stock, par value (in Dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, authorized shares
50,000,000 
50,000,000 
Preferred stock, issued shares
0 
0 
Preferred stock, outstanding shares
0 
0 
Common Class A [Member]
 
 
Par Value (in Dollars per share)
$ 0.01 
$ 0.01 
Shares Authorized
600,000,000 
600,000,000 
Shares Issued
35,964,088 
36,846,353 
Shares Outstanding
35,964,088 
36,846,353 
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 Operations (USD $)
In Thousands, except Share data
3 Months Ended
Sep. 30,		 9 Months Ended
Sep. 30,
2011
2010
2011
2010
Interest income:
 
 
 
 
Loan interest
$ 156,955 
$ 159,287 
$ 433,247 
$ 449,607 
Investment interest
672 
1,169 
2,254 
3,474 
Total interest income
157,627 
160,456 
435,501 
453,081 
Interest expense:
 
 
 
 
Interest on bonds and notes payable
60,866 
68,243 
164,227 
178,345 
Net interest income
96,761 
92,213 
271,274 
274,736 
Less provision for loan losses
5,250 
5,500 
14,250 
16,700 
Net interest income after provision for loan losses
91,511 
86,713 
257,024 
258,036 
Other income (expense):
 
 
 
 
Loan and guaranty servicing revenue
37,927 
33,464 
110,952 
106,510 
Tuition payment processing and campus commerce revenue
16,774 
14,527 
50,904 
44,704 
Enrollment services revenue
35,505 
36,439 
101,688 
105,113 
Software services revenue
4,622 
4,624 
13,745 
14,467 
Other income
3,931 
9,432 
17,249 
25,188 
Gain on sale of loans and debt repurchases
0 
9,885 
8,307 
28,821 
Derivative market value and foreign currency adjustments and derivative settlements, net
(13,631)
(35,391)
(37,002)
(44,317)
Total other income
85,128 
72,980 
265,843 
280,486 
Operating expenses:
 
 
 
 
Salaries and benefits
44,132 
41,085 
130,925 
122,691 
Litigation settlement
0 
55,000 
0 
55,000 
Cost to provide enrollment services
23,825 
23,709 
68,804 
69,845 
Depreciation and amortization
7,917 
9,025 
21,462 
29,536 
Restructure expense
0 
4,751 
0 
6,020 
Other
28,904 
26,717 
83,776 
89,120 
Total operating expenses
104,778 
160,287 
304,967 
372,212 
Income (loss) before income taxes
71,861 
(594)
217,900 
166,310 
Income tax benefit (expense)
(24,410)
226 
(78,444)
(62,363)
Net income (loss)
$ 47,451 
$ (368)
$ 139,456 
$ 103,947 
Earnings (loss) per common share:
 
 
 
 
Net earnings (loss) - basic (in Dollars per share)
$ 0.98 
$ (0.01)
$ 2.88 
$ 2.09 
Net earnings (loss) - diluted (in Dollars per share)
$ 0.98 
$ (0.01)
$ 2.87 
$ 2.08 
Weighted average common shares outstanding:
 
 
 
 
Basic (in Shares)
48,059,747 
48,938,333 
48,177,539 
49,460,625 
Diluted (in Shares)
48,253,888 
48,938,333 
48,367,923 
49,663,505 
Consolidated Statements of Shareholders' Equity and Comprehensive Income (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]
Employee Notes Receivable [Member]
Balance at Jun. 30, 2010
$ 873,945 
$ 0 
$ 380 
$ 115 
$ 101,232 
$ 773,468 
$ (1,250)
Balance (in Shares) at Jun. 30, 2010
 
0 
37,995,006 
11,495,377 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
(368)
 
 
 
 
(368)
 
Cash dividend on Class A and Class B common stock
(3,435)
 
 
 
 
(3,435)
 
Issuance of common stock, net of forfeitures
602 
 
1 
0 
601 
 
 
Issuance of common stock, net of forfeitures (in Shares)
 
 
37,728 
0 
 
 
 
Compensation expense for stock based awards
405 
 
 
 
405 
 
 
Repurchase of common stock
(26,615)
 
(13)
0 
(26,602)
 
 
Repurchase of common stock (in Shares)
 
 
(1,184,261)
0 
 
 
 
Reduction of employee stock notes receivable
80 
 
 
 
 
 
80 
Balance at Sep. 30, 2010
844,614 
0 
368 
115 
75,636 
769,665 
(1,170)
Balance (in Shares) at Sep. 30, 2010
 
0 
36,848,473 
11,495,377 
 
 
 
Balance at Dec. 31, 2009
784,563 
0 
384 
115 
109,359 
676,154 
(1,449)
Balance (in Shares) at Dec. 31, 2009
 
0 
38,396,791 
11,495,377 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
103,947 
 
 
 
 
103,947 
 
Cash dividend on Class A and Class B common stock
(10,436)
 
 
 
 
(10,436)
 
Issuance of common stock, net of forfeitures
4,837 
 
3 
0 
4,834 
 
 
Issuance of common stock, net of forfeitures (in Shares)
 
 
312,322 
0 
 
 
 
Compensation expense for stock based awards
1,096 
 
 
 
1,096 
 
 
Repurchase of common stock
(39,672)
 
(19)
0 
(39,653)
 
 
Repurchase of common stock (in Shares)
 
 
(1,860,640)
0 
 
 
 
Reduction of employee stock notes receivable
279 
 
 
 
 
 
279 
Balance at Sep. 30, 2010
844,614 
0 
368 
115 
75,636 
769,665 
(1,170)
Balance (in Shares) at Sep. 30, 2010
 
0 
36,848,473 
11,495,377 
 
 
 
Balance at Dec. 31, 2010
906,633 
0 
368 
115 
76,263 
831,057 
(1,170)
Balance (in Shares) at Dec. 31, 2010
 
0 
36,846,353 
11,495,377 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
139,456 
 
 
 
 
139,456 
 
Cash dividend on Class A and Class B common stock
(13,050)
 
 
 
 
(13,050)
 
Contingency payment related to business combination
(5,893)
 
 
 
(5,893)
 
 
Issuance of common stock, net of forfeitures
4,430 
 
3 
0 
4,427 
 
 
Issuance of common stock, net of forfeitures (in Shares)
 
 
239,620 
0 
 
 
 
Compensation expense for stock based awards
1,007 
 
 
 
1,007 
 
 
Repurchase of common stock
(21,130)
 
(11)
0 
(21,119)
 
 
Repurchase of common stock (in Shares)
 
 
(1,121,885)
0 
 
 
 
Reduction of employee stock notes receivable
30 
 
 
 
 
 
30 
Balance at Sep. 30, 2011
1,011,483 
0 
360 
115 
54,685 
957,463 
(1,140)
Balance (in Shares) at Sep. 30, 2011
 
0 
35,964,088 
11,495,377 
 
 
 
Balance at Jun. 30, 2011
988,784 
0 
370 
115 
74,646 
914,823 
(1,170)
Balance (in Shares) at Jun. 30, 2011
 
0 
37,044,372 
11,495,377 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
47,451 
 
 
 
 
47,451 
 
Cash dividend on Class A and Class B common stock
(4,811)
 
 
 
 
(4,811)
 
Issuance of common stock, net of forfeitures
315 
 
1 
0 
314 
 
 
Issuance of common stock, net of forfeitures (in Shares)
 
 
17,157 
0 
 
 
 
Compensation expense for stock based awards
310 
 
 
 
310 
 
 
Repurchase of common stock
(20,596)
 
(11)
0 
(20,585)
 
 
Repurchase of common stock (in Shares)
 
 
(1,097,441)
0 
 
 
 
Reduction of employee stock notes receivable
30 
 
 
 
 
 
30 
Balance at Sep. 30, 2011
$ 1,011,483 
$ 0 
$ 360 
$ 115 
$ 54,685 
$ 957,463 
$ (1,140)
Balance (in Shares) at Sep. 30, 2011
 
0 
35,964,088 
11,495,377 
 
 
 
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Parentheticals)
3 Months Ended
Sep. 30,		 9 Months Ended
Sep. 30,
2011
2010
2011
2010
Common Class A [Member]
 
 
 
 
Dividends paid per common share (in dollars per share)
$ 0.10 
$ 0.07 
$ 0.27 
$ 0.21 
Common Class B [Member]
 
 
 
 
Dividends paid per common share (in dollars per share)
$ 0.10 
$ 0.07 
$ 0.27 
$ 0.21 
Consolidated Statements of Cash Flows (USD $)
In Thousands
9 Months Ended
Sep. 30,
2011
2010
Net income
$ 139,456 
$ 103,947 
Adjustments to reconcile net income to net cash provided by operating activities, net of business and asset acquisitions:
 
 
Depreciation and amortization, including loan premiums/discount and deferred origination costs
54,462 
71,696 
Provision for loan losses
14,250 
16,700 
Derivative market value adjustment
18,683 
94,539 
Foreign currency transaction adjustment
10,902 
(58,608)
Proceeds to terminate and/or amend derivative instruments
12,369 
15,169 
Payments to terminate and/or amend derivative instruments
(10,068)
(763)
Gain on sale of loans
(1,345)
0 
Gain from debt repurchases
(6,962)
(28,821)
Originations and purchases of student loans-held for sale
0 
(97,782)
Change in investments - trading securities, net
(6,598)
(33,082)
Deferred income tax benefit
(15,916)
(4,292)
Non-cash compensation expense
1,574 
1,719 
Accrued litigation settlement
0 
55,000 
Other non-cash items
(124)
(202)
Decrease (increase) in accrued interest receivable
6,550 
(88,770)
Decrease (increase) in accounts receivable
(6,280)
(26,670)
Decrease (increase) in other assets
1,065 
(7,977)
(Decrease) increase in accrued interest payable
(3,207)
(104)
(Decrease) increase in other liabilities
3,135 
4,131 
Net cash provided by operating activities
211,946 
15,830 
Cash flows from investing activities, net of business and asset acquisitions:
 
