Edgar Filing: NELNET INC

nelnet_10q-033111.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from to .

COMMISSION FILE NUMBER 001-31924

NELNET, INC.

(Exact name of registrant as specified in its charter)

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

121 SOUTH 13TH STREET, SUITE 201 LINCOLN, NEBRASKA (Address of principal executive offices)	68508 (Zip Code)

(402) 458-2370

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer [ ] Accelerated filer [X]

Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of April 30, 2011, there were 36,982,244 and 11,495,377 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,317,364 shares of Class A Common Stock held by wholly owned subsidiaries).

NELNET, INC.

FORM 10-Q

INDEX

March 31, 2011

PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
	Item 4.	Controls and Procedures	67

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	68
	Item 1A.	Risk Factors	69
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
	Item 5.	Other Information	70
	Item 6.	Exhibits	71

Signatures			72

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NELNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	As of			As of
	March 31, 2011			December 31, 2010
	(unaudited)
Assets:
Student loans receivable (net of allowance for loan losses of
$41,097 and $43,626 respectively)	$	23,536,415			23,948,014
Student loans receivable - held for sale		—			84,987
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party		8,915			6,952
Cash and cash equivalents - held at a related party		39,222			276,849
Total cash and cash equivalents		48,137			283,801
Investments - trading securities		37,719			43,236
Restricted cash and investments		796,229			668,757
Restricted cash - due to customers		63,292			88,528
Accrued interest receivable		308,484			318,152
Accounts receivable (net of allowance for doubtful accounts of
$1,577 and $1,221, respectively)		52,812			52,614
Goodwill		117,118			117,118
Intangible assets, net		34,736			38,712
Property and equipment, net		31,440			30,573
Other assets		98,812			101,054
Fair value of derivative instruments		169,505			118,346

Total assets	$	25,294,699			25,893,892

Liabilities:
Bonds and notes payable	$	24,066,092			24,672,472
Accrued interest payable		15,587			19,153
Other liabilities		181,335			191,017
Due to customers		63,292			88,528
Fair value of derivative instruments		13,026			16,089
Total liabilities		24,339,332			24,987,259

Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 50,000,000 shares;
no shares issued or outstanding		—			—
Common stock:
Class A, $0.01 par value. Authorized 600,000,000 shares;
issued and outstanding 36,983,557 shares as of March 31,
2011 and 36,846,353 shares as of December 31, 2010		370			368
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares;
issued and outstanding 11,495,377 shares as of March 31,
2011 and December 31, 2010		115			115
Additional paid-in capital		73,502			76,263
Retained earnings		882,550			831,057
Employee notes receivable		(1,170	)		(1,170	)
Total shareholders' equity		955,367			906,633
Commitments and contingencies
Total liabilities and shareholders' equity	$	25,294,699			25,893,892

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(unaudited)

	Three months
	ended March 31,
	2011			2010
Interest income:
Loan interest	$	137,358			134,967
Investment interest		726			1,001
Total interest income		138,084			135,968
Interest expense:
Interest on bonds and notes payable		52,307			50,859
Net interest income		85,777			85,109
Less provision for loan losses		3,750			5,000
Net interest income after provision for loan losses		82,027			80,109

Other income (expense):
Loan and guaranty servicing revenue		35,636			36,394
Tuition payment processing and campus commerce revenue		19,369			17,382
Enrollment services revenue		33,868			33,271
Software services revenue		4,777			4,344
Other income		6,492			7,260
Gain on sale of loans and debt repurchases		8,307			10,177
Derivative market value and foreign currency
adjustments and derivative settlements, net		(3,036	)		1,682
Total other income		105,413			110,510

Operating expenses:
Salaries and benefits		43,912			40,644
Cost to provide enrollment services		22,839			22,025
Depreciation and amortization		6,776			10,783
Restructure expense		—			1,197
Other		26,105			29,055

Total operating expenses		99,632			103,704

Income before income taxes		87,808			86,915
Income tax expense		(32,928	)		(32,593	)

