Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
Or
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o |
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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)
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NEBRASKA
(State or other jurisdiction of incorporation or organization)
121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
(Address of principal executive offices)
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84-0748903
(I.R.S. Employer Identification No.)
68508
(Zip Code) |
Registrants telephone number, including area code: (402) 458-2370
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
Class A Common Stock, Par Value $0.01 per Share
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the Registrants voting common stock held by non-affiliates of the
Registrant on June 30, 2008 (the last business day of the Registrants most recently completed
second fiscal quarter), based upon the closing sale price of the Registrants Class A Common Stock
on that date of $11.23 per share, was $300,196,800. For purposes of this calculation, the
Registrants directors, executive officers, and greater than 10 percent shareholders are deemed to
be affiliates.
As of January 31, 2009, there were 37,805,721 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 a wholly owned subsidiary).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement to be filed for its 2009 Annual Meeting of
Shareholders, scheduled to be held May 20, 2009, are incorporated by reference into Part III of
this Form 10-K.
NELNET, INC.
FORM 10-K
TABLE OF CONTENTS
This report contains forward-looking statements and information that are based on managements
current expectations as of the date of this document. Statements that are not historical facts,
including statements about the Companys expectations and statements that assume or are dependent
upon future events, are forward-looking statements. These forward-looking statements are subject to
risks, uncertainties, assumptions, and other factors that may cause the actual results to be
materially different from those reflected in such forward-looking statements. These factors
include, among others, the risks and uncertainties set forth in Risk Factors and elsewhere in
this Annual Report on Form 10-K (the Report) and changes in the terms of student loans and the
educational credit marketplace arising from the implementation of, or changes in, applicable laws
and regulations, which may reduce the volume, average term, special allowance payments, and yields
on student loans under the Federal Family Education Loan Program (the FFEL Program or FFELP) of
the U.S. Department of Education (the Department) or result in loans being originated or
refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to
sell FFELP loans to the Company. The Company could also be affected by changes in the demand for
educational financing or in financing preferences of lenders, educational institutions, students,
and their families; the Companys ability to maintain its credit facilities or obtain new
facilities; the ability of lenders under the Companys credit facilities to fulfill their lending
commitments under these facilities; changes to the terms and conditions of the liquidity programs
offered by the Department; changes in the general interest rate environment and in the
securitization markets for education loans, which may increase the costs or limit the availability
of financings necessary to initiate, purchase, or carry education loans; losses from loan defaults;
changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; incorrect
estimates or assumptions by management in connection with the preparation of the consolidated
financial statements; and changes in general economic conditions. Additionally, financial
projections may not prove to be accurate and may vary materially. The reader should not place undue
reliance on forward-looking statements, which speak only as of the date of this Report. The Company
is not obligated to publicly release any revisions to forward-looking statements to reflect events
after the date of this Report or unforeseen events. Although the Company may from time to time
voluntarily update its prior forward-looking statements, it disclaims any commitment to do so
except as required by securities laws.
PART I.
ITEM 1. BUSINESS
Overview
The Company is an education planning and financing company focused on providing quality products
and services to students, families, schools, and financial institutions nationwide. The Company was
formed as a Nebraska corporation in 1977. Built through a focus on long term organic growth and
further enhanced by strategic acquisitions, the Company earns its revenues from fee-based revenues
related to its diversified education finance and service operations and from net interest income on
its portfolio of student loans.
Customers
The Companys customers consist of:
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Colleges and universities |
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Private, parochial, and other K-12 institutions |
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Lenders, holders, and agencies in education finance |
Growth in the overall education marketplace generally drives increases in the demand for the
Companys products and services. Education marketplace growth is a result of rising student
enrollment and the rising annual cost of education, which is illustrated in the following charts.
2
Product and Service Offerings
The Company offers a broad range of pre-college, in-college, and post-college products and services
that help students and families plan and pay for their education and plan their careers. The
Companys products and services are designed to simplify the education planning and financing
process and provide value to customers throughout the education life cycle.
3
Operating Segments
The Company has five operating segments as defined in Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131), as follows:
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Student Loan and Guaranty Servicing |
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Tuition Payment Processing and Campus Commerce |
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Enrollment Services |
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Software and Technical Services |
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Asset Generation and Management |
The Companys 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. Management evaluates the Companys generally accepted accounting
principles (GAAP) based financial information as well as operating results on a non-GAAP
performance measure referred to as base net income. Management believes base net income
provides additional insight into the financial performance of the core operations. For further
information, see Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations. In accordance with SFAS No. 131, the Company includes separate financial
information about its operating segments in note 21 of the notes to the consolidated financial
statements included in this Report.
4
Operating Results Revenue Diversification
The Company ranks among the nations leaders in terms of total student loan assets originated,
held, and serviced, principally consisting of loans originated under the FFEL Program (a detailed
description of the FFEL Program is included in Appendix A to this Report). In recent years, the
Company has expanded products and services generated from businesses that are not dependent upon
government programs, thereby, reducing legislative and political risk. This revenue is primarily
generated from products and services offered in the Companys Tuition Payment Processing and Campus
Commerce and Enrollment Services operating segments. The following tables summarize the Companys
revenues by operating segment for the years ended December 31, 2008, 2007, and 2006 (dollars in
thousands):
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2008 |
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As reported |
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External |
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Intersegment |
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by segment |
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Dollars |
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Percent |
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Dollars |
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Percent |
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Dollars |
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Percent |
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Student Loan and Guaranty Servicing |
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$ |
105,664 |
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19.3 |
% |
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$ |
75,361 |
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51.6 |
% |
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$ |
181,025 |
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26.2 |
% |
Tuition Payment Processing and Campus Commerce |
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50,124 |
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9.2 |
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302 |
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0.2 |
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50,426 |
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7.3 |
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Enrollment Services |
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112,459 |
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20.6 |
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2 |
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0.0 |
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112,461 |
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16.3 |
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Software and Technical Services |
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19,731 |
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3.6 |
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6,831 |
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4.7 |
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26,562 |
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3.8 |
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Total revenue from fee-based businesses |
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287,978 |
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52.7 |
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82,496 |
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56.5 |
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370,474 |
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53.6 |
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Asset Generation and Management |
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295,820 |
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54.2 |
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(2,190 |
) |
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(1.5 |
) |
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293,630 |
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42.4 |
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Corporate Activity and Overhead |
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(37,617 |
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(6.9 |
) |
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65,575 |
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45.0 |
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27,958 |
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4.0 |
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Total revenue |
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$ |
546,181 |
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100.0 |
% |
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$ |
145,881 |
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100.0 |
% |
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$ |
692,062 |
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100.0 |
% |
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2007 |
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As reported |
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External |
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Intersegment |
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by segment |
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Dollars |
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Percent |
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Dollars |
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Percent |
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Dollars |
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Percent |
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Student Loan and Guaranty Servicing |
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$ |
133,234 |
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23.2 |
% |
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$ |
74,687 |
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73.9 |
% |
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$ |
207,921 |
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30.7 |
% |
Tuition Payment Processing and Campus Commerce |
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46,484 |
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8.1 |
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|
688 |
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0.7 |
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47,172 |
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7.0 |
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Enrollment Services |
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104,245 |
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18.1 |
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891 |
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0.9 |
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105,136 |
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15.5 |
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Software and Technical Services |
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22,093 |
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3.8 |
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15,683 |
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15.5 |
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37,776 |
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5.6 |
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Total revenue from fee-based businesses |
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306,056 |
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53.2 |
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91,949 |
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|
91.0 |
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398,005 |
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58.8 |
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Asset Generation and Management |
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292,058 |
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50.8 |
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(3,737 |
) |
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(3.7 |
) |
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288,321 |
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42.7 |
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Corporate Activity and Overhead |
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(23,197 |
) |
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(4.0 |
) |
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12,777 |
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12.7 |
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(10,420 |
) |
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(1.5 |
) |
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Total revenue |
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$ |
574,917 |
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100.0 |
% |
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$ |
100,989 |
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100.0 |
% |
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$ |
675,906 |
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100.0 |
% |
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2006 |
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As reported |
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External |
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Intersegment |
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by segment |
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Dollars |
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Percent |
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Dollars |
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Percent |
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Dollars |
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Percent |
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Student Loan and Guaranty Servicing |
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$ |
130,555 |
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22.9 |
% |
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$ |
63,545 |
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76.0 |
% |
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$ |
194,100 |
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29.7 |
% |
Tuition Payment Processing and Campus Commerce |
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39,111 |
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6.8 |
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|
503 |
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0.6 |
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39,614 |
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6.0 |
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Enrollment Services |
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56,049 |
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9.8 |
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1,000 |
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1.2 |
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57,049 |
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8.7 |
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Software and Technical Services |
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15,595 |
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2.7 |
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17,877 |
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21.4 |
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33,472 |
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5.1 |
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Total revenue from fee-based businesses |
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241,310 |
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42.2 |
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|
82,925 |
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99.2 |
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|
324,235 |
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49.5 |
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Asset Generation and Management |
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352,238 |
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61.6 |
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(2,858 |
) |
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(3.4 |
) |
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349,380 |
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53.3 |
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Corporate Activity and Overhead |
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(21,856 |
) |
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(3.8 |
) |
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|
3,520 |
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4.2 |
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(18,336 |
) |
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(2.8 |
) |
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Total revenue |
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$ |
571,692 |
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100.0 |
% |
|
$ |
83,587 |
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|
100.0 |
% |
|
$ |
655,279 |
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|
100.0 |
% |
|
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5
Fee-Based Operating Segments
Student Loan and Guaranty Servicing
The Companys servicing division offers lenders across the United States a complete line of
education loan services, including application processing, underwriting, fund disbursement,
customer service, account maintenance, federal reporting and billing collections, payment
processing, default aversion, claim filing, and recovery/collection services. These activities are
performed internally for the Companys portfolio in addition to generating external fee revenue
when performed for third-party clients. The Companys student loan servicing division uses
proprietary systems to manage the servicing process. These systems provide for automated compliance
with most of the federal student loan regulations adopted under Title IV of the Higher Education
Act of 1965, as amended (the Higher Education Act). The Company offers three primary product
offerings as part of its loan and guaranty servicing functions. These product offerings and each
ones percentage of total third-party Student Loan and Guaranty Servicing revenue provided during
the year ended December 31, 2008 are as follows:
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1. |
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Origination and servicing of FFEL Program loans (47.1%) |
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2. |
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Origination and servicing of non-federally insured student loans (7.6%) |
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3. |
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Servicing and support outsourcing for guaranty agencies (45.3%) |
The following table summarizes the Companys loan servicing volumes for FFELP and private loans
(dollars in millions):
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As of December 31, 2008 |
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As of December 31, 2007 |
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Dollar |
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Percent |
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|
Dollar |
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Percent |
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Company |
|
$ |
24,596 |
(a) |
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|
68.5 |
% |
|
$ |
25,640 |
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|
75.8 |
% |
Third Party |
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|
11,293 |
(b) |
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|
31.5 |
|
|
|
8,177 |
|
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|
24.2 |
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Total |
|
$ |
35,889 |
|
|
|
100.0 |
% |
|
$ |
33,817 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
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|
(a) |
|
Approximately $644
million of these loans are eligible to be sold
to the Department of Education pursuant to its
Purchase Commitment Program. The Department
obtains all rights to service loans that it
purchases as part of this program. |
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(b) |
|
Approximately $928
million of these loans may be eligible to be
sold to the Department of Education pursuant to
its Purchase Commitment Program. The Department
obtains all rights to service loans that it
purchases as part of this program. |
During 2008, the Company sold $1.8 billion (par value) of federally insured student loans to
existing third-party servicing customers. As a result of these sales, there was a shift in loan
servicing volumes from the Company to third parties. Excluding these sales, the Company recognized
third-party servicing volume growth of 16% from existing and new customers.
The Company performs the origination and servicing activities for FFEL Program loans for itself as
well as third-party clients. The Company believes service, reputation, and/or execution are factors
considered by schools in developing their lender lists and customers in selecting a servicer for
their loans. Management believes it is important to provide exceptional customer service at a
reasonable price in order to increase the Companys loan servicing and origination volume at
schools with which the Company does business.
The Companys FFELP servicing customers include branding and forward flow lenders, as well as other
national and regional banks and credit unions, who sell loans to the Company. The Company also has
various state and non-profit secondary markets as third-party clients. The majority of the
Companys external loan servicing activities are performed under life of loan contracts. Life of
loan servicing essentially provides that as long as the loan exists, the Company shall be the sole
servicer of that loan; however, the agreement may contain deconversion provisions where, for a
fee, the lender may move the loan to another servicer.
The Company serviced FFELP loans on behalf of 85 and 121 third-party servicing customers as of
December 31, 2008 and 2007, respectively. The Company has experienced a reduction of participating
lenders for a variety of reasons, including if third-party servicing clients commence or increase
internal servicing activities, shift volume to another service provider, or exit the FFEL Program
completely. Despite this trend, the Companys remaining servicing customers have increased their
servicing volume during 2008.
The Company also provides origination and servicing activities for non-federally insured loans.
Although similar in terms of activities and functions (i.e., disbursement processing, application
processing, payment processing, statement distribution, and reporting), private loan servicing
activities are not required to comply with provisions of the Higher Education Act and may be more
customized
to individual client requirements. The Company serviced private loans on behalf of 16 third-party
servicing customers as of December 31, 2008.
6
The Company also provides servicing support for guaranty agencies, which are the organizations that
serve as the intermediary between the U.S. federal government and FFELP lenders, and is responsible
for paying the claims made on defaulted loans. The Department has designated 35 guarantors that
have been formed as either state agencies or non-profit corporations that provide FFELP guaranty
services in one or more states. Approximately half of these guarantors contract externally for
operational or technology services. The services provided by the Company include operational,
administrative, financial, and technology services to guarantors participating in the FFEL Program
and state agencies that run financial aid grant and scholarship programs.
The Companys four guaranty servicing customers include Tennessee Student Assistance Corporation,
College Assist (which is the Colorado state-designated guarantor of FFELP student loans formerly
known as College Access Network), National Student Loan Program, and the Higher Education
Assistance Commission of New York.
Competition
There is a relatively large number of lenders and servicing organizations who participate in the
FFEL Program. The chart below lists the top 10 servicing organizations for FFELP loans as of
December 31, 2007 (the latest date information was available from the Department).
|
|
|
|
|
|
|
Top FFELP Loan Servicers (a) |
|
Rank |
|
Name |
|
$ billions |
|
1 |
|
Sallie Mae |
|
$ |
127.4 |
|
2 |
|
PHEAA |
|
|
34.4 |
|
3 |
|
Nelnet |
|
|
32.2 |
|
4 |
|
Great Lakes |
|
|
32.1 |
|
5 |
|
ACS |
|
|
31.0 |
|
6 |
|
Wells Fargo |
|
|
11.7 |
|
7 |
|
JPMorgan Chase |
|
|
11.4 |
|
8 |
|
Express Loan Servicing |
|
|
8.7 |
|
9 |
|
Edfinancial |
|
|
7.7 |
|
10 |
|
KHEAA (Kentucky) |
|
|
5.5 |
|
Source: Student Loan Servicing Alliance
|
|
|
(a) |
|
The above table does
not include information from Citibank, The
Student Loan Corporation, and CLC Servicing
Corporation as these entities did not disclose
volumes. |
The principal competitor for existing and prospective loan and guaranty servicing business is SLM
Corporation, the parent company of Sallie Mae. Sallie Mae is the largest FFELP provider of
origination and servicing functions as well as one of the largest service providers of
non-federally guaranteed loans. In addition, the Departments loan servicing provider(s) could
become a larger competitor for the Company (as discussed below).
The Federal Direct Loan Program (the Direct Loan Program), through which the Federal government
lends money directly to students and families, has historically used one provider for the
origination and servicing of loans. Recent legislation, including the College Cost Reduction
Authorization Act of 2008 (the College Cost Reduction Act) and the Ensuring Continued Access to
Student Loans Act of 2008 (ECASLA), has and/or will enable the Department to accept former FFELP
loans in the form of additional Direct Loan Program capacity, and to purchase FFELP loans as far
back as 2003, in an effort to bring liquidity and stability back to the student loan market. As a
result, the Departments loan servicing provider may experience an increase in loan volume that the
Department will be responsible for servicing. With this increase in current and potential loan
volume, the Department is conducting a solicitation for additional servicing capacity. The Company
submitted an application to provide services as part of this solicitation.
The Company believes the number of guaranty agencies contracting for technology services will
increase as states continue expanding the scope of their financial aid grant programs and as a
result of existing deficient or outdated systems. Since there is a finite universe of clients,
competition for existing and new contracts is considered high. Agencies may choose to contract for
part or all of their services, and the Company believes its products and services are competitive.
To enhance its competitiveness, the Company continues to focus on service quality and technological
enhancements.
7
Seasonality
The revenue earned by the Companys loan and guaranty servicing operations is primarily related to
the outstanding portfolio size and composition and the amount of disbursement and origination
activity. Revenue generated by recurring monthly activity is driven based on the outstanding
portfolio size and composition and has little seasonality. However, a portion of the fees received
by the Company under various servicing contracts does relate to services provided in relation to
the origination and disbursement of student loans. Stafford and PLUS loans are disbursed as
directed by the school and are usually divided into two or three equal disbursements released at
specified times during the school year. The two periods of August through October and December
through March account for the majority of the Companys total annual Stafford and PLUS loan
disbursements. For private loan origination activities, disbursements peak from June through
September and the Company will earn a large portion of its origination fee income during these
months. There is also a seasonal fluctuation in guaranty processing levels due to the correlation
of the delivery of loans to students attending schools with traditional academic calendars, with
peak season occurring from approximately July to September.
Tuition Payment Processing and Campus Commerce
The Companys Tuition Payment Processing and Campus Commerce operating segment provides products
and services to help institutions and education-seeking families manage the payment of education
costs during the pre-college and college stages of the education life cycle.
The K-12 market consists of nearly 30,000 private and faith-based educational institutions
nationally. In the K-12 market the Company offers tuition management services as well as assistance
with financial needs assessment, enrollment management, and donor management. The Company has
actively managed tuition payment plans in place at approximately 4,200 K-12 educational
institutions.
Tuition management services include payment plan administration, ancillary billing, accounts
receivable management, and record keeping. K-12 educational institutions contract with the Company
to administer deferred payment plans where the institution allows the responsible party to make
monthly payments over 6 to 12 months. The Company collects a fee from either the institution or the
payer as an administration fee.
The Company offers two principal products to the higher education market: actively managed tuition
payment plans and campus commerce outsourcing. The Company has actively managed tuition payment
plans in place at approximately 600 colleges and universities. Higher educational institutions
contract with the Company to administer deferred payment plans where the institution allows the
responsible party to make monthly payments on either a semester or annual basis. The Company
collects a fee from either the institution or the payer as an administration fee.
The campus commerce solution, QuikPay®, is sold as a subscription service to colleges and
universities. QuikPay processes payments through the appropriate channels in the banking or credit
card networks to make deposits into the clients bank account. It can be further deployed to other
departments around campus as requested (e.g., application fees, alumni giving, parking, events,
etc.). There are approximately 200 college and university campuses using the QuikPay system. The
Company earns revenue for e-billing, hosting/maintenance, credit card convenience fees, and
e-payment transaction fees.
Competition
This segment of the Companys business focuses on two separate markets: private and faith-based
K-12 schools and higher education colleges and universities.
The Company is the largest provider of tuition management services to the private and faith-based
K-12 market in the United States. Competitors include: banking companies, tuition management
providers, financial needs assessment providers, accounting firms, and a myriad of software
companies.
In the higher education market, the Company targets business officers at colleges and universities.
In this market, the primary competition is limited to three tuition payment providers, as well as
solutions developed in-house by colleges and universities.
The Companys principal competitive advantages are (i) the service it provides to institutions,
(ii) the information management tools provided with the Companys service, and (iii) the Companys
ability to interface with the institutions clients. The Company believes its clients select
products primarily on technological superiority and feature functionality, but price and service
also impact the selection process.
8
Seasonality
This segment of the Companys business is subject to seasonal fluctuations which correspond, or are
related to, the traditional school year. Tuition management revenue is recognized over the course
of the academic term, but the peak operational activities take place in summer and early fall.
Revenue associated with providing QuikPay subscription services is recognized over the service
period with the highest revenue months being July through September and December and January. The
Companys operating expenses do not follow the seasonality of the revenues. This is primarily due
to fixed year-round personnel costs and seasonal marketing costs.
Enrollment Services
The Companys Enrollment Services operating segment offers enrollment products and services that
are focused on helping (i) students plan and prepare for life after high school (content
management) and (ii) colleges recruit and retain students (lead generation). The Companys
enrollment products and services include the following:
|
|
|
Content Management |
|
|
|
|
|
Test preparation study guides and online courses
|
|
|
|
|
|
Admissions consulting
|
|
|
|
|
|
Licensing of scholarship data
|
|
|
|
|
|
Essay and resume editing services
|
|
|
|
|
|
Call center services
|
|
|
|
Lead Generation |
|
|
|
Vendor lead management services
|
|
|
|
|
|
Pay per click marketing management
|
|
|
|
|
|
Email marketing
|
|
|
|
|
|
Admissions lead generation
|
|
|
|
|
|
List marketing services
|
As with all of the Companys products and services, the Companys focus is on the education seeking
family both college bound and in college and the Company delivers products and services in this
segment through four primary customer channels: higher education, corporate and government, K-12,
and direct-to-consumer/customer service. Many of the Companys products in this segment are
distributed online; however, products such as test preparation study guides are distributed as
printed materials. In addition, essay and resume editing services are delivered primarily by
contract editors. In addition to its other clients, the Company provides on-line test preparation
services and products to the United States Department of Defense under contracts with one year
terms.
Competition
In this segment, the primary areas in which the Company competes are: lead generation and
management, test preparation study guides and online courses, and call center services.
There are several large competitors in the areas of lead generation and test preparation, but the
Company does not believe any one competitor has a dominant position in all of the product and
service areas offered by the Company. The Company has seen increased competition in the area of
call center operations, including outsourced admissions, as other companies have recognized the
potential in this market.
The Company competes through various methods, including price, brand awareness, depth of product
and service selection, and customer service. The Company has attempted to be a one stop shop for
the education seeking family looking for career assessment, test preparation, and college
information. The Company also offers its institutional clients a breadth of services unrivaled in
the education industry.
Seasonality
As with the Companys other business segments, portions of the Companys Enrollment Services
segment are subject to seasonal fluctuations based upon the traditional academic school year, with
peaks in January and August. Additionally, the Company recognizes revenue from the sale of lists
when these products are distributed to the customer. Revenue from the sale of lists is dependent
on demand for the lists and varies from period to period.
Software and Technical Services
The Companys Software and Technical Services Operating Segment develops student loan servicing
software, which is used internally by the Company and licensed to third-party student loan holders
and servicers. This segment also provides information technology products and services, with core
areas of business in educational loan software solutions, business intelligence, technical
consulting services, and Enterprise Content Management (ECM) solutions.
9
The Company licenses, maintains, and supports the following systems and software:
|
|
|
HELMS/HELM-Net, STAR, and SLSS, systems which are used in the full servicing of FFELP,
private, consolidation, and Canadian loans |
|
|
|
Mariner, which is used for consolidation loan origination |
|
|
|
InfoCentre, which is a data warehouse and analysis tool for educational loans |
|
|
|
Uconnect, a tool to facilitate information sharing between different applications |
The Companys clients within the education loan marketplace include large and small financial
institutions, secondary markets, loan originators, and loan servicers. The Companys software and
documentation is distributed electronically via its web site and, if necessary, on CD-ROM. Primary
support for clients is done remotely from the Companys offices, but the Company does provide
on-site support and training when required. In addition, the Company runs and supports the software
necessary for the ELM NDN process. This process connects lenders and schools in the funds disbursal
process.
The Company also supplies and supports ECM solutions. The Companys Technical Consulting Services
group provides consulting services, primarily Microsoft related, both within and outside of the
educational loan marketplace. The Companys Microsoft Enterprise Consulting practice also provides
products and solutions for the Microsoft platform. Examples of these products are Uconnect® (an
application integration product), Dynamic Payables® (an Accounts Payable automation product), and
Dynamic Filer® (a low-cost file, scan, and search solution).
The Company is a reseller of IBM hardware and software, Hummingbird (Open Text), Kofax, and Ultimus
document imaging technology, and the Companys products require third party software from
Microsoft. All of these third party products and resources are generally available and in some
cases the Company relies on its clients obtaining these products directly from the vendors rather
than through the Company. The Company is a Microsoft Gold Certified partner and a Microsoft
Business Solutions partner.
A significant portion of the software and technology services business is dependent on the
existence of and participants in the FFEL Program. If the federal government were to terminate the
FFEL Program or the number of entities participating in the program were to decrease, the Companys
software and technical services segment would be impacted. The recent legislation and capital
market disruptions have had an impact on the profitability of FFEL Program participants. As a
result, the number of entities participating in the FFEL Program has and may continue to be
adversely impacted. This impact could have an effect on the Companys software and technical
services segment. In order to mitigate any negative impact as a result of changes in the FFEL
Program, the Company is working to diversify revenues in this segment.
Competition
The Company is one of the leaders in the education loan software processing industry. Many lenders
in the FFEL Program utilize the Companys software either directly or indirectly. Management
believes the Companys competitors in this segment are much smaller than the Company and do not
have the depth of knowledge or products offered by the Company.
The Companys primary method of competition in this segment is based upon its depth of knowledge,
experience, and product offerings in the education loan industry. The Company believes it has a
competitive edge in offering proven solutions, since the Companys competition consists primarily
of consulting firms that offer services and not products.
The Company also faces competition from loan servicers; however, loan servicing companies are
outsourcing solutions which do not allow a client to differentiate themselves in the market.
Seasonality
Software demonstrations and decisions to purchase software generally take place during year-end
budget season, but management believes implementation timeframes vary enough to provide a
consistent revenue stream throughout the year. In addition, software support is a year long ongoing
process and not generally affected by seasonality.
10
Asset Generation and Management Operating Segment
The Asset Generation and Management Operating Segment includes the origination, acquisition,
management, and ownership of the Companys student loan assets, which has historically been the
Companys largest product and service offering. The Company historically generated a substantial
portion of its earnings from the spread, referred to as the Companys student loan spread, between
the yield it receives on its student loan portfolio and the costs associated with originating,
acquiring, and financing its portfolio. Due to recent legislation and capital
market disruptions that began in 2007, the yield on student loans has been adversely impacted.
Impact of Recent Legislation and Capital Market Disruptions
On September 27, 2007, the President signed into law the College Cost Reduction Act. Among other
things, this legislation reduced special allowance payments received by lenders, increased
origination fees paid by lenders, and eliminated all provisions related to Exceptional Performer
status, and the monetary benefits associated with it. Management estimated the impact of this
legislation reduced the annual yield on FFELP loans originated after October 1, 2007 by 70 to 80
basis points. As a result of this legislation, the Company modified borrower benefits and reduced
loan acquisition and internal costs.
In addition, the Company has significant financing needs that it meets through the capital markets.
Since August 2007, the capital markets have experienced unprecedented disruptions, which have had
an adverse impact on the Companys earnings and financial condition. Since the Company cannot
determine nor control the length of time or extent to which the capital markets will remain
disrupted, it reduced its direct and indirect costs related to its asset generation activities, and
is more selective in pursuing origination activity in the direct to consumer channel. Accordingly,
beginning in January 2008, the Company suspended Consolidation and private student loan
originations and exercised contractual rights to discontinue, suspend, or defer the acquisition of
student loans in connection with substantially all of its branding and forward flow relationships.
Funding Student Loan Originations
Historically, the Company funded new loan originations using loan warehouse facilities and
asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy
and manage student loans prior to transferring them into more permanent financing arrangements. In
July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility.
Accordingly, the facility became a term facility and no new loan originations could be funded with
this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year pursuant to the Departments Loan Participation
Program (as discussed below).
In August 2008, the Department implemented the Loan Purchase Commitment Program (the Purchase
Program) and the Loan Participation Program (the Participation Program) pursuant to the ECASLA.
Under the Departments Purchase Program, the Department will purchase loans at a price equal to the
sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the
Department, and (iv) a fixed amount of $75 per loan. Under the Participation Program, the
Department provides interim short term liquidity to FFELP lenders by purchasing participation
interests in pools of FFELP loans. FFELP lenders are charged a rate of commercial paper (CP) plus
50 basis points on the principal amount of participation interests outstanding. Loans funded under
the Participation Program must be either refinanced by the lender or sold to the Department
pursuant to the Purchase Program prior to its expiration on September 30, 2009. To be eligible for
purchase or participation under the Departments programs, loans were originally limited to FFELP
Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008
and July 1, 2009, with eligible borrower benefits.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7th legislation,
which will include FFELP student loans made for the 2009-2010 academic year.
11
As of December 31, 2008, the Company had $622.2 million of FFELP loans funded using the
Participation Program. The Company plans to continue to use the Participation Program to fund loans
originated for the 2008-2009 and 2009-2010 academic years. These programs are allowing the Company
to continue originating new federal student loans to all students regardless of the school they
attend. As of February 27, 2009, the Company had $1.4 billion of FFELP loans funded using the
Participation Program.
Asset Management
As of December 31, 2008, the Company had a student loan portfolio of $25.1 billion as shown below:
Student Loan Portfolio Composition
Term Funded (Asset-Backed Securitizations)
The majority of the notes issued under asset-backed securitizations primarily reprice at a fixed
spread to three month LIBOR and are structured to substantially match the maturity of the funded
assets. These notes fund FFELP student loans that are predominantly set based on a spread to three
month commercial paper. Historically, three month LIBOR and three month commercial paper indexes
have been highly correlated. Based on cash flows developed to reflect managements current estimate
of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the
Company currently expects future undiscounted cash flows from these transactions will be
approximately $1.4 billion. These cash flows consist of net spread and servicing and administrative
revenue in excess of estimated cost. However, due to the unintended consequences of government
intervention in the commercial paper markets and limited issuances of qualifying financial
commercial paper, the relationship between the three-month financial commercial paper and LIBOR has
been distorted and volatile. Such distortion has had and may continue to have a significant impact
on the earnings and cash flows of this portfolio.
FFELP Warehouse Facility
The Companys FFELP warehouse facility terminates in May 2010. As of December 31, 2008, the Company
has $1.6 billion of student loans in the facility and $1.4 billion borrowed under the facility. The
Company plans to remove and/or refinance the remaining collateral in this facility by using the
Departments Conduit Program (as discussed below), using other financing arrangements, including
secured transactions in the capital markets, using unrestricted operating cash, and/or selling
loans to third parties.
In January 2009, the Department published summary terms under which it will finance 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 must 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 will be provided by the
capital markets at a cost based on market rates. The Conduit Program will have a term of five
years. As of December 31, 2008, the Company had $873 million of loans included in its FFELP
warehouse facility that would be eligible for this program.
Although the Company expects asset-backed securitizations to remain a primary source of funding
loans over the long term, the Company expects transaction volume to be more limited and less
favorable than in the past due to the credit market disruptions that began in August 2007. On
December 19, 2008, the Federal Reserve Board of New York published proposed terms for the U.S.
Governments Term Asset-Backed Securities Loan Facility (TALF), a program designed to facilitate
renewed issuance of consumer and small business asset-backed securities (ABS) at interest rate
spreads that are lower than current disrupted levels. As proposed, the TALF will provide investors
with funding of up to three years for eligible ABS rated by two or more rating agencies in the
highest investment-grade rating category. Eligible ABS include AAA rated student loan ABS backed
by FFELP student loans and non-government guaranteed student loans first disbursed since May 1,
2007. As of December 31, 2008, the Company had approximately $1.0 billion of student loans included
in its FFELP warehouse facility that would be eligible to serve as collateral for ABS funded under
TALF, which includes $772 million of loans that are also eligible for the Conduit Program. While
the Company expects TALF to improve its access to and reduce the cost of ABS funding, it is unable
to predict, at this time, the impact TALF will ultimately have on funding activities.
12
Private Loan Warehouse Facility
As of December 31, 2008, the Company had $154.2 million of student loans in its private loan
warehouse facility and $95.0 million borrowed under the facility. On February 25, 2009, the Company
paid all debt outstanding on this facility with operating cash and terminated the facility.
Interest Rate Risk Management
The current and future interest rate environment can and will affect the Companys interest
earnings, net interest income, and net income. The effects of changing interest rate environments
are further outlined in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market
Risk Interest Rate Risk.
The Company is exposed to interest rate risk in the form of basis risk and repricing risk because
the interest rate characteristics of the Companys assets do not match the interest rate
characteristics of the funding. As of December 31, 2008, the Company had $23.6 billion of FFELP
loans indexed to three-month financial commercial paper rate and $20.5 billion of debt indexed to
LIBOR. Due to the unintended consequences of government intervention in the commercial paper markets and limited
issuances of qualifying financial commercial paper, the relationship between the three-month
financial commercial paper and LIBOR has been distorted and volatile. Such distortion has had and
may continue to have a significant impact on the earnings of the Company. In addition, the Company
faces repricing risk due to the timing of the interest rate resets on its liabilities, which may
occur as frequently as every quarter, and the timing of the interest rate resets on its assets,
which generally occur daily.
The interest rate earned by the Company and the interest rate paid by the underlying borrowers on
the Companys portfolio of FFELP loans is set forth in the Higher Education Act and the
Departments regulations thereunder and, generally, is based upon the date the loan was originated.
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 index plus a fixed
spread that is dependent upon when the loan was originated, the loans 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 Companys 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 new legislation enacted in 2006, lenders are
required to rebate fixed rate floor income and variable rate floor income to the Department for all
new 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.
Credit Risk
The Companys portfolio of student loan assets is subject to minimal credit risk, generally based
upon the type of loan, date of origination, and quality of the underlying loan servicing.
Substantially all of the Companys loan portfolio (99% at December 31, 2008) is guaranteed by the
Department at levels ranging from 97% to 100%. Depending upon when the loan was first disbursed,
and subject to certain servicing requirements, the federal government currently guarantees 97% or
98% of the principal of and the interest on federally insured student loans, which limits the
Companys loss exposure to 3% or 2% of the outstanding balance of the Companys federally insured
portfolio (for older loans disbursed prior to 1993, the guaranty rate is 100%). The Companys
portfolio of non-federally insured loans is subject to credit risk similar to other consumer loan
assets.
13
Competition
The Company faces competition from many lenders in the student loan industry. Through its size, the
Company has successfully leveraged economies of scale to gain market share, and also competes by
offering a full array of loan products and services. The Company differentiates itself from other
lenders through its customer service, comprehensive product offering, vertical integration,
technology, and strong relationships with colleges and universities.
The Company views SLM Corporation, the parent company of Sallie Mae, as its largest competitor in
terms of loan origination and student loans held. Large, national and regional banks are also
strong competitors, although many are involved only in the origination of student loans.
Additionally, in different geographic locations across the country, the Company faces strong
competition from regional, tax-exempt student loan secondary markets.
The Direct Loan Program has reduced the origination volume available for FFEL Program participants.
As a result of the recent legislation and capital market disruptions, many lenders have withdrawn
from the student loan market. Substantially all other lenders have altered their student loan
offerings including the elimination of certain borrower benefits and premiums paid on secondary
market loan purchases. Many FFELP lenders have made other significant changes which dramatically
reduced the loan volume they originated. These conditions, primarily centered on loan access and
loan processing, have led a number of schools to convert from the FFELP to the Direct Loan Program
or participate in the Direct Loan Program in addition to the FFELP.