 
Originations and purchases of student loans, including loan premiums/discounts, and deferred origination costs
(820,812)
(2,957,976)
Purchases of student loans, including loan premiums, from a related party
(59)
(989,002)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
1,778,729 
1,342,963 
Proceeds from sale of student loans
95,178 
27,191 
Purchases of property and equipment, net
(9,776)
(7,496)
Decrease (increase) in restricted cash and investments, net
101,009 
(67,210)
Business and asset acquisitions, net of cash acquired, including contingency payments
(14,029)
(3,000)
Net cash provided by (used in) investing activities
1,130,240 
(2,654,530)
Cash flows from financing activities:
 
 
Payments on bonds and notes payable
(2,386,461)
(2,541,883)
Proceeds from issuance of bonds and notes payable
995,644 
5,104,517 
Payments on bonds payable due to a related party
(107,050)
0 
Proceeds from issuance of bonds payable due to a related party
0 
111,675 
Payments of debt issuance costs
(2,282)
(7,971)
Dividends paid
(13,050)
(10,436)
Repurchases of common stock
(21,130)
(39,672)
Proceeds from issuance of common stock
406 
371 
Payments received on employee stock notes receivable
30 
279 
Net cash (used in) provided by financing activities
(1,533,893)
2,616,880 
Net decrease in cash and cash equivalents
(191,707)
(21,820)
Cash and cash equivalents, beginning of period
283,801 
338,181 
Cash and cash equivalents, end of period
92,094 
316,361 
Supplemental disclosures of cash flow information:
 
 
Interest paid
153,167 
171,656 
Income taxes paid, net of refunds
$ 97,640 
$ 77,774 
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 September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2010 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results for the year ending December 31, 2011. 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, 2010.

Reclassifications

Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications include:

•
Reclassifying “professional and other services,” “occupancy and communications,” “postage and distribution,” “advertising and marketing,” and “trustee and other debt related fees” to “other” operating expenses.

•
Reclassifying student list amortization, which was previously included in “advertising and marketing,” to “depreciation and amortization.”

The reclassifications had no effect on consolidated net income or consolidated assets and liabilities.

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

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”), which was an update to the Receivables Topic of the FASB Accounting Standards Codification (“ASC”).   In accordance with ASU 2010-20, the Company has expanded its disclosures about the credit quality of its student loans receivable and the associated allowance for loan losses.  ASU 2010-20 requires entities to provide disclosures on a disaggregated basis. The ASU defines two levels of disaggregation – portfolio segment and class of financing receivable.  A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses.  Classes of financing receivables generally are a disaggregation of a portfolio segment. The Company evaluates the adequacy of the allowance for loan losses on its federally insured loan portfolio separately from its non-federally insured loan portfolio.  Management has determined that each of the federally insured loan portfolio and the non-federally insured loan portfolio meets the definition of a portfolio segment.  Accordingly, the portfolio segment basis disclosures required by ASU 2010-20 are presented in this note for each of these portfolios.  The Company does not disaggregate its portfolio segment student loan portfolios into classes of financing receivables as defined in ASU 2010-20. In addition, as of September 30, 2011 and December 31, 2010, the Company does not have any impaired loans as defined in the Receivables Topic of the FASB ASC.










Student loans receivable consisted of the following:

 
As of September 30, 2011
 
As of December 31, 2010
 
Held for investment
 
Held for investment
 
Held for sale (a)
Federally insured loans
$
24,655,652

 
23,757,699

 
—

Non-federally insured loans
29,061

 
26,370

 
84,987

 
24,684,713

 
23,784,069

 
84,987

Unamortized loan premiums/discounts and deferred origination costs, net
2,674

 
207,571

 
—

Allowance for loan losses – federally insured loans
(35,190
)
 
(32,908
)
 
—

Allowance for loan losses – non-federally insured loans
(10,583
)
 
(10,718
)
 
—

 
$
24,641,614

 
23,948,014

 
84,987

Allowance for federally insured loans as a percentage of such loans
0.14
%
 
0.14
%
 
 

Allowance for non-federally insured loans as a percentage of such loans
36.42
%
 
40.64
%
 
 

 
(a)
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. As of December 31, 2010, the Company classified this portfolio as held for sale and the loans were carried at fair value.

Loan Purchase

On July 8, 2011, the Company purchased the residual interest in $1.9 billion of securitized federally insured consolidation loans. The Company acquired the ownership interest in GCO SLIMS Trust I (the "SLIMS Trust") giving the Company rights to the residual interest in GCO Education Loan Funding Trust-I (the "GCO Trust"). The GCO Trust includes federally insured consolidation loans funded to term with $1.9 billion of notes payable that carry interest rates on a spread to LIBOR or are set and periodically reset via a "dutch auction" ("Auction Rate Securities").

On July 8, 2011, the SLIMS Trust included $46.2 million of notes payable that carry a fixed interest rate of 5.72%. All excess interest earned from the GCO Trust must be used to pay the interest and principal on the notes payable in the SLIMS Trust until the SLIMS notes are paid in full.

The Company has consolidated these trusts on its consolidated balance sheet because management has determined the Company is the primary beneficiary of the trusts. Upon acquisition, the Company recorded all assets and liabilities of the trusts at fair value, resulting in the recognition of a student loan fair value discount of $146 million and a bonds and notes payable fair value discount of $167 million. All other assets acquired and liabilities assumed (restricted cash, accrued interest receivable/payable, and other assets/liabilities) were recorded at cost which approximates fair value.

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance 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 September 30,
 
Nine months ended September 30,
 
2011
 
2010
 
2011
 
2010
Balance at beginning of period
$
42,300

 
50,797

 
43,626

 
50,887

Provision for loan losses:
 

 
 

 
 

 
 

Federally insured loans
5,000

 
4,500

 
13,500

 
13,700

Non-federally insured loans
250

 
1,000

 
750

 
3,000

Total provision for loan losses
5,250

 
5,500

 
14,250

 
16,700

Charge-offs:
 

 
 

 
 

 
 

Federally insured loans
(3,978
)
 
(4,510
)
 
(13,418
)
 
(13,549
)
Non-federally insured loans
(1,175
)
 
(1,933
)
 
(3,395
)
 
(5,696
)
Total charge-offs
(5,153
)
 
(6,443
)
 
(16,813
)
 
(19,245
)
 
 
 
 
 
 
 
 
Recoveries - Non-federally insured loans
350

 
358

 
1,003

 
940

Purchases:
 
 
 
 
 
 
 
Federally insured loans
2,200

 
—

 
2,200

 
2,710

Non-federally insured loans
—

 
—

 
—

 
220

Transfer to/from repurchase obligation related
 
 
 
 
 
 
 
to loans sold/purchased, net
826

 
—

 
1,507

 
(2,000
)
Balance at end of period
$
45,773

 
50,212

 
45,773

 
50,212

 
 
 
 
 
 
 
 
Allocation of the allowance for loan losses:
 

 
 

 
 

 
 

Federally insured loans
$
35,190

 
32,962

 
35,190

 
32,962

Non-federally insured loans
10,583

 
17,250

 
10,583

 
17,250

Total allowance for loan losses
$
45,773

 
50,212

 
45,773

 
50,212


Repurchase Obligations

As of September 30, 2011, 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 September 30,
 
Nine months ended September 30,
 
2011
 
2010
 
2011
 
2010
Beginning balance
$
20,689

 
12,600

 
12,600

 
10,600

Repurchase obligation transferred to/from the allowance
 
 
 
 
 
 
 
for loan losses related to loans purchased/sold, net
(826
)
 
—

 
(1,507
)
 
2,000

Repurchase obligation associated with loans sold (a)
—

 
—

 
6,270

 
—

Current period expense (b)
—

 
—

 
2,500

 
—

Ending balance
$
19,863

 
12,600

 
19,863

 
12,600


(a)
As discussed previously, on January 13, 2011, the Company sold a portfolio of loans and retained all credit risk related to this portfolio. These loans were classified as held for sale as of December 31, 2010 and the loans were carried at fair value. Upon sale, the Company established a repurchase obligation associated with those loans that are estimated to become 60 days delinquent.

(b)
The current period expense is included in "other" under operating expenses in the accompanying consolidated statements of operations. During the nine months ended September 30, 2011, the Company recorded an expense of $2.5 million related to its obligation to repurchase non-federally insured loans.

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 delinquency amounts on loans held for investment.
 