Net income	$	54,880			54,322

Earnings per common share:
Net earnings - basic	$	1.13			1.09

Net earnings - diluted	$	1.13			1.08

Dividends paid per common share	$	0.07			0.07

Weighted average common shares outstanding:
Basic		48,171,317			49,716,696
Diluted		48,363,035			49,912,589

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands, except share data)

(unaudited)


	Preferred		Common stock							Class A		Class B		Additional						Employee			Total
	stock		shares					Preferred		common		common		paid-in			Retained			notes			shareholders’
	shares		Class A			Class B		stock		stock		stock		capital			earnings			receivable			equity

Balance as of December 31, 2009		—		38,396,791			11,495,377	$	—		384		115		109,359			676,154			(1,449	)		784,563
Comprehensive income:
Net income		—		—			—		—		—		—		—			54,322			—			54,322
Cash dividend on Class A and Class B common stock - $0.07 per share		—		—			—		—		—		—		—			(3,494	)		—			(3,494	)
Issuance of common stock, net of forfeitures		—		203,438			—		—		2		—		3,532			—			—			3,534
Compensation expense for stock based awards		—		—			—		—		—		—		325			—			—			325
Repurchase of common stock		—		(12,936	)		—		—		—		—		(236	)		—			—			(236	)
Reduction of employee stock notes receivable		—		—			—		—		—		—		—			—			199			199
Balance as of March 31, 2010		—		38,587,293			11,495,377	$	—		386		115		112,980			726,982			(1,250	)		839,213

Balance as of December 31, 2010		—		36,846,353			11,495,377	$	—		368		115		76,263			831,057			(1,170	)		906,633
Comprehensive income:
Net income		—		—			—		—		—		—		—			54,880			—			54,880
Cash dividend on Class A and Class B common stock - $0.07 per share		—		—			—		—		—		—		—			(3,387	)		—			(3,387	)
Contingency payment related to business combination		—		—			—		—		—		—		(5,893	)		—			—			(5,893	)
Issuance of common stock, net of forfeitures		—		151,669			—		—		2		—		3,087			—			—			3,089
Compensation expense for stock based awards		—		—			—		—		—		—		355			—			—			355
Repurchase of common stock		—		(14,465	)		—		—		—		—		(310	)		—			—			(310	)
Balance as of March 31, 2011		—		36,983,557			11,495,377	$	—		370		115		73,502			882,550			(1,170	)		955,367

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

	Three months ended March 31,
	2011			2010

Net income	$	54,880			54,322
Adjustments to reconcile income to net cash provided by operating activities, net of business acquisition:
Depreciation and amortization, including loan premiums/discount and deferred origination costs		18,964			29,156
Provision for loan losses		3,750			5,000
Derivative market value adjustment		(66,450	)		67,570
Foreign currency transaction adjustment		65,334			(71,675	)
Proceeds to terminate and/or amend derivative instruments		12,369			855
Payments to terminate and/or amend derivative instruments		(141	)		—
Gain on sale of loans		(1,345	)		—
Gain from debt repurchases		(6,962	)		(10,177	)
Change in investments - trading securities, net		5,517			(52,899	)
Deferred income tax expense		100			7,509
Non-cash compensation expense		557			523
Other non-cash items		(189	)		254
Decrease (increase) in accrued interest receivable		9,668			(6,929	)
Increase in accounts receivable		(198	)		(18,661	)
Decrease (increase) in other assets		1,016			(464	)
Decrease in accrued interest payable		(3,566	)		(3,017	)
(Decrease) increase in other liabilities		(11,637	)		1,319
Net cash provided by operating activities		81,667			2,686

Cash flows from investing activities, net of business acquisition:
Originations and purchases of student loans, including loan premiums/discounts and deferred origination costs		(235,599	)		(1,027,883	)
Purchases of student loans, including loan premiums, from a related party		(29	)		(535,907	)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other		630,606			615,431
Proceeds from sale of student loans		95,131			20,032
Purchases of property and equipment, net		(2,992	)		(2,883	)
Increase in restricted cash and investments, net		(127,472	)		(102,366	)
Business acquisitions, net of cash acquired, including contingency payments		(7,193	)		(3,000	)
Net cash provided by (used in) investing activities		352,452			(1,036,576	)