Seasonality
The Company earns net interest income on its portfolio of student loans. Net interest income is
primarily driven by the size and composition of the portfolio in addition to the cost of borrowing
and the prevailing interest rate environment. Although originations of student loans are generally
subject to seasonal trends which correspond to the traditional academic school year, the size and
run-off of the Companys portfolio and the periodic acquisition of student loans through its
various channels limits the seasonality of net interest income. While seasonality of interest
income may be limited, the Company incurs significantly more asset generation costs prior to and at
the beginning of the academic school year.
Intellectual Property
The Company owns numerous trademarks and service marks (Marks) to identify its various products
and services. As of December 31, 2008, the Company had approximately 11 pending and 97 registered
Marks. The Company actively asserts its rights to these Marks when it believes infringement may
exist. The Company believes its Marks have developed and continue to develop strong brand-name
recognition in the industry and the consumer marketplace. Each of the Marks has, upon registration,
an indefinite duration so long as the Company continues to use the Mark on or in connection with
such goods or services as the Mark identifies. In order to protect the indefinite duration, the
Company makes filings to continue registration of the Marks. The Company owns four patent
applications that have been published, but have not yet been issued and has also actively asserted
its rights thereunder in situations where the Company believes its claims may be infringed upon.
The Company owns many copyright-protected works, including its various computer system codes and
displays, Web sites, books and other publications, and marketing collateral. The Company also has
trade secret rights to many of its processes and strategies and its software product designs. The
Companys software products are protected by both registered and common law copyrights, as well as
strict confidentiality and ownership provisions placed in license agreements which restrict the
ability to copy, distribute, or improperly disclose the software products. The Company also has
adopted internal procedures designed to protect the Companys intellectual property.
The Company seeks federal and/or state protection of intellectual property when deemed appropriate,
including patent, trademark/service mark, and copyright. The decision whether to seek such
protection may depend on the perceived value of the intellectual property, the likelihood of
securing protection, the cost of securing and maintaining that protection, and the potential for
infringement. The Companys employees are trained in the fundamentals of intellectual property,
intellectual property protection, and infringement issues. The Companys employees are also
required to sign agreements requiring, among other things, confidentiality of trade secrets,
assignment of inventions, and non-solicitation of other employees post-termination. Consultants,
suppliers, and other business partners are also required to sign nondisclosure agreements to
protect the Companys proprietary rights.
14
Employees
As of December 31, 2008, the Company had approximately 2,200 employees. Approximately 1,100 of
these employees held professional and management positions while approximately 1,100 were in
support and operational positions. None of the Companys employees are covered by collective
bargaining agreements. The Company is not involved in any material disputes with any of its
employees, and the Company believes that relations with its employees are good.
Available Information
Copies of the Companys annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to such reports are available on the Companys Web site free of
charge as soon as reasonably practicable after such reports are filed with or furnished to the
United States Securities and Exchange Commission (the SEC). Investors and other interested
parties can access these reports and the Companys proxy statements at
http://www.nelnet.com. The Company routinely posts important information for investors on
its Web site. The SEC maintains an Internet site (http://www.sec.gov) that contains periodic and
other reports such as annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K,
respectively, as well as proxy and information statements regarding the Company and other companies
that file electronically with the SEC.
The Company has adopted a Code of Conduct that applies to directors, officers, and employees,
including the Companys principal executive officer and its principal financial and accounting
officer, and has posted such Code of Conduct on its Web site. Amendments to and waivers granted
with respect to the Companys Code of Conduct relating to its executive officers and directors
which are required to be disclosed pursuant to applicable securities laws and stock exchange rules
and regulations will also be posted on its Web site. The Companys Corporate Governance Guidelines,
Audit Committee Charter, Compensation Committee Charter, and Nominating and Corporate Governance
Committee Charter are also posted on its Web site and, along with its Code of Conduct, are
available in print without charge to any shareholder who requests them. Please direct all requests
as follows:
Nelnet, Inc.
121 South 13th Street, Suite 201
Lincoln, Nebraska 68508
Attention: Secretary
Information on the Companys Web site is not incorporated by reference into this Report and should
not be considered part of this Report.
ITEM 1A. RISK FACTORS
Asset Generation and Management and Student Loan and Guaranty Servicing Operating Segments
The following risk factors relate to the Companys operating segments most impacted by the
provisions of the FFEL Program which include:
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Asset Generation and Management |
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Student Loan and Guaranty Servicing |
Additional risk factors affecting these segments are set forth under the Liquidity and Capital
Resources caption below.
Changes in legislation and regulations could have a negative impact upon the Companys business and
may affect its profitability.
Funds for payment of interest subsidy payments, special allowance payments, and other payments
under the FFEL Program are subject to annual budgetary appropriations by Congress. Federal budget
legislation has in the past contained provisions that restricted payments made under the FFEL
Program to achieve reductions in federal spending. Future federal budget legislation may adversely
affect expenditures by the Department and the financial condition of the Company.
On August 14, 2008, the Higher Education Opportunity Act (HEOA) was enacted into law and
effectively reauthorized the FFEL Program through 2014, with authorization to make FFELP loans
through 2018 to borrowers with existing loans. Provisions in the HEOA include, but are not limited
to, the following:
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School code of conduct requirements applicable to FFELP and private education
loan lending |
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Disclosure and reporting requirements for lenders and schools participating in
preferred lender arrangements |
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Permissible and prohibited inducement activities on the part of FFELP lenders,
private education lenders, and FFELP guaranty agencies |
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Additional loan origination and repayment disclosures that FFELP and private
education lenders must provide to borrowers |
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Additional FFELP loan servicing requirements |
15
The HEOA may affect the Companys profitability by increasing costs as a result of required changes
to the Companys operations.
The College Cost Reduction Act established a competitive auction program, effective July 1, 2009,
for the origination rights to PLUS loans made to parents. The Secretary of Education must hold
auctions in which FFEL Program lenders bid on the special allowance rate they are willing to accept
in exchange for the right to originate PLUS loans to parent borrowers in a particular state. The
bid submitted by a lender cannot exceed the special allowance rate for such loans currently defined
in the Higher Education Act. The Secretary may award the origination rights on a state-by-state
basis to the lenders which submit the two lowest bids. The Company may not be one of the two
lenders awarded the origination rights in one or more states, which could result in a reduced
amount of PLUS loan volume.
Furthermore, Congressional amendments to the Higher Education Act, or other relevant federal laws,
and rules and regulations promulgated by the Secretary of Education, may adversely impact holders
of FFELP loans. For example, changes might be made to the rate of interest or special allowance
payments paid on FFELP loans, to the level of insurance provided by guaranty agencies, to the fees
assessed to FFEL Program lenders, or to the servicing requirements for FFELP loans. New policies
affecting the competition between the Federal Direct Loan and FFEL Programs may be instituted, or
the FFEL Program could be eliminated in its entirety. Such changes could have a material adverse
effect on the Company and its operations. The Company cannot predict potential legislation
impacting the FFEL Program and recognizes that a level of political and legislative risk always
exists within the industry.
In addition to changes to the Higher Education Act and FFEL Program, various state laws and
regulations targeted at student lending companies have been enacted. These laws place restrictions
on lending and business practices between schools and lenders of FFELP and private education loans
and required changes to the Companys business practices and operations. As with possible actions
in the future by Congress and the Secretary of Education at the federal level, state legislatures
may enact laws and state regulating agencies may institute rules or take actions which adversely
impact holders of FFELP or private education loans.
The impact of legislative changes coupled with financial market disruption has caused the Company
and other FFELP lenders to re-evaluate the markets in which they originate loans and the value of
the FFEL Program loan assets they hold. Some lenders may limit originations to schools based on the
schools cohort default rate and some lenders may sell loans to the Department through the
Departments Participation and Purchase Program. Additionally, schools currently participating in
the FFEL Program may re-evaluate the Direct Loan Program. These changes could reduce future third
party servicing volume and the Companys loan servicing and guaranty revenue.
The Company may be subject to penalties and sanctions if it fails to comply with governmental
regulations or guaranty agency rules.
Historically, the Companys principal business has been comprised of originating, acquiring,
holding, and servicing student loans made and guaranteed pursuant to the FFEL Program, which was
created by the Higher Education Act. The Higher Education Act governs many aspects of the Companys
operations. The Company is also subject to rules of the agencies that act as guarantors of the
student loans, known as guaranty agencies. In addition, the Company is subject to certain federal
and state banking laws, regulations, and examinations, as well as federal and state consumer
protection laws and regulations, including, without limitation, laws and regulations governing
borrower privacy protection, information security, restrictions on access to student information,
and, specifically with respect to the Companys non-federally insured loan portfolio, certain state
usury laws and related regulations and the Federal Truth in Lending Act. All or most of these laws
and regulations impose substantial requirements upon lenders and servicers involved in consumer
finance. Failure to comply with these laws and regulations could result in liability for the
Company as a result of the imposition of civil penalties and potential class action law suits.
The Companys failure to comply with the regulatory regimes described above may arise from:
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Breaches of the Companys internal control systems, such as a failure to adjust
manual or automated servicing functions following a change in regulatory
requirements |
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Technological defects, such as a malfunction in or destruction of the Companys
computer systems |
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Fraud by the Companys employees or other persons in activities such as borrower
payment processing |
16
Such failure to comply, irrespective of the reason, could subject the Company to loss of the
federal guaranty on federally insured loans, costs of curing servicing deficiencies or remedial
servicing, suspension or termination of the Companys right to participate in the FFEL Program or
to participate as a servicer, negative publicity, and potential legal claims or actions brought by
the Companys servicing customers and borrowers.
The Company has the ability to cure servicing deficiencies and the Companys historical losses in
this area have been minimal. However, the Companys loan servicing and guaranty servicing
activities are highly dependent on its information systems, and while the Company has
well-developed and tested business recovery systems, the Company faces the risk of business
disruption should there be extended failures of its systems.
The Company has entered into separate agreements with the Nebraska and New York State Attorneys
General in relation to its lending activities. The Company pledges full disclosure and transparency
in its marketing, origination, and servicing of education loans. Failure to meet the terms and
conditions of an agreement could subject the Company to legal action by the respective Attorney
General.
The Higher Education Act generally prohibits a lender from providing certain inducements to
educational institutions or individuals in order to secure applicants for FFELP loans. The Company
has structured its relationships and product offerings in a manner intended to comply with the
Higher Education Act, supporting regulations, and the available communications and guidance from
the Department.
If the Department were to change its position on any of these matters, the Company may have to
change the way it markets products and services and a new marketing strategy may not be as
effective. If the Company fails to respond to the Departments change in position, the Department
could potentially impose sanctions upon the Company that could negatively impact the Companys
business.
Competition created from other lenders and servicers may adversely impact the volume of future
originations and the Companys loan and guaranty servicing businesses.
The Companys student loan originations generally are limited to students attending eligible
educational institutions in the United States. Origination volume is greater at some schools than
others, and the Companys and its servicing clients ability to remain active lenders at a
particular school is subject to competition from other FFEL Program lenders. In addition to other
lenders, the Company also faces competition from other FFEL Program loan and guaranty service
providers who may be willing to modify pricing or services to gain greater market share.
As the Company seeks to further expand its business, the Company will face numerous competitors who
may be well established in the markets the Company seeks to penetrate, or who may have better brand
recognition and greater financial resources. Consequently, such competitors may have more
flexibility to address the risks inherent in the student loan business. Additionally, some of the
Companys competitors are tax-exempt organizations that do not pay federal or state income tax
which provides them a pricing advantage. These factors could lead to lower origination volume and
reduced loan and guaranty servicing revenue.
Competition created by the Federal Direct Loan Program may adversely impact the volume of future
originations and the Companys loan and guaranty servicing business.
The Student Loan Reform Act of 1993 authorized a program of direct loans to be originated by
schools with funds provided by the Secretary of Education. Under the Direct Loan Program, the
Secretary of Education enters into agreements with schools, or origination agents in lieu of
schools, to disburse loans with funds provided by the Secretary of Education. Participation in the
program by schools is voluntary.
The loan terms are generally the same under the Direct Loan Program as under the FFEL Program,
though more flexible repayment, consolidation, and forgiveness provisions are available under the
Direct Loan Program. Additionally, the interest rate on Direct PLUS Loans made on or after July 1,
2006, is more favorable for parent and graduate borrowers. At the discretion of the Secretary of
Education, students attending schools that participate in the Direct Loan Program (and their
parents) may still be eligible for participation in the FFEL Program, though no borrower can obtain
loans under both programs for the same period of enrollment.
As a result of the recent legislation and capital market disruptions, many lenders have withdrawn
from the student loan market. Substantially all other lenders have altered their student loan
offerings including the elimination of certain borrower benefits and premiums paid on secondary
market loan purchases. Many FFELP lenders have made other significant changes which dramatically
reduced the loan volume they originated. These conditions, primarily centered on loan access and
loan processing, have led a number of schools to convert from the FFELP to the Direct Loan Program
or participate in the Direct Loan Program in addition to the FFELP.
17
It is difficult to predict the impact of the Direct Loan Program, as there is no way to accurately
predict the number of schools that will participate in future years or, if the Secretary authorizes
students attending participating schools to continue to be eligible for FFELP loans, how many
students will seek loans under the Direct Loan Program instead of the FFEL Program. In addition, it
is impossible to predict whether future legislation will eliminate, limit, or expand the Direct
Loan Program or the FFEL Program.
The reduction in the Companys student loan purchases from branding and forward flow partners could
have an adverse impact on its business.
The Company has historically acquired student loans through forward flow commitments and branding
partner arrangements with other student loan lenders. The enactment of the College Cost Reduction
Act in September 2007 resulted in a reduction in the yields on student loans and, accordingly, a
reduction in the amount of the premium the Company could pay lenders under its forward flow
commitments and branding partner arrangements. In addition, the current capital market disruptions
have rendered origination or acquisition of student loans through these channels uneconomical.
Accordingly, the Company has limited acquisition of student loans through its branding and forward
flow relationships and will only buy loans that are economically priced and eligible for the
Departments Participation and Purchase Program. As a result, the Company has and will continue to
experience a decrease in its forward flow and branding partner loan volume. The Company can give no
assurance that it will be successful in renegotiating or renewing, on economically reasonable
terms, its branding and forward flow agreements once those agreements expire. Loss of a strong
branding or forward flow partner, or relationships with schools from which a significant volume of
student loans is directly or indirectly acquired, could result in an adverse effect on the
Companys business.
A decrease in third-party servicing volume could have a negative effect on the Companys earnings.
To the extent that third-party servicing clients reduce the volume of student loans that the
Company processes on their behalf or decide not to hold FFELP loan assets, the Companys income
would be reduced, and, to the extent the related costs could not be reduced correspondingly, net
income could be adversely affected. Such volume reductions may occur for a variety of reasons,
including if third-party servicing clients commence or increase internal servicing activities,
shift volume to another service provider, sell their loan portfolios, or exit the FFEL Program
completely, for instance, as a result of reduced interest rate margins.
Future losses due to defaults on loans held by the Company present credit risk which could
adversely affect the Companys earnings.
Over 99% of the Companys student loan portfolio is comprised of federally insured loans. These
loans currently benefit from a federal guaranty of their principal balance and accrued interest.
The allowance for loan losses from the federally insured loan portfolio is based on periodic
evaluations of the Companys loan portfolios considering past experience, trends in student loan
claims rejected for payment by guarantors, changes to federal student loan programs, current
economic conditions, and other relevant factors. The federal government currently guarantees 97% of
the principal of and the interest on federally insured student loans disbursed on and after July 1,
2006 (and 98% for those loans disbursed prior to July 1, 2006), which limits the Companys loss
exposure on the outstanding balance of the Companys federally insured portfolio. Also, in
accordance with the Student Loan Reform Act of 1993, student loans disbursed prior to October 1,
1993 are fully insured for both principal and interest.
The Companys non-federally insured loans are unsecured and are not guaranteed or reinsured under
any federal student loan program or any private insurance program. Accordingly, the Company bears
the full risk of loss on these loans if the borrower and co-borrower, if applicable, default. In
determining the adequacy of the allowance for loan losses on the non-federally insured loans, the
Company considers several factors including: loans in repayment versus those in a nonpaying status,
months in repayment, delinquency status, loan program type, loan underwriting, economic trends and
historical portfolio default trends. The Company places a non-federally insured loan on nonaccrual
status and charges off the loan when the collection of principal and interest is 120 days past due.
The evaluation of the allowance for loan losses is inherently subjective, as it requires material
estimates that may be subject to significant changes. The provision for loan losses reflects the
activity for the applicable period and provides an allowance at a level that the Companys
management believes is adequate to cover probable losses inherent in the loan portfolio. However,
future defaults can be higher than anticipated due to a variety of factors such as downturns in the
economy, regulatory or operational changes, debt management operational effectiveness, and other
unforeseen future trends. If actual performance is worse than estimated, it could materially affect
the Companys estimate of the allowance for loan losses and the related provision for loan losses
in the Companys statement of operations.
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The Company must satisfy certain requirements necessary to maintain the federal guarantees of its
federally insured loans, and the Company may incur penalties or lose its guarantees if it fails to
meet these requirements.
The Company must meet various requirements in order to maintain the federal guaranty on its
federally insured loans. These requirements include establishing servicing requirements and
procedural guidelines and specify school and loan eligibility criteria. The federal guaranty on the
Companys federally insured loans is conditional based on the Companys compliance with
origination, servicing, and collection policies set by the Department and guaranty agencies.
Federally insured loans that are not originated, disbursed, or serviced in accordance with the
Departments and guarantee agency regulations may risk partial or complete loss of the guaranty
thereof. If the Company experiences a high rate of servicing deficiencies (including any
deficiencies resulting from the conversion of loans from one servicing platform to another, errors
in the loan origination process, establishment of the borrowers repayment status, and due
diligence or claim filing processes), it could result in the loan guarantee being revoked or
denied. In most cases the Company has the opportunity to cure these deficiencies by following a
prescribed cure process which usually involves obtaining the borrowers reaffirmation of the debt.
The lender becomes ineligible for special allowance interest benefits from the time of the first
error leading to the loan rejection through the date that the loan is cured.
The Company is allowed three years from the date of the loan rejection to cure most loan
rejections. If a cure cannot be achieved during this three year period, insurance is permanently
revoked and the Company maintains its right to collect the loan proceeds from the borrower.
A guaranty agency may also assess an interest penalty upon claim payment if the error(s) does not
result in a loan rejection. These interest penalties are not subject to cure provisions, and are
typically related to isolated instances of due diligence deficiencies.
Failure to comply with Federal and guarantor regulations may result in loss of insurance or
assessment of interest penalties at the time of claim reimbursement by the Company. A future
increase in either the loans claim rejections and/or interest penalties could become material to
the Companys fiscal operations.
Higher rates of prepayments of student loans could reduce the Companys profits.
Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any
time without penalty. Prepayments may result from consolidating student loans, which historically
tends to occur more frequently in low interest rate environments, from borrower defaults, which
will result in the receipt of a guaranty payment, and from voluntary full or partial prepayments,
among other things. High prepayment rates will have the most impact on the Companys asset-backed
securitization transactions, since those securities are priced according to the expected average
lives of the underlying loans. The rate of prepayments of student loans may be influenced by a
variety of economic, social, and other factors affecting borrowers, including interest rates and
the availability of alternative financing. The Companys profits could be adversely affected by
higher prepayments, which may reduce the amount of net interest income the Company receives.
Consolidation loan activity by competitors or through the Direct Loan Program presents a risk to
the Companys loan portfolio and profitability.
The Companys portfolio of federally insured loans is subject to refinancing through the use of
consolidation loans, which are expressly permitted by the Higher Education Act and the Direct Loan
Program. In January 2008, the Company suspended consolidation student loan originations as a result
of legislative actions and capital market disruptions which impacted the profitability of
consolidation loans. As a result, the Company may lose student loans in its portfolio that are
consolidated by competing FFELP lenders or by the Direct Loan Program. Increased consolidations of
student loans by the Companys competitors or by the Direct Loan Program may result in a negative
return on loans, when considering the origination costs or acquisition premiums paid with respect
to these loans. Moreover, it may result in a reduction in net interest income. Additionally,
consolidation of loans away by competing lenders or by the Direct Loan Program can result in a
decrease of the Companys servicing portfolio, thereby decreasing fee-based servicing income.
The Company faces liquidity risks associated with financing student loan originations and
acquisitions.
A primary funding need of the Company is to finance its existing student loan portfolio and to fund
new student loan originations and acquisitions. The Company relies upon secured financing vehicles
as its most significant source of funding for student loans. Current conditions in the capital
markets have resulted in reduced liquidity and increased credit risk premiums for market
participants. These conditions may continue to increase the cost and reduce the availability of
debt in the capital markets. As a result, a prolonged period of market illiquidity may affect the
Companys ability to finance its current student loan portfolio and could have an adverse impact on
the Companys future earnings and financial condition. See the additional risk factors under the
Liquidity and Capital Resources caption below and Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources.
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Elimination of the FFEL Program by the Federal Government would have a significant negative effect
on the Companys earnings and operations.
Elimination of the FFEL Program would significantly impact the Companys operations and
profitability by, among other things, reducing the Companys interest revenues as a result of the
inability to add new FFELP loans to the Companys portfolio and reducing guarantee and third-party
servicing fees as a result of reduced FFELP loan servicing and origination volume. Additionally,
the elimination of the FFEL Program would reduce education loan software sales and related
consulting fees received from lenders using the Companys software products and services.
On February 26, 2009, the President introduced several proposals related to the fiscal year 2010 Federal budget, including a
proposal for the elimination of the FFEL Program and a recommendation that all new student loan originations be funded through the Direct Loan Program, with loan servicing to be provided by
private sector companies through performance-based contracts with the Department. The proposal did not contain specific details as to implementation or timing, and the proposal is subject to
review by Congress and possible changes. The Company cannot currently predict whether this or any other proposals to eliminate the FFEL Program will ultimately be enacted.
Utilization by lenders of the Departments Participation and Purchase Program could reduce
servicing, default aversion, and collection revenue.
On July 1, 2008, pursuant to the ECASLA, the Department announced terms under which it will offer
to purchase certain FFELP student loans and participation interests in certain FFELP student loans
from FFELP lenders. Under the Departments Purchase Program, the Department will purchase loans at
a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination
fee paid to the Department, and (iv) a fixed amount of $75 per loan. Lenders will have until
September 30, 2009 to sell loans to the Department under the 2008-2009 academic year Purchase
Program.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the replication of the
Participation Program and Purchase Program for the 2009-2010 academic year. Lenders will have
until September 30, 2010 to sell 2009-2010 academic year loans to the Department.
FFELP student loans purchased by the Department through the Purchase Program may be serviced by the
Department, consequently reducing the size of the FFEL Program third-party servicing market. Use of
the Purchase Program by the Company and its third-party servicing clients will likely reduce future
third-party servicing and will reduce guaranty revenue.
Operating Segments Fee-Based Businesses
The following risk factors relate to the Companys operating segments not directly related to the
FFEL Program. These operating segments include:
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Tuition Payment Processing and Campus Commerce |
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Software and Technical Services |
Changes in legislation and regulations could have a negative impact upon the Companys business and
may affect its profitability.
Changes to privacy and direct mail legislation could negatively impact the Company, in particular
the Companys list management and lead generation activities. Changes in such legislation could
restrict the Companys ability to collect information for its list management and lead generation
activities and its ability to use the information it collects. The Company has a privacy policy
that covers how certain subsidiaries collect, protect, and use personal information. Depending on
the department, product, and/or other factors, certain entities may have more restrictive
information handling practices.
The Companys Software and Technical Services operating segment provides information technology
products and services, with core areas of business in student loan software solutions for schools,
lenders, and guarantors. Many of the Companys customers receiving these services have been
negatively impacted through reduced margins as a result of the passage of the College Cost
Reduction Act in September 2007 and the recent disruption in the financial markets. This impact
could decrease the demand for the Companys products and services and affect the Companys revenue
and profit margins.
The Companys results are affected by competitive conditions, economic changes, and customer
preferences.
Demand for the Companys products and services, which impact revenue and profit margins, is
affected by (i) the development and timing of the introduction of competitive products and
services; (ii) the Companys response to pricing pressures to stay competitive; (iii) changes in
customer discretionary spending based on economic conditions; and (iv) changes in customers
preferences for the Companys products and services, including the success of products and services
offered by competitors.
In addition, K-12 and post-secondary enrollment numbers impact the demand for the Companys
products and services. Education enrollment numbers are impacted by general population trends and
the general state of the economy. Revenue in the Companys fee-
based businesses is recurring only to the extent that customer relationships are sustained. For
some products and services, volume and growth is concentrated to a limited number of customers.
Reduction in volume or loss of key customer relationships could have a negative impact on the
Companys future operating results.
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Liquidity and Capital Resources
The Company faces liquidity and funding risk to meet its financial obligations.
Liquidity and funding risk refers to the risk that the Company will be unable to finance its
operations due to a loss of access to the capital markets or other financing alternatives, or
difficulty in raising financing needed for its assets. Liquidity and funding risk also encompasses
the ability of the Company to meet its financial obligations without experiencing significant
business disruption or reputational damage that may threaten its viability as a going concern.
The recent unprecedented disruptions in the credit and financial markets and the general economic
crisis have had and may continue to have an adverse effect on the cost and availability of
financing for the Companys student loan portfolios and, as a result, have had and may continue to
have an adverse effect on the Companys liquidity, results of operations, and financial condition.
Such adverse conditions may continue or worsen in the future.
The Companys primary funding needs are those required to finance its student loan portfolio and
satisfy its cash requirements for new student loan originations and acquisitions. In general, the
amount, type, and cost of the Companys funding, including securitizations and unsecured financing
from the capital markets and borrowings from financial institutions, have a direct impact on the
Companys operating expenses and financial results and can limit the Companys ability to grow its
student loan assets. The Company relies upon secured financing vehicles as its most significant
source of funding for student loans. The Companys primary secured financing vehicles are loan
warehouse facilities and asset-backed securitizations.
Historically, the Company funded new loan originations using loan warehouse facilities and
asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy
and manage student loans prior to transferring them into more permanent financing arrangements. In
July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility.
Accordingly, the facility became a term facility and no new loan originations could be funded with
this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year pursuant to the Departments Loan Participation
Program (as discussed below).
In August 2008, the Department implemented the Purchase Program and the Participation Program
pursuant to the ECASLA. Under the Departments Purchase Program, the Department will purchase loans
at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent
origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Under the
Participation Program, the Department provides interim short term liquidity to FFELP lenders by
purchasing participation interests in pools of FFELP loans. FFELP lenders are charged a rate of
commercial paper plus 50 basis points on the principal amount of participation interests
outstanding. Loans funded under the Participation Program for the 2008-2009 academic year must be
either refinanced by the lender or sold to the Department pursuant to the Purchase Program prior to
its expiration on September 30, 2009. To be eligible for purchase or participation under the
Departments programs, loans were originally limited to FFELP Stafford or PLUS loans made for the
academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible
borrower benefits.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7th legislation,
which will include FFELP student loans made for the 2009-2010 academic year. Loans for the
2009-2010 academic year will need to be refinanced or sold to the Department prior to September 30,
2010.
With respect to the origination of new FFELP student loans for the 2008-2009 and 2009-2010 academic
years, the Company currently expects to utilize the Departments Participation Program.
The Company has historically relied on asset-backed securitizations as a significant source of
funding for student loans on a long term basis. The severe disruptions in the credit and financial
markets have made asset-backed securitization financing generally unavailable. The Company is
currently unable to predict when market conditions will allow for future asset-backed
securitization financing. See Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources.
21
If the Company is unable to obtain cost-effective and stable funding alternatives, its funding
capabilities and liquidity would be negatively impacted and its cost of funds could increase,
adversely affecting the Companys results of operations. In addition, the Companys ability to
originate and acquire student loans would be limited or could be eliminated.
The Company is exposed to mark-to-formula collateral support risk on its FFELP warehouse facility.
The Companys warehouse facility for FFELP loans provides formula based advance rates based on
current market conditions, which require equity support to be posted to the facility. While the
Company does not believe that the loan valuation formula is reflective of the actual fair value of
its loans, it is subject to compliance with these provisions of the warehouse facility agreement.
As of December 31, 2008, $1.4 billion was outstanding under this facility. Under the current terms
of the facility, the remaining student loan collateral will need to be refinanced or removed by May
9, 2010, the final maturity of the facility. As of December 31, 2008, the Company had $280.6
million posted as equity funding support for the facility.
The Company has utilized its $750.0 million unsecured line of credit to fund equity advances on its
warehouse facility. As of December 31, 2008, the Company had $691.5 million outstanding under the
line of credit and $51.2 million available for future use. The amount available under the line of
credit is less than maximum capacity as a credit provider is no longer funding draw requests (see
below).
Continued disruptions in the credit and financial markets may cause additional volatility in the
loan valuation formula under the warehouse facility. Should a significant change in the valuation
of loans result in additional required equity funding support for the warehouse facility greater
than what the Company can provide, the warehouse facility could be subject to an event of default
resulting in a termination of the facility and an acceleration of the repayment provisions. A
default on the FFELP warehouse facility would result in an event of default on the Companys
unsecured line of credit that would result in the outstanding balance on the line of credit
becoming immediately due and payable.
The Company plans to remove and/or refinance the remaining collateral in this facility by using the
Departments Conduit Program, using other financing arrangements, including secured transactions in
the capital markets, using unrestricted operating cash, and/or selling loans to third parties. The
Company cannot predict if it will be successful at removing and/or refinancing the remaining
collateral in the FFELP warehouse facility and such terms may have a material adverse effect on the
Companys results of operations and financial condition.
The Company faces counterparty risk.
The Company has exposure to the financial condition of its various lending, investment, and
derivative counterparties. If any of the Companys counterparties is unable to perform its
obligations, the Company would, depending on the type of counterparty arrangement, experience a
loss of liquidity or an economic loss. Related to derivative exposure, the Company may not be able
to cost effectively replace the derivative position depending on the type of derivative and the
current economic environment. If the Company was not able to replace the derivative position, the
Company would be exposed to a greater level of interest rate and/or foreign currency exchange rate
risk which could lead to additional losses.
The lending commitment under the Companys $750.0 million 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. On September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. Since the bankruptcy filing, the
Company has experienced funding delays from Lehman for its portion of the lending commitment and
does not expect Lehman to fund future borrowing requests. See Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources.
As a source of liquidity for funding new FFELP student loan originations, the Company maintains a
participation agreement with the related party Union Bank and Trust Company (Union Bank), as
trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company
participation interests in student loans. The Company currently can participate loans to Union
Bank to the extent of availability under the grantor trusts, up to $750 million. In the event that
Union Bank experiences adverse changes to its financial condition, such participation agreement
liquidity may not be available to the Company in the future.
As of December 31, 2008, the Company had a total of $610 million invested in guaranteed investment
contracts (GICs). Approximately $100 million of these GICs are with foreign banks, which receive
support from regional or national governments. The remaining $510 million of these GICs are with a
total of three banks, all of which are currently at least A rated, and with one such bank
representing 88% of this amount. These agreements may be terminated by the Company if the GIC
providers unsecured credit rating falls below a certain threshold. A default by the
counterparties under the GICs could lead to a loss of the Companys investment and have a material
adverse effect on the Companys results of operations and financial condition.
22
When the mark-to-market value of a derivative instrument is negative, the Company owes the
counterparty and, therefore, has no immediate counterparty risk. Additionally, if the negative
mark-to-market 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 may depend on the Companys unsecured credit rating. 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 Companys capital resources.
When the fair value of a derivative contract is positive, this generally indicates that the
counterparty owes the Company. 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.
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 Companys risk committee. The Company also has a policy of requiring
that all derivative contracts be governed by an International Swaps and Derivatives Association,
Inc. Master Agreement.
The Company is exposed to interest rate risk in the form of basis risk and repricing risk because
the interest rate characteristics of the Companys assets do not match the interest rate
characteristics of the funding for the assets.
The Company issues asset-backed securities, the vast majority being variable rate, to fund its
student loan assets. The variable rate debt is generally indexed to 3-month LIBOR, set by auction,
or through a remarketing process. The income generated by the Companys student loan assets is
generally driven by short term indices (treasury bills and commercial paper) that are different
from those which affect the Companys liabilities (generally LIBOR), which creates basis risk.
Moreover, the Company also faces repricing risk due to the timing of the interest rate resets on
its liabilities, which may occur as infrequently as every quarter, and the timing of the interest
rate resets on its assets, which generally occurs daily. In a declining interest rate environment,
this may cause the Companys student loan spread to compress, while in a rising rate environment,
it may cause the spread to increase.
In using different index types and different index reset frequencies to fund assets, 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 short term with rate movements
that are highly correlated over a longer period of time, they have recently become less correlated.
There can be no assurance the indices will regain their high level of correlation in the future due to capital
market dislocations or other factors not within the Companys control. In such circumstances, the
Companys earnings could be adversely affected, possibly to a material extent.
The Company has used derivative instruments to hedge the repricing risk due to the timing of the
interest rate resets on its assets and liabilities. However, the Company does not generally hedge
the basis risk due to the different interest rate indices associated with its assets and
liabilities since the derivatives needed to hedge this risk are generally illiquid or non-existent
and the relationship between the indices for most of the Companys assets and liabilities has been
highly correlated over a long period of time. Recently, the spread has widened and may widen
further, which has and may continue to have a significant impact on the net spread of the Companys
student loan portfolio.
As of December 31, 2008, the Company had approximately $23.6 billion of FFELP loans indexed to
three-month financial commercial paper rate and $20.5 billion of debt indexed to LIBOR. Due to the
unintended consequences of government intervention in the commercial paper markets and limited
issuances of qualifying financial commercial paper, the relationship between the three-month
financial CP and LIBOR rates has been distorted and volatile. To address this issue, the Department
announced that for purposes of calculating the FFELP loan index from October 27, 2008 to December
31, 2008, the Federal Reserves Commercial Paper Funding Facility rate was used for those days in
which no three-month financial commercial paper rate was available. This action partially mitigated the recent volatility between CP and LIBOR, however, there are no assurances that the Department will utilize a
similar methodology for the first quarter of 2009 or in the future.
Characteristics unique to asset-backed securitizations may negatively affect the Companys
continued liquidity.
The interest rates on certain of the Companys asset-backed securities are set and periodically
reset via a dutch auction (Auction Rate Securities) or through a remarketing utilizing
remarketing agents (Variable Rate Demand Notes).
For Auction Rate Securities, investors and potential investors submit orders through a
broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various
interest rates. The broker-dealers submit their clients orders to the auction agent, who then
determines the clearing interest rate for the upcoming period. Interest rates on these Auction Rate
Securities are reset periodically, generally every 7 to 35 days, by the auction agent or agents.
Beginning in the first quarter of 2008, as part of the ongoing
credit market crisis, auction rate securities from various issuers have failed to receive
sufficient order interest from potential investors to clear successfully, resulting in failed
auction status. Since February 2008, the Companys Auction Rate Securities have failed in this
manner. Under historical conditions, the broker-dealers would purchase these securities if investor
demand is weak. However, since February 2008, the broker-dealers have been allowing auctions to
fail. Currently, all of the Companys Auction Rate Securities are in a failed auction status and
the Company believes they will remain in a failed auction status for an extended period of time and
possibly permanently.
23
As a result of a failed auction, the Auction Rate Securities will generally pay interest to the
holder at a maximum rate as defined by the indenture. While these rates will vary by class of
security, they will generally be based on a spread to LIBOR or Treasury Securities. These maximum
rates are subject to increase if the credit ratings on the bonds are downgraded.