As of September 30, 2011
 
As of December 31, 2010
 
Dollars
 
Percent
 
Dollars
 
Percent
Federally Insured Loans:
 
 
 
 
 
 
 
Loans in-school/grace/deferment (a)
$
4,358,786

 
 
 
$
4,358,616

 
 
Loans in forbearance (b)
3,390,367

 
 
 
2,984,869

 
 
Loans in repayment status:
 

 
 
 
 

 
 
Loans current
14,555,949

 
86.1
%
 
14,309,480

 
87.2
%
Loans delinquent 31-60 days (c)
675,053

 
4.0

 
794,140

 
4.8

Loans delinquent 61-90 days (c)
366,831

 
2.2

 
306,853

 
1.9

Loans delinquent 91 days or greater (d)
1,308,666

 
7.7

 
1,003,741

 
6.1

Total loans in repayment
16,906,499

 
100.0
%
 
16,414,214

 
100.0
%
Total federally insured loans
$
24,655,652

 
 

 
$
23,757,699

 
 

 
 
 
 
 
 
 
 
Non-Federally Insured Loans:
 

 
 

 
 

 
 

Loans in-school/grace/deferment (a)
$
2,944

 
 

 
$
3,500

 
 

Loans in forbearance (b)
473

 
 

 
292

 
 

Loans in repayment status:
 

 
 

 
 

 
 

Loans current
19,209

 
74.9
%
 
16,679

 
73.9
%
Loans delinquent 31-60 days (c)
893

 
3.5

 
1,546

 
6.8

Loans delinquent 61-90 days (c)
1,344

 
5.2

 
1,163

 
5.2

Loans delinquent 91 days or greater
4,198

 
16.4

 
3,190

 
14.1

Total loans in repayment
25,644

 
100.0
%
 
22,578

 
100.0
%
Total non-federally insured loans
$
29,061

 
 

 
$
26,370

 
 

 
(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 91 days or greater include 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 September 30, 2011
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes (a):
 
 
 
 
 
Bonds and notes based on indices
$
20,703,892

 
0.29% - 6.90%
 
11/25/15 - 7/27/48
Bonds and notes based on auction or remarketing
970,575

 
0.16% - 2.14%
 
5/1/28 - 5/25/42
Total variable-rate bonds and notes
21,674,467

 
 
 
 
Commercial paper - FFELP warehouse facilities
719,668

 
0.22% - 0.45%
 
7/1/14
Department of Education Conduit
2,398,456

 
0.30%
 
5/8/14
Unsecured line of credit
149,390

 
0.63%
 
5/8/12
Unsecured debt - Junior Subordinated Hybrid Securities
100,697

 
3.74%
 
9/15/61
Other borrowings
43,510

 
3.58 % - 5.72%
 
11/14/11 - 3/1/22
 
25,086,188

 
 
 
 
Discount on bonds and notes payable
(159,676
)
 
 
 
 
Total
$
24,926,512

 
 
 
 
 
 
As of December 31, 2010
 
Carrying
amount
 
Interest rate
range
 
Final maturity
Variable-rate bonds and notes (a):
 
 
 
 
 
Bonds and notes based on indices
$
20,170,217

 
0.30% - 6.90%
 
5/26/14 - 7/27/48
Bonds and notes based on auction or remarketing
944,560

 
0.24% - 1.51%
 
5/1/11 - 7/1/43
Total variable-rate bonds and notes
21,114,777

 
 
 
 
Commercial paper - FFELP warehouse facility
108,381

 
0.29% - 0.35%
 
7/29/13
Department of Education Conduit
2,702,345

 
0.31%
 
5/8/14
Unsecured line of credit
450,000

 
0.79%
 
5/8/12
Unsecured debt - Junior Subordinated Hybrid Securities
163,255

 
7.40%
 
9/15/61
Related party debt
107,050

 
0.53%
 
5/20/11
Other borrowings
26,664

 
0.26% - 5.10%
 
1/1/11 - 11/11/15
 
$
24,672,472

 
 
 
 
(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 financing vehicles during the periods presented above include loan warehouse facilities, asset-backed securitizations, and the government’s Conduit Program (as described below).

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.

On July 14, 2011, the Company renewed the liquidity agreement on its existing FFELP warehouse facility (the “NFSLW-I Warehouse”) and entered into an additional FFELP warehouse facility (the “NHELP-I Warehouse”).

When the Company renewed the liquidity agreement on its NFSLW-I Warehouse facility on July 14, 2011, it had a maximum financing amount of $300.0 million which was increased to $500.0 million on August 10, 2011. The NFSLW-I Warehouse has a revolving financing structure supported by 364-day liquidity provisions, which expires on April 1, 2012. The final maturity date of the facility is July 1, 2014. In the event the Company is unable to renew the liquidity provisions by April 1, 2012, 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 July 1, 2014.

The NFSLW-I Warehouse facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 85 percent to 98 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 84.5 to 90 percent based on loan type. As of September 30, 2011, $362.1 million was outstanding under the NFSLW-I Warehouse facility, $137.9 million was available for future use, and $30.9 million was advanced as equity support.

The NHELP-I Warehouse has a maximum financing amount of $500.0 million, with a revolving financing structure supported by 364-day liquidity provisions, which expires on October 1, 2012. The final maturity date of the facility is July 1, 2014. In the event the Company is unable to renew the liquidity provisions by October 1, 2012, 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 July 1, 2014.

The NHELP-I Warehouse facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 93 percent to 95 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 85 to 90 percent based on loan type. As of September 30, 2011, $357.6 million was outstanding under the NHELP-I Warehouse facility, $142.4 million was available for future use, and $18.5 million was advanced as equity support.

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 violation of these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facilities.

Asset-backed securitizations

During the first quarter of 2011, the Company completed an asset-backed securities transaction totaling $384.4 million.  Notes issued in this asset-backed securities transaction carry interest rates based on a spread to LIBOR.  The Company used the proceeds from the sale of these notes to purchase principal and interest on student loans, including loans which were previously financed in the NFSLW-I Warehouse facility.

Department of Education’s Conduit Program

In May 2009, the U.S. Department of Education (the “Department”) implemented a program under which it finances eligible FFELP Stafford and PLUS loans in a conduit vehicle established to provide funding for student lenders (the "Conduit Program").  Loans eligible for the Conduit Program had to be first disbursed on or after October 1, 2003, but not later than June 30, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements. Funding for the Conduit Program is provided by the capital markets at a cost based on market rates, with the Company being advanced 97 percent of the student loan face amount. Excess amounts needed to fund the remaining 3 percent of the student loan balances were contributed by the Company. The Conduit Program expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”) issued by the Conduit Program are supported by a combination of  (i) notes backed by FFELP loans, (ii) a liquidity agreement with the Federal Financing Bank, and (iii) a put agreement provided by the Department.  If the conduit does not have sufficient funds to pay all Student Loan Notes, then those Student Loan Notes will be repaid with funds from the Federal Financing Bank.  The Federal Financing Bank will hold the notes for a short period of time and, if at the end of that time, the Student Loan Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the Conduit Program will be sold to the Department through a put agreement at a price of 97 percent of the face amount of the loans.  As of September 30, 2011, the Company had $2.4 billion borrowed under the facility and $85.1 million advanced as equity support in the facility. Effective July 1, 2010, no additional loans could be funded using the Conduit Program.

Unsecured Line of Credit

The Company has a $750.0 million unsecured line of credit that terminates on May 8, 2012.  As of September 30, 2011, there was $149.4 million outstanding on this line.  Upon termination in 2012, there can be no assurance that the Company will be able to maintain this line of credit, find alternative funding, or increase the amount outstanding under the line, if necessary.  The lending commitment under the Company’s unsecured line of credit is provided by a total of thirteen banks, with no individual bank representing more than 11% of the total lending commitment. The bank lending group includes Lehman Brothers Bank ("Lehman"), a subsidiary of Lehman Brothers Holdings Inc., which represents approximately 7% of the lending commitment under the line of credit. In September 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The Company does not expect that Lehman will fund future borrowing requests. As of September 30, 2011, excluding Lehman’s lending commitment, the Company has $558.6 million available for future use under its unsecured line of credit.

The 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 September 30, 2011, 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 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.

Junior Subordinated Hybrid Securities

On September 27, 2006 the Company issued $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities ("Hybrid Securities"). The Hybrid Securities are unsecured obligations of the Company. The interest rate on the Hybrid Securities from the date they were issued through September 28, 2011 was 7.40%, payable semi-annually. Beginning September 29, 2011 through September 29, 2036, the "scheduled maturity date," the interest rate on the Hybrid Securities is equal to three-month LIBOR plus 3.375%, payable quarterly. The principal amount of the Hybrid Securities will become due on the scheduled maturity date only to the extent that the Company has received proceeds from the sale of certain qualifying capital securities prior to such date (as defined in the Hybrid Securities' prospectus). If any amount is not paid on the scheduled maturity date, it will remain outstanding and bear interest at a floating rate as defined in the prospectus, payable monthly. On September 15, 2061, the Company must pay any remaining principal and interest on the Hybrid Securities in full whether or not the Company has sold qualifying capital securities. At the Company's option, the Hybrid Securities are redeemable in whole or in part, any time on or after September 29, 2011, at their principal amount plus accrued and unpaid interest, provided in the case of a redemption in part that the principal amount outstanding after such redemption is at least $50.0 million.





Related Party Transactions

Union Bank Participation Agreement

The Company maintains an agreement with Union Bank and Trust Company ("Union Bank"), an entity under common control, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans (the "FFELP Participation Agreement"). The Company uses this facility as an additional source to fund FFELP student loans.  As of September 30, 2011 and December 31, 2010, $505.1 million and $350.4 million, respectively, of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company.  The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750.0 million or an amount in excess of $750.0 million if mutually agreed to by both parties.  Loans participated under this agreement 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.

Related Party Debt

The Company has from time to time repurchased certain of its own asset-backed securities (bonds and notes payable). For accounting purposes, these notes have been effectively retired and are not included on the Company’s consolidated balance sheets. However, these securities are legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. As of December 31, 2010, the Company had $107.1 million of these securities participated to Union Bank, as trustee for various grantor trusts, and such notes were included in “bonds and notes payable” on the Company’s consolidated balance sheet. During the first quarter of 2011, the Company redeemed all outstanding notes under this participation.

Debt Repurchases

During the first nine months of 2010 and 2011, the Company repurchased outstanding debt as summarized in note 4, "Gain on Sale of Loans and Debt Repurchases."