Cash flows from financing activities:
Payments on bonds and notes payable		(1,090,797	)		(1,028,622	)
Proceeds from issuance of bonds and notes payable		533,097			2,061,893
Payments on bonds payable due to a related party		(107,050	)		—
Payments of debt issuance costs		(1,460	)		(4,069	)
Dividends paid		(3,387	)		(3,494	)
Repurchases of common stock		(310	)		(236	)
Proceeds from issuance of common stock		124			117
Payments received on employee stock notes receivable		—			199
Net cash (used in) provided by financing activities		(669,783	)		1,025,788


Net decrease in cash and cash equivalents		(235,664	)		(8,102	)

Cash and cash equivalents, beginning of period		283,801			338,181

Cash and cash equivalents, end of period	$	48,137			330,079

Supplemental disclosures of cash flow information:
Interest paid	$	53,674			49,777

Income taxes paid, net of refunds	$	32,293			25,123

See accompanying notes to consolidated financial statements.

NELNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of March 31, 2011 and for the three months ended

March 31, 2011 and 2010 is unaudited)

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

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of March 31, 2011 and for the three ended March 31, 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 months ended March 31, 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.

2. 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. 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 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, the Company does not have any impaired loans as defined in the Receivables Topic of the FASB Accounting Standards Codification.

Student loans receivable consisted of the following:

	As of March 31, 2011			As of December 31, 2010
	Held for investment			Held for investment			Held for sale (a)
Federally insured loans	$	23,367,707			23,757,699			—
Non-federally insured loans		23,489			26,370			84,987
		23,391,196			23,784,069			84,987
Unamortized loan premiums/discounts and deferred origination costs, net		186,316			207,571			—
Allowance for loan losses – federally insured loans		(31,553	)		(32,908	)		—
Allowance for loan losses – non-federally insured loans		(9,544	)		(10,718	)		—
	$	23,536,415			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		40.63	%		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.

Activity in the Allowance for Loan Losses

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. Activity in the allowance for loan losses is shown below.

	Three months ended March 31,
	2011			2010

Balance at beginning of period	$	43,626			50,887
Provision for loan losses:
Federally insured loans		3,500			4,000
Non-federally insured loans		250			1,000
Total provision for loan losses		3,750			5,000
Charge-offs:
Federally insured loans		(4,855	)		(4,068	)
Non-federally insured loans		(994	)		(1,380	)
Total charge-offs		(5,849	)		(5,448	)
Recoveries:
Non-federally insured loans		370			251
Total recoveries		370			251

Purchase (sale) of federally insured loans, net		—			710
Purchase (sale) of non-federally insured loans, net		(800	)		(2,000	)
Balance at end of period	$	41,097			49,400

Allocation of the allowance for loan losses:
Federally insured loans	$	31,553			30,744
Non-federally insured loans		9,544			18,656
Total allowance for loan losses	$	41,097			49,400

Allowance for federally insured loans as a percentage of such loans		0.14	%		0.13	%
Allowance for non-federally insured loans as a percentage of such loans		40.63	%		13.43	%

Repurchase Obligation

As of March 31, 2011, the Company had participated a cumulative amount of $126.2 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 to the participated loans discussed above, on January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% 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 sheet. The activity related to this accrual is detailed below.

	Three months ended March 31,
	2011		2010

Beginning balance	$	12,600		10,600
Estimated repurchase obligation related to loans sold, net		6,876		-
Estimated repurchase obligation related to loans participated, net		194		2,000
Ending balance	$	19,670		12,600