The Company cannot predict whether future auctions related to its Auction Rate Securities will be
successful. The Company is currently seeking alternatives for reducing its exposure to the auction
rate market, but may not be able to achieve alternate financing for some or all of its Auction Rate
Securities. If there is no demand for the Companys Auction Rate Securities, the Company could be
subject to interest costs substantially above the anticipated and historical rates paid on these
types of securities.
For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to
investors. If there are insufficient potential bid orders to purchase all of the notes offered for
sale, the Company could be subject to interest costs substantially above the anticipated and
historical rates paid on these types of securities.
The Company is exposed to interest rate risk because of the interest rate characteristics of
certain of its assets and the interest rate characteristics of the related funding of such assets.
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 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 Companys 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 new legislation enacted in 2006, lenders are
required to rebate fixed rate floor income and variable rate floor income to the Department for all
new 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 convert to variable rate loans, the impact of the rate fluctuations is reduced.
The Company is subject to foreign currency exchange risk and such risk could lead to increased
costs.
As a result of the Companys offerings in Euro-denominated notes, the Company is exposed to market
risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and the
Euro, and LIBOR and EURIBOR. The principal and accrued interest on these notes is re-measured at
each reporting period and recorded on the Companys balance sheet in U.S. dollars based on the
foreign currency exchange rate on that date. When foreign currency exchange rates between the U.S.
dollar and the Euro change significantly, earnings may fluctuate significantly. The Company entered
into cross-currency interest rate swaps that hedge these risks but, as discussed below, such swaps
may not always be effective.
The Companys derivative instruments may not be successful in managing interest and foreign
currency exchange rate risks, which may negatively impact the Companys operations.
When the Company utilizes derivative instruments, it utilizes them to manage interest and foreign
currency exchange rate sensitivity. The Companys derivative instruments are intended as economic
hedges but do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS No.
133); consequently, the change in fair value, called the mark-to-market, of these derivative
instruments is included in the Companys operating results. Changes or shifts in the forward yield
curve and foreign currency exchange rates can and have significantly impacted the valuation of the
Companys derivatives. Accordingly, changes or shifts in the forward yield curve and foreign
currency exchange rates will impact the financial position, results of operations, and cash flows
of the Company. Further, the Company may incur costs or be subject to bid/ask spreads if the
Company terminates a derivative instrument. The derivative instruments used by the Company are
typically in the form of interest rate swaps, basis swaps, and cross-currency interest rate swaps.
24
Developing an effective strategy for dealing with movements in interest rates and foreign currency
exchange rates is complex, and no strategy can completely insulate the Company from risks
associated with such fluctuations. Although the Company believes its derivative instruments are
highly effective, because many of its derivatives are not balance guaranteed to a particular pool
of student loans, the Company is subject to prepayment risk that could result in the Company being
under or over hedged, which could result in material losses to the Company. In addition, the
Companys interest rate and foreign currency exchange risk management activities could expose the
Company to substantial mark-to-market losses if interest rates or foreign currency exchange rates
move materially differently from the environment when the derivatives were entered into. As a
result, the Company cannot offer any assurance that its economic hedging activities will
effectively manage its interest and foreign currency exchange rate sensitivity, or have the desired
beneficial impact on its results of operations or financial condition.
The ratings of the Company or of any securities issued by the Company may change, which may
increase the Companys costs of capital and may reduce the liquidity of the Companys securities.
Ratings are based primarily on the creditworthiness of the Company, the underlying assets of
asset-backed securitizations, the amount of credit enhancement in any given transaction, and the
legal structure of any given transaction. Ratings are not a recommendation to purchase, hold, or
sell any of the Companys securities inasmuch as the ratings do not address the market price or
suitability for investors. There is no assurance that ratings will remain in effect for any given
period of time or that current ratings will not be lowered or withdrawn by any rating agency.
Ratings for the Company or any of its securities may be increased, lowered, or withdrawn by any
rating agency if, in the rating agencys judgment, circumstances so warrant. If the Companys
credit ratings are lowered or withdrawn, the Company may experience an increase in the interest
rate paid on the Companys unsecured line of credit or the interest rates or other costs associated
with other capital raising activities by the Company, which may negatively affect the Companys
operations. Moreover, if the unsecured ratings of the Company are lowered or withdrawn, it may
affect the terms of the Companys outstanding derivative contracts and could result in requirements
for the Company to post additional collateral under those contracts. Additionally, a lowered or
withdrawn credit rating may negatively affect the liquidity of the Companys securities.
General Risk Factors
A continued economic recession could reduce demand for Company products and services and lead to
lower revenue and lower earnings.
The Company earns revenue from the interest and fees charged on the loans and other products and
services it sells. When the economy slows, the demand for those products and services can fall,
reducing interest and fee revenue and earnings. An economic downturn can also hurt the ability of
borrowers to repay their loans, causing higher loan losses. Several factors could cause the economy
to slow down or even recede, including higher energy costs, higher interest rates, reduced consumer
or corporate spending, declining home values, natural disasters, terrorist activities, military
conflicts, and the normal cyclical nature of the economy.
Changes in accounting policies or accounting standards, changes in how accounting standards are
interpreted or applied, and incorrect estimates and assumptions by management in connection with
the preparation of the Companys consolidated financial statements could materially affect the
reported amounts of asset and liabilities, the reported amounts of income and expenses, and related
disclosures.
The Companys accounting policies are fundamental to determining and understanding financial
condition and results of operations. Some of these policies require use of estimates and
assumptions that could affect the reported amounts of assets and liabilities and the reported
amounts of income and expenses during the reporting periods. Several of the Companys accounting
policies are critical because they require management to make difficult, subjective, and complex
judgments about matters that are inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions or using different assumptions. See
Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies. From time to time the Financial Accounting Standards
Board (FASB) and the SEC change the financial accounting and reporting standards that govern the
preparation of external financial statements. In addition, accounting standard setters and those
who interpret the accounting standards (such as the FASB and/or the SEC) may change or even reverse
their previous interpretations or positions on how these standards should be applied. Changes in
financial accounting and reporting standards and changes in current interpretations may be beyond
the Companys control, can be hard to predict, and could materially impact how the Company reports
its financial condition and results of operations. The Company could be required to apply a new or
revised standard retroactively or apply an existing standard differently, also retroactively, in
each case resulting in the Company potentially restating prior period financial statements that
could potentially be material.
25
The Companys future results may be affected by various legal and regulatory proceedings.
The outcome of legal proceedings may differ from the Companys expectations because the outcomes of
litigation, including regulatory matters, are often difficult to reliably predict. Various factors
or developments can lead the Company to change current estimates of liabilities and related
insurance receivables where applicable, or make such estimates for matters previously not
susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a
significant settlement, significant regulatory developments or changes in applicable law. A future
adverse ruling, settlement, or unfavorable development could result in future charges that could
have a material adverse effect on the Companys results of operations or cash flows in any
particular period.
The market price of the Companys Class A common stock may fluctuate significantly, which may
result in losses for investors.
From January 1, 2008 to February 27, 2009, the closing daily sales price of the Companys Class A
common stock as reported by the New York Stock Exchange ranged from a low of $4.91 per share to a
high of $16.06 per share. The Company expects the Class A common stock to continue to be subject to
fluctuations as a result of a variety of factors, including factors beyond the Companys control.
These factors include:
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Changes in interest rates and credit market conditions affecting the cost and
availability of financing for the Companys student loan assets |
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Changes in the education financing regulatory framework |
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Changes in demand for education financing or other products and services that the
Company offers |
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Variations in the Companys quarterly operating results |
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Changes in financial estimates by securities analysts |
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Changes in market valuations of comparable companies |
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Future sales of the Companys Class A common stock |
In addition, in May 2008 the Company announced that it was temporarily suspending its quarterly
dividend payments of $0.07 per share on its Class A and Class B common stock. The Company will
continue to evaluate its dividend policy, but the payment of future dividends remains in the
discretion of the Companys board of directors and will continue to depend on the Companys
earnings, capital requirements, financial condition, and other factors. In addition, the payment
of dividends is subject to the terms of certain other outstanding securities issued by the Company.
The Company does not currently anticipate resuming the payment of dividends on its common stock in
the foreseeable future.
The Company may not meet the expectations of shareholders and/or of securities analysts at some
time in the future, and the market price of the Companys Class A common stock could decline as a
result.
Negative publicity that may be associated with the student lending industry, including negative
publicity about the Company, may harm the Companys reputation and adversely affect operating
results.
During 2007 and 2008, the student lending industry was the subject of various investigations and
reports. The publicity associated with these investigations and reports may have a negative impact
on the Companys reputation. To the extent that potential or existing customers decide not to
utilize the Companys products or services as a result of such publicity, the Companys operating
results may be adversely affected.
If management does not effectively execute the Companys restructuring objectives to reduce
infrastructure costs and reposition the Company in the education market place, it could adversely
affect the Companys customers, operations, revenue, and ability to compete.
As the result of FFEL Program regulation changes, financial market disruption, and an ongoing
economic recession, the Company has implemented restructuring objectives to reduce infrastructure
costs and reposition itself in the education market place. Beginning in the third quarter of 2007
and continuing into 2009, the Company has executed initiatives that created efficiencies within its
asset generation business and decreased operating expenses through a reduction in workforce,
realignment of operating facilities, and restructuring of operating systems and system support.
If management is unable to successfully implement the Companys reorganization objectives or if
these objectives do not have the desired effects or result in the projected efficiencies, the
Company may incur additional or unexpected expenses, reputation damage, or loss of customers which
would adversely affect the Companys operations and revenues.
26
Failures in the Companys information technology system could materially disrupt its business.
The Companys servicing and operating processes are highly dependent upon its information
technology system infrastructure, and the Company faces the risk of business disruption if failures
in its information systems occur, which could have a material impact upon its
business and operations. The Company depends heavily on its own computer-based data processing
systems in servicing both its own student loans and those of third-party servicing customers and
providing tuition payment and campus commerce transactions and lead generation products and
services. The Company regularly backs up its data and maintains detailed disaster recovery plans. A
major physical disaster or other calamity that causes significant damage to information systems
could adversely affect the Companys business. Additionally, loss of information systems for a
sustained period of time could have a negative impact on the Companys performance and ultimately
on cash flow in the event the Company were unable to process transactions and/or provide services
to customers.
A compromise of customer data could negatively impact the Companys business.
The Company, on its own behalf and on behalf of other entities, stores a significant amount of
personal data about the customers to whom the Company provides services. If access to customer data
were compromised through breach of its systems, fraud, or otherwise, the Company could suffer
reputation damage, loss of customers, and unexpected financial costs.
Exposure related to certain tax issues could decrease the Companys net income.
A corporation is considered to be a personal holding company under the U.S. Internal Revenue Code
of 1986, as amended (the Code), if (1) at least 60% of its adjusted ordinary gross income is
personal holding company income (generally, passive income) and (2) at any time during the last
half of the taxable year more than half, by value, of its stock is owned by five or fewer
individuals, as determined under attribution rules of the Code. If both of these tests are met, a
personal holding company is subject to an additional tax on its undistributed personal holding
company income, currently at a 15% rate. Five or fewer individuals hold more than half the value of
the Companys stock. In June 2003, the Company submitted a request for a private letter ruling from
the Internal Revenue Service seeking a determination that its federally guaranteed student loans
qualify as assets of a lending or finance business, as defined in the Code. Such a determination
would have assured the Company that holding such loans does not make it a personal holding company.
Based on its historical practice of not issuing private letter rulings concerning matters that it
considers to be primarily factual, however, the Internal Revenue Service has indicated that it will
not issue the requested ruling, taking no position on the merits of the legal issue. So long as
more than half of the Companys value continues to be held by five or fewer individuals, if it were
to be determined that some portion of its federally guaranteed student loans does not qualify as
assets of a lending or finance business, as defined in the Code, the Company could become subject
to personal holding company tax on its undistributed personal holding company income. The Company
continues to believe that neither Nelnet, Inc. nor any of its subsidiaries is a personal holding
company. However, even if Nelnet, Inc. or one of its subsidiaries was determined to be a personal
holding company, the Company believes that by utilizing intercompany distributions, it could
eliminate or substantially eliminate its exposure to personal holding company taxes, although it
cannot assure that this will be the case.
The Company is subject to federal and state income tax laws and regulations. Income tax regulations
are often complex and require interpretation. Changes in income tax regulations could negatively
impact the Companys results of operations. If states enact legislation, alter apportionment
methodologies, or aggressively apply the income tax nexus standards, the Company may become subject
to additional state taxes. The applicability and taxation on the earnings from intangible personal
property has been the subject of state audits and litigation with state taxing authorities and tax
policy debates by various state legislatures. As the U.S. Congress and U.S. Supreme Court have not
provided clear guidance in this regard, conflicting state laws and court decisions create
tremendous uncertainty and expense for taxpayers conducting interstate commerce.
From time to time, the Company engages in transactions in which the tax consequences may be subject
to uncertainty. Examples of such transactions include asset and business acquisitions and
dispositions, financing transactions, apportionment, nexus standards, and income recognition.
Significant judgment is required in assessing and estimating the tax consequences of these
transactions. The Company prepares and files tax returns based on the interpretation of tax laws
and regulations. In the normal course of business, the Companys tax returns are subject to
examination by various taxing authorities. Such examinations may result in future tax and interest
assessments by these taxing authorities. In accordance with SFAS No. 109, Accounting for Income
Taxes, and Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, the Company establishes reserves for tax contingencies related to deductions and
credits that it may be unable to sustain. Differences between the reserves for tax contingencies
and the amounts ultimately owed are recorded in the period they become known. Adjustments to the
Companys reserves could have a material effect on the Companys financial statements.
27
Transactions with affiliates and potential conflicts of interest of certain of the Companys
officers and directors, including the Companys Chief Executive Officer, pose risks to the
Companys shareholders that the Company may not enter into transactions on the same terms that the
Company could receive from unrelated third-parties.
The Company has entered into certain contractual arrangements with entities controlled by Michael
S. Dunlap, the Companys Chairman, Chief Executive Officer, and a principal shareholder, and
members of his family and, to a lesser extent, with entities in which other directors and members
of management hold equity interests or board or management positions. Such arrangements constitute
a significant portion of the Companys business and include cash management activities and sales of
student loans and
student loan origination rights by such affiliates to the Company. These arrangements may present
potential conflicts of interest. Many of these arrangements are with Union Bank, in which Mr.
Dunlap owns an indirect interest and of which he serves as a member of the Board of Directors. The
Company intends to maintain its relationship with Union Bank, which management believes provides
substantial benefits to the Company, although there can be no assurance that any transactions
between the Company and entities controlled by Mr. Dunlap, his family, and/or other officers and
directors of the Company are, or in the future will be, on terms that are no less favorable than
what could be obtained from an unrelated third party.
The Companys Chairman and Chief Executive Officer owns a substantial percentage of the Companys
Class A and Class B common stock and is able to control all matters subject to a shareholder vote.
Michael S. Dunlap, the Companys Chairman, Chief Executive Officer, and a principal shareholder,
beneficially owns a substantial percentage of the Companys outstanding shares of Class A common
stock and Class B common stock. Each share of Class A common stock has one vote and each share of
Class B common stock has 10 votes on all matters to be voted upon by the Companys shareholders. As
a result, Mr. Dunlap is able to control all matters requiring approval by the Companys
shareholders, including the election of all members of the Board of Directors, and may do so in a
manner with which other shareholders may not agree or which they may not consider to be in the best
interest of other shareholders. In addition, Stephen F. Butterfield, the Companys Vice Chairman,
owns a substantial number of shares of Class B common stock.
Managing assets for third parties has inherent risks that, if not properly managed, could
negatively affect the Companys business.
As part of the Companys Loan and Guaranty Servicing and other Fee Based business segments, the
Company manages loan portfolios and transfers funds for third party customers. A compromise of
security surrounding loan portfolio and cash management processes or mismanagement of customer
assets could lead to litigation, fraud, reputation damage, and unanticipated operating costs that
could affect the Companys overall business.
The Company may face operational risks from its reliance on vendors to complete specific business
operations.
The Company relies on outside vendors to provide key components of business operations such as
internet connections and network access. Disruptions in communication services provided by a vendor
or any failure of a vendor to handle current or higher volumes of use could hurt the Companys
ability to deliver products and services to customers and otherwise to conduct business. Financial
or operational difficulties of an outside vendor could also hurt operations if those difficulties
interfere with the vendors services.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved comments from the staff of the Securities and Exchange Commission
regarding its periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2. PROPERTIES
The following table lists the principal facilities for office space owned or leased by the Company.
The Company owns the building in Lincoln, Nebraska where its principal office is located. The
building is subject to a lien securing the outstanding mortgage debt on the property.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
Approximate |
|
|
expiration |
|
Location |
|
Primary Function or Segment |
|
square feet |
|
|
date |
|
Lincoln, NE |
|
Corporate Headquarters, Asset Generation and Management, Student
Loan and Guaranty Servicing |
|
|
154,000 |
|
|
|
|
|
Aurora, CO |
|
Asset Generation and Management, Student Loan and Guaranty Servicing, Software and Technical Services |
|
|
124,000 |
|
|
February 2015 |
|
Jacksonville, FL |
|
Student Loan and Guaranty Servicing, Software and Technical Services |
|
|
109,000 |
|
|
January 2014 |
|
Lawrenceville, NJ |
|
Enrollment Services |
|
|
62,000 |
|
|
April 2011 |
|
The square footage amounts above exclude a total of approximately 43,000 square feet of owned
office space in Lincoln, Nebraska that the Company leases to third parties. The Company also leases
approximately 62,000 square feet of office space in Indianapolis, Indiana where Asset Generation
and Management and Student Loan and Guaranty Servicing operations were previously conducted, of
which 56,000 square feet is now subleased to third parties. The Company leases other office
facilities located throughout the United States. These properties are leased on terms and for
durations that are reflective of commercial standards in the communities where these properties are
located. The Company believes that its respective properties are generally adequate to meet its
long term business goals. The Companys principal office is located at 121 South 13th
Street, Suite 201, Lincoln, Nebraska 68508.
28
ITEM 3. 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 thereunder,
and the Departments 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 Companys management that the disposition or ultimate determination of these claims, lawsuits,
and proceedings will not have a material adverse effect on the Companys business, financial
position, or results of operations.
Municipal Derivative Bid Practices Investigation
As previously disclosed, on February 8, 2008, Shockley Financial Corp. (SFC), an indirect,
wholly-owned subsidiary of the Company that provides investment advisory services for the
investment of proceeds from the issuance of municipal and corporate bonds, received a grand jury
subpoena issued by the U.S. District Court for the Southern District of New York upon application
of the Antitrust Division of the U.S. Department of Justice (DOJ). The subpoena seeks certain
information and documents from SFC in connection with DOJs criminal investigation of the bond
industry with respect to possible anti-competitive practices related to awards of guaranteed
investment contracts and other products for the investment of proceeds from bond issuances. SFC
currently has one employee. The Company and SFC are cooperating with the investigation.
On March 5, 2008, SFC received a subpoena from the SEC related to a similar investigation, on June
6, 2008 and June 12, 2008, SFC received subpoenas from the New York Attorney General and the
Florida Attorney General, respectively, relating to their similar investigations. Each of the
subpoenas seeks information similar to that of the DOJ. The Company and SFC are cooperating with
these investigations.
SFC was also named as a defendant in a number of substantially identical purported class action
lawsuits, which as of June 16, 2008 have been consolidated before the U.S. District Court for the
Southern District of New York, under the caption In re Municipal Derivatives Antitrust Litigation.
The consolidated suit (the Suit) alleges several financial institutions and financial service
provider defendants engaged in a conspiracy not to compete and to fix prices and rig bids for
municipal derivatives (including GICs) sold to issuers of municipal bonds. The Suit also asserts
claims for violations of Section 1 of the Sherman Act, fraudulent concealment, unfair competition
and violation of the California Cartwright Act. On January 30, 2009, SFC entered into a Tolling and
Cooperation Agreement (Tolling Agreement) with a number of the plaintiffs involved in the Suit.
In connection with the Tolling Agreement, on February 5, 2009 SFC was voluntarily dismissed from
the Suit, without prejudice, on motion of the plaintiffs who are parties to the Tolling Agreement.
To the extent SFC is not dismissed by other plaintiffs, SFC intends to vigorously contest the Suit.
SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory
agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to
predict the ultimate outcome of the investigations or the Suit.
Department of Education Review
The Department of Education periodically reviews participants in the FFEL Program for compliance
with program provisions. On June 28, 2007, the Department notified the Company that it would be
conducting a review of the Companys administration of the FFEL Program under the Higher Education
Act. The Company understands that the Department selected several schools and lenders for review.
Specifically, the Department indicated it was reviewing the Companys practices in connection with
the prohibited inducement provisions of the Higher Education Act and the provisions of the Higher
Education Act and the associated regulations which allow borrowers to have a choice of lenders. The
Company responded to the Departments requests for information and documentation and has cooperated
with their review.
While the Company cannot predict the ultimate outcome of the review, the Company believes its
activities have materially complied with the Higher Education Act, the rules and regulations
adopted by the Department of Education thereunder, and the Departments guidance regarding those
rules and regulations.
29
Department of Justice
In connection with the Companys settlement with the Department of Education in January 2007 to
resolve the Office of Inspector General of the Department of Education (the OIG) audit report
with respect to the Companys student loan portfolio receiving
special allowance payments at a minimum 9.5% interest rate, the Company was informed in February
2007 by the Department of Education that a civil attorney with the Department of Justice had opened
a file regarding the issues set forth in the OIG report, which the Company understands is common
procedure following an OIG audit report. The Company has engaged in discussions with and provided
information to the DOJ in connection with the review.
By letter dated November 18, 2008, the DOJ requested that the Company provide the DOJ certain
documents and information related to the Companys compliance with the prohibited inducement
provisions of the Higher Education Act and associated regulations. The Company responded to the
DOJs requests and is cooperating with their review.
While the Company is unable to predict the ultimate outcome of these reviews, the Company believes
its practices complied with applicable law, including the provisions of the Higher Education Act,
the rules and regulations adopted by the Department of Education thereunder, and the Departments
guidance regarding those rules and regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.
PART II.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Companys Class A Common Stock is listed and traded on the New York Stock Exchange under the
symbol NNI, while its Class B Common Stock is not publicly traded. The number of holders of
record of the Companys Class A Common Stock and Class B Common Stock as of January 31, 2009 was
773 and nine, respectively. Because many shares of the Companys Class A Common stock are held by
brokers and other institutions on behalf of shareholders, the Company is unable to estimate the
total number of beneficial owners represented by these record holders. The following table sets
forth the high and low sales prices for the Companys Class A Common Stock for each full quarterly
period in 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
1st Quarter |
|
|
2nd Quarter |
|
|
3rd Quarter |
|
|
4th Quarter |
|
|
1st Quarter |
|
|
2nd Quarter |
|
|
3rd Quarter |
|
|
4th Quarter |
|
High |
|
$ |
13.66 |
|
|
$ |
14.11 |
|
|
$ |
16.06 |
|
|
$ |
14.80 |
|
|
$ |
27.92 |
|
|
$ |
28.00 |
|
|
$ |
24.35 |
|
|
$ |
19.61 |
|
Low |
|
|
9.00 |
|
|
|
10.35 |
|
|
|
9.37 |
|
|
|
9.21 |
|
|
|
23.38 |
|
|
|
22.99 |
|
|
|
17.11 |
|
|
|
11.99 |
|
In the first quarter of 2007, the Company began paying dividends of $0.07 per share on the
Companys Class A and Class B Common Stock which were paid quarterly through the first quarter of
2008. On May 21, 2008, the Company announced that it was temporarily suspending its quarterly
dividend program. The Company will continue to evaluate its dividend policy, which is subject to
future earnings, capital requirements, financial condition, and other factors.
30
Performance Graph
The following graph compares the change in the cumulative total shareholder return on the Companys
Class A Common Stock to that of the cumulative return of the Dow Jones U.S. Total Market Index and
the Dow Jones U.S. Financial Services Index. The graph assumes that the value of an investment in
the Companys Class A Common Stock and each index was $100 on December 31, 2003 and that all
dividends, if applicable, were reinvested. The performance shown in the graph represents past
performance and should not be considered an indication of future performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG NELNET, INC., THE DOW JONES US TOTAL MARKET INDEX,
AND THE DOW JONES US FINANCIAL SERVICES INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company/Index |
|
12/31/2003 |
|
|
12/31/2004 |
|
|
12/31/2005 |
|
|
12/31/2006 |
|
|
12/31/2007 |
|
|
12/31/2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nelnet, Inc. |
|
$ |
100.00 |
|
|
$ |
120.22 |
|
|
$ |
181.61 |
|
|
$ |
122.14 |
|
|
$ |
57.58 |
|
|
$ |
65.33 |
|
Dow Jones U.S. Total Market Index |
|
|
100.00 |
|
|
|
112.01 |
|
|
|
119.10 |
|
|
|
137.64 |
|
|
|
145.91 |
|
|
|
91.69 |
|
Dow Jones U.S. Financial Services Index |
|
|
100.00 |
|
|
|
114.26 |
|
|
|
123.84 |
|
|
|
158.21 |
|
|
|
132.73 |
|
|
|
55.16 |
|
The preceding information under the caption Performance Graph shall be deemed to be furnished
but not filed with the Securities and Exchange Commission.
Stock Repurchases
The following table summarizes the repurchases of Class A common stock during the fourth quarter of
2008 by the Company or any affiliated purchaser of the Company, as defined in Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of |
|
|
Maximum number |
|
|
|
|
|
|
|
|
|
|
|
shares purchased |
|
|
of shares that may |
|
|
|
Total number |
|
|
Average |
|
|
as part of publicly |
|
|
yet be purchased |
|
|
|
of shares |
|
|
price paid |
|
|
announced plans |
|
|
under the plans |
|
Period |
|
purchased (1) |
|
|
per share |
|
|
or programs (2) (3) |
|
|
or programs (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 October 31, 2008 |
|
|
1,606 |
|
|
$ |
13.10 |
|
|
|
1,606 |
|
|
|
7,107,906 |
|
November 1 November 30, 2008 |
|
|
260,468 |
|
|
|
36.93 |
|
|
|
1,708 |
|
|
|
7,384,499 |
|
December 1 December 31, 2008 |
|
|
56,508 |
|
|
|
12.84 |
|
|
|
1,645 |
|
|
|
7,156,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
318,582 |
|
|
$ |
32.54 |
|
|
|
4,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total number of shares includes: (i) shares purchased pursuant to the 2006
Plan discussed in footnote (2) below; (ii) shares purchased pursuant to the 2006
ESLP discussed in footnote (3) below, of which there were none for the months of
October, November, or December 2008; and (iii) shares purchased other than through a publicly announced program, as described below. Shares of Class A common stock purchased pursuant
to the 2006 Plan included 1,606 shares, 1,708 shares, and 1,645 shares in October,
November, and December, respectively, that had been issued to the Companys 401(k) plan
and allocated to employee participant accounts pursuant to the plans provisions for
Company matching contributions in shares of Company stock, and were purchased by the
Company from the plan pursuant to employee participant instructions to dispose of such
shares. In addition, 54,863 shares withheld by the Company in December to satisfy tax withholding requirements upon the issuance of shares to an employee under the
Companys Restricted Stock Plan in connection with a separation agreement. 258,760 shares were purchased by
the Company in November for $37.10 per share in connection with the settlement of the Companys obligations upon the exercise of outstanding put options issued by the Company as discussed in note
10 of the notes to the consolidated financial statements included in this Report. These
shares were originally issued by the Company in November 2005 in consideration for the
purchase of 5280 Solutions, Inc. |
31
|
|
|
(2) |
|
On May 25, 2006, the Company publicly announced that its Board of Directors had
authorized a stock repurchase program to repurchase up to a total of five million shares
of the Companys Class A common stock (the 2006 Plan). On February 7, 2007, the
Companys Board of Directors increased the total shares the Company is allowed to
repurchase to 10 million. The 2006 Plan had an initial expiration date of May 24, 2008,
which was extended until May 24, 2010 by the Companys Board of Directors on January 30,
2008. |
|
(3) |
|
On May 25, 2006, the Company publicly announced that the shareholders of the
Company approved an Employee Stock Purchase Loan Plan (the 2006 ESLP) to allow the
Company to make loans to employees for the purchase of shares of the Companys Class A
common stock either in the open market or directly from the Company. A total of
$40 million in loans may be made under the 2006 ESLP, and a total of one million
shares of Class A common stock are reserved for issuance under the 2006 ESLP. Shares
may be purchased directly from the Company or in the open market through a broker at
prevailing market prices at the time of purchase, subject to any conditions or
restrictions on the timing, volume, or prices of purchases as determined by the
Compensation Committee of the Board of Directors and set forth in the Stock Purchase
Loan Agreement with the participant. The 2006 ESLP shall terminate May 25, 2016. |
|
(4) |
|
The maximum number of shares that may yet be purchased under the plans is
calculated below. There are no assurances that any additional shares will be repurchased
under either the 2006 Plan or the 2006 ESLP. Shares under the 2006 ESLP may be issued by
the Company rather than purchased in open market transactions. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B / C) |
|
|
(A + D) |
|
|
|
Maximum number of |
|
|
Approximate dollar |
|
|
Closing price on |
|
|
Approximate |
|
|
Approximate |
|
|
|
shares that |
|
|
value of shares that |
|
|
the last trading day |
|
|
number of shares that |
|
|
number of shares that |
|
|
|
may yet be |
|
|
may yet be |
|
|
of the Companys |
|
|
may yet be |
|
|
may yet be |
|
|
|
purchased under the |
|
|
purchased under |
|
|
Class A Common |
|
|
purchased under |
|
|
purchased under |
|
|
|
2006 Plan |
|
|
the 2006 ESLP |
|
|
Stock |
|
|
the 2006 ESLP |
|
|
the 2006 Plan and |
|
As of |
|
(A) |
|
|
(B) |
|
|
(C) |
|
|
(D) |
|
|
2006 ESLP |
|
October 31, 2008 |
|
|
4,616,450 |
|
|
$ |
36,450,000 |
|
|
$ |
14.63 |
|
|
|
2,491,456 |
|
|
|
7,107,906 |
|
November 30, 2008 |
|
|
4,614,742 |
|
|
|
36,450,000 |
|
|
|
13.16 |
|
|
|
2,769,757 |
|
|
|
7,384,499 |
|
December 31, 2008 |
|
|
4,613,097 |
|
|
|
36,450,000 |
|
|
|
14.33 |
|
|
|
2,543,615 |
|
|
|
7,156,712 |
|
Equity Compensation Plans
For information regarding the Companys equity compensation plans, see Part III, Item 12 of this
Report.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and other operating information of the Company.
The selected financial data in the table is derived from the consolidated financial statements of
the Company. The following selected financial data should be read in conjunction with the
consolidated financial statements, the related notes, and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in this Report. As a result of certain
transactions as summarized below, the period-to-period comparability of the Companys financial
position and results of operations may be difficult.
|
|
|
During 2004 through 2006, the Company acquired the stock or certain assets of 17
different entities. |
|
|
|
The Company began recognizing interest income in 2004 on a loan portfolio in which it
earned a minimum interest rate of 9.5 percent. Interest income earned on this portfolio
decreased as a result of rising interest rates and the pay down of the portfolio. As a
result of the Companys settlement entered into with the Department, beginning July 1,
2006 the Company no longer recognizes 9.5 percent floor income on this loan portfolio.