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

“Gain on sale of loans and debt repurchases” in the accompanying consolidated statements of income is composed of the following items:

 
 
Three months ended
 
Nine months ended
 
September 30, 2011
 
September 30, 2011
 
Notional
amount
 
Purchase
price
 
Gain
 
Notional
amount
 
Purchase
price
 
Gain
Gains on debt repurchases:
 
 
 
 
 
 
 
 
 
 
 
Junior Subordinated Hybrid Securities
$
—

 
—

 
—

 
62,558

 
55,651

 
6,907

Asset-backed securities (a)
11,654

 
11,654

 
—

 
12,254

 
12,199

 
55

 
$
11,654

 
11,654

 
—

 
74,812

 
67,850

 
6,962

Gain on sale of loans
 

 
 

 
—

 
 

 
 

 
1,345

Gain on sale of loans and debt repurchases
 

 
 

 
$
—

 
 

 
 

 
$
8,307

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30, 2010
 
September 30, 2010
 
Notional
amount
 
Purchase
price
 
Gain
 
Notional
amount
 
Purchase
price
 
Gain
Gains on debt repurchases:
 

 
 

 
 

 
 

 
 

 
 

Junior Subordinated Hybrid Securities
$
34,995

 
30,073

 
4,922

 
34,995

 
30,073

 
4,922

Asset-backed securities (a)
85,675

 
80,712

 
4,963

 
477,700

 
453,801

 
23,899

 
$
120,670

 
110,785

 
9,885

 
512,695

 
483,874

 
28,821


(a)
For accounting purposes, the asset-backed securities repurchased by the Company are effectively retired and are not included on the Company’s consolidated balance sheet.  However, as of September 30, 2011, the Company has purchased a cumulative amount of $72.6 million of these securities that remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate.  Upon a sale to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. The par value of these notes ($72.6 million as of September 30, 2011) may not represent market value of such securities.

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 occurs 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 September 30, 2011, the Company had $23.7 billion and $1.0 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 $20.0 billion of debt indexed to three-month LIBOR, which resets quarterly, and $0.7 billion of debt indexed to one-month LIBOR, which resets monthly.

Because of the different indice types and different indice reset frequencies, the Company is exposed to interest rate risk in the form of basis risk and repricing risk, which, as noted above, is the risk that the different indices may reset at different frequencies, or will not move in the same direction or with the same magnitude. While these indices are all short term in nature with rate movements that are highly correlated over a longer period of time, there have been points in recent history when volatility has been high and correlation has been reduced.

The Company has used derivative instruments to hedge both the basis and repricing risk on certain student loans in which the Company earns interest based on a treasury bill rate that resets daily and are funded with debt indexed to primarily three-month LIBOR.  To hedge these loans, the Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays a weekly treasury bill rate plus a spread as defined in the agreement ("T-Bill/LIBOR Basis Swaps").

However, 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 and the relationship between these indices has been highly correlated over a long period of time.

The Company has also 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 basis swaps outstanding as of both September 30, 2011 and December 31, 2010:
 
 
 
 
 
Notional amounts
 
 
 
 
1:3 Basis Swaps
 
T-Bill/LIBOR
Basis Swaps
 
Maturity
 
 
2011
 
 
$
—

 
225,000

 
2021
 
 
250,000

 
—

 
2023
 
 
1,250,000

 
—

 
2024
 
 
250,000

 
—

 
2028
 
 
100,000

 
—

 
2039
(a)
 
150,000

 
—

 
2040
(b)
 
200,000

 
—

 
 
 
 
$
2,200,000

 
225,000


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

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


Interest rate swaps – floor income hedges

FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment (or SAP) formula set by the Department and the borrower rate, which is fixed over a period of time. The SAP formula is based on an applicable 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 special allowance payment formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

As of September 30, 2011 and December 31, 2010, the Company had $11.1 billion and $8.5 billion, respectively, of student loan assets that were earning fixed rate floor income. The following tables summarize the outstanding derivative investments used by the Company to economically hedge these loans.
 
 
 
As of September 30, 2011
 
 
 
Notional
 
Weighted average fixed rate paid by the Company (a)
 
Maturity
 
amount
 
 
2013
 
$
2,150,000

 
0.85
%
 
2014
 
750,000

 
0.85

 
2015
 
100,000

 
2.26

 
2020
 
50,000

 
3.23

 
 
 
$
3,050,000

 
0.87
%
 
 
 
 
As of December 31, 2010
 
 
 
Notional
 
Weighted average fixed rate paid by the Company (a)
 
Maturity
 
amount
 
 
2011
 
$
4,300,000

 
0.53
%
 
2012
 
3,950,000

 
0.67

 
2013
 
650,000

 
1.07

 
2015
 
100,000

 
2.26

 
2020
 
50,000

 
3.23

 
 
 
$
9,050,000

 
0.66
%

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

 
Interest rate swaps – unsecured debt hedges

On September 27, 2006, the Company issued $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities. As of September 30, 2011, $100.7 million of these notes were outstanding. The interest rate on the Hybrid Securities from the date they were issued through September 28, 2011 was 7.40%. Beginning September 29, 2011 through September 29, 2036, the interest rate on the Hybrid Securities is equal to three-month LIBOR plus 3.375%, payable quarterly. As of September 30, 2011 and December 31, 2010, 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 September 30, 2011
Notional amount (a)
 
Weighted average fixed rate paid by the Company (b)
 
$
75,000

 
4.28
%
 
 
 
As of December 31, 2010
Notional amount (a)
 
Weighted average fixed rate paid by the Company (b)
 
$
100,000

 
4.27
%

(a)
The effective start date on $75 million (notional amount) of the derivatives outstanding is March 2012 with a maturity date of 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 is 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” on the accompanying consolidated statements of operations.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2011
 
2010
 
2011
 
2010
Re-measurement of Euro Notes
$
73,453

 
(106,468
)
 
(10,902
)
 
58,608

Change in fair value of cross currency interest rate swaps
(53,142
)
 
107,531

 
28,125

 
(52,491
)
Total impact to statements of income - income (expense)
$
20,311

 
1,063

 
17,223

 
6,117


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 operations. 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 operations and are accounted for as a change in fair value of such derivative. During the three and nine months ended September 30, 2011, the Company terminated and/or amended certain derivatives for net payments of $9.5 million and net proceeds of $2.3 million, respectively. During the three and nine months ended September 30, 2010, the Company terminated and/or amended certain derivatives for net proceeds of $0.4 million and $14.4 million, respectively.
 
The following table summarizes the fair value of the Company’s derivatives not designated as hedging:

 
Fair value of asset derivatives
 
Fair value of liability derivatives
 
As of
 
As of
 
As of
 
As of
 
September 30, 2011
 
December 31, 2010
 
September 30, 2011
 
December 31, 2010
1:3 basis swaps
$
7,479

 
10,489

 
770

 
44

T-Bill/LIBOR basis swaps
13

 
—

 
7

 
201

Interest rate swaps - floor income hedges
—

 
10,569

 
25,760

 
15,372

Interest rate swaps - hybrid debt hedges
—

 
1,132

 
22,535

 
470

Cross-currency interest rate swaps
123,043

 
94,918

 
—

 
—

Other
85

 
1,238

 
275

 
2

Total
$
130,620

 
118,346

 
49,347

 
16,089


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

Derivatives not designated as hedging
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2011
 
2010
 
2011
 
2010
Settlements:
 
 

 
 

 
 

 
 

1:3 basis swaps
 
$
321

 
893

 
902

 
974

T-Bill/LIBOR basis swaps
 
(69
)
 
—

 
(263
)
 
—

Interest rate swaps - floor income hedges
 
(3,482
)
 
(4,040
)
 
(16,045
)
 
(12,183
)
Interest rate swaps - hybrid debt hedges
 
(250
)
 
(242
)
 
(744
)
 
(242
)
Cross-currency interest rate swaps
 
3,745

 
1,025

 
8,625

 
3,243

Other
 
(8
)
 
(222
)
 
108

 
(178
)
Total settlements - income (expense)
 
257

 
(2,586
)
 
(7,417
)
 
(8,386
)
Change in fair value:
 
 

 
 

 
 

 
 

1:3 basis swaps
 
1,702

 
1,258

 
(3,736
)
 
7,012

T-Bill/LIBOR basis swaps
 
87

 
(221
)
 
208

 
15

Interest rate swaps - floor income hedges
 
(15,423
)
 
(26,736
)
 
(20,137
)
 
(34,284
)
Interest rate swaps - hybrid debt hedges
 
(20,747
)
 
(6,031
)
 
(23,196
)
 
(11,352
)
Cross-currency interest rate swaps
 
(53,142
)
 
107,531

 
28,125

 
(52,491
)
Other
 
182

 
(2,138
)
 
53

 
(3,439
)
Total change in fair value - (expense) income
 
(87,341
)
 
73,663

 
(18,683
)
 
(94,539
)
 
 
 
 
 
 
 
 
 
Re-measurement of Euro Notes (foreign currency
 
 
 
 
 
 
 
 
transaction adjustment) - income (expense)
 
73,453

 
(106,468
)
 
(10,902
)
 
58,608

 
 
 
 
 
 
 
 
 
Derivative market value and foreign currency
 
 
 
 
 
 
 
 
adjustments and derivative settlements - (expense) income
 
$
(13,631
)
 
(35,391
)
 
(37,002
)
 
(44,317
)

Derivative Instruments - Credit and Market Risk

By using derivative instruments, the Company is exposed to credit and 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.  Additionally, 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 posts collateral is dependent upon the Company’s unsecured credit rating.  If the Company’s credit ratings are downgraded from current levels or if interest and foreign currency exchange rates move materially, the Company could be required to deposit a significant amount of collateral with its derivative instrument counterparties. The collateral deposits, if significant, could negatively impact the Company’s liquidity and capital resources. As of September 30, 2011, the Company had $48.5 million posted as collateral to derivative counterparties, which is included in “restricted cash and investments” in the Company’s consolidated balance sheet. The Company does not use the collateral to offset fair value amounts recognized in the financial statements for derivative instruments.