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 March 31, 2011					As of December 31, 2010
	Dollars		Percent			Dollars		Percent
Federally Insured Loans:
Loans in-school/grace/deferment (a)	$	4,332,130				$	4,358,616
Loans in forebearance (b)		3,086,292					2,984,869
Loans in repayment status:
Loans current		13,933,107		87.3	%		14,309,480		87.2	%
Loans delinquent 31-60 days (c)		595,386		3.7			794,140		4.8
Loans delinquent 61-90 days (c)		392,008		2.5			306,853		1.9
Loans delinquent 91 days or greater (d)		1,028,784		6.5			1,003,741		6.1
Total loans in repayment		15,949,285		100.0	%		16,414,214		100.0	%
Total federally insured loans	$	23,367,707				$	23,757,699
Non-Federally Insured Loans:
Loans in-school/grace/deferment (a)	$	3,069				$	3,500
Loans in forebearance (b)		239					292
Loans in repayment status:
Loans current		16,564		82.1	%		16,679		73.9	%
Loans delinquent 31-60 days (c)		363		1.8			1,546		6.8
Loans delinquent 61-90 days (c)		692		3.4			1,163		5.2
Loans delinquent 91 days or greater		2,562		12.7			3,190		14.1
Total loans in repayment		20,181		100.0	%		22,578		100.0	%
Total non-federally insured loans	$	23,489				$	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)	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.

Loan Sales

See note 4, “Gain on Sale of Loans and Debt Repurchases,” for a summary of loans sold by the Company.

3. Bonds and Notes Payable

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

	As of March 31, 2011
	Carrying		Interest rate
	amount		range		Final maturity

Variable-rate bonds and notes (a):
Bonds and notes based on indices	$	20,124,373		0.32% - 6.90%	5/26/14 - 7/27/48
Bonds and notes based on auction or remarketing		858,375		0.23% - 1.51%	5/1/11 - 7/1/43
Total variable-rate bonds and notes		20,982,748
Commercial paper - FFELP warehouse facility		257,121		0.28% - 0.32%	7/29/13
Department of Education Conduit		2,585,955		0.32%	5/8/14
Unsecured line of credit		125,000		0.69%	5/8/12
Unsecured debt - Junior Subordinated Hybrid Securities		100,697		7.40%	9/15/61
Other borrowings		14,571		3.56% - 5.10%	11/14/11 - 11/11/15
	$	24,066,092

	As of December 31, 2010
	Carrying		Interest rate
	amount		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 a loan warehouse facility, 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 facility

The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facility. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. The Company’s FFELP warehouse facility has a maximum financing amount of $500.0 million, with a revolving financing structure supported by 364-day liquidity provisions, which expire on July 29, 2011. The final maturity date of the facility is July 29, 2013. In the event the Company is unable to renew the liquidity provisions by July 29, 2011, 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 29, 2013.

The FFELP 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 75 to 80 percent based on loan type. The facility contains 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 facility. As of March 31, 2011, $257.1 million was outstanding under the FFELP warehouse facility, $242.9 million was available for future use, and $15.4 million was advanced as equity support.

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 FFELP warehouse facility.

Department of Education’s Conduit Program

In May 2009, 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 March 31, 2011, the Company had $2.6 billion borrowed under the facility and $90.1 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 in May 2012. As of March 31, 2011, there was $125.0 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 March 31, 2011, excluding Lehman’s lending commitment, the Company has $581.3 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-guaranteed loans in the Company’s portfolio

As of March 31, 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 facility.

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 FFELP warehouse facility 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.

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. The Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day term upon termination of the participation certificate. As of March 31, 2011 and December 31, 2010, $378.9 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 on a short-term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million or an amount in excess of $750 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 quarter of 2011 and 2010, the Company repurchased outstanding debt as summarized in note 4, “Gain on Sale of Loans and Debt Repurchases.”

4. 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 March 31,
	2011		2010

Gain on sale of loans	$	1,345		—

Gain from debt repurchases (a)		6,962		10,177

	$	8,307		10,177

(a)	The activity included in “Gain from debt repurchases” is detailed below.

	Three months ended March 31, 2011						Three months ended March 31, 2010
	Notional amount		Purchase price		Gain		Notional amount		Purchase price		Gain

Unsecured debt - Junior Subordinated Hybrid Securities	$	62,558		55,651		6,907		—		—		—
Asset-backed securities (1)		600		545		55		274,250		264,073		10,177
	$	63,158		56,196		6,962		274,250		264,073		10,177

(1)

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 March 31, 2011, the Company has purchased a cumulative amount of $61.7 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 ($61.7 million as of March 31, 2011) may not represent market value of such securities.