In addition, the Company recognized an impairment charge of $21.7 million in 2006
related to loan premiums paid on loans acquired in 2005 that were previously considered
eligible for 9.5% special allowance payments prior to the settlement with the
Department. |
32
|
|
|
In May 2007, the Company sold EDULINX, a Canadian student loan service provider and
subsidiary of the Company. As a result of this transaction, the results of operations
for EDULINX are reported as discontinued operations for all periods presented. |
|
|
|
Upon passage of the College Cost Reduction Act in September 2007, management
evaluated the carrying amount of goodwill and certain intangible assets. Based on the
legislative changes and the student loan business model modifications the Company
implemented as a result of the legislative changes, the Company recorded an impairment
charge of $39.4 million and a restructuring charge of $20.3 million. The restructuring
activities have resulted in expense savings in subsequent periods. The September 2007
legislation contains provisions with implications for participants in the FFEL Program
by significantly decreasing the annual yield on loans originated after October 1, 2007. |
|
|
|
In September 2007, the Company also recorded an expense of $15.7 million to increase
the Companys allowance for loan losses related to the increase in risk share as a
result of the elimination of the Exceptional Performer program. |
|
|
|
In January 2008, the Company announced a plan to further reduce operating expenses
related to its student loan origination and related businesses as a result of ongoing
disruptions in the credit markets. As a result of this plan, the
Company recorded restructuring charges of $26.1 million in 2008. The restructuring
activities have resulted in expense savings in subsequent periods. |
|
|
|
Due to legislation and capital market disruptions, beginning in January 2008, the
Company suspended Consolidation loan originations and exercised contractual rights to
discontinue, suspend, or defer the acquisition of student loans in connection with
substantially all of its branding and forward flow relationships. This decreased the
amount of loans originated and acquired from historical periods. |
|
|
|
In 2008, as a result of the disruptions in the debt and secondary markets, the
Company sold $1.8 billion (par value) of student loans in order to reduce the amount of
student loans remaining under the Companys multi-year committed financing facility for
FFELP loans, which reduced the Companys exposure related to certain equity support
provisions included in this facility. These loan sales resulted in the recognition of a
loss of $51.4 million. |
|
|
|
During the fourth quarter of 2008, the Company incurred expenses of $13.5 million
from fees paid related to liquidity contingency planning. |
Management evaluates the Companys GAAP-based financial information as well as operating results on
a non-GAAP performance measure referred to as base net income. Management believes base net
income provides additional insight into the financial performance of the core operations.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands, except share data) |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
187,892 |
|
|
|
244,614 |
|
|
|
308,459 |
|
|
|
328,999 |
|
|
|
398,160 |
|
Less provision (recovery) for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
15,308 |
|
|
|
7,030 |
|
|
|
(529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
(recovery) for loan losses |
|
|
162,892 |
|
|
|
216,436 |
|
|
|
293,151 |
|
|
|
321,969 |
|
|
|
398,689 |
|
Other income |
|
|
307,392 |
|
|
|
327,238 |
|
|
|
247,033 |
|
|
|
145,500 |
|
|
|
119,653 |
|
Gain (loss) on sale of loans |
|
|
(51,414 |
) |
|
|
3,597 |
|
|
|
16,133 |
|
|
|
301 |
|
|
|
240 |
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
10,827 |
|
|
|
26,806 |
|
|
|
(31,075 |
) |
|
|
96,227 |
|
|
|
(11,918 |
) |
Derivative settlements, net |
|
|
55,657 |
|
|
|
18,677 |
|
|
|
23,432 |
|
|
|
(17,008 |
) |
|
|
(34,140 |
) |
Salaries and benefits |
|
|
(183,393 |
) |
|
|
(236,631 |
) |
|
|
(214,676 |
) |
|
|
(142,132 |
) |
|
|
(130,840 |
) |
Amortization of intangible assets |
|
|
(26,230 |
) |
|
|
(30,426 |
) |
|
|
(25,062 |
) |
|
|
(8,151 |
) |
|
|
(8,707 |
) |
Impairment expense |
|
|
(18,834 |
) |
|
|
(49,504 |
) |
|
|
(21,488 |
) |
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
(212,157 |
) |
|
|
(219,048 |
) |
|
|
(185,053 |
) |
|
|
(117,448 |
) |
|
|
(98,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest |
|
|
44,740 |
|
|
|
57,145 |
|
|
|
102,395 |
|
|
|
279,258 |
|
|
|
234,397 |
|
Income tax expense |
|
|
17,896 |
|
|
|
21,716 |
|
|
|
36,237 |
|
|
|
100,581 |
|
|
|
85,227 |
|
Income from continuing operations |
|
|
26,844 |
|
|
|
35,429 |
|
|
|
65,916 |
|
|
|
178,074 |
|
|
|
149,170 |
|
Income (loss) from discontinued operations, net of tax |
|
|
1,818 |
|
|
|
(2,575 |
) |
|
|
2,239 |
|
|
|
3,048 |
|
|
|
9 |
|
Net income |
|
|
28,662 |
|
|
|
32,854 |
|
|
|
68,155 |
|
|
|
181,122 |
|
|
|
149,179 |
|
Earnings (loss) per share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.54 |
|
|
|
0.71 |
|
|
|
1.23 |
|
|
|
3.31 |
|
|
|
2.78 |
|
Discontinued operations |
|
|
0.04 |
|
|
|
(0.05 |
) |
|
|
0.04 |
|
|
|
0.06 |
|
|
|
|
|
Net income |
|
|
0.58 |
|
|
|
0.66 |
|
|
|
1.27 |
|
|
|
3.37 |
|
|
|
2.78 |
|
Weighted average shares outstanding (basic) |
|
|
49,099,967 |
|
|
|
49,618,107 |
|
|
|
53,593,056 |
|
|
|
53,761,727 |
|
|
|
53,648,605 |
|
Weighted average shares outstanding (diluted) |
|
|
49,114,208 |
|
|
|
49,628,802 |
|
|
|
53,593,056 |
|
|
|
53,761,727 |
|
|
|
53,648,605 |
|
Dividends per common share |
|
$ |
0.07 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and acquisition volume (a) |
|
$ |
2,809,083 |
|
|
|
5,152,110 |
|
|
|
6,696,118 |
|
|
|
8,471,121 |
|
|
|
4,070,529 |
|
Average student loans |
|
|
26,044,507 |
|
|
|
25,143,059 |
|
|
|
21,696,466 |
|
|
|
15,716,388 |
|
|
|
11,809,663 |
|
Student loans serviced (at end of period) (b) |
|
|
35,888,693 |
|
|
|
33,817,458 |
|
|
|
30,593,592 |
|
|
|
26,988,839 |
|
|
|
21,076,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core student loan spread |
|
|
0.93 |
% |
|
|
1.13 |
% |
|
|
1.42 |
% |
|
|
1.51 |
% |
|
|
1.66 |
% |
Net loan charge-offs as a percentage of
the ending balance of student loans in repayment |
|
|
0.125 |
% |
|
|
0.046 |
% |
|
|
0.018 |
% |
|
|
0.007 |
% |
|
|
0.102 |
% |
Shareholders equity to total assets
(at end of period) |
|
|
2.31 |
% |
|
|
2.09 |
% |
|
|
2.51 |
% |
|
|
2.85 |
% |
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
189,847 |
|
|
|
111,746 |
|
|
|
102,343 |
|
|
|
96,678 |
|
|
|
41,181 |
|
Student loans receivables, net |
|
|
25,413,008 |
|
|
|
26,736,122 |
|
|
|
23,789,552 |
|
|
|
20,260,807 |
|
|
|
13,461,814 |
|
Goodwill and intangible assets |
|
|
252,232 |
|
|
|
277,525 |
|
|
|
353,008 |
|
|
|
243,630 |
|
|
|
16,792 |
|
Total assets |
|
|
27,854,897 |
|
|
|
29,162,783 |
|
|
|
26,796,873 |
|
|
|
22,798,693 |
|
|
|
15,169,511 |
|
Bonds and notes payable |
|
|
26,787,959 |
|
|
|
28,115,829 |
|
|
|
25,562,119 |
|
|
|
21,673,620 |
|
|
|
14,300,606 |
|
Shareholders equity |
|
|
643,226 |
|
|
|
608,879 |
|
|
|
671,850 |
|
|
|
649,492 |
|
|
|
456,175 |
|
|
|
|
(a) |
|
Initial loans originated or acquired through various channels, including originations
through the direct channel; acquisitions through the branding partner channel, the forward
flow channel, and the secondary market (spot purchases); and loans acquired in portfolio
and business acquisitions. |
|
(b) |
|
The student loans serviced does not include loans serviced by EDULINX for all periods
presented. |
34
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Managements Discussion and Analysis of Financial Condition and Results of Operations is for the
years ended December 31, 2008, 2007, and 2006. All dollars are in thousands, except per share
amounts, unless otherwise noted.)
OVERVIEW
The Company is an education planning and financing company focused on providing quality products
and services to students, families, and schools nationwide. The Company is a vertically-integrated
organization that offers a broad range of products and services to its customers throughout the
education life cycle.
Built through a focus on long term organic growth and further enhanced by strategic acquisitions,
the Company earns its revenues from fee-based revenues related to its diversified education finance
and service operations and from net interest income on its portfolio of student loans.
The following provides certain events and operating activities that have impacted the financial
condition and operating results of the Company. These items include:
|
|
|
Reduced exposure to liquidity risk on the Companys FFELP warehouse facility |
|
|
|
Continued diversification of revenue through fee-based businesses |
|
|
|
Continued decreases in operating expenses |
Reduction in Liquidity Risk Exposure FFELP Warehouse Facility
The Companys multi-year committed financing facility for FFELP loans has historically allowed the
Company to buy and manage the majority of its student loans prior to transferring them into more
permanent financing arrangements. The terms and conditions of this facility provides for formula
based advance rates based on current market conditions, which require equity support to be posted
to the facility. In order to reduce exposure related to these equity support provisions, the
Company reduced the amount of loans included in the facility in 2008 by (i) completing asset-backed
securities transactions of $4.5 billion which were issued at rates higher than those historically
achieved by the Company, and (ii) selling $1.8 billion (par value) in student loan assets resulting
in the recognition of a loss of $51.4 million. In addition, the Company incurred expenses of $13.5
million in 2008 from fees paid related to liquidity contingency planning.
As of December 31, 2008, the outstanding balance under this facility was $1.4 billion. The Company
plans to remove and/or refinance the remaining collateral in this facility by using the
Departments Conduit Program (as discussed below), using other financing arrangements, using
unrestricted operating cash, and/or selling loans to third parties.
Revenue Diversification
In recent years, the Company has expanded products and services generated from businesses that are
not dependent upon government programs reducing legislative and political risk. This revenue is
primarily generated from products and services offered in the Companys Tuition Payment Processing
and Campus Commerce and Enrollment Services operating segments. The only product and service
offering in these segments that was affected by student loan legislative developments is list
marketing services. The table below includes the Companys revenue from fee-based businesses and
shows the revenue earned by the Companys operating segments that are less dependent upon
government programs, excluding list marketing services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
Tuition Payment Processing and Campus Commerce |
|
$ |
50,124 |
|
|
|
46,484 |
|
|
|
3,640 |
|
|
|
|
|
Enrollment Services Content Management and Lead
Generation |
|
|
103,014 |
|
|
|
81,649 |
|
|
|
21,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from fee-based businesses
less dependent upon government programs |
|
|
153,138 |
|
|
|
128,133 |
|
|
$ |
25,005 |
|
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enrollment Services List Marketing Services |
|
|
9,445 |
|
|
|
22,596 |
|
|
|
|
|
|
|
|
|
Student Loan and Guaranty Servicing |
|
|
105,664 |
|
|
|
133,234 |
|
|
|
|
|
|
|
|
|
Software and Technical Services |
|
|
19,731 |
|
|
|
22,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from fee-based businesses |
|
$ |
287,978 |
|
|
|
306,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Operating Expenses
As a result of the restructuring plans implemented in September 2007 and January 2008, as well as
the Companys continued focus on capitalizing on the operating leverage of the Companys business
structure and strategies, operating expenses decreased $95.0 million for the year ended December
31, 2008 compared to the same period a year ago. Excluding restructuring expense, impairment
expense, and liquidity contingency planning fees, operating expenses decreased $74.7 million, or
15.7%, for the year ended December 31, 2008 compared to the same period in 2007.
RESULTS OF OPERATIONS
The Companys operating results are primarily driven by the performance of its existing portfolio,
the cost necessary to generate new assets, the revenues generated by its fee based businesses, and
the cost to provide those services. The performance of the Companys portfolio is driven by net
interest income and losses related to credit quality of the assets along with the cost to
administer and service the assets and related debt.
Net Interest Income
The Company generates a significant portion of its earnings from the spread, referred to as its
student loan spread, between the yield the Company receives on its student loan portfolio and the
cost of funding these loans. This spread income is reported on the Companys consolidated
statements of income as net interest income. The amortization of loan premiums, including
capitalized costs of origination, the 1.05% per year consolidation loan rebate fee paid to the
Department, and yield adjustments from borrower benefit programs, are netted against loan interest
income on the Companys statements of income. The amortization of debt issuance costs is included
in interest expense on the Companys statements of income.
The Companys portfolio of FFELP loans originated prior to April 1, 2006 earns interest at the
higher of a variable rate based on the special allowance payment (SAP) formula set by the
Department and the borrower rate. The SAP formula is based on an applicable index plus a fixed
spread that is dependent upon when the loan was originated, the loans repayment status, and
funding sources for the loan. As a result of one of the provisions of the Higher Education
Reconciliation Act of 2005 (HERA), the Companys portfolio of FFELP loans originated on or after
April 1, 2006 earns interest at a variable rate based on the SAP formula. For the portfolio of
loans originated on or after April 1, 2006, when the borrower rate exceeds the variable rate based
on the SAP formula, the Company must return the excess to the Department.
On September 27, 2007, the President signed into law the College Cost Reduction Act. This
legislation has and will continue to have a significant impact on the Companys net interest income
and should be considered when reviewing the Companys results of operations. Among other things,
this legislation:
|
|
|
Reduced special allowance payments to for-profit lenders and not-for-profit lenders
by 0.55 percentage points and 0.40 percentage points, respectively, for both Stafford
and Consolidation loans disbursed on or after October 1, 2007 |
|
|
|
Reduced special allowance payments to for-profit lenders and not-for-profit lenders
by 0.85 percentage points and 0.70 percentage points, respectively, for PLUS loans
disbursed on or after October 1, 2007 |
|
|
|
Increased origination fees paid by lenders on all FFELP loan types, from 0.5 percent
to 1.0 percent, for all loans first disbursed on or after October 1, 2007 |
|
|
|
Eliminated all provisions relating to Exceptional Performer status, and the monetary
benefit associated with it, effective October 1, 2007 |
|
|
|
Reduces default insurance to 95 percent of the unpaid principal of such loans, for
loans first disbursed on or after October 1, 2012 |
The impact of this legislation has reduced the annual yield on FFELP loans originated after October
1, 2007. The Company believes it can mitigate some of the reduction in annual yield by creating
efficiencies and lowering costs, modifying borrower benefits, and reducing loan acquisition costs.
Because the Company generates a significant portion of its earnings from its student loan spread,
the interest rate sensitivity of the Companys balance sheet is very important to its operations.
The current and future interest rate environment can and will affect the Companys interest
earnings, net interest income, and net income. The effects of changing interest rate environments
are further outlined in Item 7A, Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk.
36
Investment interest income, which is a component of net interest income, includes income from
unrestricted interest-earning deposits and funds in the Companys special purpose entities which
are utilized for its asset-backed securitizations.
Net interest income also includes interest expense on unsecured debt offerings. The proceeds from
these unsecured debt offerings were and have been used by the Company to fund general business
operations, certain asset and business acquisitions, and the repurchase of stock under the
Companys stock repurchase plan.
Provision for Loan Losses
Management estimates and establishes an allowance for loan losses through a provision charged to
expense. Losses are charged against the allowance when management believes the collectability of
the loan principal is unlikely. Recovery of amounts previously charged off is credited to the
allowance for loan losses. Management maintains the allowance for federally insured and
non-federally insured loans at a level believed to be adequate to provide for estimated probable
credit losses inherent in the loan portfolio. This evaluation is inherently subjective because it
requires estimates that may be susceptible to significant changes. The Company analyzes the
allowance separately for its federally insured loans and its non-federally insured loans.
Management bases the allowance for the federally insured loan portfolio on periodic evaluations of
the Companys loan portfolios, considering past experience, trends in student loan claims rejected
for payment by guarantors, changes to federal student loan programs, current economic conditions,
and other relevant factors. One of the changes to the Higher Education Act as a result of HERAs
enactment in February 2006, was to lower the guaranty rates on FFELP loans, including a decrease in
insurance and reinsurance on portfolios receiving the benefit of the Exceptional Performance
designation by 1%, from 100% to 99% of principal and accrued interest (effective July 1, 2006), and
a decrease in insurance and reinsurance on portfolios not subject to the Exceptional Performance
designation by 1%, from 98% to 97% of principal and accrued interest (effective for all loans first
disbursed on and after July 1, 2006).
In September 2005, the Company was re-designated as an Exceptional Performer by the Department in
recognition of its exceptional level of performance in servicing FFELP loans. As a result of this
designation, the Company received 99% reimbursement (100% reimbursement prior to July 1, 2006) on
all eligible FFELP default claims submitted for reimbursement during the applicable period. Only
FFELP loans that were serviced by the Company, as well as loans owned by the Company and serviced
by other service providers designated as Exceptional Performers by the Department, were eligible
for the 99% reimbursement.
On September 27, 2007, the President signed into law the College Cost Reduction Act. Among other
things, this legislation eliminated all provisions relating to Exceptional Performer status, and
the monetary benefit associated with it, effective October 1, 2007. Accordingly, the majority of
claims submitted on or after October 1, 2007 are subject to reimbursement at 97% or 98% of
principal and accrued interest depending on the disbursement date of the loan. During 2007, the
Company recorded an expense of $15.7 million to increase the Companys allowance for loan losses
related to the increase in risk share as a result of the elimination of the Exceptional Performer
program.
In determining the adequacy of the allowance for loan losses on the non-federally insured loans,
the Company considers several factors including: loans in repayment versus those in a nonpaying
status, months in repayment, delinquency status, type of program, and trends in defaults in the
portfolio based on Company and industry data. The Company places a non-federally insured loan on
nonaccrual status and charges off the loan when the collection of principal and interest is 120
days past due.
Other Income
The Company also earns fees and generates income from other sources, including principally loan and
guaranty servicing income; fee-based income on borrower late fees, payment management activities,
and certain marketing and enrollment services; and fees from providing software services.
Loan and Guaranty Servicing Income Loan servicing fees are determined according to individual
agreements with customers and are calculated based on the dollar value of loans, number of loans,
or number of borrowers serviced for each customer. Guaranty servicing fees, generally, are
calculated based on the number of loans serviced, volume of loans serviced, or amounts collected. Revenue is recognized when
earned pursuant to applicable agreements, and when ultimate collection is assured.
Other Fee-Based Income Other fee-based income includes borrower late fee income, payment
management fees, the sale of lists and print products, and subscription-based products and
services. Borrower late fee income earned by the Companys education lending subsidiaries is
recognized when payments are collected from the borrower. Fees for payment management services are
recognized over the period in which services are provided to customers. Revenue from the sale of
lists and printed products is generally earned and recognized, net of estimated returns, upon
shipment or delivery. Revenues from the sales of subscription-based products and services are
recognized ratably over the term of the subscription. Subscription revenue received or receivable
in advance of the delivery of services is included in deferred revenue.
37
Software Services Software services income is determined from individual agreements with
customers and includes license and maintenance fees associated with student loan software products.
Computer and software consulting services are recognized over the period in which services are
provided to customers.
Operating Expenses
Operating expenses includes indirect costs incurred to generate and acquire student loans, costs
incurred to manage and administer the Companys student loan portfolio and its financing
transactions, costs incurred to service the Companys student loan portfolio and the portfolios of
third parties, costs incurred to provide tuition payment processing, campus commerce, enrollment,
list management, software, and technical services to third parties, the depreciation and
amortization of capital assets and intangible assets, investments in products, services, and
technology to meet customer needs and support continued revenue growth, and other general and
administrative expenses. Operating expenses also includes employee termination benefits, lease
termination costs, the write-down of certain assets related to the Companys September 2007 and
January 2008 restructuring initiatives, and certain severance and retention costs associated with
additional strategic decisions made during 2008.
Year ended December 31, 2008 compared to year ended December 31, 2007
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
1,176,383 |
|
|
|
1,667,057 |
|
|
|
(490,674 |
) |
Investment interest |
|
|
37,998 |
|
|
|
80,219 |
|
|
|
(42,221 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,214,381 |
|
|
|
1,747,276 |
|
|
|
(532,895 |
) |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bonds and notes payable |
|
|
1,026,489 |
|
|
|
1,502,662 |
|
|
|
(476,173 |
) |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
187,892 |
|
|
|
244,614 |
|
|
|
(56,722 |
) |
Provision for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
(3,178 |
) |
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
$ |
162,892 |
|
|
|
216,436 |
|
|
|
(53,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income decreased for the year ended December 31, 2008 compared to 2007 as a
result of the compression in the core student loan spread as discussed in this Item 7 under
Asset Generation and Management Operating Segment Results of Operations. Core student
loan spread was 0.93% and 1.13% for the years ended December 31, 2008 and 2007,
respectively. The decrease was also due to an overall decrease in cash held in 2008
compared to 2007 and lower interest rates in 2008. The decreases to net interest income
were offset by the amount of variable rate floor income the Company earned during these
periods. During the years ended December 31, 2008, the Company earned $42.3 million of
variable rate floor income, as compared to $3.0 million of variable rate floor income
earned during the year ended December 31, 2007. |
|
|
|
Excluding an expense of $15.7 million to increase the Companys allowance for loan
losses related to the increase in risk share as a result of the elimination of the
Exceptional Performer program in the third quarter of 2007, the provision for loan losses
increased for the year ended December 31, 2008 compared to 2007. The provision for loan
losses for federally insured loans increased as a result of the increase in risk share as a
result of the loss of Exceptional Performer. The provision for loan losses for
non-federally insured loans increased primarily due to increases in delinquencies as a
result of the continued weakening of the U.S. economy. |
38
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
$ |
104,176 |
|
|
|
128,069 |
|
|
|
(23,893 |
) |
Other fee-based income |
|
|
178,699 |
|
|
|
160,888 |
|
|
|
17,811 |
|
Software services income |
|
|
19,757 |
|
|
|
22,669 |
|
|
|
(2,912 |
) |
Other income |
|
|
4,760 |
|
|
|
15,612 |
|
|
|
(10,852 |
) |
Gain (loss) on sale of loans |
|
|
(51,414 |
) |
|
|
3,597 |
|
|
|
(55,011 |
) |
Derivative market value, foreign currency,
and put option adjustments |
|
|
10,827 |
|
|
|
26,806 |
|
|
|
(15,979 |
) |
Derivative settlements, net |
|
|
55,657 |
|
|
|
18,677 |
|
|
|
36,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
322,462 |
|
|
|
376,318 |
|
|
|
(53,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income decreased due to decreases in FFELP loan servicing
income, non-federally insured loan servicing income, and guaranty servicing income as
further discussed in this Item 7 under Student Loan and Guaranty Servicing Operating
Segment Results of Operations. |
|
|
|
Other fee-based income increased due to an increase in the number of managed tuition
payment plans and an increase in campus commerce transactions processed in the Tuition
Payment Processing and Campus Commerce Operating Segment, as well as an increase in lead
generation sales volume in the Enrollment Services Operating Segment and an increase in
borrower late fee income in the Asset Generation and Management Operating Segment. |
|
|
|
Software services income decreased as the result of a reduction in the number of
projects for existing customers and the loss of customers due to the legislative
developments in the student loan industry throughout 2008. |
|
|
|
Other income decreased for the year ended December 31, 2008 compared to 2007 due to a
gain of $3.9 million from the sale of an entity accounted for under the equity method in
2007. In addition, the Company recognized $2.6 million in 2007 related to an agreement with
a third party under which the Company provided administrative services to the third party
for a fee. This agreement was terminated in the third quarter of 2007. The remaining change
is a result of a decrease in income earned on certain investment activities. |
|
|
|
The Company recognized a loss of $51.4 million during the year ended December 31, 2008
as a result of the sale of $1.8 billion of student loans as further discussed in this Item
7 under Asset Generation and Management Operating Segment Results of Operations. |
|
|
|
The change in derivative market value, foreign currency, and put option adjustments
was caused by the change in the fair value of the Companys derivative portfolio and
foreign currency rate fluctuations which are further discussed in Item 7A, Quantitative
and Qualitative Disclosures about Market Risk. The Company maintains an overall risk
management strategy that incorporates the use of derivative instruments to reduce the
economic effect of interest rate volatility. Management has structured all of the Companys
derivative transactions with the intent that each is economically effective; however, the
Companys derivative instruments do not qualify for hedge accounting under SFAS No. 133. |
|
|
|
Further detail of the components of derivative settlements is included in Item 7A,
Quantitative and Qualitative Disclosures about Market Risk. Derivative settlements for
each applicable period should be evaluated with the Companys net interest income. |
39
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
Salaries and benefits |
|
$ |
177,724 |
|
|
|
230,316 |
|
|
|
(52,592 |
) |
Other expenses |
|
|
223,464 |
|
|
|
245,558 |
|
|
|
(22,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses, excluding
restructure expense, impairment
expense, and liquidity contingency
planning fees |
|
|
401,188 |
|
|
|
475,874 |
|
|
$ |
(74,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure expense |
|
|
7,067 |
|
|
|
10,231 |
|
|
|
|
|
Impairment expense |
|
|
18,834 |
|
|
|
49,504 |
|
|
|
|
|
Liquidity contingency planning fees |
|
|
13,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
440,614 |
|
|
|
535,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding restructuring and impairment charges and the liquidity contingency planning fees
recognized by the Company in 2008, operating expenses decreased $74.7 million for the year ended
December 31, 2008 compared to 2007. The decrease is the result of cost savings from the September
2007 and January 2008 restructuring plans implemented by the Company. These plans resulted in the
net reduction of approximately 700 positions in the Companys overall workforce, leading to
decreases in salaries and benefits and other expenses. The decrease is also a result of the Company
capitalizing on the operating leverage of its business structure and strategies.
Operating expenses for the year ended December 31, 2008 includes $3.9 million of certain severance
and retention costs associated with additional strategic decisions made during 2008. These costs
are not included in restructure expense in the above table.
Income Taxes
The Companys effective tax rate was 40% for the year ended December 31, 2008 compared to 38% for
the same period in 2007. The effective tax rate increased due to the permanent tax impact of stock
compensation and outstanding put options related to prior acquisitions and a reduction of federal
and state tax credits as a percentage of pre-tax book income. This increase was partially offset by
a benefit from resolution of uncertain tax matters and a reduction in state taxes.
40
Year ended December 31, 2007 compared to year ended December 31, 2006
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
1,667,057 |
|
|
|
1,455,715 |
|
|
|
211,342 |
|
Investment Interest |
|
|
80,219 |
|
|
|
93,918 |
|
|
|
(13,699 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,747,276 |
|
|
|
1,549,633 |
|
|
|
197,643 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bonds and notes payable |
|
|
1,502,662 |
|
|
|
1,241,174 |
|
|
|
261,488 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
244,614 |
|
|
|
308,459 |
|
|
|
(63,845 |
) |
Provision for loan losses |
|
|
28,178 |
|
|
|
15,308 |
|
|
|
12,870 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
$ |
216,436 |
|
|
|
293,151 |
|
|
|
(76,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income for the year ended December 31, 2006 included $32.3 million of 9.5%
special allowance payments. In accordance with the Companys Settlement Agreement with the
Department in January 2007, the Company did not receive any 9.5% special allowance payments
in 2007. Excluding the 9.5% special allowance payments, net interest income before the
allowance for loan losses decreased $31.6 million. Interest expense increased $10.8 million
for the year ended December 31, 2007 compared to the same period in 2006 as a result of
additional issuances of unsecured debt used to fund operating activities of the Company.
The remaining change in net interest income before the provision for loan losses is
attributable to the growth in the Companys student loan portfolio offset by a decrease in
core student loan spread. Core student loan spread was 1.13% and 1.42% for the years ended
December 31, 2007 and 2006, respectively, as further discussed in this Item 7 under Asset
Generation and Management Operating Segment Results of Operations. |
|
|
|
The provision for loan losses increased for the year ended December 31, 2007 compared to
2006 as a result of the Company recognizing $15.7 million in expense for provision for loan
losses as a result of the elimination of the Exceptional Performer program. During the year
ended December 31, 2006, the Company recognized $6.9 million in expense for provision for
loan losses as a result of HERAs enactment in February 2006. |
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
$ |
128,069 |
|
|
|
121,593 |
|
|
|
6,476 |
|
Other fee-based income |
|
|
160,888 |
|
|
|
102,318 |
|
|
|
58,570 |
|
Software services income |
|
|
22,669 |
|
|
|
15,890 |
|
|
|
6,779 |
|
Other income |
|
|
15,612 |
|
|
|
7,232 |
|
|
|
8,380 |
|
Gain on sale of loans |
|
|
3,597 |
|
|
|
16,133 |
|
|
|
(12,536 |
) |
Derivative market value, foreign currency,
and put option adjustments |
|
|
26,806 |
|
|
|
(31,075 |
) |
|
|
57,881 |
|
Derivative settlements, net |
|
|
18,677 |
|
|
|
23,432 |
|
|
|
(4,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
376,318 |
|
|
|
255,523 |
|
|
|
120,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income increased due to an increase in guaranty servicing
income which was offset by a decrease in FFELP loan servicing income as further discussed
in this Item 7 under Student Loan and Guaranty Servicing Operating Segment Results of
Operations. |
|
|
|
Other fee-based income increased due to business acquisitions, an increase in the
number of managed tuition payment plans, an increase in campus commerce and related
clients, and an increase in lead generation sales due to additional
customers. |
|
|
|
Software services income increased as a result of new customers, additional projects
for existing customers, and increased fees in the Software and Technical Services Operating
Segment. |
41
|
|
|
Other income increased as a result of a gain on the sale of an entity accounted for
under the equity method of $3.9 million in September 2007. The remaining change is a result
of income earned on certain investment activities. |
|
|
|
As part of the Companys asset management strategy, the Company periodically sells
student loan portfolios to third parties. During 2007 and 2006, the Company sold $115.3
million (par value) and $748.5 million (par value) of student loans, respectively,
resulting in the recognition of a gain of $3.6 million and $16.1 million, respectively. |
|
|
|
The change in derivative market value, foreign currency, and put option adjustments
was caused by the change in the fair value of the Companys derivative portfolio and
foreign currency rate fluctuations which are further discussed in Item 7A, Quantitative
and Qualitative Disclosures about Market Risk. The Company maintains an overall risk
management strategy that incorporates the use of derivative instruments to reduce the
economic effect of interest rate volatility. Management has structured all of the Companys
derivative transactions with the intent that each is economically effective; however, the
Companys derivative instruments do not qualify for hedge accounting under SFAS No. 133. |
|
|
|
Further detail of the components of derivative settlements is included in Item 7A,
Quantitative and Qualitative Disclosures about Market Risk. Derivative settlements for
each applicable period should be evaluated with the Companys net interest income. |
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
Salaries and benefits |
|
$ |
230,316 |
|
|
|
228,238 |
|
|
|
2,078 |
|
Other expenses |
|
|
245,558 |
|
|
|
242,591 |
|
|
|
2,967 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses, excluding
the impact of acquisitions, restructure
expense, and impairment expense |
|
|
475,874 |
|
|
|
470,829 |
|
|
$ |
5,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of acquisitions |
|
|
|
|
|
|
(46,038 |
) |
|
|
|
|
Restructure expense |
|
|
10,231 |
|
|
|
|
|
|
|
|
|
Impairment expense |
|
|
49,504 |
|
|
|
21,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
535,609 |
|
|
|
446,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding the impact of acquisitions and restructuring and impairment charges, operating expenses
increased $5.0 million, or 1%, in 2007 compared to 2006.
Income Taxes
The Companys effective tax rate was 38.0% for the year ended December 31, 2007 compared to 35.4%
for the same period in 2006. The effective tax rate increased due to certain enacted state tax law
changes, resolution of uncertain tax matters, and an increase in expense recognized by the Company
during 2007 compared to 2006 related to its outstanding put options which are not deductible for
tax purposes. The increases were partially offset by increased federal and state tax credits earned
during the year.
42
Financial Condition as of December 31, 2008 compared to December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
Change |
|
|
|
2008 |
|
|
2007 |
|
|
Dollars |
|
|
Percent |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans receivable, net |
|
$ |
25,413,008 |
|
|
|
26,736,122 |
|
|
|
(1,323,114 |
) |
|
|
(4.9) |
% |
Cash, cash equivalents, and investments |
|
|
1,348,104 |
|
|
|
1,120,838 |
|
|
|
227,266 |
|
|
|
20.3 |
|
Goodwill |
|
|
175,178 |
|
|
|
164,695 |
|
|
|
10,483 |
|
|
|
6.4 |
|
Intangible assets, net |
|
|
77,054 |
|
|
|
112,830 |
|
|
|
(35,776 |
) |
|
|
(31.7 |
) |
Fair value of derivative instruments |
|
|
175,174 |
|
|
|
222,471 |
|
|
|
(47,297 |
) |
|
|
(21.3 |
) |
Other assets |
|
|
666,379 |
|
|
|
805,827 |
|
|
|
(139,448 |
) |
|
|
(17.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
27,854,897 |
|
|
|
29,162,783 |
|
|
|
(1,307,886 |
) |
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes payable |
|
$ |
26,787,959 |
|
|
|
28,115,829 |
|
|
|
(1,327,870 |
) |
|
|
(4.7 |
)% |
Fair value of derivative instruments |
|
|
1,815 |
|
|
|
5,885 |
|
|
|
(4,070 |
) |
|
|
(69.2 |
) |
Other liabilities |
|
|
421,897 |
|
|
|
432,190 |
|
|
|
(10,293 |
) |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
27,211,671 |
|
|
|
28,553,904 |
|
|
|
(1,342,233 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
643,226 |
|
|
|
608,879 |
|
|
|
34,347 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
27,854,897 |
|
|
|
29,162,783 |
|
|
|
(1,307,886 |
) |
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total assets decreased during 2008 primarily due to a decrease in student loans
receivable as a result of a sale of $1.8 billion of student loans in 2008 as further discussed in
this Item 7 under Asset Generation and Management Operating Segment Results of Operations
offset by loan originations and acquisitions, net of repayments and participations. Total
liabilities decreased primarily due to a decrease in bonds and notes payable. This decrease is a
result of the decrease in student loan funding obligations due to a decrease in the Companys
student loan portfolio.
OPERATING SEGMENTS
The Company has five operating segments as defined in SFAS No. 131 as follows: Student Loan and
Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services, Software
and Technical Services, and Asset Generation and Management. The Companys 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 Companys operating segments are the same as those described in note 3
in the notes to the consolidated financial statements included in this Report. Intersegment
revenues are charged by a segment to another segment that provides the product or service.
Intersegment revenues and expenses are included within each segment consistent with the income
statement presentation provided to management. Changes in management structure or allocation
methodologies and procedures may result in changes in reported segment financial information.
The management reporting process measures the performance of the Companys 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 Companys chief operating
decision maker, evaluates the performance of the Companys operating segments based on their
profitability. As discussed further below, management measures the profitability of the Companys
operating segments on the basis of base net income. Accordingly, information regarding the
Companys operating segments is provided based on base net income. The Companys base net
income is not a defined term within 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.
In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of
the Company. As a result of this transaction, the results of operations for EDULINX are reported as
discontinued operations for all periods presented. The operating results of EDULINX were included
in the Student Loan and Guaranty Servicing operating segment. The Company presents base net
income excluding discontinued operations since the operations and cash flows of EDULINX have been
eliminated from the ongoing operations of the Company. Therefore, the results of operations for the
Student Loan and Guaranty Servicing segment exclude the operating results of EDULINX for all
periods presented. See note 2 in the notes to the consolidated financial statements included in
this Report for additional information concerning EDULINXs detailed operating results that have
been segregated from continuing operations and reported as discontinued operations.
43
Historically, the Company generated the majority of its revenue from net interest income earned in
its Asset Generation and Management operating segment. In recent years, the Company has made
several acquisitions that have expanded the Companys
products and services and has diversified its revenue primarily from fee-based businesses. The
Company currently offers a broad range of pre-college, in-college, and post-college products and
services to students, families, schools, and financial institutions. These products and services
help students and families plan and pay for their education and students plan their careers. The
Companys products and services are designed to simplify the education planning and financing
process and are focused on providing value to students, families, and schools throughout the
education life cycle. The Company continues to look for ways to diversify its sources of revenue,
including those generated from businesses that are not dependent upon government programs, reducing
legislative and political risk.
Base net income is the primary financial performance measure used by management to develop the
Companys financial plans, track results, and establish corporate performance targets and incentive
compensation. While base net income is not a substitute for reported results under GAAP, the
Company relies on base net income in operating its business because base net income permits
management to make meaningful period-to-period comparisons of the operational and performance
indicators that are most closely assessed by management. Management believes this information
provides additional insight into the financial performance of the core business activities of the
Companys operating segments.
Accordingly, the tables presented below reflect base net income which is reviewed and utilized by
management to manage the business for each of the Companys operating segments. Reconciliation of
the segment totals to the Companys consolidated operating results in accordance with GAAP are also
included in the tables below. Included below under Non-GAAP Performance Measures is further
discussion regarding base net income and its limitations, including a table that details the
differences between base net income and GAAP net income by operating segment.