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 September 30, 2011, the trustee for the Company’s asset-backed securities transactions held $100.3 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.

The Company attempts to manage market and credit risks associated with interest and foreign currency exchange 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 September 30, 2011, 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.
Note 6 - Investments
Investment Holdings [Text Block]
Investments

Included in “investments – trading securities” on the consolidated balance sheets as of September 30, 2011 and December 31, 2010 are debt and equity securities that are bought and held principally for the purpose of selling them in the near term. These investments are classified as trading securities and reported at fair value.

In December 2010, Union Bank established various trusts whereby Union Bank serves as trustee for the purpose of purchasing, holding, managing, and selling investments in student loan asset-backed securities.  Union Bank, in its individual capacity, and the Company have both invested money into the trusts.  As of September 30, 2011 and December 31, 2010, the Company had $9.6 million and $4.9 million, respectively,  invested in the trusts, and such investments are included in “investments – trading securities” on the consolidated balance sheets.

Prior to May 1, 2011, the Company and Union Bank employed certain individuals as dual employees and such employees provided consulting and advisory services to Union Bank as trustee for these trusts, and Union Bank agreed to pay the Company for the share of such employees’ salary and payroll based on the value of such services rendered as well as the loss of value of such dual employees’ services to the Company.  On May 9, 2011, a subsidiary of the Company entered into a management agreement with Union Bank, effective as of May 1, 2011, under which the subsidiary performs various advisory and management services on behalf of Union Bank with respect to investments in securities by the trusts, including identifying securities for purchase or sale by the trusts.  The agreement provides that Union Bank will pay to the subsidiary annual fees of 25 basis points on the outstanding balance of the investments in the trusts.  As of September 30, 2011, the outstanding balance of investments in the trusts was $326.1 million.  In addition, Union Bank will pay additional fees to the subsidiary of 50% of the gains from the sale of securities from the trusts.  During the three and nine months ended September 30, 2011, the Company recognized $2.9 million and $4.1 million, respectively, of fee revenue related to this agreement which is included in “other income” in the accompanying consolidated statements of income.

Note 7 - Intangible Assets
Intangible Assets Disclosure [Text Block]
Intangible Assets

Intangible assets consist of the following:

 
Weighted
average
remaining
useful life as of
September 30,
2011 (months)
 
As of September 30, 2011
 
As of December 31, 2010
Amortizable intangible assets:
 
 
 
Customer relationships (net of accumulated amortization of
 
 
 
 
 
$58,450 and $49,743, respectively)
64

 
$
26,656

 
28,576

Computer software (net of accumulated amortization of
 
 
 
 
 
$4,399 and $2,419, respectively)
16

 
3,519

 
5,499

Trade names (net of accumulated amortization of
 
 
 
 
 
$8,694 and $6,956, respectively)
15

 
2,899

 
4,637

Total - amortizable intangible assets
54

 
$
33,074

 
38,712


The Company recorded amortization expense on its intangible assets of $4.5 million and $5.4 million for the three months ended September 30, 2011 and 2010, respectively, and $12.4 million and $18.1 million for the nine months ended September 30, 2011 and 2010, respectively. The Company will continue to amortize intangible assets over their remaining useful lives.  As of September 30, 2011, the Company estimates it will record amortization expense as follows:
 
2011 (October 1 - December 31)
$
4,491

2012
17,531

2013
4,286

2014
2,429

2015
925

2016 and thereafter
3,412

 
$
33,074


During the first quarter of 2010, the Company purchased certain assets of a software company that constituted a business combination.  The initial consideration paid by the Company was $3.0 million in cash.  In addition to the initial purchase price, additional payments are to be made by the Company based on certain operating results as defined in the purchase agreement.  These contingent payments are payable in two additional annual installments due in March 2012 and March 2013 and in total are estimated by the Company, as of September 30, 2011, to be $3.5 million.  The contingent payments will be remeasured to fair value each reporting date until the contingency is resolved, with all changes in fair value being recognized in earnings. Substantially all of the purchase price was allocated to a computer software intangible asset that is being amortized over three years.
 
On June 30, 2011, the Company purchased contracts with more than 370 K–12 schools to provide tuition payment plan services.  The initial consideration paid by the Company was $6.9 million in cash.  The initial purchase price is subject to adjustment based on customer retention.  In September 2011, the Company received approximately $51,000 as an adjustment to the purchase price. The final adjustment to purchase price, if any, will occur on May 31, 2012.  Substantially all of the purchase price was allocated to a customer relationship intangible asset that is being amortized over three years.

Note 8 - Goodwill
Goodwill Disclosure [Text Block]
Goodwill

The following table summarizes the Company’s allocation of goodwill by operating segment as of September 30, 2011 and December 31, 2010:

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 - Shareholders’ Equity
Stockholders' Equity Note Disclosure [Text Block]
Shareholders’ Equity

Dividends

Dividends of $0.07, $0.10, and $0.10 per share on the Company’s Class A and Class B common stock were paid on March 15, 2011, June 15, 2011, and September 15, 2011 respectively, to all holders of record as of March 1, 2011, June 1, 2011, and September 1, 2011, respectively. In addition, a $0.10 per share dividend on the Company’s Class A and Class B common stock will be paid on December 15, 2011 to all holders of record as of December 1, 2011.

Stock Repurchases

Shares repurchased by the Company during 2011 are shown in the table below.
 
 
Total shares repurchased
 
Purchase price (in thousands)
 
Average price of shares repurchased (per share)
 
 
 
 
Three months ended March 31, 2011
 
14,465

 
$
310

 
$
21.44

 
 
 
 
 
 
 
Three months ended June 30, 2011
 
9,979

 
224

 
22.39

 
 
 
 
 
 
 
Three months ended September 30, 2011
 
1,097,441

 
20,596

 
18.77

 
 
 
 
 
 
 
Nine months ended September 30, 2011
 
1,121,885

 
$
21,130

 
$
18.83

 
 
 
 
 
 
 
 
Contingent Consideration - infiNET Integrated Solutions, Inc. (“infiNET”)

In 2004, the Company purchased 50% of the stock of infiNET and, in 2006, purchased the remaining 50% of infiNET’s stock. infiNET provides software for customer-focused electronic transactions, information sharing, and electronic account and bill presentment for colleges and universities. Consideration for the purchase of the remaining 50% of the stock of infiNET included 95,380 restricted shares of the Company’s Class A common stock. The purchase agreement provided that the 95,380 shares of Class A common stock issued in the acquisition were subject to stock price guaranty provisions whereby if on or about February 28, 2011 the average market trading price of the Class A common stock was less than $104.8375 per share and had not exceeded that price for any 25 consecutive trading days during the 5-year period from the closing of the acquisition to February 28, 2011, then the Company was required to pay additional cash to the sellers of infiNET for each share of Class A common stock issued in an amount representing the difference between $104.8375 less the greater of $41.9335 or the gross sales price such seller obtained from a sale of the shares occurring subsequent to February 28, 2011. On February 28, 2011, the Company paid $5.9 million in cash to satisfy this obligation. This payment was recorded by the Company as a reduction to additional paid-in capital.
Note 10 - 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 is shown in the table below.

A reconciliation of weighted average shares outstanding follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2011
 
2010
 
2011
 
2010
Net income (loss) attributable to Nelnet, Inc.
$
47,451

 
(368
)
 
139,456

 
103,947

Less earnings (loss) allocated to holders of unvested
 
 
 
 
 
 
 
restricted stock
303

 
(4
)
 
873

 
671

Net income (loss) available to common stockholders
$
47,148

 
(364
)
 
138,583

 
103,276

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
48,059,747

 
48,938,333

 
48,177,539

 
49,460,625

Dilutive effect of the assumed vesting of
 
 
 
 
 
 
 
restricted stock awards
194,141

 
—

 
190,384

 
202,880

Weighted average common shares outstanding - diluted
48,253,888

 
48,938,333

 
48,367,923

 
49,663,505

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.98

 
(0.01
)
 
2.88

 
2.09

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share
$
0.98

 
(0.01
)
 
2.87

 
2.08


No diluted effect of the assumed vesting of restricted stock awards is presented for the three months ended September 30, 2010 as the Company reported a net loss and including these shares would have been antidilutive for the period. The dilutive effect of these shares if the Company had net income for the period was not significant.
Note 11 - 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 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, 2010. 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.

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.  Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability.  As discussed further below, management measures the profitability of the Company’s operating segments based on “base net income.”  Accordingly, information regarding the Company’s operating segments is provided based on “base net income.”  The Company’s “base net income” is not a defined term within generally accepted accounting principles (“GAAP”) and may not be comparable to similarly titled measures reported by other companies.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.

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 of 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 guarantee agencies. These activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services.

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, the Company offers actively managed tuition payment plans as well as assistance with financial needs assessment, enrollment management, and donor management. The Company 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 (interactive and list marketing services) and helping students plan and prepare for life after high school (publishing services and resource centers). Interactive marketing products and services include agency of record services, qualified inquiry generation, pay per click, and other marketing management, along with call center solutions. The majority of interactive marketing revenue is derived from fees which are earned through the delivery of qualified inquiries or clicks provided to colleges and universities. List marketing services include providing lists to help higher education institutions and businesses reach the middle school, high school, college bound high school, college, and young adult market places. Publishing services include test preparation study guides, school directories and databases, and career exploration guides.  Resource centers include online courses, scholarship search and selection data, career planning, and on-line information about colleges and universities.

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 (the Reconciliation Act of 2010), 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:

•
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 and finance, legal, and marketing. Beginning in 2010, these costs were allocated to each operating segment based on estimated use of such activities and services.