5. Derivative Financial Instruments

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

Interest Rate Risk

The Company’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 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 March 31, 2011, the Company had $22.4 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 $19.4 billion of debt indexed to three-month LIBOR, which resets quarterly.

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 March 31, 2011 and December 31, 2010:

	Notional Amounts
	1:3 Basis Swaps		T-Bill/LIBOR Basis Swaps
Maturity	1:3 Basis Swaps		T-Bill/LIBOR Basis Swaps

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 March 31, 2011 and December 31, 2010, the Company had $8.4 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 March 31, 2011
			Weighted
			average fixed
	Notional		rate paid by
Maturity	Amount		the Company (a)

2011	$	3,800,000		0.54	%
2012		950,000		1.08
2013		650,000		1.07
2015		100,000		2.26
2020		50,000		3.23
	$	5,550,000		0.75	%

	As of December 31, 2010
			Weighted
			average fixed
	Notional		rate paid by
Maturity	Amount		the Company (a)

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-month 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 March 31, 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 is 7.40%, payable semi-annually. Beginning September 29, 2011 through September 29, 2036, the interest rate on the Hybrid Securities will be equal to three-month LIBOR plus 3.375%, payable quarterly. As of both March 31, 2011 and December 31, 2010, the Company had the following derivatives outstanding that were used to effectively convert the future variable interest rate on the Hybrid Securities to a fixed rate.

		Weighted
		average fixed
	Notional	rate paid by
	Amount (a)	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. $25 million (notional amount) of the derivatives outstanding are cancelable on September 29, 2011 at the Company’s discretion. If this one time option to cancel is not exercised by the Company, the maturity date will be 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 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 income.

	Three months ended March 31,
	2011			2010
Re-measurement of Euro Notes	$	(65,334	)		71,675
Change in fair value of cross currency interest rate swaps		62,532			(59,075	)
Total impact to statements of income - income (expense)	$	(2,802	)		12,600

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

Accounting for Derivative Financial Instruments

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

Any proceeds received or payments made by the Company to terminate a derivative in advance of its expiration date, or to amend the terms of an existing derivative, are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income and are accounted for as a change in fair value on such derivative. During the three months ended March 31, 2011 and 2010, the Company terminated and/or amended certain derivatives for net proceeds of $12.2 million and $0.9 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 March 31, 2011		As of December 31, 2010		As of March 31, 2011		As of December 31, 2010

1:3 basis swaps	$	6,554		10,489		319		44
T-Bill/LIBOR basis swaps		—		—		172		201
Interest rate swaps - floor income hedges		3,361		10,569		12,517		15,372
Interest rate swaps - hybrid debt hedges		2,109		1,132		—		470
Cross-currency interest rate swaps		157,450		94,918		—		—
Other		31		1,238		18		2

Total	$	169,505		118,346		13,026		16,089

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

	Three months ended March 31,
Derivatives not designated as hedging	2011			2010

Settlements:
1:3 basis swaps	$	208			131
T-Bill/LIBOR basis swaps		(129	)		—
Interest rate swaps - floor income hedges		(6,218	)		(3,856	)
Interest rate swaps - hybrid debt hedges		(246	)		—
Cross-currency interest rate swaps		2,109			1,302
Other		124			—
Total settlements - (expense) income		(4,152	)		(2,423	)

Change in fair value:
1:3 basis swaps		(4,210	)		(546	)
T-Bill/LIBOR basis swaps		29			45
Interest rate swaps - floor income hedges		6,395			(7,538	)
Interest rate swaps - hybrid debt hedges		1,448			—
Cross-currency interest rate swaps		62,532			(59,075	)
Other		256			(456	)
Total change in fair value - (expense) income		66,450			(67,570	)

Re-measurement of Euro Notes (foreign currency
transaction adjustment) - (expense) income		(65,334	)		71,675

Derivative market value and foreign currency adjustments
and derivative settlements - (expense) income	$	(3,036	)		1,682

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 March 31, 2011, the Company had $8.7 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 March 31, 2011, the trustee on the Company’s asset-backed securities transactions held $167.5 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 March 31, 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.