44
Segment Results and Reconciliations to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
1,377 |
|
|
|
1,689 |
|
|
|
17 |
|
|
|
24 |
|
|
|
3,107 |
|
|
|
1,164,329 |
|
|
|
6,810 |
|
|
|
(2,190 |
) |
|
|
42,325 |
|
|
|
1,214,381 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986,556 |
|
|
|
42,123 |
|
|
|
(2,190 |
) |
|
|
|
|
|
|
1,026,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
1,377 |
|
|
|
1,689 |
|
|
|
17 |
|
|
|
24 |
|
|
|
3,107 |
|
|
|
177,773 |
|
|
|
(35,313 |
) |
|
|
|
|
|
|
42,325 |
|
|
|
187,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
1,377 |
|
|
|
1,689 |
|
|
|
17 |
|
|
|
24 |
|
|
|
3,107 |
|
|
|
152,773 |
|
|
|
(35,313 |
) |
|
|
|
|
|
|
42,325 |
|
|
|
162,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
104,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,287 |
|
|
|
16 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
104,176 |
|
Other fee-based income |
|
|
|
|
|
|
48,435 |
|
|
|
112,405 |
|
|
|
|
|
|
|
160,840 |
|
|
|
17,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,699 |
|
Software services income |
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
19,707 |
|
|
|
19,744 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
19,757 |
|
Other income |
|
|
51 |
|
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
(229 |
) |
|
|
(448 |
) |
|
|
5,437 |
|
|
|
|
|
|
|
|
|
|
|
4,760 |
|
Gain (loss) on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,035 |
) |
|
|
1,621 |
|
|
|
|
|
|
|
|
|
|
|
(51,414 |
) |
Intersegment revenue |
|
|
75,361 |
|
|
|
302 |
|
|
|
2 |
|
|
|
6,831 |
|
|
|
82,496 |
|
|
|
|
|
|
|
63,385 |
|
|
|
(145,881 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
10,361 |
|
|
|
10,827 |
|
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,622 |
|
|
|
|
|
|
|
|
|
|
|
(9,965 |
) |
|
|
55,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
179,699 |
|
|
|
48,457 |
|
|
|
112,444 |
|
|
|
26,538 |
|
|
|
367,138 |
|
|
|
30,480 |
|
|
|
70,329 |
|
|
|
(145,881 |
) |
|
|
396 |
|
|
|
322,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
51,320 |
|
|
|
23,290 |
|
|
|
24,379 |
|
|
|
18,081 |
|
|
|
117,070 |
|
|
|
8,316 |
|
|
|
54,910 |
|
|
|
98 |
|
|
|
2,999 |
|
|
|
183,393 |
|
Restructure expense severance and contract
termination costs |
|
|
747 |
|
|
|
|
|
|
|
282 |
|
|
|
487 |
|
|
|
1,516 |
|
|
|
1,845 |
|
|
|
3,706 |
|
|
|
(7,067 |
) |
|
|
|
|
|
|
|
|
Impairment expense |
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
|
|
9,351 |
|
|
|
4,409 |
|
|
|
|
|
|
|
|
|
|
|
18,834 |
|
Other expenses |
|
|
33,922 |
|
|
|
9,879 |
|
|
|
76,189 |
|
|
|
2,489 |
|
|
|
122,479 |
|
|
|
35,679 |
|
|
|
53,975 |
|
|
|
24 |
|
|
|
26,230 |
|
|
|
238,387 |
|
Intersegment expenses |
|
|
25,111 |
|
|
|
478 |
|
|
|
3,240 |
|
|
|
37 |
|
|
|
28,866 |
|
|
|
74,609 |
|
|
|
3,733 |
|
|
|
(107,208 |
) |
|
|
|
|
|
|
|
|
Corporate allocations |
|
|
22,626 |
|
|
|
919 |
|
|
|
3,401 |
|
|
|
2,286 |
|
|
|
29,232 |
|
|
|
2,496 |
|
|
|
|
|
|
|
(31,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
138,800 |
|
|
|
34,566 |
|
|
|
107,491 |
|
|
|
23,380 |
|
|
|
304,237 |
|
|
|
132,296 |
|
|
|
120,733 |
|
|
|
(145,881 |
) |
|
|
29,229 |
|
|
|
440,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
42,276 |
|
|
|
15,580 |
|
|
|
4,970 |
|
|
|
3,182 |
|
|
|
66,008 |
|
|
|
50,957 |
|
|
|
(85,717 |
) |
|
|
|
|
|
|
13,492 |
|
|
|
44,740 |
|
Income tax expense (benefit) (a) |
|
|
14,321 |
|
|
|
5,175 |
|
|
|
1,730 |
|
|
|
1,021 |
|
|
|
22,247 |
|
|
|
18,356 |
|
|
|
(28,499 |
) |
|
|
|
|
|
|
5,792 |
|
|
|
17,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
27,955 |
|
|
|
10,405 |
|
|
|
3,240 |
|
|
|
2,161 |
|
|
|
43,761 |
|
|
|
32,601 |
|
|
|
(57,218 |
) |
|
|
|
|
|
|
7,700 |
|
|
|
26,844 |
|
Income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,818 |
|
|
|
1,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
27,955 |
|
|
|
10,405 |
|
|
|
3,240 |
|
|
|
2,161 |
|
|
|
43,761 |
|
|
|
32,601 |
|
|
|
(57,218 |
) |
|
|
|
|
|
|
9,518 |
|
|
|
28,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is used to calculate income taxes for each operating segment. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
23.3 |
% |
|
|
31.1 |
% |
|
|
4.4 |
% |
|
|
12.0 |
% |
|
|
17.8 |
% |
|
|
27.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense,
impairment expense, loss on sale
of loans, liquidity contingency planning
fees, and corporate allocations |
|
|
39.1 |
% |
|
|
32.9 |
% |
|
|
7.7 |
% |
|
|
22.4 |
% |
|
|
27.5 |
% |
|
|
55.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
35.3 |
% |
|
|
37.2 |
% |
|
|
(1.4 |
%) |
|
|
26.4 |
% |
|
|
25.0 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense,
impairment expense, and provision
for loan losses related to the loss
of Exceptional Performer |
|
|
36.2 |
% |
|
|
37.2 |
% |
|
|
10.3 |
% |
|
|
26.6 |
% |
|
|
28.6 |
% |
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
33.6 |
% |
|
|
31.8 |
% |
|
|
18.7 |
% |
|
|
24.4 |
% |
|
|
29.8 |
% |
|
|
49.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding impairment expense |
|
|
33.6 |
% |
|
|
31.8 |
% |
|
|
18.7 |
% |
|
|
24.4 |
% |
|
|
29.8 |
% |
|
|
55.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
5,459 |
|
|
|
3,809 |
|
|
|
347 |
|
|
|
18 |
|
|
|
9,633 |
|
|
|
1,730,882 |
|
|
|
7,485 |
|
|
|
(3,737 |
) |
|
|
3,013 |
|
|
|
1,747,276 |
|
Interest expense |
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
14 |
|
|
|
1,465,883 |
|
|
|
40,502 |
|
|
|
(3,737 |
) |
|
|
|
|
|
|
1,502,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
5,459 |
|
|
|
3,802 |
|
|
|
340 |
|
|
|
18 |
|
|
|
9,619 |
|
|
|
264,999 |
|
|
|
(33,017 |
) |
|
|
|
|
|
|
3,013 |
|
|
|
244,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
5,459 |
|
|
|
3,802 |
|
|
|
340 |
|
|
|
18 |
|
|
|
9,619 |
|
|
|
236,821 |
|
|
|
(33,017 |
) |
|
|
|
|
|
|
3,013 |
|
|
|
216,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
127,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,775 |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,069 |
|
Other fee-based income |
|
|
|
|
|
|
42,682 |
|
|
|
103,311 |
|
|
|
|
|
|
|
145,993 |
|
|
|
13,387 |
|
|
|
1,508 |
|
|
|
|
|
|
|
|
|
|
|
160,888 |
|
Software services income |
|
|
|
|
|
|
|
|
|
|
594 |
|
|
|
22,075 |
|
|
|
22,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,669 |
|
Other income |
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
4,433 |
|
|
|
11,095 |
|
|
|
|
|
|
|
|
|
|
|
15,612 |
|
Gain on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,597 |
|
Intersegment revenue |
|
|
74,687 |
|
|
|
688 |
|
|
|
891 |
|
|
|
15,683 |
|
|
|
91,949 |
|
|
|
|
|
|
|
9,040 |
|
|
|
(100,989 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,806 |
|
|
|
26,806 |
|
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,628 |
|
|
|
12,049 |
|
|
|
|
|
|
|
|
|
|
|
18,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
202,462 |
|
|
|
43,454 |
|
|
|
104,796 |
|
|
|
37,758 |
|
|
|
388,470 |
|
|
|
28,339 |
|
|
|
33,692 |
|
|
|
(100,989 |
) |
|
|
26,806 |
|
|
|
376,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
85,462 |
|
|
|
20,426 |
|
|
|
33,480 |
|
|
|
23,959 |
|
|
|
163,327 |
|
|
|
23,101 |
|
|
|
49,839 |
|
|
|
(1,747 |
) |
|
|
2,111 |
|
|
|
236,631 |
|
Restructure expense- severance and contract
termination costs |
|
|
1,840 |
|
|
|
|
|
|
|
929 |
|
|
|
58 |
|
|
|
2,827 |
|
|
|
2,406 |
|
|
|
4,998 |
|
|
|
(10,231 |
) |
|
|
|
|
|
|
|
|
Impairment expense |
|
|
|
|
|
|
|
|
|
|
11,401 |
|
|
|
|
|
|
|
11,401 |
|
|
|
28,291 |
|
|
|
9,812 |
|
|
|
|
|
|
|
|
|
|
|
49,504 |
|
Other expenses |
|
|
36,618 |
|
|
|
8,901 |
|
|
|
60,445 |
|
|
|
2,995 |
|
|
|
108,959 |
|
|
|
29,205 |
|
|
|
77,915 |
|
|
|
2,969 |
|
|
|
30,426 |
|
|
|
249,474 |
|
Intersegment expenses |
|
|
10,552 |
|
|
|
364 |
|
|
|
335 |
|
|
|
775 |
|
|
|
12,026 |
|
|
|
74,714 |
|
|
|
5,240 |
|
|
|
(91,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
134,472 |
|
|
|
29,691 |
|
|
|
106,590 |
|
|
|
27,787 |
|
|
|
298,540 |
|
|
|
157,717 |
|
|
|
147,804 |
|
|
|
(100,989 |
) |
|
|
32,537 |
|
|
|
535,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
73,449 |
|
|
|
17,565 |
|
|
|
(1,454 |
) |
|
|
9,989 |
|
|
|
99,549 |
|
|
|
107,443 |
|
|
|
(147,129 |
) |
|
|
|
|
|
|
(2,718 |
) |
|
|
57,145 |
|
Income tax expense (benefit) (a) |
|
|
27,910 |
|
|
|
6,675 |
|
|
|
(553 |
) |
|
|
3,796 |
|
|
|
37,828 |
|
|
|
40,828 |
|
|
|
(57,285 |
) |
|
|
|
|
|
|
345 |
|
|
|
21,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
continuing operations |
|
|
45,539 |
|
|
|
10,890 |
|
|
|
(901 |
) |
|
|
6,193 |
|
|
|
61,721 |
|
|
|
66,615 |
|
|
|
(89,844 |
) |
|
|
|
|
|
|
(3,063 |
) |
|
|
35,429 |
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,575 |
) |
|
|
(2,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
45,539 |
|
|
|
10,890 |
|
|
|
(901 |
) |
|
|
6,193 |
|
|
|
61,721 |
|
|
|
66,615 |
|
|
|
(89,844 |
) |
|
|
|
|
|
|
(5,638 |
) |
|
|
32,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Income taxes are based on 38% of net income (loss) before tax for the individual operating
segment. |
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
8,957 |
|
|
|
4,029 |
|
|
|
531 |
|
|
|
105 |
|
|
|
13,622 |
|
|
|
1,534,423 |
|
|
|
4,446 |
|
|
|
(2,858 |
) |
|
|
|
|
|
|
1,549,633 |
|
Interest expense |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
1,215,529 |
|
|
|
28,495 |
|
|
|
(2,858 |
) |
|
|
|
|
|
|
1,241,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8,957 |
|
|
|
4,021 |
|
|
|
531 |
|
|
|
105 |
|
|
|
13,614 |
|
|
|
318,894 |
|
|
|
(24,049 |
) |
|
|
|
|
|
|
|
|
|
|
308,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan losses |
|
|
8,957 |
|
|
|
4,021 |
|
|
|
531 |
|
|
|
105 |
|
|
|
13,614 |
|
|
|
303,586 |
|
|
|
(24,049 |
) |
|
|
|
|
|
|
|
|
|
|
293,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
121,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,593 |
|
Other fee-based income |
|
|
|
|
|
|
35,090 |
|
|
|
55,361 |
|
|
|
|
|
|
|
90,451 |
|
|
|
11,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,318 |
|
Software services income |
|
|
5 |
|
|
|
|
|
|
|
157 |
|
|
|
15,490 |
|
|
|
15,652 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,890 |
|
Other income |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
3,833 |
|
|
|
3,302 |
|
|
|
|
|
|
|
|
|
|
|
7,232 |
|
Gain on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,133 |
|
Intersegment revenue |
|
|
63,545 |
|
|
|
503 |
|
|
|
1,000 |
|
|
|
17,877 |
|
|
|
82,925 |
|
|
|
|
|
|
|
662 |
|
|
|
(83,587 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,075 |
) |
|
|
(31,075 |
) |
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,381 |
|
|
|
5,051 |
|
|
|
|
|
|
|
|
|
|
|
23,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
185,240 |
|
|
|
35,593 |
|
|
|
56,518 |
|
|
|
33,367 |
|
|
|
310,718 |
|
|
|
50,452 |
|
|
|
9,015 |
|
|
|
(83,587 |
) |
|
|
(31,075 |
) |
|
|
255,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
83,988 |
|
|
|
17,607 |
|
|
|
15,510 |
|
|
|
22,063 |
|
|
|
139,168 |
|
|
|
53,036 |
|
|
|
32,979 |
|
|
|
(12,254 |
) |
|
|
1,747 |
|
|
|
214,676 |
|
Impairment expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,687 |
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
21,488 |
|
Other expenses |
|
|
32,419 |
|
|
|
8,371 |
|
|
|
30,854 |
|
|
|
3,238 |
|
|
|
74,882 |
|
|
|
51,085 |
|
|
|
59,086 |
|
|
|
|
|
|
|
25,062 |
|
|
|
210,115 |
|
Intersegment expenses |
|
|
12,577 |
|
|
|
1,025 |
|
|
|
17 |
|
|
|
|
|
|
|
13,619 |
|
|
|
52,857 |
|
|
|
4,857 |
|
|
|
(71,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
128,984 |
|
|
|
27,003 |
|
|
|
46,381 |
|
|
|
25,301 |
|
|
|
227,669 |
|
|
|
178,665 |
|
|
|
96,723 |
|
|
|
(83,587 |
) |
|
|
26,809 |
|
|
|
446,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
65,213 |
|
|
|
12,611 |
|
|
|
10,668 |
|
|
|
8,171 |
|
|
|
96,663 |
|
|
|
175,373 |
|
|
|
(111,757 |
) |
|
|
|
|
|
|
(57,884 |
) |
|
|
102,395 |
|
Income tax expense (benefit) (a) |
|
|
24,780 |
|
|
|
4,791 |
|
|
|
4,054 |
|
|
|
3,105 |
|
|
|
36,730 |
|
|
|
66,642 |
|
|
|
(46,902 |
) |
|
|
|
|
|
|
(20,233 |
) |
|
|
36,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before minority interest |
|
|
40,433 |
|
|
|
7,820 |
|
|
|
6,614 |
|
|
|
5,066 |
|
|
|
59,933 |
|
|
|
108,731 |
|
|
|
(64,855 |
) |
|
|
|
|
|
|
(37,651 |
) |
|
|
66,158 |
|
Minority interest in subsidiary income |
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations |
|
|
40,433 |
|
|
|
7,578 |
|
|
|
6,614 |
|
|
|
5,066 |
|
|
|
59,691 |
|
|
|
108,731 |
|
|
|
(64,855 |
) |
|
|
|
|
|
|
(37,651 |
) |
|
|
65,916 |
|
Income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,239 |
|
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40,433 |
|
|
|
7,578 |
|
|
|
6,614 |
|
|
|
5,066 |
|
|
|
59,691 |
|
|
|
108,731 |
|
|
|
(64,855 |
) |
|
|
|
|
|
|
(35,412 |
) |
|
|
68,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Income taxes are based on 38% of net income (loss) before tax for the individual operating
segment. |
Non-GAAP Performance Measures
In accordance with the rules and regulations of the Securities and Exchange Commission, the Company
prepares financial statements in accordance with generally accepted accounting principles. In
addition to evaluating the Companys GAAP-based financial information, management also evaluates
the Companys operating segments on a non-GAAP performance measure referred 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 management
believes these measures provide 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
financial plans, allocate resources, track results, evaluate performance, establish corporate
performance targets, and determine incentive compensation. Accordingly, financial information is
reported to management on a base net income basis by operating segment, as these are the measures
used regularly by the Companys chief operating decision maker. The Companys board of directors
utilizes base net income to set performance targets and evaluate managements performance. The
Company also believes analysts, rating agencies, and creditors use base net income in their
evaluation of the Companys results of operations. While base net income is not a substitute for
reported results under GAAP, the Company utilizes base net income in operating its business
because base net income permits management to make meaningful period-to-period comparisons by
eliminating the temporary volatility in the Companys performance that arises from certain items
that are primarily affected by factors beyond the control of management. Management believes base
net income provides additional insight into the financial performance of the core business
activities of the Companys operations.
47
Limitations of Base Net Income
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons discussed above,
management believes that base net income is an important additional tool for providing a more
complete understanding of the Companys results of operations. Nevertheless, base net income is
subject to certain general and specific limitations that investors should carefully consider. For
example, as stated above, unlike financial accounting, there is no comprehensive, authoritative
guidance for management reporting. The Companys base net income is not a defined term within
GAAP and may not be comparable to similarly titled measures reported by other companies. Investors,
therefore, may not be able to compare the Companys performance with that of other companies based
upon base net income. Base net income results are only meant to supplement GAAP results by
providing additional information regarding the operational and performance indicators that are most
closely monitored and used by the Companys management and board of directors to assess performance
and information which the Company believes is important to analysts, rating agencies, and
creditors.
Other limitations of base net income arise from the specific adjustments that management makes to
GAAP results to derive base net income results. These differences are described below.
The adjustments required to reconcile from the Companys base net income measure to its GAAP
results of operations relate to differing treatments for derivatives, foreign currency transaction
adjustments, discontinued operations, and certain other items that management does not consider in
evaluating the Companys operating results. The following table reflects adjustments associated
with these areas by operating segment and Corporate Activity and Overhead:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Generation |
|
|
Activity |
|
|
|
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
and |
|
|
and |
|
|
|
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Management |
|
|
Overhead |
|
|
Total |
|
|
|
Year ended December 31, 2008 |
|
|
Derivative market value, foreign currency, and
put option adjustments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,844 |
) |
|
|
3,483 |
|
|
|
(10,361 |
) |
Amortization of intangible assets |
|
|
4,751 |
|
|
|
7,826 |
|
|
|
12,451 |
|
|
|
1,057 |
|
|
|
145 |
|
|
|
|
|
|
|
26,230 |
|
Compensation related to business combinations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,999 |
|
|
|
2,999 |
|
Variable-rate floor income, net of settlements on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,360 |
) |
|
|
|
|
|
|
(32,360 |
) |
Income (loss) from discontinued operations, net of tax |
|
|
(1,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,818 |
) |
Net tax effect (a) |
|
|
(1,590 |
) |
|
|
(2,615 |
) |
|
|
(4,185 |
) |
|
|
(354 |
) |
|
|
16,770 |
|
|
|
(2,234 |
) |
|
|
5,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
1,343 |
|
|
|
5,211 |
|
|
|
8,266 |
|
|
|
703 |
|
|
|
(29,289 |
) |
|
|
4,248 |
|
|
|
(9,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,224 |
) |
|
|
(2,582 |
) |
|
|
(26,806 |
) |
Amortization of intangible assets |
|
|
5,094 |
|
|
|
5,815 |
|
|
|
12,692 |
|
|
|
1,191 |
|
|
|
5,634 |
|
|
|
|
|
|
|
30,426 |
|
Compensation related to business combinations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,111 |
|
|
|
2,111 |
|
Variable-rate floor income, net of settlements on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,013 |
) |
|
|
|
|
|
|
(3,013 |
) |
Income (loss) from discontinued operations, net of tax |
|
|
2,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,575 |
|
Net tax effect (a) |
|
|
(1,936 |
) |
|
|
(2,209 |
) |
|
|
(4,823 |
) |
|
|
(452 |
) |
|
|
8,209 |
|
|
|
1,556 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
5,733 |
|
|
|
3,606 |
|
|
|
7,869 |
|
|
|
739 |
|
|
|
(13,394 |
) |
|
|
1,085 |
|
|
|
5,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,483 |
|
|
|
25,592 |
|
|
|
31,075 |
|
Amortization of intangible assets |
|
|
5,641 |
|
|
|
5,968 |
|
|
|
4,573 |
|
|
|
1,263 |
|
|
|
7,617 |
|
|
|
|
|
|
|
25,062 |
|
Compensation related to business combinations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,747 |
|
|
|
1,747 |
|
Variable-rate floor income, net of settlements on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
(2,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,239 |
) |
Net tax effect (a) |
|
|
(2,143 |
) |
|
|
(2,268 |
) |
|
|
(1,738 |
) |
|
|
(480 |
) |
|
|
(4,978 |
) |
|
|
(8,626 |
) |
|
|
(20,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
1,259 |
|
|
|
3,700 |
|
|
|
2,835 |
|
|
|
783 |
|
|
|
8,122 |
|
|
|
18,713 |
|
|
|
35,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Beginning in 2008, tax effect is computed using the Companys consolidated
effective tax rate for each applicable quarterly period. In prior periods, tax
effect was computed at 38% and the change in the value of the put options for
prior periods (included in Corporate Activity and Overhead) was not tax effected
as this is not deductible for income tax purposes. |
48
Differences between GAAP and Base Net Income
Managements financial planning and evaluation of operating results does not take into account the
following items because their volatility and/or inherent uncertainty affect the period-to-period
comparability of the Companys results of operations. A more detailed discussion of the differences
between GAAP and base net income follows.
Derivative market value, foreign currency, and put option 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 Companys risk management strategy in which the Company does not qualify for hedge
treatment under GAAP. SFAS No. 133 requires that changes in fair value of derivative instruments
be recognized currently in earnings unless specific hedge accounting criteria, as specified by SFAS
No. 133, are met. The Company maintains an overall interest rate risk management strategy that
incorporates the use of derivative instruments to reduce the economic effect of interest rate
volatility. Derivative instruments primarily used by the Company include interest rate swaps, basis
swaps, and cross-currency interest rate swaps. Management has structured all of the Companys
derivative transactions with the intent that each is economically effective. However, the Company
does not qualify its derivatives for hedge treatment as defined by SFAS No. 133, and the
stand-alone derivative must be marked-to-market in the income statement with no consideration for
the corresponding change in fair value of the hedged item. The Company believes these point-in-time
estimates of asset and liability values that are subject to interest rate fluctuations make it
difficult to evaluate the ongoing results of operations against its business plan and affect the
period-to-period comparability of the results of operations. Included in base net income are the
economic effects of the Companys derivative instruments, which includes any cash paid or received
being recognized as an expense or revenue upon actual derivative settlements. These settlements are
included in Derivative market value, foreign currency, and put option adjustments and derivative
settlements, net on the Companys consolidated statements of income.
Base net income excludes the foreign currency transaction gains or losses caused by the
re-measurement of the Companys Euro-denominated bonds to U.S. dollars. In connection with the
issuance of the Euro-denominated bonds, the Company has entered into cross-currency interest rate
swaps. Under the terms of these agreements, the principal payments on the Euro-denominated notes
will effectively be paid at the exchange rate in effect at the issuance date of the bonds. The
cross-currency interest rate swaps also convert the floating rate paid on the Euro-denominated
bonds (EURIBOR index) to an index based on LIBOR. Included in base net income are the economic
effects of any cash paid or received being recognized as an expense or revenue upon actual
settlements of the cross-currency interest rate swaps. These settlements are included in
Derivative market value, foreign currency, and put option adjustments and derivative settlements,
net on the Companys consolidated statements of income. However, the gains or losses caused by the
re-measurement of the Euro-denominated bonds to U.S. dollars and the change in market value of the
cross-currency interest rate swaps are excluded from base net income as the Company believes the
point-in-time estimates of value that are subject to currency rate fluctuations related to these
financial instruments make it difficult to evaluate the ongoing results of operations against the
Companys business plan and affect the period-to-period comparability of the results of operations.
The re-measurement of the Euro-denominated bonds 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.
Base net income also excludes the change in fair value of put options issued by the Company for
certain business acquisitions. The put options are valued by the Company each reporting period
using a Black-Scholes pricing model. Therefore, the fair value of these options is primarily
affected by the strike price and term of the underlying option, the Companys current stock price,
and the dividend yield and volatility of the Companys stock. The Company believes these
point-in-time estimates of value that are subject to fluctuations make it difficult to evaluate the
ongoing results of operations against the Companys business plans and affects the period-to-period
comparability of the results of operations.
The gains and/or losses included in Derivative market value, foreign currency, and put option
adjustments and derivative settlements, net on the Companys consolidated statements of income are
primarily caused by interest rate and currency volatility, changes in the value of put options
based on the inputs used in the Black-Scholes pricing model, as well as the volume and terms of put
options and of derivatives not receiving hedge treatment. Base net income excludes these
unrealized gains and losses and isolates the effect of interest rate, currency, and put option
volatility on the fair value of such instruments during the period. Under GAAP, the effects of
these factors on the fair value of the put options and the derivative instruments (but not the
underlying hedged item) tend to show more volatility in the short term.
Amortization of intangible assets: Base net income excludes the amortization of acquired
intangibles, which arises primarily from the acquisition of definite life intangible assets in
connection with the Companys acquisitions, since the Company feels that such charges do not drive
the Companys operating performance on a long term basis and can affect the period-to-period
comparability of the results of operations.
Compensation related to business combinations: The Company has structured certain business
combinations in which the consideration paid has been dependent on the sellers continued
employment with the Company. As such, the value of the consideration paid is recognized as
compensation expense by the Company over the term of the applicable employment agreement. Base net
income excludes this expense because the Company believes such charges do not drive its operating
performance on a long term basis and can affect the period-to-period comparability of the results
of operations. If the Company did not enter into the employment agreements in connection with the
acquisition, the amount paid to these former shareholders of the acquired entity would have been
recorded by the Company as additional consideration of the acquired entity, thus, not having an
effect on the Companys results of operations.
49
Variable rate floor income, net of settlements on derivatives: Loans that reset annually on July 1
can generate excess spread income compared with the rate based on the special allowance payment
formula in declining interest rate environments. The Company refers to this additional income as
variable rate floor income. The Company excludes variable rate floor income, net of settlements
paid on derivatives used to hedge student loan assets earning variable rate floor income, from its
base net income since the timing and amount of variable rate floor income (if any) is uncertain, it
has been eliminated by legislation for all loans originated on and after April 1, 2006, and it is
in excess of expected spreads. In addition, because variable rate floor income is subject to the
underlying rate for the subject loans being reset annually on July 1, it is a factor beyond the
Companys control which can affect the period-to-period comparability of results of operations.
Variable rate floor income was calculated by the Company on a statutory maximum basis. However, as
a result of the disruption in the capital markets beginning in August 2007, the full benefit of
variable rate floor income calculated on a statutory maximum basis has not been realized by the
Company due to the widening of the spread between short term interest rate indices and the
Companys actual cost of funds. As a result of the ongoing volatility of interest rates, effective
October 1, 2008, the Company changed its calculation of variable rate floor income to better
reflect the economic benefit received by the Company related to this income taking into
consideration the volatility of certain rate indices which offset the value received. For the year
ended December 31, 2008, the economic benefit received by the Company related to variable rate
floor income was $25.7 million. There was no economic benefit received by the Company related to
variable rate floor income for the three months ended December 31, 2008. Variable rate floor
income calculated on a statutory maximum basis for the three months and year ended December 31,
2008 was $2.2 million and $44.5 million, respectively. Beginning October 1, 2008, the economic
benefit used by the Company has been used to determine core student loan spread and base net
income.
Discontinued operations: In May 2007, the Company sold EDULINX. As a result of this transaction,
the results of operations for EDULINX are reported as discontinued operations for all periods
presented. The Company presents base net income excluding discontinued operations since the
operations and cash flows of EDULINX have been eliminated from the ongoing operations of the
Company.
STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT RESULTS OF OPERATIONS
The Student Loan and Guaranty Servicing segment provides for the servicing of the Companys student
loan portfolios and the portfolios of third parties and servicing provided to guaranty agencies.
The servicing and business process outsourcing activities include loan origination activities,
application processing, borrower updates, payment processing, due diligence procedures, and claim
processing. These activities are performed internally for the Companys portfolio in addition to
generating fee revenue when performed for third-party clients. The guaranty servicing, servicing
support, and business process outsourcing activities include providing software and data center
services, borrower and loan updates, default aversion tracking services, claim processing services,
and post-default collection services to guaranty agencies.
Loan servicing fees are determined according to individual agreements with customers and are
calculated based on the dollar value of loans, number of loans, or number of borrowers serviced for
each customer. In addition, the Company earns servicing revenue for the origination of loans.
Guaranty servicing fees, generally, are calculated based on the number of loans serviced, volume of loans serviced, or amounts
collected.
Student Loan Servicing Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
|
(dollars in millions) |
|
|
Company |
|
$ |
24,596 |
(a) |
|
|
68.5 |
% |
|
$ |
25,640 |
|
|
|
75.8 |
% |
|
$ |
21,869 |
|
|
|
71.5 |
% |
Third Party |
|
|
11,293 |
(b) |
|
|
31.5 |
|
|
|
8,177 |
|
|
|
24.2 |
|
|
|
8,725 |
|
|
|
28.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,889 |
|
|
|
100.0 |
% |
|
$ |
33,817 |
|
|
|
100.0 |
% |
|
$ |
30,594 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Approximately $644 million
of these loans are eligible to be sold to the
Department of Education pursuant to its Purchase
Commitment Program. The Department obtains all rights
to service loans which it purchases as part of this
program. |
|
(b) |
|
Approximately $928 million
of these loans may be eligible to be sold to the
Department of Education pursuant to its Purchase
Commitment Program. The Department obtains all rights
to service loans which it purchases as part of this
program. |
50
In 2008, the Company sold $1.8 billion (par value), of federally insured student loans. As a
result of these sales, there was a shift in loan servicing volumes from the Company to third
parties. Excluding these sales, the Company recognized third party servicing volume growth of 16%
from existing and new customers.
Year ended December 31, 2008 compared to year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
1,377 |
|
|
|
5,459 |
|
|
|
(4,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
104,287 |
|
|
|
127,775 |
|
|
|
(23,488 |
) |
Other income |
|
|
51 |
|
|
|
|
|
|
|
51 |
|
Intersegment revenue |
|
|
75,361 |
|
|
|
74,687 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
179,699 |
|
|
|
202,462 |
|
|
|
(22,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
51,320 |
|
|
|
85,462 |
|
|
|
(34,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure expense severance and contract
termination costs |
|
|
747 |
|
|
|
1,840 |
|
|
|
(1,093 |
) |
Impairment expense |
|
|
5,074 |
|
|
|
|
|
|
|
5,074 |
|
Other expenses |
|
|
33,922 |
|
|
|
36,618 |
|
|
|
(2,696 |
) |
Intersegment expenses |
|
|
25,111 |
|
|
|
10,552 |
|
|
|
14,559 |
|
Corporate allocations |
|
|
22,626 |
|
|
|
|
|
|
|
22,626 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
138,800 |
|
|
|
134,472 |
|
|
|
4,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
42,276 |
|
|
|
73,449 |
|
|
|
(31,173 |
) |
Income tax expense |
|
|
14,321 |
|
|
|
27,910 |
|
|
|
(13,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
27,955 |
|
|
|
45,539 |
|
|
|
(17,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
23.3 |
% |
|
|
35.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding restructure and impairment
expense
and corporate allocations |
|
|
39.1 |
% |
|
|
36.2 |
% |
|
|
|
|
Net interest income after the provision for loan losses. Investment income decreased as a
result of an overall decrease in cash held in 2008 compared to 2007, as well as lower interest
rates.
Loan and guaranty servicing income. Loan and guaranty servicing income for the year ended
December 31, 2008 decreased from the same period in 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing of
FFEL Program loans |
|
$ |
49,099 |
|
|
|
55,376 |
|
|
|
(6,277) |
|
|
|
(11.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing of
non-federally insured student loans |
|
|
7,980 |
|
|
|
10,297 |
|
|
|
(2,317) |
|
|
|
(22.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and support outsourcing for
guaranty agencies |
|
|
47,208 |
|
|
|
62,102 |
|
|
|
(14,894) |
|
|
|
(24.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income
to external parties |
|
$ |
104,287 |
|
|
|
127,775 |
|
|
|
(23,488) |
|
|
|
(18.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
FFELP loan servicing income decreased due to new servicing contracts being priced at
lower rates, the loss of clients following the legislative developments in September 2007,
and a decrease in originations. This decrease is partially offset by an increase in loan
servicing volume. |
|
|
|
|
Non-federally insured loan servicing income decreased due to a significant customer
ceasing to originate non-federally insured loans. |
|
|
|
|
Servicing and support outsourcing for guaranty agencies decreased $2.5 million from
$16.2 million in 2007 to $13.7 million in 2008 due to a decrease in collection revenue. The
remaining decrease is due to the termination of a Voluntary Flexible Agreement between the Department and College
Assist, which decreased certain rates in which the Company earns revenue. |
Operating expenses. Operating expenses increased for the year ended December 31, 2008
compared to the same period in 2007 as a result of the allocation of additional corporate overhead
expenses, which were included in Corporate Activity and Overhead for the year ended December 31,
2007. Excluding restructure expense, impairment expense, and corporate allocations, operating
expenses decreased $22.3 million, or 16.8%, for the year ended December 31, 2008 compared to the
same period in 2007 as a result of cost savings from the Companys September 2007 and January 2008
restructuring plans.
Year ended December 31, 2007 compared to year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
5,459 |
|
|
|
8,957 |
|
|
|
(3,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
127,775 |
|
|
|
121,593 |
|
|
|
6,182 |
|
Software services income |
|
|
|
|
|
|
5 |
|
|
|
(5 |
) |
Other income |
|
|
|
|
|
|
97 |
|
|
|
(97 |
) |
Intersegment revenue |
|
|
74,687 |
|
|
|
63,545 |
|
|
|
11,142 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
202,462 |
|
|
|
185,240 |
|
|
|
17,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
85,462 |
|
|
|
83,988 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure expense severance and contract
termination costs |
|
|
1,840 |
|
|
|
|
|
|
|
1,840 |
|
Other expenses |
|
|
36,618 |
|
|
|
32,419 |
|
|
|
4,199 |
|
Intersegment expenses |
|
|
10,552 |
|
|
|
12,577 |
|
|
|
(2,025 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
134,472 |
|
|
|
128,984 |
|
|
|
5,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
73,449 |
|
|
|
65,213 |
|
|
|
8,236 |
|
Income tax expense |
|
|
27,910 |
|
|
|
24,780 |
|
|
|
3,130 |
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
45,539 |
|
|
|
40,433 |
|
|
|
5,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
35.3 |
% |
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding restructure expense |
|
|
36.2 |
% |
|
|
33.6 |
% |
|
|
|
|
Net interest income after the provision for loan losses. Investment income decreased as a
result of an overall decrease in cash held in 2007 compared to 2006.
52
Loan and guaranty servicing income. Loan and guaranty servicing income for the year ended
December 31, 2007 decreased from the same period in 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing of
FFEL Program loans |
|
$ |
55,376 |
|
|
|
66,374 |
|
|
|
(10,998 |
) |
|
|
(16.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing of
non-federally insured student loans |
|
|
10,297 |
|
|
|
9,672 |
|
|
|
625 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and support outsourcing for
guaranty agencies |
|
|
62,102 |
|
|
|
45,547 |
|
|
|
16,555 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guarantee servicing income
to external parties |
|
$ |
127,775 |
|
|
|
121,593 |
|
|
|
6,182 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loan servicing income decreased as a result of a decrease in the volume of loans
serviced. In addition, as a result of the legislative developments, several of the
Companys lender partner servicing contracts were priced at lower rates in order to retain
clients. |
|
|
|
|
Servicing and support outsourcing for guaranty agencies increased as a result of an
increase in the volume of guaranteed loans serviced as well as an increase in collections
due to utilizing an outside collection agency. |
Operating expenses. Operating expenses increased as a result of an increase in costs
associated with servicing a larger portfolio of guaranteed loans offset by a decrease in costs as a
result of outsourcing guaranty collections to an outside agency. During 2007, the operating margin
increased as a result of (i) reducing certain fixed costs; (ii) achieving operating leverage; and
(iii) realizing operational benefits from integration activities. These integration activities
included servicing platform and certain system conversions which have increased operating costs
over the prior two years.