Segment Operating Results – “Base Net Income”

The tables below include the operating results of each of the Company’s operating segments. Management, including the chief operating decision maker, evaluates the Company on certain non-GAAP performance measures that the Company refers to as “base net income” for each operating segment. While “base net income” is not a substitute for reported results under GAAP, the Company relies on “base net income” to manage each operating segment because it believes this measure provides additional information regarding the operational and performance indicators that are most closely assessed by management.

“Base net income” is 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. Management believes this information provides additional insight into the financial performance of the core business activities of the Company’s operating segments. Accordingly, the tables presented below reflect “base net income,” which is the operating measure reviewed and utilized by management to manage the business. Reconciliations of the segment totals to the Company’s operating results in accordance with GAAP are also included in the tables below.

Income Taxes

For segment reporting, income taxes are applied 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.

Reclassifications

Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications had no effect on any of the segments’ net income or assets and liabilities.
Segment Results and Reconciliations to GAAP
 
Three months ended September 30, 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
 
Base Net
Income
 
Adjustments
to GAAP
Results
 
GAAP
Results of
Operations
Total interest income
$
15

 
11

 
—

 
26

 
157,071

 
1,285

 
(755
)
 
157,627

 
—

 
157,627

Interest expense
—

 
—

 
—

 
—

 
59,049

 
2,572

 
(755
)
 
60,866

 
—

 
60,866

Net interest income (loss)
15

 
11

 
—

 
26

 
98,022

 
(1,287
)
 
—

 
96,761

 
—

 
96,761

Less provision for loan losses
—

 
—

 
—

 
—

 
5,250

 
—

 
—

 
5,250

 
—

 
5,250

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

 
11

 
—

 
26

 
92,772

 
(1,287
)
 
—

 
91,511

 
—

 
91,511

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
37,927

 
—

 
—

 
37,927

 
—

 
—

 
—

 
37,927

 
—

 
37,927

Intersegment servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
16,622

 
—

 
—

 
16,622

 
—

 
—

 
(16,622
)
 
—

 
—

 
—

Tuition payment processing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and campus commerce revenue
—

 
16,774

 
—

 
16,774

 
—

 
—

 
—

 
16,774

 
—

 
16,774

Enrollment services revenue
—

 
—

 
35,505

 
35,505

 
—

 
—

 
—

 
35,505

 
—

 
35,505

Software services revenue
4,622

 
—

 
—

 
4,622

 
—

 
—

 
—

 
4,622

 
—

 
4,622

Other income
—

 
—

 
—

 
—

 
3,694

 
237

 
—

 
3,931

 
—

 
3,931

Gain on sale of loans and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
debt repurchases
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(13,888
)
 
(13,888
)
Derivative settlements, net
—

 
—

 
—

 
—

 
507

 
(250
)
 
—

 
257

 
—

 
257

Total other income (expense)
59,171

 
16,774

 
35,505

 
111,450

 
4,201

 
(13
)
 
(16,622
)
 
99,016

 
(13,888
)
 
85,128

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
25,335

 
7,594

 
6,484

 
39,413

 
694

 
4,025

 
—

 
44,132

 
—

 
44,132

Cost to provide enrollment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
services
—

 
—

 
23,825

 
23,825

 
—

 
—

 
—

 
23,825

 
—

 
23,825

Depreciation and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
amortization
2,005

 
286

 
784

 
3,075

 
—

 
352

 
—

 
3,427

 
4,490

 
7,917

Restructure expense
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
14,420

 
2,302

 
2,129

 
18,851

 
3,311

 
6,742

 
—

 
28,904

 
—

 
28,904

Intersegment expenses, net
1,291

 
1,166

 
783

 
3,240

 
16,865

 
(3,483
)
 
(16,622
)
 
—

 
—

 
—

Total operating expenses
43,051

 
11,348

 
34,005

 
88,404

 
20,870

 
7,636

 
(16,622
)
 
100,288

 
4,490

 
104,778

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes and corporate overhead allocation
16,135

 
5,437

 
1,500

 
23,072

 
76,103

 
(8,936
)
 
—

 
90,239

 
(18,378
)
 
71,861

Corporate overhead allocation
(963
)
 
(321
)
 
(321
)
 
(1,605
)
 
(1,605
)
 
3,210

 
—

 
—

 
—

 
—

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes
15,172

 
5,116

 
1,179

 
21,467

 
74,498

 
(5,726
)
 
—

 
90,239

 
(18,378
)
 
71,861

Income tax (expense) benefit
(5,765
)
 
(1,944
)
 
(448
)
 
(8,157
)
 
(27,902
)
 
4,665

 
—

 
(31,394
)
 
6,984

 
(24,410
)
Net income (loss)
$
9,407

 
3,172

 
731

 
13,310

 
46,596

 
(1,061
)
 
—

 
58,845

 
(11,394
)
 
47,451

 
Three months ended September 30, 2010
 
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
 
Base Net
Income
 
Adjustments
to GAAP
Results
 
GAAP
Results of
Operations
Total interest income
$
13

 
12

 
—

 
25

 
159,752

 
1,919

 
(1,240
)
 
160,456

 
—

 
160,456

Interest expense
—

 
—

 
—

 
—

 
64,302

 
5,181

 
(1,240
)
 
68,243

 
—

 
68,243

Net interest income (loss)
13

 
12

 
—

 
25

 
95,450

 
(3,262
)
 
—

 
92,213

 
—

 
92,213

Less provision for loan losses
—

 
—

 
—

 
—

 
5,500

 
—

 
—

 
5,500

 
—

 
5,500

Net interest income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
after provision for loan losses
13

 
12

 
—

 
25

 
89,950

 
(3,262
)
 
—

 
86,713

 
—

 
86,713

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
33,464

 
—

 
—

 
33,464

 
—

 
—

 
—

 
33,464

 
—

 
33,464

Intersegment servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
20,022

 
—

 
—

 
20,022

 
—

 
—

 
(20,022
)
 
—

 
—

 
—

Tuition payment processing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and campus commerce revenue
—

 
14,527

 
—

 
14,527

 
—

 
—

 
—

 
14,527

 
—

 
14,527

Enrollment services revenue
—

 
—

 
36,439

 
36,439

 
—

 
—

 
—

 
36,439

 
—

 
36,439

Software services revenue
4,624

 
—

 
—

 
4,624

 
—

 
—

 
—

 
4,624

 
—

 
4,624

Other income
—

 
—

 
—

 
—

 
4,710

 
4,722

 
—

 
9,432

 
—

 
9,432

Gain on sale of loans and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
debt repurchases
—

 
—

 
—

 
—

 
4,963

 
4,922

 
—

 
9,885

 
—

 
9,885

Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(32,805
)
 
(32,805
)
Derivative settlements, net
—

 
—

 
—

 
—

 
(2,131
)
 
(455
)
 
—

 
(2,586
)
 
—

 
(2,586
)
Total other income (expense)
58,110

 
14,527

 
36,439

 
109,076

 
7,542

 
9,189

 
(20,022
)
 
105,785

 
(32,805
)
 
72,980

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
22,682

 
6,652

 
6,142

 
35,476

 
1,054

 
4,615

 
(60
)
 
41,085

 
—

 
41,085

Litigation settlement
—

 
—

 
—

 
—

 
—

 
55,000

 
—

 
55,000

 
—

 
55,000

Cost to provide enrollment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
services
—

 
—

 
23,709

 
23,709

 
—

 
—

 
—

 
23,709

 
—

 
23,709

Depreciation and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
amortization
1,362

 
330

 
1,624

 
3,316

 
—

 
354

 
—

 
3,670

 
5,355

 
9,025

Restructure expense
4,751

 
—

 
—

 
4,751

 
—

 
—

 
—

 
4,751

 
—

 
4,751

Other
12,470

 
2,053

 
2,556

 
17,079

 
2,937

 
6,701

 
—

 
26,717

 
—

 
26,717

Intersegment expenses, net
1,166

 
973

 
701

 
2,840

 
20,295

 
(3,173
)
 
(19,962
)
 
—

 
—

 
—

Total operating expenses
42,431

 
10,008

 
34,732

 
87,171

 
24,286

 
63,497

 
(20,022
)
 
154,932

 
5,355

 
160,287

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes and corporate overhead allocation
15,692

 
4,531

 
1,707

 
21,930

 
73,206

 
(57,570
)
 
—

 
37,566

 
(38,160
)
 
(594
)
Corporate overhead allocation
(1,676
)
 
(559
)
 
(559
)
 
(2,794
)
 
(2,793
)
 
5,587

 
—

 
—

 
—

 
—

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes
14,016

 
3,972

 
1,148

 
19,136

 
70,413

 
(51,983
)
 
—

 
37,566

 
(38,160
)
 
(594
)
Income tax (expense) benefit
(5,326
)
 
(1,510
)
 
(436
)
 
(7,272
)
 
(26,757
)
 
19,754

 
—

 
(14,275
)
 
14,501

 
226

Net income (loss)
$
8,690

 
2,462

 
712

 
11,864

 
43,656

 
(32,229
)
 
—

 
23,291

 
(23,659
)
 
(368
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional information:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)
$
8,690

 
2,462

 
712

 
11,864

 
43,656

 
(32,229
)
 
—

 
23,291

 
 
 
 
Plus: Litigation settlement (a)
—

 
—

 
—

 
—

 
—

 
55,000

 
—

 
55,000

 
 
 
 
Plus: Restructure expense (b)
4,751

 
—

 
—

 
4,751

 
—

 
—

 
—

 
4,751

 
 
 
 
Less: Net tax effect
(1,805
)
 
—

 
—

 
(1,805
)
 
—

 
(20,900
)
 
—

 
(22,705
)
 
 
 
 
Net income (loss), excluding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
litigation settlement and restructure expense
$
11,636

 
2,462

 
712

 
14,810

 
43,656

 
1,871

 
—

 
60,337

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge.
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.