6.	Investments

Included in investments on the consolidated balance sheets as of March 31, 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, 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 March 31, 2011 and December 31, 2010, the Company had $22.3 million and $4.9 million, respectively, and Union Bank had $161.5 million and $28.6 million, respectively, invested in the trusts. The Company’s investments held in the trusts 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 will perform 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. In addition, Union Bank will pay additional fees to the subsidiary of 50% of the gains from the sale of securities from the trusts.

7.	Intangible Assets

Intangible assets consist of the following:

	Weighted
	average
	remaining
	useful life as of	As of		As of
	March 31,	March 31,		December 31,
	2011 (months)	2011		2010
Amortizable intangible assets:
Customer relationships (net of accumulated amortization of $52,479
and $49,743, respectively)	71	$	25,840		28,576
Computer software (net of accumulated amortization of $3,079
and $2,419, respectively)	22		4,839		5,499
Trade names (net of accumulated amortization of $7,536 and
$6,956, respectively)	21		4,057		4,637

Total - amortizable intangible assets	59	$	34,736		38,712

The Company recorded amortization expense on its intangible assets of $4.0 million and $6.5 million for the three months ended March 31, 2011 and 2010, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of March 31, 2011, the Company estimates it will record amortization expense as follows:

2011 (April 1 - December 31)	$	11,808
2012		15,269
2013		2,024
2014		1,298
2015		925
2016 and thereafter		3,412
	$	34,736

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 March 31, 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.

Goodwill

The following table summarizes the Company’s allocation of goodwill by operating segment as of March 31, 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

9. Shareholders’ Equity

Issuance of Class A Common Stock

In March 2011 and 2010, the Company’s 2010 and 2009 annual performance-based incentives awarded to management were paid in approximately 129,000 and 173,000 fully vested and unrestricted shares of Class A common stock, respectively, issued pursuant to the Company’s Restricted Stock Plan.

Dividends

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

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.

10. 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 March 31,
	2011		2010
Net income attributable to Nelnet, Inc.	$	54,880		54,322
Less earnings allocated to unvested restricted stockholders		346		339
Net income available to common stockholders	$	54,534		53,983
Weighted average common shares outstanding - basic		48,171,317		49,716,696
Dilutive effect of the assumed vesting of restricted stock awards		191,718		195,893
Weighted average common shares outstanding - diluted		48,363,035		49,912,589
Basic earnings per common share	$	1.13		1.09
Diluted earnings per common share	$	1.13		1.08

11. 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 or 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 school operations consulting and 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 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 March 31, 2011
	Fee-Based
			Tuition
	Student		Payment
	Loan		Processing						Asset		Corporate
	and		and				Total		Generation		Activity			Eliminations			Base		Adjustments		GAAP
	Guaranty		Campus		Enrollment		Fee-		and		and			and			net		to GAAP		Results of
	Servicing		Commerce		Services		Based		Management		Overhead			Reclassifications			income		Results		Operations


Total interest income	$	15		6		—		21		137,639		1,146			(722	)		138,084		—		138,084
Interest expense		—		—		—		—		49,716		3,313			(722	)		52,307		—		52,307
Net interest income (loss)		15		6		—		21		87,923		(2,167	)		—			85,777		—		85,777

Less provision for loan losses		—		—		—		—		3,750		—			—			3,750		—		3,750
Net interest income (loss) after provision for loan losses		15		6		—		21		84,173		(2,167	)		—			82,027		—		82,027

Other income (expense):
Loan and guaranty servicing revenue		35,636		—		—		35,636		—		—			—			35,636		—		35,636
Intersegment servicing revenue		17,857		—		—		17,857		—		—			(17,857	)		—		—		—
Tuition payment processing and campus commerce revenue		—		19,369		—		19,369		—		—			—			19,369		—		19,369
Enrollment services revenue		—		—		33,868		33,868		—		—			—			33,868		—		33,868
Software services revenue		4,777