53
TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT RESULTS OF OPERATIONS
The Companys Tuition Payment Processing and Campus Commerce operating segment provides products
and services to help institutions and education-seeking families manage the payment of education
costs during the pre-college and college stages of the education life cycle. The Company provides
actively managed tuition payment solutions, online payment processing, detailed information
reporting, financial needs analysis, and data integration services to K-12 and higher educational
institutions, families, and students. In addition, the Company provides customer-focused electronic
transactions, information sharing, and account and bill presentment to colleges and universities.
Year ended December 31, 2008 compared to year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
1,689 |
|
|
|
3,802 |
|
|
|
(2,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fee-based income |
|
|
48,435 |
|
|
|
42,682 |
|
|
|
5,753 |
|
Other income |
|
|
(280 |
) |
|
|
84 |
|
|
|
(364 |
) |
Intersegment revenue |
|
|
302 |
|
|
|
688 |
|
|
|
(386 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
48,457 |
|
|
|
43,454 |
|
|
|
5,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
23,290 |
|
|
|
20,426 |
|
|
|
2,864 |
|
Other expenses |
|
|
9,879 |
|
|
|
8,901 |
|
|
|
978 |
|
Intersegment expenses |
|
|
478 |
|
|
|
364 |
|
|
|
114 |
|
Corporate allocations |
|
|
919 |
|
|
|
|
|
|
|
919 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
34,566 |
|
|
|
29,691 |
|
|
|
4,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
15,580 |
|
|
|
17,565 |
|
|
|
(1,985 |
) |
Income tax expense |
|
|
5,175 |
|
|
|
6,675 |
|
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
10,405 |
|
|
|
10,890 |
|
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
31.1 |
% |
|
|
37.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding corporate allocations |
|
|
32.9 |
% |
|
|
37.2 |
% |
|
|
|
|
Net interest income after the provision for loan losses. Investment income decreased as a
result of decreases in interest rates on cash held in 2008 compared to 2007.
Other fee-based income. Other fee-based income increased for the year ended December 31,
2008 compared to the same period in 2007 as a result of an increase in the number of managed
tuition payment plans as well as an increase in campus commerce transactions processed.
Operating expenses. Operating expenses increased for the year ended December 31, 2008
compared to the same period in 2007 as a result of incurring additional costs associated with
salaries and benefits, as well as other expenses, to support the increase in the number of managed
tuition payment plans and campus commerce transactions processed. In addition, the Company
continues to invest in products, services, and technology to meet customer needs and support
continued revenue growth. These investments increased 2008 operating expenses compared to 2007.
54
Year ended December 31, 2007 compared to year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
3,802 |
|
|
|
4,021 |
|
|
|
(219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fee-based income |
|
|
42,682 |
|
|
|
35,090 |
|
|
|
7,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
|
|
84 |
|
|
|
|
|
|
|
84 |
|
Intersegment revenue |
|
|
688 |
|
|
|
503 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
43,454 |
|
|
|
35,593 |
|
|
|
7,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
20,426 |
|
|
|
17,607 |
|
|
|
2,819 |
|
Other expenses |
|
|
8,901 |
|
|
|
8,371 |
|
|
|
530 |
|
Intersegment expenses |
|
|
364 |
|
|
|
1,025 |
|
|
|
(661 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
29,691 |
|
|
|
27,003 |
|
|
|
2,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
17,565 |
|
|
|
12,611 |
|
|
|
4,954 |
|
Income tax expense |
|
|
6,675 |
|
|
|
4,791 |
|
|
|
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before minority interest |
|
|
10,890 |
|
|
|
7,820 |
|
|
|
3,070 |
|
Minority interest |
|
|
|
|
|
|
(242 |
) |
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
10,890 |
|
|
|
7,578 |
|
|
|
3,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
37.2 |
% |
|
|
31.8 |
% |
|
|
|
|
Other fee-based income. Other fee-based income increased for the year ended December 31,
2007 compared to the same period in 2006 as a result of an increase in the number of managed
tuition payment plans as well as an increase in campus commerce clients.
Operating expenses. Operating expenses increased for the year ended December 31, 2007
compared to the same period in 2006 as a result of incurring additional costs associated with
salaries and benefits, as well as other expenses, to support the increase in the number of managed
tuition payment plans and campus commerce clients. In addition, the Company continues to invest in
products, services, and technology to meet customer needs and support continued revenue growth.
These investments increased 2007 operating expenses compared to 2006.
55
ENROLLMENT SERVICES OPERATING SEGMENT RESULTS OF OPERATIONS
The Companys Enrollment Services segment offers products and services that are focused on helping
(i) students plan and prepare for life after high school (content management) and (ii) colleges
recruit and retain students (lead generation). Content management products and services include
test preparation study guides and online courses, admissions consulting, licensing of scholarship
data, essay and resume editing services, and call center services. Lead generation products and
services include vendor lead management services, pay per click marketing management, email
marketing, admissions lead generation, and list marketing services.
Year ended December 31, 2008 compared to year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
17 |
|
|
|
340 |
|
|
|
(323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fee-based income |
|
|
112,405 |
|
|
|
103,311 |
|
|
|
9,094 |
|
Software services income |
|
|
37 |
|
|
|
594 |
|
|
|
(557 |
) |
Intersegment revenue |
|
|
2 |
|
|
|
891 |
|
|
|
(889 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
112,444 |
|
|
|
104,796 |
|
|
|
7,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
24,379 |
|
|
|
33,480 |
|
|
|
(9,101 |
) |
|
Restructure expense severance and
and contract termination costs |
|
|
282 |
|
|
|
929 |
|
|
|
(647 |
) |
Impairment expense |
|
|
|
|
|
|
11,401 |
|
|
|
(11,401 |
) |
Other expenses |
|
|
76,189 |
|
|
|
60,445 |
|
|
|
15,744 |
|
Intersegment expenses |
|
|
3,240 |
|
|
|
335 |
|
|
|
2,905 |
|
Corporate allocations |
|
|
3,401 |
|
|
|
|
|
|
|
3,401 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
107,491 |
|
|
|
106,590 |
|
|
|
901 |
|
|
|
|
|
|
|
|
|
|
|
|
Base net income (loss) before income taxes |
|
|
4,970 |
|
|
|
(1,454 |
) |
|
|
6,424 |
|
Income tax expense (benefit) |
|
|
1,730 |
|
|
|
(553 |
) |
|
|
2,283 |
|
|
|
|
|
|
|
|
|
|
|
|
Base net income (loss) |
|
$ |
3,240 |
|
|
|
(901 |
) |
|
|
4,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
4.4 |
% |
|
|
(1.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding restructure and impairment expense
and corporate allocations |
|
|
7.7 |
% |
|
|
10.3 |
% |
|
|
|
|
Other fee-based income. Other fee-based income increased as a result of an increase in
lead generation volume and an increase in content management products and services. This increase
in income was offset by a decrease due to the impacts of the economy and the legislative
developments in the student loan industry on the list marketing services offered by this segment.
Excluding the income associated with the list marketing services, other fee-based income increased
approximately $21.4 million, or 26.2%, for the year ended December 31, 2008 compared to the same
period in 2007.
Operating expenses. Excluding restructure expense, impairment expense, and the increase in
expenses associated with the allocation of additional corporate overhead expenses, which were
included in Corporate Activity and Overhead for the year ended December 31, 2007, operating
expenses increased $9.5 million, or 10.1%, for the year ended December 31, 2008 compared to the
same period in 2007. This was the result of an increase in costs associated with providing lead
generation services. Salaries and benefits decreased $9.1 million for the year ended December 31,
2008 compared to the same period in 2007 as a result of cost savings from the September 2007 and
January 2008 restructuring plans.
For the years ended December 31, 2008 and 2007, operating margins, excluding restructure and
impairment expense, corporate allocations, and the income and expenses associated with list
marketing services, were 8.9% and (0.3%), respectively.
56
Year ended December 31, 2007 compared to year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
340 |
|
|
|
531 |
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fee-based income |
|
|
103,311 |
|
|
|
55,361 |
|
|
|
47,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software services income |
|
|
594 |
|
|
|
157 |
|
|
|
437 |
|
Intersegment revenue |
|
|
891 |
|
|
|
1,000 |
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
104,796 |
|
|
|
56,518 |
|
|
|
48,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
33,480 |
|
|
|
15,510 |
|
|
|
17,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure expense severance and
contract termination costs |
|
|
929 |
|
|
|
|
|
|
|
929 |
|
Impairment expense |
|
|
11,401 |
|
|
|
|
|
|
|
11,401 |
|
Other expenses |
|
|
60,445 |
|
|
|
30,854 |
|
|
|
29,591 |
|
Intersegment expenses |
|
|
335 |
|
|
|
17 |
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
106,590 |
|
|
|
46,381 |
|
|
|
60,209 |
|
|
|
|
|
|
|
|
|
|
|
|
Base net income (loss)
before income taxes |
|
|
(1,454 |
) |
|
|
10,668 |
|
|
|
(12,122 |
) |
Income tax expense (benefit) |
|
|
(553 |
) |
|
|
4,054 |
|
|
|
(4,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
Base net income (loss) |
|
$ |
(901 |
) |
|
|
6,614 |
|
|
|
(7,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
(1.4 |
%) |
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding restructure expense
and impairment expense |
|
|
10.3 |
% |
|
|
18.7 |
% |
|
|
|
|
Other fee-based income. Other fee-based income increased primarily as the result of
acquisitions. The Company purchased CUnet, LLC (CUnet) and purchased certain assets and assumed
certain liabilities from Thomson Learning, Inc (currently referred to as Petersons). These
acquisitions increased other-fee based revenues by $39.8 million. The remaining increase of $8.2
million is a result of an increase in lead generation sales due to additional customers.
Operating expenses. Total operating expenses increased $60.2 million for the year ended
December 31, 2007 compared to 2006. Operating expenses increased $40.2 million as a result of the
acquisitions of CUnet and Petersons. The remaining increase in operating expense, excluding the
2007 impairment and restructuring charges, is $7.7 million and is a result of further developing
resources and products for the Companys customers in this segment and increases in costs to
support the increase in revenue.
57
SOFTWARE AND TECHNICAL SERVICES OPERATING SEGMENT RESULTS OF OPERATIONS
The Companys Software and Technical Services operating segment develops student loan servicing
software, which is used internally by the Company and also licensed to third-party student loan
holders and servicers. This segment also provides information technology products and services,
with core areas of business in educational loan software solutions, business intelligence,
technical consulting services, and Enterprise Content Management solutions.
Many of the Companys external customers receiving services in this segment have been negatively
impacted as a result of the passage of the College Cost Reduction Act and the recent disruption in
the capital markets. This impact could decrease the demand for products and services and affect
this segments future revenue and profit margins.
Year ended December 31, 2008 compared to year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
24 |
|
|
|
18 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software services income |
|
|
19,707 |
|
|
|
22,075 |
|
|
|
(2,368 |
) |
Intersegment revenue |
|
|
6,831 |
|
|
|
15,683 |
|
|
|
(8,852 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
26,538 |
|
|
|
37,758 |
|
|
|
(11,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
18,081 |
|
|
|
23,959 |
|
|
|
(5,878 |
) |
Restructure expense severance and contract
termination costs |
|
|
487 |
|
|
|
58 |
|
|
|
429 |
|
Other expenses |
|
|
2,489 |
|
|
|
2,995 |
|
|
|
(506 |
) |
Intersegment expenses |
|
|
37 |
|
|
|
775 |
|
|
|
(738 |
) |
Corporate allocations |
|
|
2,286 |
|
|
|
|
|
|
|
2,286 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,380 |
|
|
|
27,787 |
|
|
|
(4,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
3,182 |
|
|
|
9,989 |
|
|
|
(6,807 |
) |
Income tax expense |
|
|
1,021 |
|
|
|
3,796 |
|
|
|
(2,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
2,161 |
|
|
|
6,193 |
|
|
|
(4,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
12.0 |
% |
|
|
26.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding restructure expense
and corporate allocations |
|
|
22.4 |
% |
|
|
26.6 |
% |
|
|
|
|
Software services income. Software services income decreased for the year ended December
31, 2008 compared to the same period in 2007 as the result of a reduction in the number of projects
for existing customers and the loss of customers due to the legislative developments in the student
loan industry throughout 2008.
Intersegment revenue. Intersegment revenue decreased for the year ended December 31, 2008
compared to the same period in 2007 as a result of a decrease in projects for internal customers.
Operating expenses. The decrease in operating expenses was driven by a decrease in costs
associated with salaries and benefits as a result of the decrease in projects for customers and the
loss of customers due to legislative developments in the student loan industry. These decreases
were partially offset by increases in operating expenses as a result of the allocation of
additional corporate overhead expenses, which were included in Corporate Activity and Overhead for
the year ended December 31, 2007.
58
Year ended December 31, 2007 compared to year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
18 |
|
|
|
105 |
|
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software services income |
|
|
22,075 |
|
|
|
15,490 |
|
|
|
6,585 |
|
Intersegment revenue |
|
|
15,683 |
|
|
|
17,877 |
|
|
|
(2,194 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
37,758 |
|
|
|
33,367 |
|
|
|
4,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
23,959 |
|
|
|
22,063 |
|
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructure expense severance and contract
termination costs |
|
|
58 |
|
|
|
|
|
|
|
58 |
|
Other expenses |
|
|
2,995 |
|
|
|
3,238 |
|
|
|
(243 |
) |
Intersegment expenses |
|
|
775 |
|
|
|
|
|
|
|
775 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
27,787 |
|
|
|
25,301 |
|
|
|
2,486 |
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
9,989 |
|
|
|
8,171 |
|
|
|
1,818 |
|
Income tax expense |
|
|
3,796 |
|
|
|
3,105 |
|
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
6,193 |
|
|
|
5,066 |
|
|
|
1,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
26.4 |
% |
|
|
24.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense |
|
|
26.6 |
% |
|
|
24.4 |
% |
|
|
|
|
Software services income. Software services income increased for the year ended December
31, 2007 compared to the same period in 2006 as a result of new customers, additional projects for
existing customers, and increased fees.
Operating expenses. The increase in operating expenses was driven by additional costs
associated with salaries and benefits, as well as other expenses, to support the increases in
customers and projects.
59
ASSET
GENERATION AND MANAGEMENT OPERATING SEGMENT RESULTS OF OPERATIONS
The Asset Generation and Management Operating Segment includes the origination, acquisition,
management, and ownership of the Companys student loan assets, which has historically been the
Companys largest product and service offering. The Company historically generated a substantial
portion of its earnings from the spread, referred to as the Companys student loan spread, between
the yield it receives on its student loan portfolio and the costs associated with originating,
acquiring, and financing its portfolio. The Company generates student loan
assets through direct origination or through acquisitions. The student loan assets are held in a
series of education lending subsidiaries designed specifically for this purpose.
In addition to the student loan portfolio, all costs and activity associated with the generation of
assets, funding of those assets, and maintenance of the debt transactions are included in this
segment. This includes derivative activity and the related derivative market value and foreign
currency adjustments. The Company is also able to leverage its capital market expertise by
providing investment advisory services and other related services to third parties through a
licensed broker-dealer subsidiary. Revenues and expenses for those functions are also included in
the Asset Generation and Management segment.
Student Loan Portfolio
The table below outlines the components of the Companys student loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
As of December 31, 2007 |
|
|
As of December 31, 2006 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Federally insured: (a) (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated prior to 10/1/07 |
|
$ |
6,641,817 |
|
|
|
26.1 |
% |
|
$ |
6,624,009 |
|
|
|
24.8 |
% |
|
$ |
5,724,586 |
|
|
|
24.1 |
% |
Originated on or after 10/1/07 |
|
|
960,751 |
|
|
|
3.8 |
|
|
|
101,901 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
PLUS/SLS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated prior to 10/1/07 |
|
|
412,142 |
|
|
|
1.6 |
|
|
|
414,708 |
|
|
|
1.5 |
|
|
|
365,112 |
|
|
|
1.5 |
|
Originated on or after 10/1/07 |
|
|
115,528 |
|
|
|
0.5 |
|
|
|
15,233 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Consolidation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated prior to 10/1/07 |
|
|
16,614,950 |
|
|
|
65.3 |
|
|
|
18,646,993 |
|
|
|
69.8 |
|
|
|
17,127,623 |
|
|
|
72.0 |
|
Originated on or after 10/1/07 |
|
|
42,753 |
|
|
|
0.2 |
|
|
|
251,554 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
Non-federally insured |
|
|
273,108 |
|
|
|
1.1 |
|
|
|
274,815 |
|
|
|
1.0 |
|
|
|
197,147 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
25,061,049 |
|
|
|
98.6 |
|
|
|
26,329,213 |
|
|
|
98.5 |
|
|
|
23,414,468 |
|
|
|
98.4 |
|
Unamortized premiums and deferred
origination costs |
|
|
402,881 |
|
|
|
1.6 |
|
|
|
452,501 |
|
|
|
1.7 |
|
|
|
401,087 |
|
|
|
1.7 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance federally insured |
|
|
(25,577 |
) |
|
|
(0.1 |
) |
|
|
(24,534 |
) |
|
|
(0.1 |
) |
|
|
(7,601 |
) |
|
|
(0.0 |
) |
Allowance non-federally insured |
|
|
(25,345 |
) |
|
|
(0.1 |
) |
|
|
(21,058 |
) |
|
|
(0.1 |
) |
|
|
(18,402 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
25,413,008 |
|
|
|
100.0 |
% |
|
$ |
26,736,122 |
|
|
|
100.0 |
% |
|
$ |
23,789,552 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The College Cost Reduction Act reduced the yield on federally insured loans
originated on or after October 1, 2007. As of December 31, 2008 and December 31,
2007, $548.4 million and $278.9 million, respectively, of federally insured student
loans are excluded from the above table as these loans are accounted for as
participation interests sold under an agreement with Union Bank which is further
discussed in note 8 in the Companys consolidated financial statements included in
this Report. As of December 31, 2008, $377.1 million of the loans accounted for as
participation interests sold under this agreement were originated on or after October
1, 2007, of which $32.8 million were eligible to be participated to the Department
under the Participation Program. |
|
(b) |
|
As of December 31, 2008, $637.3 million of federally insured student loans from the
above table were eligible to be sold or participated to the Department under the
Departments Loan Purchase Commitment and Participation Programs, of which $622.2 million were participated to the Department under the Participation Program. |
Origination and Acquisition
The Company has historically originated and acquired loans through various methods and channels
including: (i) direct-to-consumer channel (in which the Company originates student loans directly
with student and parent borrowers), (ii) campus based origination channels, and (iii) spot
purchases.
The Company will originate or acquire loans through its campus based channel either directly under
one of its brand names or through other originating lenders. In addition to its brands, the Company
acquires student loans from lenders to whom the Company provides marketing and/or origination
services established through various contracts. Branding partners are lenders for which the Company
acts as a marketing agent in specified geographic areas. A forward flow lender is one for whom the
Company provides origination services but provides no marketing services or whom simply agrees to
sell loans to the Company under forward sale commitments.
60
The following table sets forth the activity of loans originated or acquired through each of the
Companys channels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
26,329,213 |
|
|
|
23,414,468 |
|
|
|
19,912,955 |
|
Direct channel: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation loan originations |
|
|
69,078 |
|
|
|
3,096,754 |
|
|
|
5,299,820 |
|
Less consolidation of existing portfolio |
|
|
(28,474 |
) |
|
|
(1,602,835 |
) |
|
|
(2,643,880 |
) |
|
|
|
|
|
|
|
|
|
|
Net consolidation loan originations |
|
|
40,604 |
|
|
|
1,493,919 |
|
|
|
2,655,940 |
|
Stafford/PLUS loan originations |
|
|
1,258,961 |
|
|
|
1,086,398 |
|
|
|
1,035,695 |
|
Branding partner channel |
|
|
936,044 |
|
|
|
662,629 |
|
|
|
720,641 |
|
Forward flow channel |
|
|
517,551 |
|
|
|
1,105,145 |
|
|
|
1,600,990 |
|
Other channels |
|
|
55,922 |
|
|
|
804,019 |
|
|
|
682,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total channel acquisitions |
|
|
2,809,082 |
|
|
|
5,152,110 |
|
|
|
6,696,118 |
|
Repayments, claims, capitalized interest, participations, and other |
|
|
(1,877,885 |
) |
|
|
(1,321,055 |
) |
|
|
(1,332,086 |
) |
Consolidation loans lost to external parties |
|
|
(369,145 |
) |
|
|
(800,978 |
) |
|
|
(1,114,040 |
) |
Loans sold |
|
|
(1,830,216 |
) |
|
|
(115,332 |
) |
|
|
(748,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
25,061,049 |
|
|
|
26,329,213 |
|
|
|
23,414,468 |
|
|
|
|
|
|
|
|
|
|
|
The Company has significant financing needs that it meets through the capital markets. Since August
2007, the capital markets have experienced unprecedented disruptions, which have had an adverse
impact on the Companys earnings and financial condition. Since the Company could not determine nor
control the length of time or extent to which the capital markets would remain disrupted, it
reduced its direct and indirect costs related to its asset generation activities and was more
selective in pursuing origination activity in the direct to consumer channel. Accordingly,
beginning in January 2008, the Company suspended Consolidation and private student loan
originations and exercised contractual rights to discontinue, suspend, or defer the acquisition of
student loans in connection with substantially all of its branding and forward flow relationships.
Prior to and in conjunction with exercising this right, during the first quarter of 2008, the
Company accelerated the purchase of loans from certain branding partner and forward flow lenders of
approximately $511 million.
During July 2008, the Company purchased approximately $440 million of student loans from certain
branding partner and forward flow lenders of which such purchases were previously deferred. These
loans were financed in the Companys FFELP warehouse facility prior to the term-out of this
agreement.
Historically, the Company funded new loan originations using loan warehouse facilities and
asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy
and manage student loans prior to transferring them into more permanent financing arrangements. In
July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility.
Accordingly, the facility became a term facility and no new loan originations could be funded with
this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year pursuant to the Departments Loan Participation
Program (as discussed below).
In August 2008, the Department implemented the Loan Purchase Commitment Program and the Loan
Participation Program pursuant to the ECASLA. Under the Departments Purchase Program, the
Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest,
(iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per
loan. Under the Participation Program, the Department provides interim short term liquidity to
FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are
charged a rate of commercial paper plus 50 basis points on the principal amount of participation
interests outstanding. Loans funded under the Participation Program must be either refinanced by
the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on
September 30, 2009. To be eligible for purchase or participation under the Departments programs,
loans were originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009,
first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7th legislation,
which will include FFELP student loans made for the 2009-2010 academic year.
61
The Company plans to continue to use the Participation Program to fund loans originated for the
2008-2009 and 2009-2010 academic years. These programs are allowing the Company to continue
originating new federal student loans to all students regardless of the school they attend.
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. An
analysis of the Companys allowance for loan losses is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
45,592 |
|
|
|
26,003 |
|
|
|
13,390 |
|
Provision for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured loans |
|
|
17,000 |
|
|
|
23,158 |
|
|
|
9,268 |
|
Non-federally insured loans |
|
|
8,000 |
|
|
|
5,020 |
|
|
|
6,040 |
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
15,308 |
|
Charge-offs, net of recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured loans |
|
|
(15,207 |
) |
|
|
(6,225 |
) |
|
|
(1,765 |
) |
Non-federally insured loans |
|
|
(3,713 |
) |
|
|
(1,193 |
) |
|
|
(930 |
) |
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(18,920 |
) |
|
|
(7,418 |
) |
|
|
(2,695 |
) |
Sale of federally insured loans |
|
|
(750 |
) |
|
|
|
|
|
|
|
|
Sale of non-federally insured loans |
|
|
|
|
|
|
(1,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
50,922 |
|
|
|
45,592 |
|
|
|
26,003 |
|
|
|
|
|
|
|
|
|
|
|
Allocation of the allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured loans |
|
$ |
25,577 |
|
|
|
24,534 |
|
|
|
7,601 |
|
Non-federally insured loans |
|
|
25,345 |
|
|
|
21,058 |
|
|
|
18,402 |
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses |
|
$ |
50,922 |
|
|
|
45,592 |
|
|
|
26,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs as a percentage of average student loans |
|
|
0.073 |
% |
|
|
0.030 |
% |
|
|
0.012 |
% |
Net loan charge-offs as a percentage of the ending balance of
student loans in repayment |
|
|
0.125 |
% |
|
|
0.046 |
% |
|
|
0.018 |
% |
Total allowance as a percentage of average student loans |
|
|
0.196 |
% |
|
|
0.181 |
% |
|
|
0.120 |
% |
Total allowance as a percentage of ending balance of student loans |
|
|
0.203 |
% |
|
|
0.173 |
% |
|
|
0.111 |
% |
Non-federally insured allowance as a percentage of the ending
balance of non-federally insured loans |
|
|
9.280 |
% |
|
|
7.663 |
% |
|
|
9.334 |
% |
Average student loans |
|
$ |
26,044,507 |
|
|
|
25,143,059 |
|
|
|
21,696,466 |
|
Ending balance of student loans |
|
|
25,061,049 |
|
|
|
26,329,213 |
|
|
|
23,414,468 |
|
Ending balance of non-federally insured loans |
|
|
273,108 |
|
|
|
274,815 |
|
|
|
197,147 |
|
62
Delinquencies have the potential to adversely impact the Companys earnings through increased
servicing and collection costs and account charge-offs. The table below shows the Companys student
loan delinquency amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
As of December 31, 2007 |
|
Federally Insured Loans: |
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Loans in-school/grace/deferment(1) |
|
$ |
7,374,602 |
|
|
|
|
|
|
$ |
7,115,505 |
|
|
|
|
|
Loans in forebearance(2) |
|
|
2,484,478 |
|
|
|
|
|
|
|
3,015,456 |
|
|
|
|
|
Loans in repayment status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current |
|
|
13,169,101 |
|
|
|
88.3 |
% |
|
|
13,937,702 |
|
|
|
87.5 |
% |
Loans delinquent 31-60 days(3) |
|
|
536,112 |
|
|
|
3.6 |
|
|
|
682,956 |
|
|
|
4.3 |
|
Loans delinquent 61-90 days(3) |
|
|
240,549 |
|
|
|
1.6 |
|
|
|
353,303 |
|
|
|
2.2 |
|
Loans delinquent 91 days or greater(4) |
|
|
983,099 |
|
|
|
6.5 |
|
|
|
949,476 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans in repayment |
|
|
14,928,861 |
|
|
|
100.0 |
% |
|
|
15,923,437 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federally insured loans |
|
$ |
24,787,941 |
|
|
|
|
|
|
$ |
26,054,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Federally Insured Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in-school/grace/deferment(1) |
|
$ |
84,237 |
|
|
|
|
|
|
$ |
111,946 |
|
|
|
|
|
Loans in forebearance(2) |
|
|
9,540 |
|
|
|
|
|
|
|
12,895 |
|
|
|
|
|
Loans in repayment status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current |
|
|
169,865 |
|
|
|
94.7 |
% |
|
|
142,851 |
|
|
|
95.3 |
% |
Loans delinquent 31-60 days(3) |
|
|
3,315 |
|
|
|
1.8 |
|
|
|
3,450 |
|
|
|
2.3 |
|
Loans delinquent 61-90 days(3) |
|
|
1,743 |
|
|
|
1.0 |
|
|
|
1,247 |
|
|
|
0.8 |
|
Loans delinquent 91 days or greater(4) |
|
|
4,408 |
|
|
|
2.5 |
|
|
|
2,426 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans in repayment |
|
|
179,331 |
|
|
|
100.0 |
% |
|
|
149,974 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-federally insured loans |
|
$ |
273,108 |
|
|
|
|
|
|
$ |
274,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
(2) |
|
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. |
|
(3) |
|
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. |
|
(4) |
|
Loans delinquent 91 days or greater include loans in claim status, which are loans which
have gone into default and have been submitted to the guaranty agency for FFELP loans, or, if
applicable, the insurer for non-federally insured loans, to process the claim for payment. |
Student Loan Spread Analysis
The following table analyzes the student loan spread on the Companys portfolio of student loans
and represents the spread on assets earned in conjunction with the liabilities and derivative
instruments used to fund the assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Student loan yield |
|
|
5.58 |
% |
|
|
7.76 |
% |
|
|
7.85 |
% |
Consolidation rebate fees |
|
|
(0.73 |
) |
|
|
(0.77 |
) |
|
|
(0.72 |
) |
Premium and deferred origination costs amortization |
|
|
(0.35 |
) |
|
|
(0.36 |
) |
|
|
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
Student loan net yield |
|
|
4.50 |
|
|
|
6.63 |
|
|
|
6.74 |
|
Student loan cost of funds |
|
|
(3.45 |
) |
|
|
(5.49 |
) |
|
|
(5.12 |
) |
|
|
|
|
|
|
|
|
|
|
Student loan spread |
|
|
1.05 |
|
|
|
1.14 |
|
|
|
1.62 |
|
Variable-rate floor income, net of
settlements on derivatives |
|
|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
|
|
Special allowance yield adjustments, net of
settlements on derivatives (a) |
|
|
|
|
|
|
|
|
|
|
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core student loan spread |
|
|
0.93 |
% |
|
|
1.13 |
% |
|
|
1.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of student loans |
|
$ |
26,044,507 |
|
|
$ |
25,143,059 |
|
|
|
21,696,466 |
|
Average balance of debt outstanding |
|
|
26,869,364 |
|
|
|
26,599,361 |
|
|
|
23,379,258 |
|
|
|
|
(a) |
|
The special allowance yield adjustment represents the impact on net spread had certain
9.5% loans earned at statutorily defined rates under a taxable financing. The special
allowance yield adjustment includes net settlements on derivative instruments that were
used to hedge this loan portfolio earning the excess yield. On January 19, 2007, the
Company entered into a Settlement Agreement with the Department to resolve the audit by the
OIG of the Companys portfolio of student loans receiving 9.5% special allowance payments.
Under the terms of the Agreement, all 9.5% special allowance payments were eliminated for
periods on and after July 1, 2006. The Company had been deferring recognition of 9.5%
special allowance payments related to those loans subject to the OIG audit effective July
1, 2006 pending satisfactory resolution of this issue. |
63
As noted in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, the Company has
a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the
statutorily defined variable lender rate creating fixed rate floor income which is included in its
core student loan spread. The majority of these loans are consolidation loans that earn the greater
of the borrower rate or 2.64% above the average commercial paper rate during the calendar quarter.
When excluding fixed rate floor income, the Companys core student loan spread was 0.79%, 1.09%,
and 1.28% for the years ended December 31, 2008, 2007, and 2006, respectively.
The compression of the Companys core student loan spread during the year ended December 31, 2008
compared to 2007 was the result of the following items:
|
|
|
The passage of the College Cost Reduction Act has reduced the yield on all FFELP loans
originated after October 1, 2007. |
|
|
|
|
Historically, the movement of the various interest rate indices received on the
Companys student loan assets and paid on the debt to fund such loans was highly
correlated. As shown in Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, the short term movement of the indices was dislocated beginning in August 2007.
This dislocation has had a negative impact on the Companys student loan net interest
income. |
|
|
|
|
The spread to LIBOR on asset-backed securities transactions has increased
significantly since August 2007. Since August 2007, the Company has issued $6.0 billion
of notes in asset-backed securities transactions ($1.5 billion in August 2007, $1.2
billion in March 2008, $1.9 billion in April 2008, and $1.3 billion in May 2008). The
increase in costs on these transactions from historical levels have had and will continue
to have a negative impact on the Companys student loan net interest income. The
increased spread to LIBOR on asset-backed securities transactions is shown in the below
table: |
|
|
|
The interest rates on approximately $1.9 billion of the Companys asset-backed
securities are set and periodically reset via a dutch auction. Beginning in
February 2008, the auction process to establish the rates on the Auction Rate
Securities has failed. As a result of a failed auction, the Auction Rate Securities
will generally pay interest to the holder at a maximum rate as defined by the
governing documents. During 2008, the Company paid unfavorable interest rates on the
majority of its Auction Rate Securities as a result of the application of certain of
these maximum rate auction provisions in the underlying documents for such
financings. |
The compression of the Companys core student loan spread during the year ended December 31, 2007
compared to 2006 was the result of the following items:
|
|
|
The increase in the cost of debt as a result of the disruptions in the debt and
secondary capital markets. |
64
|
|
|
An increase in lower yielding consolidation loans and an increase in the
consolidation rebate fees. |
|
|
|
|
The elimination of 9.5% special allowance payments on non-special allowance yield
adjustment student loans as a result of the Settlement Agreement with the
Department. |
|
|
|
|
The mismatch in the reset frequency between the Companys floating rate assets
and floating rate liabilities. The companys core student loan spread benefited in
the rising interest rate environment for the first six months in 2006 because the
Companys cost of funds reset periodically on a discrete basis, in advance, while
the Companys student loans received a yield based on the average daily interest
rate over the period. As interest rates remained relatively flat or decreased during
2007, as compared to the same period in 2006, the Company did not benefit from the
rate reset discrepancy of its assets and liabilities contributing to the
compression. |
Year ended December 31, 2008 compared to year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
152,773 |
|
|
|
236,821 |
|
|
|
(84,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
16 |
|
|
|
294 |
|
|
|
(278 |
) |
Other fee-based income |
|
|
17,859 |
|
|
|
13,387 |
|
|
|
4,472 |
|
Other income |
|
|
(448 |
) |
|
|
4,433 |
|
|
|
(4,881 |
) |
Gain (loss) on sale of loans |
|
|
(53,035 |
) |
|
|
3,597 |
|
|
|
(56,632 |
) |
Derivative market value, foreign currency,
and put option adjustments |
|
|
466 |
|
|
|
|
|
|
|
466 |
|
Derivative settlements, net |
|
|
65,622 |
|
|
|
6,628 |
|
|
|
58,994 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
30,480 |
|
|
|
28,339 |
|
|
|
2,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
8,316 |
|
|
|
23,101 |
|
|
|
(14,785 |
) |
Restructure expense severance and contract
termination costs |
|
|
1,845 |
|
|
|
2,406 |
|
|
|
(561 |
) |
Impairment expense |
|
|
9,351 |
|
|
|
28,291 |
|
|
|
(18,940 |
) |
Other expenses |
|
|
35,679 |
|
|
|
29,205 |
|
|
|
6,474 |
|
Intersegment expenses |
|
|
74,609 |
|
|
|
74,714 |
|
|
|
(105 |
) |
Corporate allocations |
|
|
2,496 |
|
|
|
|
|
|
|
2,496 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
132,296 |
|
|
|
157,717 |
|
|
|
(25,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
50,957 |
|
|
|
107,443 |
|
|
|
(56,486 |
) |
Income tax expense |
|
|
18,356 |
|
|
|
40,828 |
|
|
|
(22,472 |
) |
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
32,601 |
|
|
|
66,615 |
|
|
|
(34,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
27.8 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin -
excluding restructure expense,
impairment expense, provision for loan
losses related to the loss of Exceptional
Performer in 2007, the loss on sale of loans
in 2008, liquidity contingency planning
fees, and corporate allocations |
|
|
55.5 |
% |
|
|
54.8 |
% |
|
|
|
|
65
Net interest income after the provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Change |
|
|
|
2008 |
|
|
2007 |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
1,415,281 |
|
|
|
1,948,751 |
|
|
|
(533,470 |
) |
|
|
(27.4 |
)% |
Consolidation rebate fees |
|
|
(190,604 |
) |
|
|
(193,687 |
) |
|
|
3,083 |
|
|
|
1.6 |
|
Amortization of loan premiums and
deferred origination costs |
|
|
(90,619 |
) |
|
|
(91,020 |
) |
|
|
401 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan interest |
|
|
1,134,058 |
|
|
|
1,664,044 |
|
|
|
(529,986 |
) |
|
|
(31.8 |
) |
Investment interest |
|
|
30,271 |
|
|
|
66,838 |
|
|
|
(36,567 |
) |
|
|
(54.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,164,329 |
|
|
|
1,730,882 |
|
|
|
(566,553 |
) |
|
|
(32.7 |
) |
Interest on bonds and notes payable |
|
|
986,556 |
|
|
|
1,465,883 |
|
|
|
(479,327 |
) |
|
|
(32.7 |
) |
Provision for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
(3,178 |
) |
|
|
(11.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses |
|
$ |
152,773 |
|
|
|
236,821 |
|
|
|
(84,048 |
) |
|
|
(35.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average student loan portfolio increased $0.9 billion, or 3.6%, for the year ended
December 31, 2008 compared to the same period in 2007. The increase in average loans was
offset by a decrease in the yield earned on student loans. Loan interest income decreased
$533.5 million as a result of these factors. |
|
|
|
Consolidation rebate fees decreased due to the $0.2 billion, or 1.1%, decrease in the
average consolidation loan portfolio. |
|
|
|
The amortization of loan premiums and deferred origination costs decreased as a result
of reduced costs to acquire or originate loans. |
|
|
|
Investment interest decreased as a result of an overall decrease in average cash held in
2008 as compared to 2007, as well as lower interest rates. |
|
|
|
Interest expense decreased as a result of a decrease in interest rates on the Companys
variable rate debt which lowered the Companys cost of funds (excluding net derivative
settlements) to 3.67% for the year ended December 31, 2008 compared to 5.51% for the same
period a year ago. |
|
|
|
Excluding an expense of $15.7 million to increase the Companys allowance for loan
losses related to the increase in risk share as a result of the elimination of the
Exceptional Performer program in 2007, the provision for loan losses increased for the year
ended December 31, 2008 compared to 2007. The provision for loan losses for federally
insured loans increased in 2008 as a result of the increase in risk share as a result of
the loss of Exceptional Performer. The provision for loan losses for non-federally insured
loans increased primarily due to increases in delinquencies as a result of the continued
weakening of the U.S. economy. |
Other fee-based income. Borrower late fees increased $3.3 million for the year ended
December 31, 2008 compared to the same period in 2007 as a result of the increase in the average
student loan portfolio.