 
Nine months ended September 30, 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
 
Base Net
Income
 
Adjustments
to GAAP
Results
 
GAAP
Results of
Operations
Total interest income
$
42

 
19

 
—

 
61

 
433,994

 
3,578

 
(2,132
)
 
435,501

 
—

 
435,501

Interest expense
—

 
—

 
—

 
—

 
158,034

 
8,325

 
(2,132
)
 
164,227

 
—

 
164,227

Net interest income (loss)
42

 
19

 
—

 
61

 
275,960

 
(4,747
)
 
—

 
271,274

 
—

 
271,274

Less provision for loan losses
—

 
—

 
—

 
—

 
14,250

 
—

 
—

 
14,250

 
—

 
14,250

Net interest income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
after provision for loan losses
42

 
19

 
—

 
61

 
261,710

 
(4,747
)
 
—

 
257,024

 
—

 
257,024

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
110,952

 
—

 
—

 
110,952

 
—

 
—

 
—

 
110,952

 
—

 
110,952

Intersegment servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
51,272

 
—

 
—

 
51,272

 
—

 
—

 
(51,272
)
 
—

 
—

 
—

Tuition payment processing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and campus commerce revenue
—

 
50,904

 
—

 
50,904

 
—

 
—

 
—

 
50,904

 
—

 
50,904

Enrollment services revenue
—

 
—

 
101,688

 
101,688

 
—

 
—

 
—

 
101,688

 
—

 
101,688

Software services revenue
13,745

 
—

 
—

 
13,745

 
—

 
—

 
—

 
13,745

 
—

 
13,745

Other income
—

 
—

 
—

 
—

 
11,827

 
5,422

 
—

 
17,249

 
—

 
17,249

Gain on sale of loans and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
debt repurchases
—

 
—

 
—

 
—

 
1,400

 
6,907

 
—

 
8,307

 
—

 
8,307

Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(29,585
)
 
(29,585
)
Derivative settlements, net
—

 
—

 
—

 
—

 
(6,805
)
 
(612
)
 
—

 
(7,417
)
 
—

 
(7,417
)
Total other income (expense)
175,969

 
50,904

 
101,688

 
328,561

 
6,422

 
11,717

 
(51,272
)
 
295,428

 
(29,585
)
 
265,843

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
75,454

 
21,995

 
18,672

 
116,121

 
2,181

 
12,623

 
—

 
130,925

 
—

 
130,925

Cost to provide enrollment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
services
—

 
—

 
68,804

 
68,804

 
—

 
—

 
—

 
68,804

 
—

 
68,804

Depreciation and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
amortization
4,647

 
967

 
2,377

 
7,991

 
—

 
1,046

 
—

 
9,037

 
12,425

 
21,462

Restructure expense
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
43,604

 
7,263

 
6,889

 
57,756

 
9,988

 
16,032

 
—

 
83,776

 
—

 
83,776

Intersegment expenses, net
3,720

 
3,377

 
2,560

 
9,657

 
52,059

 
(10,444
)
 
(51,272
)
 
—

 
—

 
—

Total operating expenses
127,425

 
33,602

 
99,302

 
260,329

 
64,228

 
19,257

 
(51,272
)
 
292,542

 
12,425

 
304,967

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes and corporate overhead allocation
48,586

 
17,321

 
2,386

 
68,293

 
203,904

 
(12,287
)
 
—

 
259,910

 
(42,010
)
 
217,900

Corporate overhead allocation
(2,949
)
 
(983
)
 
(983
)
 
(4,915
)
 
(4,914
)
 
9,829

 
—

 
—

 
—

 
—

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes
45,637

 
16,338

 
1,403

 
63,378

 
198,990

 
(2,458
)
 
—

 
259,910

 
(42,010
)
 
217,900

Income tax (expense) benefit
(17,340
)
 
(6,208
)
 
(533
)
 
(24,081
)
 
(75,616
)
 
5,289

 
—

 
(94,408
)
 
15,964

 
(78,444
)
Net income (loss)
$
28,297

 
10,130

 
870

 
39,297

 
123,374

 
2,831

 
—

 
165,502

 
(26,046
)
 
139,456












 
Nine months ended September 30, 2010
 
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
 
Base Net
Income
 
Adjustments
to GAAP
Results
 
GAAP
Results of
Operations
Total interest income
$
43

 
24

 
—

 
67

 
450,715

 
5,439

 
(3,140
)
 
453,081

 
—

 
453,081

Interest expense
—

 
—

 
—

 
—

 
164,063

 
17,422

 
(3,140
)
 
178,345

 
—

 
178,345

Net interest income (loss)
43

 
24

 
—

 
67

 
286,652

 
(11,983
)
 
—

 
274,736

 
—

 
274,736

Less provision for loan losses
—

 
—

 
—

 
—

 
16,700

 
—

 
—

 
16,700

 
—

 
16,700

Net interest income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
after provision for loan losses
43

 
24

 
—

 
67

 
269,952

 
(11,983
)
 
—

 
258,036

 
—

 
258,036

Other income (expense):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loan and guaranty servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
106,764

 
—

 
—

 
106,764

 
—

 
(254
)
 
—

 
106,510

 
—

 
106,510

Intersegment servicing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue
63,571

 
—

 
—

 
63,571

 
—

 
—

 
(63,571
)
 
—

 
—

 
—

Tuition payment processing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and campus commerce revenue
—

 
44,704

 
—

 
44,704

 
—

 
—

 
—

 
44,704

 
—

 
44,704

Enrollment services revenue
—

 
—

 
105,113

 
105,113

 
—

 
—

 
—

 
105,113

 
—

 
105,113

Software services revenue
14,467

 
—

 
—

 
14,467

 
—

 
—

 
—

 
14,467

 
—

 
14,467

Other income
519

 
—

 
—

 
519

 
14,114

 
10,555

 
—

 
25,188

 
—

 
25,188

Gain on sale of loans and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
debt repurchases
—

 
—

 
—

 
—

 
23,899

 
4,922

 
—

 
28,821

 
—

 
28,821

Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(35,931
)
 
(35,931
)
Derivative settlements, net
—

 
—

 
—

 
—

 
(7,931
)
 
(455
)
 
—

 
(8,386
)
 
—

 
(8,386
)
Total other income (expense)
185,321

 
44,704

 
105,113

 
335,138

 
30,082

 
14,768

 
(63,571
)
 
316,417

 
(35,931
)
 
280,486

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
69,591

 
19,864

 
18,660

 
108,115

 
3,698

 
12,540

 
(1,662
)
 
122,691

 
—

 
122,691

Litigation settlement
—

 
—

 
—

 
—

 
—

 
55,000

 
—

 
55,000

 
—

 
55,000

Cost to provide enrollment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
services
—

 
—

 
69,845

 
69,845

 
—

 
—

 
—

 
69,845

 
—

 
69,845

Depreciation and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
amortization
3,538

 
1,002

 
5,744

 
10,284

 
3

 
1,146

 
—

 
11,433

 
18,103

 
29,536

Restructure expense
6,040

 
—

 
—

 
6,040

 
—

 
(20
)
 
—

 
6,020

 
—

 
6,020

Other
45,638

 
6,433

 
7,563

 
59,634

 
10,147

 
19,339

 
—

 
89,120

 
—

 
89,120

Intersegment expenses, net
4,158

 
2,626

 
1,775

 
8,559

 
63,011

 
(9,661
)
 
(61,909
)
 
—

 
—

 
—

Total operating expenses
128,965

 
29,925

 
103,587

 
262,477

 
76,859

 
78,344

 
(63,571
)
 
354,109

 
18,103

 
372,212

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes and corporate overhead allocation
56,399

 
14,803

 
1,526

 
72,728

 
223,175

 
(75,559
)
 
—

 
220,344

 
(54,034
)
 
166,310

Corporate overhead allocation
(4,349
)
 
(1,450
)
 
(1,450
)
 
(7,249
)
 
(7,247
)
 
14,496

 
—

 
—

 
—

 
—

Income (loss) before
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income taxes
52,050

 
13,353

 
76

 
65,479

 
215,928

 
(61,063
)
 
—

 
220,344

 
(54,034
)
 
166,310

Income tax (expense) benefit
(19,779
)
 
(5,076
)
 
(28
)
 
(24,883
)
 
(82,053
)
 
24,040

 
—

 
(82,896
)
 
20,533

 
(62,363
)
Net income (loss)
$
32,271

 
8,277

 
48

 
40,596

 
133,875

 
(37,023
)
 
—

 
137,448

 
(33,501
)
 
103,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional information:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)
$
32,271

 
8,277

 
48

 
40,596

 
133,875

 
(37,023
)
 
—

 
137,448

 
 
 
 
Plus: Litigation settlement (a)
—

 
—

 
—

 
—

 
—

 
55,000

 
—

 
55,000

 
 
 
 
Plus: Restructure expense (b)
6,040

 
—

 
—

 
6,040

 
—

 
(20
)
 
—

 
6,020

 
 
 
 
Less: Net tax effect
(2,295
)
 
—

 
—

 
(2,295
)
 
—

 
(20,892
)
 
—

 
(23,187
)
 
 
 
 
Net income (loss), excluding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
litigation settlement and restructure expense
$
36,016

 
8,277

 
48

 
44,341

 
133,875

 
(2,935
)
 
—

 
175,281

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge.
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans.
 