Other income. Other income decreased due to the elimination of an agreement with a third
party during the third quarter of 2007 under which the Company provided administrative services to
the third party for a fee and due to realized losses from certain investments. Income in 2007 from
this agreement was $2.6 million.
Gain (loss) on sale of loans. As part of the Companys asset management strategy, the
Company periodically sells student loan portfolios to third parties. In 2007, the Company sold
$115.3 million (par value) of student loans and recorded a gain of $3.6 million. During 2008, the
Company recognized a loss of $53.0 million as a result of the sale of $1.8 billion (par value) of
loans. These loans were sold to decrease the collateral included in the Companys FFELP warehouse
facility to reduce exposure related to the facilitys equity support provisions.
Derivative settlements, net. The Company maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce the economic effect of interest rate
volatility. Management has structured all of the Companys derivative transactions with the intent
that each is economically effective; however, the Companys derivative instruments do not qualify
for hedge accounting under SFAS No. 133. Derivative settlements for each applicable period should
be evaluated with the Companys net
interest income.
66
Operating expenses. The Company incurred expenses of $13.5 million in 2008 from fees paid
related to liquidity contingency planning. Excluding these fees, restructure expense, impairment
expense, and corporate allocations, which were included in Corporate Activity and Overhead for the
year ended December 31, 2007, operating expenses decreased $21.9 million, or 17.3%, for the year
ended December 31, 2008 compared to same period in 2007. This decrease is a result of cost savings
from the Companys September 2007 and January 2008 restructuring plans.
Year ended December 31, 2007 compared to year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after the provision
for loan losses |
|
$ |
236,821 |
|
|
|
303,586 |
|
|
|
(66,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
294 |
|
|
|
|
|
|
|
294 |
|
Other fee-based income |
|
|
13,387 |
|
|
|
11,867 |
|
|
|
1,520 |
|
Software services income |
|
|
|
|
|
|
238 |
|
|
|
(238 |
) |
Other income |
|
|
4,433 |
|
|
|
3,833 |
|
|
|
600 |
|
Gain (loss) on sale of loans |
|
|
3,597 |
|
|
|
16,133 |
|
|
|
(12,536 |
) |
Derivative settlements, net |
|
|
6,628 |
|
|
|
18,381 |
|
|
|
(11,753 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
28,339 |
|
|
|
50,452 |
|
|
|
(22,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
23,101 |
|
|
|
53,036 |
|
|
|
(29,935 |
) |
Restructure expense severance and contract
termination costs |
|
|
2,406 |
|
|
|
|
|
|
|
2,406 |
|
Impairment expense |
|
|
28,291 |
|
|
|
21,687 |
|
|
|
6,604 |
|
Other expenses |
|
|
29,205 |
|
|
|
51,085 |
|
|
|
(21,880 |
) |
Intersegment expenses |
|
|
74,714 |
|
|
|
52,857 |
|
|
|
21,857 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
157,717 |
|
|
|
178,665 |
|
|
|
(20,948 |
) |
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
107,443 |
|
|
|
175,373 |
|
|
|
(67,930 |
) |
Income tax expense |
|
|
40,828 |
|
|
|
66,642 |
|
|
|
(25,814 |
) |
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
66,615 |
|
|
|
108,731 |
|
|
|
(42,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
40.5 |
% |
|
|
49.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense,
impairment expense, and provision for loan
losses related to the loss of Exceptional
Performer in 2007 |
|
|
54.8 |
% |
|
|
55.7 |
% |
|
|
|
|
Net interest income after the provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Change |
|
|
|
2007 |
|
|
2006 |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
1,948,751 |
|
|
|
1,699,859 |
|
|
|
248,892 |
|
|
|
14.6 |
% |
Consolidation rebate fees |
|
|
(193,687 |
) |
|
|
(156,751 |
) |
|
|
(36,936 |
) |
|
|
(23.6 |
) |
Amortization of loan premiums and
deferred origination costs |
|
|
(91,020 |
) |
|
|
(87,393 |
) |
|
|
(3,627 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan interest |
|
|
1,664,044 |
|
|
|
1,455,715 |
|
|
|
208,329 |
|
|
|
14.3 |
|
Investment interest |
|
|
66,838 |
|
|
|
78,708 |
|
|
|
(11,870 |
) |
|
|
(15.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,730,882 |
|
|
|
1,534,423 |
|
|
|
196,459 |
|
|
|
12.8 |
|
Interest on bonds and notes payable |
|
|
1,465,883 |
|
|
|
1,215,529 |
|
|
|
250,354 |
|
|
|
20.6 |
|
Provision for loan losses |
|
|
28,178 |
|
|
|
15,308 |
|
|
|
12,870 |
|
|
|
84.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses |
|
$ |
236,821 |
|
|
|
303,586 |
|
|
|
(66,765 |
) |
|
|
(22.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
Loan interest for the year ended December 31, 2006 included $32.3 million of 9.5%
special allowance payments. The Company received no 9.5% special allowance payments for the
year ended December 31, 2007 as a result of the Settlement Agreement with the Department. |
|
|
|
The average student loan portfolio increased $3.4 billion, or 15.9%, for the year ended
December 31, 2007 compared to the same period in 2006. Student loan yield, excluding 9.5%
special allowance payments, increased to 7.75% in 2007 from 7.69% in 2006. The increase in
student loan yield is the result of a higher interest rate environment and is offset by an
increase in the percentage of lower yielding consolidation loans to the total portfolio.
Loan interest income, excluding the 9.5% special allowance payments, increased $281.2
million as a result of these factors. |
|
|
|
Consolidation rebate fees increased due to the $3.4 billion, or 22.9%, increase in the
average consolidation loan portfolio. |
|
|
|
The amortization of loan premiums and deferred origination costs increased due to an
increase in the average student loan portfolio. |
|
|
|
Investment interest decreased as a result of an overall decrease in cash held in 2007 as
compared to 2006. |
|
|
|
Interest expense increased due to the $3.2 billion, or 13.8%, increase in average debt
for the year ended December 31, 2007 compared to the same period in 2006. In addition, the
Companys cost of funds (excluding net derivative settlements) increased to 5.51% for the
year ended December 31, 2007 compared to 5.20% for the same period a year ago. Interest
expense was impacted in 2007 by credit market disruptions as further discussed in this
Report. |
|
|
|
The provision for loan losses increased in 2007 because the Company recognized a $15.7
million provision on its federally insured portfolio as a result of the College Cost
Reduction Act. The 2006 provision for loan losses includes a $6.9 million charge the
Company recognized on its federally insured portfolio as a result of HERA which was enacted
into law on February 8, 2006. Excluding these items, the provision for loan losses
increased in 2007 as a result of the increase in risk share as a result of the loss of
Exceptional Performer and an increase in the average student loan portfolio. |
Other fee-based income. Borrower late fees increased $0.9 million for the year ended
December 31, 2007 compared to the same period in 2006 as a result of the increase in the average
student loan portfolio. In addition, income from providing investment advisory services and
services to third parties through the Companys licensed broker dealer increased in 2007 compared
to 2006.
Gain (loss) on sale of loans. As part of the Companys asset management strategy, the
Company periodically sells student loan portfolios to third parties. During 2007 and 2006, the
Company sold $115.3 million (par value) and $748.5 million (par value) of student loans,
respectively, resulting in the recognition of a gain of $3.6 million and $16.1 million,
respectively.
Derivative settlements, net. The Company maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce the economic effect of interest rate
volatility. Management has structured all of the Companys derivative transactions with the intent
that each is economically effective; however, the Companys derivative instruments do not qualify
for hedge accounting under SFAS No. 133. Derivative settlements for each applicable period should
be evaluated with the Companys net interest income.
Operating expenses. Excluding the restructure and impairment charges, operating expenses
decreased $30.0 million, or 19.1%, for the year ended December 31, 2007 compared to the same period
in 2006. The Company reduced its cost to service loans by converting loan volume acquired during
certain 2005 acquisitions from third party servicers to the Companys servicing platform. These
reductions were offset by an increase in the cost to service loans as a result of loan growth.
LIQUIDITY AND CAPITAL RESOURCES
The Companys fee-based businesses are not capital intensive businesses and all of these businesses
produce positive operating cash flows. As such, a minimal amount of debt and equity capital is
allocated to these segments. Therefore, the majority of the Liquidity and Capital Resources
discussion is concentrated on the Companys Asset Generation and Management operating segment. The
Company has historically utilized operating cash flow, secured financing transactions (which
include warehouse facilities and asset-backed securitizations), operating lines of credit, and
other borrowing arrangements to fund its Asset Generation and Management operations and student
loan acquisitions. In addition, the Company uses operating cash flow, borrowings on its unsecured
line of
credit, and unsecured debt offerings to fund corporate activities, business acquisitions, and
repurchases of common stock. The Company has also used its common stock to partially fund certain
business acquisitions. The Company has a universal shelf registration statement with the SEC which
allows the Company to sell up to $825.0 million of securities that may consist of common stock,
preferred stock, unsecured debt securities, warrants, stock purchase contracts, and stock purchase
units. The terms of any securities are established at the time of the offering.
68
The Company may issue equity and debt securities in the future in order to improve capital,
increase liquidity, refinance upcoming maturities, or provide for general corporate purposes.
Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding debt
securities, including debt securities which the Company may issue in the future, for cash and/or
through exchanges for other securities. Such repurchases or exchanges may be made in open market
transactions, privately negotiated transactions, or otherwise. Any such repurchases or exchanges
will depend on prevailing market conditions, the Companys liquidity requirements, contractual
restrictions, compliance with securities laws, and other factors. The amounts involved in any such
transactions may be material.
The following table summarizes the Companys bonds and notes outstanding as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
|
Interest rate |
|
|
|
|
|
|
amount |
|
|
|
range |
|
|
|
Final maturity |
|
Variable-rate bonds and notes (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes based on indices |
|
$ |
20,509,073 |
|
|
|
0.75% 5.02% |
|
|
|
09/25/13 06/25/41 |
|
Bonds and notes based on auction or remarketing (b) |
|
|
2,713,285 |
|
|
|
0.00% 6.00% |
|
|
|
11/01/09 07/01/43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable-rate bonds and notes |
|
|
23,222,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper FFELP facility (c) |
|
|
1,445,327 |
|
|
|
1.32% 2.94% |
|
|
|
05/09/10 |
|
Commercial paper private loan facility (c) |
|
|
95,020 |
|
|
|
2.49% |
|
|
|
03/14/09 |
|
Fixed-rate bonds and notes (a) |
|
|
202,096 |
|
|
|
5.30% 6.68% |
|
|
|
11/01/09 05/01/29 |
|
Unsecured fixed rate debt |
|
|
475,000 |
|
|
|
5.13% and 7.40% |
|
|
|
06/01/10 and 09/15/61 |
|
Unsecured line of credit |
|
|
691,500 |
|
|
|
0.98% 2.41% |
|
|
|
05/08/12 |
|
Department of Education Participation |
|
|
622,170 |
|
|
|
3.37% |
|
|
|
09/30/09 |
|
Other borrowings |
|
|
34,488 |
|
|
|
1.25% 5.47% |
|
|
|
05/22/09 11/01/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,787,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Issued in asset-backed securitizations |
|
(b) |
|
As of December 31, 2008, the Company had $115.2 million
of bonds based on an auction rate of 0%, due to the Maximum Rate
auction provisions in the underlying documents for such financings. The
Maximum Rate provisions include multiple components, one of which is
based on T-bill rates. The T-bill component calculation for these bonds
produced negative rates, which resulted in auction rates of zero
percent for the applicable period. |
|
(c) |
|
Loan warehouse facilities |
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 Companys 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 Companys secured financing vehicles are loan warehouse facilities,
asset-backed securitizations, and the governments Participation Program (as described below).
On July 31, 2008, the Company did not renew its liquidity provisions on its FFELP loan warehouse
facility. Accordingly, the facility became a term facility and no new loan originations could be
funded with this facility. In August 2008, the Company accessed alternative sources of funding to
originate new FFELP student loans, including the Departments Loan Participation Program, and an
existing facility with Union Bank which are further discussed below.
Loan warehouse facilities
Student loan warehousing has historically allowed the Company to buy and manage student loans prior
to transferring them into more permanent financing arrangements. The Company has historically
relied upon three conduit warehouse loan financing vehicles to support its funding needs on a short
term basis: a multi-year committed facility for FFELP loans, a $250.0 million private loan
warehouse for non-federally insured student loans, and a single-seller extendible commercial paper
conduit for FFELP loans.
FFELP Warehouse Facility
The Companys multi-year committed facility for FFELP loans terminates in May 2010 and was
supported by 364-day liquidity which was scheduled for renewal on May 9, 2008. The Company obtained
an extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the
liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a
term facility with a final maturity date of May 9, 2010. Pursuant to the terms of the agreement,
since liquidity was not renewed, the Companys cost of financing under this facility increased 10
basis points. The agreement also includes provisions which allow the banks to
charge a rate equal to LIBOR plus 128.5 basis points if they choose to finance their portion of the
facility with sources of funds other than their commercial paper conduit. As of December 31, 2008,
the Company had $1.6 billion of student loans in the facility and $1.4 billion borrowed under the
facility.
69
The terms and conditions of the Companys warehouse facility for FFELP loans provides for formula
based advance rates based on market conditions. While the Company does not believe that the loan
valuation formula is reflective of the actual fair value of its loans, it is subject to compliance
with such mark-to-formula provisions of the warehouse facility agreement. As of December 31, 2008
and February 27, 2009, the Company had a cumulative amount of $280.6 million and $236.3 million,
respectively, posted as equity funding support for this facility.
The Company has utilized its $750.0 million unsecured line of credit to fund equity advances on its
warehouse facility. As of February 27, 2009, the Company had $691.5 million outstanding under this
line of credit. The unsecured line of credit terminates in May 2012.
Continued dislocations in the credit markets may cause additional volatility in the loan valuation
formula. Should a significant change in the valuation of loans result in additional required equity
funding support for the warehouse facility greater than what the Company can provide, the warehouse
facility could be subject to an event of default resulting in a termination of the facility and an
acceleration of the repayment provisions. A default on the FFELP warehouse facility would result in
an event of default on the Companys unsecured line of credit that would result in the outstanding
balance on the line of credit becoming immediately due and payable.
The Company continues to look at various alternatives to remove loans from the warehouse facility
including other financing arrangements, using unrestricted operating cash, and/or selling loans to
third parties. In addition, in January 2009, the Department published summary terms under which it
will finance eligible FFELP Stafford and PLUS loans in a conduit vehicle established to provide
funding for student lenders. Loans eligible for the Conduit Program must 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 will be provided by the
capital markets at a cost based on market rates. The Conduit Program will have a term of five
years. As of December 31, 2008, the Company had approximately $873 million of loans included in its
warehouse facility that would be eligible for the Conduit Program.
Private Loan Warehouse Facility
As of December 31, 2008, the Company had $154.2 million of student loans in its private loan
warehouse facility and $95.0 million borrowed under the facility. On February 25, 2009, the Company
paid all debt outstanding on this facility with operating cash and terminated the facility.
Commercial Paper Warehouse Program
In August 2006, the Company established a $5.0 billion extendable commercial paper warehouse
program for FFELP loans, under which it can issue one or more short term extendable secured
liquidity notes. As of December 31, 2008, no notes were outstanding under this warehouse program.
As a result of the disruption of the credit markets, there is no market for the issuance of notes
under this facility. Management believes it is currently unlikely a market will exist in the
foreseeable future.
Asset-backed securitizations
Of the $26.8 billion of debt outstanding as of December 31, 2008, $23.4 billion was issued under
term asset-backed securitizations. Depending on market conditions, the Company anticipates
continuing to access the asset-backed securities market. As a result of the disruptions in the
credit markets, the Company may not be able to issue asset-backed financings at rates historically
achieved by the Company, at levels equal to or less than other financing agreements, or at levels
otherwise considered beneficial to the Company. Accordingly, the Companys operational and
financial results may be negatively impacted. Securities issued in the securitization transactions
are generally priced based upon a spread to LIBOR or set under an auction or remarketing procedure.
LIBOR based notes
As of December 31, 2008, the Company had $20.5 billion of notes issued under asset-backed
securitizations that primarily reprice at a fixed spread to three month LIBOR and are structured to
substantially match the maturity of the funded assets. These notes fund
FFELP student loans that are predominantly set based on a spread to three month commercial paper.
The three month LIBOR and three month commercial paper indexes have historically been highly
correlated. Based on cash flows developed to reflect managements current estimate of, among other
factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently
expects future undiscounted cash flows from these transactions will be approximately $1.4 billion.
These cash flows consist of net spread and servicing and administrative revenue in excess of
estimated cost. However, due to the unintended consequences of government intervention in the
commercial paper markets and limited issuances of qualifying financial commercial paper, the
relationship between the three-month financial commercial paper and LIBOR rates has been distorted
and volatile. Such distortion has had and may continue to have a significant impact on the earnings
and cash flows of this portfolio.
70
The Company has certain LIBOR-indexed notes that match the maturity of the funded assets, however,
must periodically be remarketed by the Company. Upon remarketing, the interest rates on the notes
are reset. The Company also has the option to repurchase the notes prior to a failed remarketing
and hold the notes as an investment until such time they can be remarketed. In the event the notes
cannot be remarketed and they are not repurchased by the Company, the interest rate increases to
and remains at 3-month LIBOR plus 75 basis points until such time as they can be successfully
remarketed or purchased by the Company. The Company has $200 million of notes due to be remarketed
on May 26, 2009 and an additional $950 million and $115 million to be remarketed in 2016 and 2018,
respectively.
Auction or remarketing based notes
The interest rates on certain of the Companys asset-backed securities are set and periodically
reset via a dutch auction or through a remarketing utilizing remarketing agents. The Company is
currently sponsor on approximately $1.9 billion of Auction Rate Securities and $0.8 billion of
Variable Rate Demand Notes.
For Auction Rate Securities, investors and potential investors submit orders through a
broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various
interest rates. The broker-dealers submit their clients orders to the auction agent, who then
determines the clearing interest rate for the upcoming period. Interest rates on these Auction Rate
Securities are reset periodically, generally every 7 to 35 days, by the auction agent or agents.
During the first quarter of 2008, as part of the credit market crisis, auction rate securities from
various issuers failed to receive sufficient order interest from potential investors to clear
successfully, resulting in failed auction status. Since February 8, 2008, the Companys Auction
Rate Securities have failed in this manner. Under normal conditions, banks have historically
purchased these securities when investor demand is weak. However, since February 2008, banks have
been allowing auctions to fail. Currently, all of the Companys Auction Rate Securities are in a
failed auction status and the Company believes they will remain in a failed status for an extended
period of time and possibly permanently.
As a result of a failed auction, the Auction Rate Securities will generally pay interest to the
holder at a maximum rate as defined by the indenture. While these rates will vary, they will
generally be based on a spread to LIBOR or Treasury Securities. Based on the relative levels of
these indices as of December 31, 2008, the rates expected to be paid by the Company range from
91-day T-Bill plus 125 basis points, on the low end, to LIBOR plus 250 basis points, on the high
end. These maximum rates are subject to increase if the credit ratings on the bonds are downgraded.
The Company cannot predict whether future auctions related to its Auction Rate Securities will be
successful, but management believes it is likely auctions will continue to fail indefinitely. The
Company is currently seeking alternatives for reducing its exposure to the auction rate market, but
may not be able to achieve alternate financing for some or all of its Auction Rate Securities.
For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to
investors. If there are insufficient potential bid orders to purchase all of the notes offered for
sale, the Company could be subject to interest costs substantially above the anticipated and
historical rates paid on these types of securities. The maximum rate for Variable Rate Demand Notes
is based on a spread to certain indexes as defined in the underlying documents, with the highest to
the Company being Prime plus 200 basis points.
Funding New FFELP Student Loan Originations
Historically, the Company funded new loan originations using loan warehouse facilities and
asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy
and manage student loans prior to transferring them into more permanent financing arrangements. In
July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility.
Accordingly, the facility became a term facility and no new loan originations could be funded with
this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year pursuant to the Departments Loan Participation
Program and participation agreement with Union Bank.
Department of Educations Loan Participation and Purchase Commitment Programs
In August 2008, the Department implemented the Loan Purchase Commitment Program and the Loan
Participation Program pursuant to the ECASLA. Under the Departments Purchase Program, the
Department will purchase loans at a price equal to the sum of (i) par
value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and
(iv) a fixed amount of $75 per loan. Under the Participation Program, the Department provides
interim short term liquidity to FFELP lenders by purchasing participation interests in pools of
FFELP loans. FFELP lenders are charged a rate of commercial paper plus 50 basis points on the
principal amount of participation interests outstanding. Loans funded under the Participation
Program must be either refinanced by the lender or sold to the Department pursuant to the Purchase
Program prior to its expiration on September 30, 2009. To be eligible for purchase or participation
under the Departments programs, loans were originally limited to FFELP Stafford or PLUS loans made
for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with
eligible borrower benefits.
71
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7th legislation,
which will include FFELP student loans made for the 2009-2010 academic year.
As of December 31, 2008, the Company had $622.2 million of FFELP loans funded using the
Participation Program. The Company plans to continue to use the Participation Program to fund loans
originated for the 2008-2009 and 2009-2010 academic years. These programs are allowing the Company
to continue originating new federal student loans to all students regardless of the school they
attend. As of February 27, 2009, the Company had $1.4 billion of FFELP loans funded using the
Participation Program.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, 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 has the option to purchase the participation
interests from the grantor trusts at the end of a 364-day period upon termination of the
participation certificate. As of December 31, 2008, $548.4 million 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 Banks 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. Loans participated under this agreement qualify as a sale
pursuant to the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (SFAS No. 140). Accordingly, the participation
interests sold are not included on the Companys consolidated balance sheet.
Unsecured Operating Line of Credit
The Company has a $750.0 million unsecured line of credit that terminates in May 2012. As of
December 31, 2008, there was $691.5 million outstanding on this line and $58.5 million available
for future use. The weighted average interest rate on this line of credit was 1.25% as of December
31, 2008. 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. As discussed previously, the Company may need to fund certain loans or
provide additional equity funding support related to advance rates on its warehouse facilities. As
of February 27, 2009, the Company has contributed $236.3 million in equity funding support to these
facilities. The Company has funded these contributions primarily by advances on its operating line
of credit. As of February 27, 2009, the Company has $691.5 million outstanding under this line of
credit. The lending commitment under the Companys 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, a subsidiary of Lehman Brothers
Holdings Inc., which represents approximately 7% of the lending commitment under the line of
credit. On September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. Since the bankruptcy filing, the Company has
experienced funding delays from Lehman and does not expect Lehman to fund future borrowing
requests. As of February 27, 2009, excluding Lehman Banks lending commitment, the Company had
$51.2 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:
|
(i) |
|
A minimum consolidated net worth |
|
|
(ii) |
|
A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters) |
|
|
(iii) |
|
A limitation on subsidiary indebtedness |
|
|
(iv) |
|
A limitation on the percentage of non-guaranteed loans in the Companys portfolio |
As of December 31, 2008, the Company was in compliance with all of these requirements. Many of
these covenants are duplicated in the Companys other lending facilities, including its FFELP and
private loan warehouses.
As previously discussed, continued dislocations in the credit markets may cause additional
volatility in the loan valuation formula included in the Companys FFELP warehouse facility. Should
a significant change in the valuation of loans result in additional required equity funding support
for the warehouse facility greater than what the Company can provide, the warehouse facility could
be subject to an event of default resulting in a termination of the facility and an acceleration of
the repayment provisions. A default on the FFELP warehouse facility would result in an event of
default on the Companys unsecured line of credit that would result in the outstanding balance on
the line of credit becoming immediately due and payable.
72
The Companys operating line of credit does not have any covenants related to unsecured debt
ratings. However, changes in the Companys ratings (as well as the amounts the Company borrows)
have modest implications on the pricing level at which the Company obtains funding.
Unsecured Debt Offerings
In May 2005, the Company issued $275.0 million in aggregate principal amount of Senior Notes due
June 1, 2010 (the Notes). The Notes are unsecured obligations of the Company. The interest rate
on the Notes is 5.125%, payable semiannually. At the Companys option, the Notes are redeemable in
whole at any time or in part from time to time at the redemption price described in the Companys
prospectus supplement.
In September 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 the optional redemption date, September 28, 2011, is 7.40%, payable semi-annually.
Beginning September 29, 2011 through September 29, 2036, the scheduled maturity date, the
interest rate on the Hybrid Securities will be 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 Companys option, the Hybrid Securities are
redeemable in whole at any time or in part from time to time at the redemption price described in
the prospectus supplement.
Contractual Obligations
The Company is committed under noncancelable operating leases for certain office and warehouse
space and equipment. The Companys contractual obligations as of December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1 to 3 years |
|
|
3 to 5 years |
|
|
5 years |
|
Bonds and notes payable |
|
$ |
26,787,959 |
|
|
|
792,970 |
|
|
|
1,841,576 |
|
|
|
814,633 |
|
|
|
23,338,780 |
|
Operating lease obligations |
|
|
39,372 |
|
|
|
9,425 |
|
|
|
15,689 |
|
|
|
11,547 |
|
|
|
2,711 |
|
Other |
|
|
47,055 |
|
|
|
20,000 |
|
|
|
27,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,874,386 |
|
|
|
822,395 |
|
|
|
1,884,320 |
|
|
|
826,180 |
|
|
|
23,341,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company had a reserve of $6.4 million for uncertain income tax
positions per the provisions of FIN 48 (including the federal benefit received from state positions
and accrued interest). This obligation is not included in the above table as the timing and
resolution of the income tax positions cannot be reasonably estimated at this time.
The Company has an obligation to purchase $47.1 million of private loans from an unrelated
financial institution in quarterly installments of $5 million through the third quarter of 2010
with any remaining amount to be purchased at that time.
The Company has commitments with its branding partners and forward flow lenders which obligate the
Company to purchase loans originated under specific criteria, although the branding partners and
forward flow lenders are typically not obligated to provide the Company with a minimum amount of
loans. These commitments generally run for periods ranging from one to five years and are generally
renewable. The Company has significant financing needs that it meets through the capital markets,
including the debt and secondary markets. Since August 2007, these markets have experienced
unprecedented disruptions, which are having an adverse impact on the Companys earnings and
financial condition. The Company cannot determine nor control the length of time or extent to
which the capital markets will remain disrupted. Accordingly, the Company has the ability to
exercise contractual rights to discontinue, suspend, or defer the acquisition of student loans in
connection with its branding and forward flow relationships. Commitments to purchase loans under
these arrangements are not included in the table above.
As a result of the Companys previous acquisitions, the Company has certain contractual obligations
or commitments as follows:
|
|
|
LoanSTAR Funding Group, Inc. (LoanSTAR) As part of the agreement for the acquisition
of the capital stock of LoanSTAR from the Greater Texas Foundation (Texas Foundation),
the Company agreed to sell student loans in an aggregate amount sufficient to permit the
Texas Foundation to maintain a portfolio of loans equal to no less than $200 million
through October 2010. The sales price for such loans is the fair value mutually agreed upon
between the Company and the Texas Foundation. To satisfy this obligation, the Company is
obligated to sell loans to the Texas Foundation on a quarterly basis; however, the
Foundation recently has chosen not to purchase such loans. |
73
|
|
|
infiNET Integrated Solutions, Inc. (infiNET) Stock price guarantee of $104.8375 per
share on 95,380 shares of Class A Common Stock (less the greater of $41.9335 or the gross
sales price such seller obtains from a sale of the shares occurring prior to February 28,
2011 as defined in the agreement) issued as part of the original purchase price. The
obligation to pay this guaranteed stock price is due February 28, 2011 and is not included
in the table above. Based upon the closing sale price of the Companys Class A Common Stock
as of December 31, 2008 of $14.33 per share, the Companys obligation under this stock
price guarantee would have been $6.0 million (($104.8375 $41.9335) x 95,380 shares). Any
cash paid by the Company in consideration of satisfying the guaranteed value of stock
issued for this acquisition would be recorded by the Company as a reduction to additional
paid-in capital. |
Sources of Liquidity
Sources of Liquidity Available for New FFELP Stafford and PLUS Loans
On July 31, 2008, the Company did not renew the liquidity provisions of its FFELP warehouse
facility. Accordingly, on July 31, 2008, the facility became a term facility with a final maturity
date of May 9, 2010. No new student loan originations can be funded under this program.
The Company has unlimited sources of primary liquidity available for new FFELP Stafford and PLUS
loan originations for the 2008-2009 and 2009-2010 academic years under the Departments
Participation and Purchase Programs. In addition, the Company maintains an agreement with Union
Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the
Company participation interests in student loans. See Union Bank Participation Agreement
discussed earlier in this section.
Sources of Liquidity Available for General Corporate Purposes
The following table details the Companys primary sources of liquidity and the available capacity
at February 27, 2009 for general corporate purposes:
|
|
|
|
|
Sources of primary liquidity: (a) |
|
|
|
|
Cash and cash equivalents (b) |
|
$ |
215,000 |
|
Unencumbered private student loan assets |
|
|
197,000 |
|
Unused unsecured line of credit (c) |
|
|
51,000 |
|
|
|
|
|
|
|
|
|
|
Total sources of primary liquidity |
|
$ |
463,000 |
|
|
|
|
|
|
|
|
(a) |
|
The sources of primary liquidity table above does not include the
following: |
|
|
|
Asset-backed security investments As part of the Companys
issuance of asset-backed securitizations in March 2008 and May 2008, due to
credit market conditions when these notes were issued, the Company purchased
the Class B subordinated notes of $36 million (par value) and $41 million (par
value), respectively. These notes are not included on the Companys
consolidated balance sheet. If the credit market conditions improve, the
Company anticipates selling these notes to third parties. 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. Upon sale, these notes would be shown as
bonds and notes payable on the Companys consolidated balance sheet. Unless
there is a significant market improvement, the Company believes the market
value of such notes will be less than par value. The difference between the
par value and market value would be recognized by the Company as interest
expense over the life of the bonds. |
|
|
|
(b) |
|
The Company also has restricted cash and investments; however, the Company
is limited in the amounts of funds that can be transferred from its subsidiaries
through intercompany loans, advances, or cash dividends. These limitations result
from the restrictions contained in trust indentures under debt financing arrangements
to which the Companys education lending subsidiaries are parties. The Company does
not believe these limitations will significantly affect its operating cash needs. The
amounts of cash and investments restricted in the respective reserve accounts of
the education lending subsidiaries are shown on the balance sheets as restricted cash
and investments. |
|
(c) |
|
The lending commitment under the Companys 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, a subsidiary of Lehman Brothers Holdings Inc., which represents approximately
7% of the lending commitment under the line of credit. On September 15, 2008, Lehman
Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code. Since the bankruptcy filing, the Company has
experienced funding delays from Lehman and does not expect Lehman to fund future
borrowing requests. The amount included in the table above excludes Lehmans
commitment. |
74
Dividends
In the first quarter of 2007, the Company began paying dividends of $0.07 per share on the
Companys Class A and Class B Common Stock which were paid quarterly through the first quarter of
2008. On May 21, 2008, the Company announced that it was temporarily suspending its quarterly
dividend program. The Company will continue to evaluate its dividend policy, which is subject to
future earnings, capital requirements, financial condition, and other factors.
CRITICAL ACCOUNTING POLICIES
This Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses the Companys consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of income and expenses during the
reporting periods. The Company bases its estimates and judgments on historical experience and on
various other factors that the Company believes are reasonable under the circumstances. Actual
results may differ from these estimates under varying assumptions or conditions. Note 3 of the
consolidated financial statements, which are included in this Report, includes a summary of the
significant accounting policies and methods used in the preparation of the consolidated financial
statements.
On an on-going basis, management evaluates its estimates and judgments, particularly as they relate
to accounting policies that management believes are most critical that is, they are most
important to the portrayal of the Companys financial condition and results of operations and they
require managements most difficult, subjective, or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. Management has
identified the following critical accounting policies that are discussed in more detail below:
allowance for loan losses, revenue recognition, purchase price accounting related to business and
certain asset acquisitions, and income taxes.
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable losses on student loans.
This evaluation process is subject to numerous estimates and judgments. 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.
The allowance for the federally insured loan portfolio is based on periodic evaluations of the
Companys loan portfolios considering past experience, trends in student loan claims rejected for
payment by guarantors, changes to federal student loan programs, current economic conditions, and
other relevant factors. Should any of these factors change, the estimates made by management would
also change, which in turn would impact the level of the Companys future provision for loan
losses.
In determining the adequacy of the allowance for loan losses on the non-federally insured loans,
the Company considers several factors including: loans in repayment versus those in a nonpaying
status, months in repayment, delinquency status, type of program, and trends in defaults in the
portfolio based on Company and industry data. Should any of these factors change, the estimates
made by management would also change, which in turn would impact the level of the Companys future
provision for loan losses. The Company places a non-federally insured loan on nonaccrual status and
charges off the loan when the collection of principal and interest is 120 days past due.