The adjustments required to reconcile from the Company’s “base net income” measure to its GAAP results of operations relate to differing treatments for derivatives, foreign currency transaction adjustments, and amortization of intangible assets. These items are excluded from management’s evaluation of the Company’s operating results. The following tables reflect adjustments associated with these areas by operating segment and Corporate Activity and Overhead:
 

 
Student
Loan
and
Guaranty
Servicing
 
Tuition
Payment
Processing
and Campus
Commerce
 
Enrollment
Services
 
Asset
Generation
and
Management
 
Corporate
Activity
and
Overhead
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2011
Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments (a)
$
—

 
—

 
—

 
(6,677
)
 
20,565

 
13,888

Amortization of intangible
 
 
 
 
 
 
 
 
 
 
 
assets (b)
2,099

 
1,513

 
878

 
—

 
—

 
4,490

Net tax effect (c)
(798
)
 
(575
)
 
(334
)
 
2,537

 
(7,814
)
 
(6,984
)
Total adjustments to GAAP
$
1,301

 
938

 
544

 
(4,140
)
 
12,751

 
11,394

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2010
Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments (a)
$
—

 
—

 
—

 
24,966

 
7,839

 
32,805

Amortization of intangible
 
 
 
 
 
 
 
 
 
 
 
assets (b)
2,112

 
1,120

 
2,123

 
—

 
—

 
5,355

Net tax effect (c)
(803
)
 
(426
)
 
(807
)
 
(9,487
)
 
(2,978
)
 
(14,501
)
Total adjustments to GAAP
$
1,309

 
694

 
1,316

 
15,479

 
4,861

 
23,659

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2011
Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments (a)
$
—

 
—

 
—

 
6,443

 
23,142

 
29,585

Amortization of intangible
 
 
 
 
 
 
 
 
 
 
 
assets (b)
6,299

 
3,492

 
2,634

 
—

 
—

 
12,425

Net tax effect (c)
(2,394
)
 
(1,327
)
 
(1,001
)
 
(2,448
)
 
(8,794
)
 
(15,964
)
Total adjustments to GAAP
$
3,905

 
2,165

 
1,633

 
3,995

 
14,348

 
26,046

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2010
Derivative market value and
 
 
 
 
 
 
 
 
 
 
 
foreign currency adjustments (a)
$
—

 
—

 
—

 
20,955

 
14,976

 
35,931

Amortization of intangible
 
 
 
 
 
 
 
 
 
 
 
assets (b)
6,462

 
4,636

 
7,005

 
—

 
—

 
18,103

Net tax effect (c)
(2,456
)
 
(1,763
)
 
(2,665
)
 
(7,963
)
 
(5,686
)
 
(20,533
)
Total adjustments to GAAP
$
4,006

 
2,873

 
4,340

 
12,992

 
9,290

 
33,501


(a)
Derivative market value and foreign currency adjustments:  “Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP.  Included in “base net income” are the economic effects of the Company’s derivative instruments, which includes any cash paid or received being recognized as an expense or revenue upon actual derivative settlements.  “Base net income” also excludes the foreign currency transaction gains or losses caused by the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars.

(b)
Amortization of intangible assets:  “Base net income” excludes the amortization of acquired intangibles.

(c)
Income taxes are applied based on 38% for the individual operating segments.
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 September 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments (a)
$
14,263

 
—

 
35,571

 
49,834

Fair value of derivative instruments (b)
—

 
130,620

 
—

 
130,620

Total assets
$
14,263

 
130,620

 
35,571

 
180,454

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Fair value of derivative instruments (b)
$
—

 
49,347

 
—

 
49,347

Total liabilities
$
—

 
49,347

 
—

 
49,347


 
As of December 31, 2010
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments (a)
$
31,375

 
—

 
11,861

 
43,236

Fair value of derivative instruments (b)
—

 
118,346

 
—

 
118,346

Total assets
$
31,375

 
118,346

 
11,861

 
161,582

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Fair value of derivative instruments (b)
$
—

 
16,089

 
—

 
16,089

Total liabilities
$
—

 
16,089

 
—

 
16,089


(a)
Investments represent investments classified by the Company as “trading securities” which are 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 U.S. Treasury securities that trade in active markets. Level 3 investments include student loan auction rate asset-backed securities. The fair value for the student loan auction rate 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 nine months ended September 30, 2011.

The following table presents a roll forward of the fair value of Level 3 assets during 2011.

 
Level 3
 
Investments -
 
trading securities
Balance at December 31, 2010
$
11,861

Total realized and unrealized gains (losses) included in income, net (a)
(105
)
Purchases
23,890

Redemptions/Sales
(5,931
)
 
 
Balance at March 31, 2011
29,715

 
 

Total realized and unrealized gains (losses) included in income, net (a)
636

Purchases
3,261

Redemptions/Sales
(8,940
)
 
 
 Balance at June 30, 2011
24,672

 
 

Total realized and unrealized gains (losses) included in income, net (a)
(3,632
)
Purchases
28,668

Redemptions/Sales
(14,137
)
 
 
Balance at September 30, 2011
$
35,571

 
 
Total gains (losses) included in income attributable to the change in unrealized gains (losses) relating to Level 3 assets held at September 30, 2011: (a)
 
 
 

Three month period ended September 30, 2011
$
(4,303
)
Nine month period ended September 30, 2011
(4,152
)

(a)
Realized and unrealized gains (losses) are included in “other income” in the Company’s consolidated statements of income.

The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets:

 
As of September 30, 2011
 
As of December 31, 2010
 
Fair value
 
Carrying value
 
Fair value
 
Carrying value
Financial assets:
 
 
 
 
 
 
 
Student loans receivable
$
24,254,401

 
24,641,614

 
24,836,538

 
23,948,014

Student loans receivable - held for sale
—

 
—

 
84,987

 
84,987

Cash and cash equivalents
92,094

 
92,094

 
283,801

 
283,801

Investments - trading securities
49,834

 
49,834

 
43,236

 
43,236

Restricted cash
375,394

 
375,394

 
453,748

 
453,748

Restricted cash – due to customers
52,300

 
52,300

 
88,528

 
88,528

Restricted investments
225,824

 
225,824

 
215,009

 
215,009

Accrued interest receivable
331,071

 
331,071

 
318,152

 
318,152

Derivative instruments
130,620

 
130,620

 
118,346

 
118,346

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Bonds and notes payable
23,819,415

 
24,926,512

 
24,651,191

 
24,672,472

Accrued interest payable
16,965

 
16,965

 
19,153

 
19,153

Due to customers
52,300

 
52,300

 
88,528

 
88,528

Derivative instruments
49,347

 
49,347

 
16,089

 
16,089

 
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 remaining financial assets and liabilities were estimated using the following methods and assumptions:

Student Loans Receivable and Student Loans Receivable – Held for Sale

The Company’s student loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale. Student loans classified as held for sale at December 31, 2010 are those loans which the Company sold in January 2011 and were valued using the sales price (100% of par value) less the estimated credit risk related to this portfolio. The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent. For all other loans, fair values 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 rates 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.

Note 13 - Legal Proceedings
Legal Matters and Contingencies [Text Block]
Legal Proceedings

General

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters principally consist of claims by student loan borrowers disputing the manner in which their student loans have been processed and disputes with other business entities. In addition, from time to time, the Company receives information and document requests from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to the requests. While the Company cannot predict the ultimate outcome of any inquiry or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company’s management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company’s business, financial position, or results of operations.

Bais Yaakov of Spring Valley v. Peterson’s Nelnet, LLC

On January 4, 2011, a complaint against Peterson’s Nelnet, LLC (“Peterson’s”), a subsidiary of the Company, was filed in the U.S. District Court for the District of New Jersey (the “District Court”).  The complaint alleges that Peterson’s sent six advertising faxes to the named plaintiff in 2008-2009 that were not the result of express invitation or permission granted by the plaintiff and did not include certain opt out language.  The complaint also alleges that such faxes violated the federal Telephone Consumer Protection Act (the “TCPA”), purportedly entitling the plaintiff to $500 per violation, trebled for willful violations for each of the six faxes.  The complaint further alleges that Peterson’s had sent putative class members more than 10,000 faxes that violated the TCPA, amounting to more than $5 million in statutory penalty damages and more than $15 million if trebled for willful violations.  The complaint seeks to establish a class action for two different classes of plaintiffs: Class A, to whom Peterson’s sent unsolicited fax advertisements containing opt out notices similar to those contained in the faxes received by the named plaintiff; and Class B, to whom Peterson’s sent fax advertisements containing opt out notices similar to those contained in the faxes received by the named plaintiff.  As of the filing date of this report, the District Court has not established or recognized any class.

On February 16, 2011, Peterson’s filed a motion to dismiss the complaint, which was denied by the District Court on April 15, 2011 shortly after a similar motion to dismiss that had been granted in an unrelated case involving alleged TCPA violations related to faxes was reversed by the U.S. Court of Appeals for the Third Circuit (the “Appeals Court”), which has jurisdiction over the District Court.  On April 29, 2011, Peterson’s filed an answer to the complaint, but also filed a motion for reconsideration of the motion to dismiss.  On May 17, 2011, the Appeals Court granted a petition for rehearing of the motion to dismiss in the unrelated TCPA fax case, and on May 31, 2011, Peterson’s filed a motion for stay pending the outcome of that rehearing.  On September 12, 2011, the motion for stay was granted, and the motion for reconsideration was denied by the District Court. On September 20, 2011, the named plaintiff filed a motion for reconsideration of the District Court's order, which is set for hearing on November 22, 2011.

Peterson’s intends to continue to contest the suit vigorously.  Due to the preliminary stage of this matter and the uncertainty and risks inherent in class determination and the overall litigation process, the Company believes that a meaningful estimate of a reasonably possible loss, if any, or range of reasonably possible losses, if any, cannot currently be made.