The allowance for federally insured and non-federally insured loans is maintained at a level
management believes is adequate to provide for estimated probable credit losses inherent in the
loan portfolio. This evaluation is inherently subjective because it requires estimates that may be
susceptible to significant changes.
Revenue Recognition
Student Loan Income The Company recognizes student loan income as earned, net of amortization of
loan premiums and deferred origination costs. Loan income is recognized based upon the expected
yield of the loan after giving effect to borrower utilization of incentives such as principal
reductions for timely payments (borrower benefits) and other yield adjustments. The estimate of
the borrower benefits discount is dependent on the estimate of the number of borrowers who will
eventually qualify for these benefits. For competitive and liquidity purposes, the Company
frequently changes the borrower benefit programs in both amount and qualification factors. These
programmatic changes must be reflected in the estimate of the borrower benefit discount. Loan
premiums, deferred origination costs, and borrower benefits are included in the carrying value of
the student loan on the consolidated balance sheet and are amortized over the estimated life of the
loan in accordance with SFAS No. 91, Accounting for Non-Refundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases. The most sensitive estimate for
loan premiums, deferred origination costs, and borrower benefits is the estimate of the constant
prepayment rate (CPR). CPR is a variable in the life of loan estimate that measures the rate at
which loans in a portfolio pay before their stated maturity. The CPR is directly correlated to the
average life of the portfolio. CPR equals the percentage of loans that prepay annually as a
percentage of the beginning of period
balance. A number of factors can affect the CPR estimate such as the rate of consolidation activity
and default rates. Should any of these factors change, the estimates made by management would also
change, which in turn would impact the amount of loan premium and deferred origination cost
amortization recognized by the Company in a particular period.
75
Other Fee-Based Income Other fee-based income is primarily attributable to fees for providing
services and the sale of lists and print products. Fees associated with services are recognized in
the period services are rendered and earned under service arrangements with clients where service
fees are fixed or determinable and collectability is reasonably assured. The Companys service fees
are determined based on written price quotations or service agreements having stipulated terms and
conditions that do not require management to make any significant judgments or assumptions
regarding any potential uncertainties. Revenue from the sale of lists and print products is
generally earned and recognized, net of estimated returns, upon shipment or delivery.
The Company assesses collectability of revenues and its allowance for doubtful accounts based on a
number of factors, including past transaction history with the customer and the credit-worthiness
of the customer. An allowance for doubtful accounts is established to record accounts receivable at
estimated net realizable value. If the Company determines that collection of revenues is not
reasonably assured at or prior to delivery of the Companys services, revenue is recognized upon
the receipt of cash.
Goodwill
and Intangible Assets Impairment Assessments
The Company reviews goodwill for impairment annually and whenever triggering events or changes in
circumstances indicate its carrying value may not be recoverable in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). The provisions of SFAS No. 142 require that
a two-step impairment test be performed on goodwill. In the first step, the Company compares the
fair value of each reporting unit to its carrying value. If the fair value of the reporting unit
exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not
impaired and the Company is not required to perform further testing. If the carrying value of the
net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the
Company must perform the second step of the impairment test in order to determine the implied fair
value of the reporting units goodwill. If the carrying value of a reporting units goodwill
exceeds its implied fair value, then the Company would record an impairment loss equal to the
difference.
Determining the fair value of a reporting unit involves the use of significant estimates and
assumptions. These estimates and assumptions include revenue growth rates and operating margins
used to calculate projected future cash flows, risk-adjusted discount rates, future economic and
market conditions, and determination of appropriate market comparables. Actual future results may
differ from those estimates.
The Company makes judgments about the recoverability of purchased intangible assets annually and
whenever triggering events or changes in circumstances indicate that an other than temporary
impairment may exist. Each quarter the Company evaluates the estimated remaining useful lives of
purchased intangible assets and whether events or changes in circumstances warrant a revision to
the remaining periods of amortization. In accordance with FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, recoverability of these assets is measured by
comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is
expected to generate. If the asset is considered to be impaired, the amount of any impairment is
measured as the difference between the carrying value and the fair value of the impaired asset.
Assumptions and estimates about future values and remaining useful lives of the Companys
intangible and other long-lived assets are complex and subjective. They can be affected by a
variety of factors, including external factors such as industry and economic trends, and internal
factors such as changes in the Companys business strategy and internal forecasts. Although the
Company believes the historical assumptions and estimates used are reasonable and appropriate,
different assumptions and estimates could materially impact the reported financial results.
Income Taxes
The Company is subject to the income tax laws of the U.S and its states and municipalities in which
the Company operates. These tax laws are complex and subject to different interpretations by the
taxpayer and the relevant government taxing authorities. In establishing a provision for income tax
expense, the Company must make judgments and interpretations about the application of these
inherently complex tax laws. The Company must also make estimates about when in the future certain
items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of
the tax laws may be subject to review/adjudication by the court systems of the various tax
jurisdictions or may be settled with the taxing authority upon examination or audit. The Company
reviews these balances quarterly and as new information becomes available, the balances are
adjusted, as appropriate.
76
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No. 141R), which
changes the accounting for business acquisitions. SFAS No. 141R requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed in a business combination. Certain provisions of this
standard will, among other things, impact the determination of acquisition-date fair value of
consideration paid in a business combination (including contingent consideration); exclude
transaction costs from acquisition accounting; and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, in-process research and development,
indemnification assets, and tax benefits. For the Company, SFAS No. 141R is effective for business
combinations and adjustments to an acquired entitys deferred tax asset and liability balances
occurring after December 31, 2008. The Company is currently evaluating the future impacts and
disclosures related to SFAS No. 141R.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This
Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective as of the beginning of the first fiscal year that begins
after November 15, 2007 (January 1, 2008 for the Company) and is to be applied prospectively. The
Company adopted SFAS No. 157 on January 1, 2008. The Company elected to delay the application of
SFAS No. 157 to nonfinancial assets and nonfinancial liabilities, as allowed by FASB Staff Position
SFAS No. 157-2. The Company is currently evaluating the impacts and disclosures related to SFAS No.
157-2, but would not expect SFAS No. 157-2 to have a material impact on the Companys consolidated
results of operations or financial condition. In light of the recent economic turmoil occurring in
the United States, the FASB released FSP SFAS No. 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active (SFAS No. 157-3), on October 10, 2008. SFAS
No. 157-3 clarified, among other things, that quotes and other market inputs need not be solely
used to determine fair value if they do not relate to an active market. SFAS No. 157-3 points out
that when relevant observable market information is not available, an approach that incorporates
managements judgments about the assumptions that market participants would use in pricing the
asset in a current sale transaction would be acceptable (such as a discounted cash flow analysis).
Regardless of the valuation technique applied, entities must include appropriate risk adjustments
that market participants would make, including adjustments for nonperformance risk (credit risk)
and liquidity risk.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159), which
permits an entity to choose, at specified election dates, to measure eligible financial instruments
and certain other items at fair value that are not currently required to be measured at fair value.
An entity shall report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. SFAS No. 159 allows entities to achieve
an offset accounting effect for certain changes in fair value of related assets and liabilities
without having to apply complex hedge accounting provisions, and is expected to expand the use of
fair value measurement consistent with the Boards long term objectives for financial instruments.
SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for similar types of
assets and liabilities. SFAS No. 159 is effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007 (January 1, 2008 for the Company). At the effective date,
an entity may elect the fair value option for eligible items that exist at that date. The entity
shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment
to the opening balance of retained earnings. Upon the effective date of SFAS No. 159, the Company
has elected not to measure any items at fair value that were not currently required to be measured
at fair value. Accordingly, the adoption of SFAS No. 159 had no impact on the Companys financial
statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51 (SFAS No. 160), which establishes new standards governing
the accounting for and reporting of noncontrolling interests (NCIs) in partially owned
consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this
standard indicate, among other things, that NCIs (previously referred to as minority interests) be
treated as a separate component of equity, not as a liability; that increases and decreases in the
parents ownership interest that leave control intact be treated as equity transactions, rather
than as step acquisitions or dilution gains or losses; and that losses of a partially owned
consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit
balance. This standard also requires changes to certain presentation and disclosure requirements.
For the Company, SFAS No. 160 is effective beginning January 1, 2009. The provisions of the
standard are to be applied to all NCIs prospectively, except for the presentation and disclosure
requirements, which are to be applied retrospectively to all periods presented. The Company is
currently evaluating the future impacts and disclosures related to SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, which is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better understand the
effects of derivative instruments and hedging activities on an entitys financial position,
financial performance, and cash flows. The new standard also improves transparency about the
location and amounts of derivative instruments in an entitys financial statements, how derivative
instruments and related hedged items are accounted for under SFAS No. 133, and how derivative
instruments and related hedged items affect its financial position, financial performance, and cash
flows. The standard
is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company is currently evaluating the
future impacts and disclosures related to SFAS No. 161.
77
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). This standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with generally accepted accounting
principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days
following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting
Oversight Boards amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The Company does not expect SFAS No. 162 to have a
material impact on the preparation of its consolidated financial statements.
In December 2007, the FASB ratified the Emerging Issues Task Force consensus on EITF Issue
No. 07-1, Accounting for Collaborative Arrangements (EITF No. 07-1), that discusses how parties
to a collaborative arrangement (which does not establish a legal entity within such arrangement)
should account for various activities. The consensus indicates that costs incurred and revenues
generated from transactions with third parties (i.e. parties outside of the collaborative
arrangement) should be reported by the collaborators on the respective line items in their income
statements pursuant to EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent. Additionally, the consensus provides that income statement characterization of payments
between the participants in a collaborative arrangement should be based upon existing authoritative
pronouncements; analogy to such pronouncements if not within their scope; or a reasonable,
rational, and consistently applied accounting policy election. EITF No. 07-1 is effective for the
Company beginning January 1, 2009 and is to be applied retrospectively to all periods presented for
collaborative arrangements existing as of the date of adoption. The Company is currently evaluating
the impacts and disclosures related to EITF No. 07-1.
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). This guidance is intended to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141R when the underlying arrangement includes
renewal or extension of terms that would require substantial costs or result in a material
modification to the asset upon renewal or extension. Companies estimating the useful life of a
recognized intangible asset must now consider their historical experience in renewing or extending
similar arrangements or, in the absence of historical experience, must consider assumptions that
market participants would use about renewal or extension as adjusted for SFAS 142s entity-specific
factors. FSP 142-3 is effective for the Company beginning January 1, 2009. The Company is currently
evaluating the potential impact of the adoption of FSP 142-3 on its consolidated financial
position, results of operations, and cash flows.
In September 2008, the FASB issued FSP SFAS 133-1 and FIN 45-4, Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation
No. 45, and Clarification of the Effective Date of FASB Statement No. 161 (FSP 133-1 and FIN
45-4), that require additional disclosures for sellers of credit derivative instruments and
certain guarantees. FSP 133-1 and FIN 45-4 amend FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, and FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, by
requiring additional disclosures for certain guarantees and credit derivatives sold including:
maximum potential amount of future payments, the related fair value, and the current status of the
payment/performance risk. The standard is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged. The
Company is currently evaluating the impacts and disclosures related to FSP 133-1 and FIN 45-4.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities (EITF 03-6-1). EITF 03-6-1 defines
participating securities as those that are expected to vest and are entitled to receive
nonforfeitable dividends or dividend equivalents. Unvested share-based payment awards that have a
right to receive dividends on common stock (restricted stock) will be considered participating
securities and included in earnings per share using the two-class method. The two-class method
requires net income to be reduced for dividends declared and paid in the period on such shares.
Remaining net income is then allocated to each class of stock (proportionately based on
unrestricted and restricted shares which pay dividends) for calculation of basic earnings per
share. Diluted earnings per share would then be calculated based on basic shares outstanding plus
any additional potentially dilutive shares, such as options and restricted stock that do not pay
dividends or are not expected to vest. This FSP is effective in the first quarter 2009. The Company
is currently evaluating the impacts and disclosures relating to EITF 03-6-1.
78
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Companys 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 sensitivity of the balance sheet is a key profitability driver.
The following table sets forth the Companys loan assets and debt instruments by rate
characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
As of December 31, 2007 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Fixed-rate loan assets |
|
$ |
2,532,609 |
|
|
|
10.1 |
% |
|
$ |
1,136,544 |
|
|
|
4.3 |
% |
Variable-rate loan assets |
|
|
22,528,440 |
|
|
|
89.9 |
|
|
|
25,192,669 |
|
|
|
95.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,061,049 |
|
|
|
100.0 |
% |
|
$ |
26,329,213 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt instruments |
|
$ |
677,096 |
|
|
|
2.5 |
% |
|
$ |
689,476 |
|
|
|
2.5 |
% |
Variable-rate debt instruments |
|
|
26,110,863 |
|
|
|
97.5 |
|
|
|
27,426,353 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,787,959 |
|
|
|
100.0 |
% |
|
$ |
28,115,829 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 index plus a fixed
spread that is dependent upon when the loan was originated, the loans 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 Companys 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 new legislation enacted in 2006, lenders are
required to rebate fixed rate floor income and variable rate floor income to the Department for all
new FFELP loans first originated on or after April 1, 2006.
For the years ended December 31, 2008, 2007, and 2006, loan interest income includes approximately
$37.5 million, $10.3 million, and $30.2 million of fixed rate floor income, respectively. For the
years ended December 31, 2008 and 2007, loan interest income includes approximately $42.3 million
and $3.0 million of variable rate floor income, respectively. The Company did not earn variable
rate floor income in the year ended December 31, 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.
79
The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a
SAP rate of 2.64%:
The following table shows the Companys student loan assets that are earning fixed rate floor
income as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower/ |
|
|
Estimated |
|
|
Balance of |
|
Fixed |
|
lender |
|
|
variable |
|
|
assets earning fixed-rate |
|
interest |
|
weighted |
|
|
conversion |
|
|
floor income as of |
|
rate range |
|
average yield |
|
|
rate (a) |
|
|
December 31, 2008 (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 4.0% |
|
|
3.64 |
% |
|
|
1.00 |
% |
|
$ |
1,183 |
|
4.0 4.49% |
|
|
4.25 |
% |
|
|
1.61 |
% |
|
|
2,097 |
|
4.5 4.99% |
|
|
4.73 |
% |
|
|
2.09 |
% |
|
|
2,507 |
|
5.0 5.49% |
|
|
5.34 |
% |
|
|
2.70 |
% |
|
|
387,063 |
|
5.5 5.99% |
|
|
5.67 |
% |
|
|
3.03 |
% |
|
|
344,236 |
|
6.0 6.49% |
|
|
6.19 |
% |
|
|
3.55 |
% |
|
|
406,420 |
|
6.5 6.99% |
|
|
6.70 |
% |
|
|
4.06 |
% |
|
|
362,556 |
|
7.0 7.49% |
|
|
7.17 |
% |
|
|
4.53 |
% |
|
|
124,283 |
|
7.5 7.99% |
|
|
7.70 |
% |
|
|
5.06 |
% |
|
|
206,865 |
|
8.0 8.99% |
|
|
8.16 |
% |
|
|
5.52 |
% |
|
|
428,425 |
|
> 9.0% |
|
|
9.04 |
% |
|
|
6.40 |
% |
|
|
266,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,532,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The estimated variable conversion rate is the estimated short term interest rate at which
loans would convert to variable rate. |
|
(b) |
|
As of December 31, 2008, the Company had $201.5 million of fixed rate debt that was used
by the Company to hedge fixed rate student loan assets. The weighted average interest rate
paid by the Company on this debt as of December 31, 2008 was 6.17%. |
As of December 31, 2008, the Company had $3.7 billion of student loan assets that were eligible to
earn variable rate floor income.
The Company is exposed to interest rate risk in the form of basis risk and repricing risk because
the interest rate characteristics of the Companys assets do not match the interest rate
characteristics of the funding. The Company attempts to match the interest rate characteristics of
certain pools of loan assets with debt instruments of substantially similar characteristics. Due to
the variability in duration of the Companys assets and varying market conditions, the Company does
not attempt to perfectly match the interest rate characteristics of the entire loan portfolio with
the underlying debt instruments. 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 Companys outlook as to current and future market conditions. Based on those factors, the
Company uses derivative instruments as part of its overall risk management strategy. Derivative
instruments used as part of the Companys interest rate risk management strategy currently include
interest rate swaps, basis swaps, and cross-currency swaps.
80
The following table presents the Companys FFELP student loan assets and related funding arranged
by underlying indices as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
|
|
|
|
|
|
|
|
|
outstanding |
|
|
|
|
|
|
|
|
|
|
|
that funded |
|
|
|
Frequency of |
|
|
|
|
|
|
student loan |
|
Index (e) |
|
Variable Resets |
|
|
Assets |
|
|
assets (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 month H15 financial commercial paper (b) |
|
Daily |
|
$ |
23,627,814 |
|
|
|
622,170 |
|
3 month Treasury bill |
|
Varies |
|
|
1,160,127 |
|
|
|
|
|
3 month LIBOR (c) |
|
Quarterly |
|
|
|
|
|
|
20,509,073 |
|
Auction-rate or remarketing |
|
Varies |
|
|
|
|
|
|
2,713,285 |
|
Asset-backed commercial paper |
|
Varies |
|
|
|
|
|
|
1,445,327 |
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
202,096 |
|
Other (d) |
|
|
|
|
|
|
704,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,491,951 |
|
|
|
25,491,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company has certain basis swaps outstanding in which the Company (i) receives
three-month LIBOR set discretely in advance and pays a daily weighted average three-month
LIBOR less a spread as defined in the individual agreements (Average/Discrete Basis
Swaps); and (ii) receives three-month LIBOR and pays one-month LIBOR (3/1 Basis Swaps).
The Company entered into these derivative instruments to better match the interest rate
characteristics on its student loan assets and the debt funding such assets. The following
table summarizes these derivatives as of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
|
Average/Discrete |
|
|
3/1 Basis |
|
Maturity |
|
Basis Swaps |
|
|
Swaps |
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
4,500,000 |
|
|
|
|
|
2011 |
|
|
2,700,000 |
|
|
|
|
|
2012 |
|
|
2,400,000 |
|
|
|
|
|
2018 |
|
|
|
|
|
|
1,300,000 |
|
2023 |
|
|
|
|
|
|
1,250,000 |
|
2028 |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,600,000 |
|
|
|
2,650,000 |
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
The Companys FFELP student loans earn interest based on the daily average H15 financial
commercial paper index calculated on a fiscal quarter. The Companys funding includes FFELP
student loans under the Departments Participation Program. |
|
|
|
Due to the unintended consequences of government intervention in the commercial paper markets
and limited issuances of qualifying financial commercial paper, the relationship between the
three-month financial CP and LIBOR rates has been distorted and volatile. To address this issue, the
Department announced that for purposes of calculating the FFELP loan index from October 27,
2008 to December 31, 2008, the Federal Reserves Commercial Paper Funding Facility rate was
used for those days in which no three-month financial commercial paper rate was available.
This resulted in a CP/LIBOR spread of 21 basis points in the fourth quarter of 2008 compared
to 8 basis points in the third quarter of 2008. The CP/LIBOR spread would have been 62 basis
points in the fourth quarter of 2008 if the Department had not addressed the issue by using
the Federal Reserves Commercial Paper Funding Facility rates discussed above. There are no
assurances that the Department will utilize a similar methodology for the first quarter of
2009 or in the future. |
|
(c) |
|
The Company has Euro-denominated notes that reprice on the EURIBOR index. The Company has
entered into derivative instruments (cross-currency interest rate swaps) that convert the
EURIBOR index to 3 month LIBOR. As a result, these notes are reflected in the 3 month LIBOR
category in the above table. See Foreign Currency Exchange Risk. |
|
(d) |
|
Assets include restricted cash and investments and other assets. |
81
|
|
|
(e) |
|
Historically, the movement of the various interest rate indices received on the Companys
student loan assets and paid on the debt to fund such loans was highly correlated. As shown
below, the short term movement of the indices was dislocated beginning in August 2007. This
dislocation has had a negative impact on the Companys student loan net interest income. |
Financial Statement Impact of Derivative Instruments
The Company accounts for its derivative instruments in accordance with SFAS No. 133. SFAS No. 133
requires that changes in the fair value of derivative instruments be recognized currently in
earnings unless specific hedge accounting criteria as specified by SFAS No. 133 are met. Management
has structured all of the Companys derivative transactions with the intent that each is
economically effective. However, the Companys derivative instruments do not qualify for hedge
accounting under SFAS No. 133; consequently, the change in fair value of these derivative
instruments is included in the Companys operating results. Changes or shifts in the forward yield
curve and fluctuations in currency rates can significantly impact the valuation of the Companys
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. The change in
fair value of the Companys derivatives are included in derivative market value, foreign currency,
and put option adjustments and derivative settlements, net in the Companys consolidated
statements of income and resulted in an expense of $38.6 million for the year ended December 31,
2008 and income of $139.1 million and $43.9 million for the years ended December 31, 2007 and 2006,
respectively.
82
The following summarizes the derivative settlements included in derivative market value, foreign
currency, and put option adjustments and derivative settlements, net on the consolidated
statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps loan portfolio |
|
$ |
(15,037 |
) |
|
|
4,753 |
|
|
|
12,993 |
|
Basis swaps loan portfolio |
|
|
46,751 |
|
|
|
8,535 |
|
|
|
|
|
Interest rate swaps other (a) |
|
|
|
|
|
|
12,050 |
|
|
|
7,044 |
|
Special allowance yield adjustment
derivatives (a) |
|
|
|
|
|
|
|
|
|
|
19,794 |
|
Cross-currency interest rate swaps |
|
|
23,942 |
|
|
|
(6,661 |
) |
|
|
(14,406 |
) |
Other (b) |
|
|
|
|
|
|
|
|
|
|
(1,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative settlements received (paid), net |
|
$ |
55,656 |
|
|
|
18,677 |
|
|
|
23,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the fourth quarter 2006, in consideration of not receiving 9.5% special
allowance payments on a prospective basis, the Company entered into a series of off-setting
interest rate swaps that mirrored the $2.45 billion in pre-existing interest rate swaps
that the Company had utilized to hedge its loan portfolio receiving 9.5% special allowance
payments against increases in interest rates. |
|
|
|
During the second quarter 2007, the Company entered into a series of off-setting interest
rate swaps that mirrored the remaining interest rate swaps utilized to hedge the Companys
student loan portfolio against increases in interest rates. |
|
|
|
The net effect of the offsetting derivatives discussed above was to lock in a series of
future income streams on underlying trades through their respective maturity dates. The net
settlements on these derivatives are included in interest rate swaps other. In August
2007, the Company terminated these derivatives for net proceeds of $50.8 million. |
|
|
|
Settlements on the 9.5% special allowance derivatives prior to entering into the off-setting
derivatives discussed above were classified in the special allowance yield adjustment
derivatives line item through September 30, 2006. |
|
(b) |
|
During 2006, the Company issued junior subordinated hybrid securities and entered into
a derivative instrument to economically lock into a fixed interest rate prior to the actual
pricing of the transaction. Upon pricing of these notes, the Company terminated the
derivative instrument. The consideration paid by the Company to terminate this derivative
was $2.0 million. |
83
Sensitivity Analysis
The following tables summarize the effect on the Companys earnings, based upon a sensitivity
analysis performed by the Company assuming a hypothetical increase and decrease in interest rates
of 100 basis points while funding spreads remain constant. In addition, as it relates to the effect
on earnings, a sensitivity analysis was performed assuming the funding index increases 10 basis
points while holding the asset index constant, if the funding index is different than the asset
index. The effect on earnings was performed on the Companys variable rate assets and liabilities.
The analysis includes the effects of the Companys interest rate and basis swaps in existence
during these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
Interest Rates |
|
|
Asset and funding index |
|
|
|
Change from decrease of 100 |
|
|
Change from increase of 100 |
|
|
mismatches |
|
|
|
basis points |
|
|
basis points |
|
|
Increase of 10 basis points |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
Effect on earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in pre-tax net income before
impact of derivative settlements |
|
$ |
26,744 |
|
|
|
59.8 |
% |
|
$ |
(24,224 |
) |
|
|
(54.1 |
)% |
|
$ |
(26,863 |
) |
|
|
(60.0 |
)% |
Impact of derivative settlements |
|
|
(19,830 |
) |
|
|
(44.3 |
) |
|
|
19,830 |
|
|
|
44.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net income before taxes |
|
$ |
6,914 |
|
|
|
15.5 |
% |
|
$ |
(4,394 |
) |
|
|
(9.8 |
)% |
|
$ |
(26,863 |
) |
|
|
(60.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in basic and diluted
earning per share |
|
$ |
0.08 |
|
|
|
|
|
|
$ |
(0.05 |
) |
|
|
|
|
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
Interest Rates |
|
|
Asset and funding index |
|
|
|
Change from decrease of 100 |
|
|
Change from increase of 100 |
|
|
mismatches |
|
|
|
basis points |
|
|
basis points |
|
|
Increase of 10 basis points |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
Effect on earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in pre-tax net income before
impact of derivative settlements |
|
$ |
2,020 |
|
|
|
3.5 |
% |
|
$ |
6,828 |
|
|
|
11.9 |
% |
|
$ |
(26,599 |
) |
|
|
(46.5) |
% |
Impact of derivative settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net income before taxes |
|
$ |
2,020 |
|
|
|
3.5 |
% |
|
$ |
6,828 |
|
|
|
11.9 |
% |
|
$ |
(26,599 |
) |
|
|
(46.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in basic and diluted
earning per share |
|
$ |
0.03 |
|
|
|
|
|
|
$ |
0.09 |
|
|
|
|
|
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
Interest Rates |
|
|
Asset and funding index |
|
|
|
Change from decrease of 100 |
|
|
Change from increase of 100 |
|
|
mismatches |
|
|
|
basis points |
|
|
basis points |
|
|
Increase of 10 basis points |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
Effect on earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in pre-tax net income before
impact of derivative settlements |
|
$ |
9,695 |
|
|
|
9.1 |
% |
|
$ |
25,841 |
|
|
|
24.1 |
% |
|
$ |
(23,379 |
) |
|
|
(22.8) |
% |
Impact of derivative settlements |
|
|
(12,875 |
) |
|
|
(12.1 |
) |
|
|
12,875 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net income before taxes |
|
$ |
(3,180 |
) |
|
|
(3.0 |
)% |
|
$ |
38,716 |
|
|
|
36.2 |
% |
|
$ |
(23,379 |
) |
|
|
(22.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in basic and diluted
earning per share |
|
$ |
(0.04 |
) |
|
|
|
|
|
$ |
0.46 |
|
|
|
|
|
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-denominated notes with interest rates based on a
spread to the EURIBOR index. As a result of this transaction, 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 Companys 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, foreign currency, and put
option adjustments and derivative settlements, net in the Companys 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 index based on notional amounts
of 420.5 million and
352.7 million and pays a spread to the LIBOR index 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 Company did not qualify these derivative instruments as hedges under
SFAS No. 133; consequently, the change in fair value is included in the Companys operating
results.
84
For the year ended December 31, 2008, the Company recorded income of $52.9 million as a result of
re-measurement of the Euro Notes and a loss of $24.4 million for the change in the fair value of
the related derivative instrument. For the years ended
December 31, 2007 and 2006, the Company recorded losses of $108.7 million and $70.4 million, respectively, as
a result of the re-measurement of the Euro Notes and income of
$125.5 million and $66.2 million, respectively, for the change in the fair value of the related derivative
instrument. These
amounts are included in derivative market value, foreign currency, and put option adjustments and
derivative settlements, net on the Companys consolidated statements of income.
The re-measurement of the Euro-denominated bonds 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements listed under the heading (a) 1.
Consolidated Financial Statements of Item 15 of this Report, which consolidated financial
statements are incorporated into this Report by reference in response to this Item 8.
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under supervision and with the participation of certain members of the Companys management,
including the chief executive and the chief financial officers, the Company completed an evaluation
of the effectiveness of the design and operation of its disclosure controls and procedures (as
defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on
this evaluation, the Companys chief executive and chief financial officers believe that the
disclosure controls and procedures were effective as of the end of the period covered by this
Report with respect to timely communication to them and other members of management responsible for
preparing periodic reports and material information required to be disclosed in this Report as it
relates to the Company and its consolidated subsidiaries.
The effectiveness of the Companys or any system of disclosure controls and procedures is subject
to certain limitations, including the exercise of judgment in designing, implementing, and
evaluating the controls and procedures, the assumptions used in identifying the likelihood of
future events, and the inability to eliminate misconduct completely. As a result, there can be no
assurance that the Companys disclosure controls and procedures will prevent all errors or fraud or
ensure that all material information will be made known to appropriate management in a timely
fashion. By their nature, the Companys or any system of disclosure controls and procedures can
provide only reasonable assurance regarding managements control objectives.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting during the Companys
last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) for the Company. The Companys
internal control system was designed to provide reasonable assurance to the Companys management
and board of directors regarding the preparation and fair presentation of published financial
statements in accordance with U.S. generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management maintains a comprehensive system of controls intended to ensure that transactions are
executed in accordance with managements authorization, assets are safeguarded, and financial
records are reliable. Management also takes steps to ensure that information and communication
flows are effective and to monitor performance, including performance of internal control
procedures.
Management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2008 based on the criteria for effective internal control described in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2008, the Companys internal control over financial reporting is effective.
85
The effectiveness of the Companys internal control over financial reporting as of December 31,
2008 has been audited by KPMG LLP, the Companys independent registered public accounting firm, as
stated in their report included herein, which expressed an unqualified opinion on the effectiveness
of the Companys internal control over financial reporting as of December 31, 2008.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Nelnet, Inc.:
We have audited Nelnet, Inc.s internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Nelnet, Inc.s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Nelnet, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Nelnet, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of income, shareholders equity
and comprehensive income, and cash flows for each of the years in the three-year period ended
December 31, 2008, and our report dated March 2, 2009 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Lincoln, Nebraska
March 2, 2009
ITEM 9B. OTHER INFORMATION
During the fourth quarter of 2008, no information was required to be disclosed in a report on Form
8-K, but not reported.
86
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information as to the directors, executive officers, corporate governance, and Section 16(a)
beneficial ownership reporting compliance of the Company set forth under the captions PROPOSAL
1ELECTION OF DIRECTORSNominees, EXECUTIVE OFFICERS, CORPORATE GOVERNANCE, and SECURITY
OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement to be filed on Schedule 14A with the SEC, no
later than 120 days after the end of the Companys fiscal year, relating to the Companys Annual
Meeting of Shareholders scheduled to be held on May 20, 2009 (the Proxy Statement) is
incorporated into this Report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions CORPORATE GOVERNANCE and EXECUTIVE COMPENSATION in
the Proxy Statement is incorporated into this Report by reference.
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information set forth under the caption SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS,
AND PRINCIPAL SHAREHOLDERSStock Ownership in the Proxy Statement is incorporated into this Report
by reference. There are no arrangements known to the Company, the operation of which may at a
subsequent date result in a change in the control of the Company.
The following table summarizes, as of December 31, 2008, information about compensation plans under
which equity securities are authorized for issuance.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares remaining |
|
|
|
Number of shares to be |
|
|
Weighted-average exercise |
|
|
available for future issuance |
|
|
|
issued upon exercise of |
|
|
price of outstanding |
|
|
under equity compensation |
|
|
|
outstanding options, |
|
|
options, |
|
|
plans (excluding securities |
|
|
|
warrants, and rights |
|
|
warrants, and rights |
|
|
reflected in column (a)) |
|
Plan category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by shareholders |
|
|
0 |
|
|
$ |
0 |
|
|
|
3,337,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
not approved by shareholders |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
0 |
|
|
$ |
0 |
|
|
|
3,337,714 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 1,471,662, 275,135, 730,013, and 860,904 shares of Class A Common
Stock remaining available for future issuance under the Nelnet, Inc. Restricted Stock
Plan, Nelnet, Inc. Directors Stock Compensation Plan, Nelnet, Inc. Employee Share Purchase
Plan, and Nelnet, Inc. Employee Stock Purchase Loan Plan, respectively. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information set forth under the captions CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
CORPORATE GOVERNANCE Board Composition and Director Independence, and CORPORATE GOVERNANCE
Board Committees in the Proxy Statement is incorporated into this Report by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption PROPOSAL 2APPOINTMENT OF INDEPENDENT
AUDITORIndependent Accountant Fees and Services in the Proxy Statement is incorporated into this
Report by reference.
87
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Consolidated Financial Statements
The following consolidated financial statements of Nelnet, Inc. and its subsidiaries and the
Report of Independent Registered Public Accounting Firm thereon are included in Item 8 above:
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Page |
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Report of Independent Registered Public Accounting Firm |
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F-2 |
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Consolidated Balance Sheets as of December 31, 2008 and 2007 |
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F-3 |
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Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006 |
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F-4 |
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Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended
December 31, 2008, 2007, and 2006 |
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F-5 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006 |
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F-6 |
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Notes to Consolidated Financial Statements |
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F-7 |
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2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is
shown in the consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or incorporated by
reference as part of this Report.
4. Appendix
Appendix A Description of the Federal Family Education Loan Program
88
(b) Exhibits
EXHIBIT INDEX
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Exhibit No. |
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Description |
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2.1 |
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Stock and Asset Purchase Agreement dated as of October 3, 2005 among Nelnet, Inc., NNI Acquisition Servicing Limited Partnership, Greater Texas Foundation, and LoanSTAR Systems, Inc., filed as Exhibit 2.1 to Nelnet, Inc.s Current Report on Form 8-K filed on October 3, 2005 and incorporated herein by reference. |
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2.2 |
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Agreement and Plan of Merger dated as of May 31, 2007 among Nelnet, Inc., Nelnet Academic Services, LLC and Packers Service Group, Inc., filed as Exhibit 2.1 to the registrants Current Report on Form 8-K filed on June 6, 2007 and incorporated herein by reference. |
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3.1 |
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Second Amended and Restated Articles of Incorporation of Nelnet, Inc., as amended, filed as Exhibit 3.1 to the registrants Quarterly Report for the period ended September 30, 2006, filed on Form 10-Q and incorporated by reference herein. |
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3.2 |
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Articles of Amendment to Second Amended and Restated Articles of Incorporation of Nelnet, Inc. Incorporated by reference to Exhibit 3.1 to the registrants quarterly report for the period ended June 30, 2007, filed on Form 10-Q. |
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3.3 |
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Fourth Amended and Restated Bylaws of Nelnet, Inc., as amended as of December 31, 2007, filed as Exhibit 3.1 to the registrants Current Report on Form 8-K filed on January 7, 2008 and incorporated herein by reference. |
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4.1 |
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Form of Class A Common Stock Certificate of Nelnet, Inc. Incorporated by reference to Exhibit 4.1 to the registrants Form S-1 Registration Statement. |
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4.2 |
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Certain instruments, including indentures of trust, defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries, none of which instruments authorizes a total amount of indebtedness thereunder in excess of 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis, are
omitted from this Exhibit Index pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. Many of such instruments have been previously filed with the Securities and Exchange Commission, and the registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. |
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4.3 |
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Registration Rights Agreement, dated as of December 16, 2003, by and among Nelnet, Inc. and the shareholders of Nelnet, Inc. signatory thereto. Incorporated by reference to Exhibit 4.11 to the registrants Form S-1 Registration Statement. |
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10.1 |
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Warehouse Note Purchase and Security Agreement among Nelnet Education Loan Funding, as Borrower, Wells Fargo Bank Minnesota, National Association, as Trustee, Wells Fargo Bank Minnesota, National Association, as Eligible Lender Trustee, Quincy Capital Corporation, as Bank of America Conduit Lender, Bank of America, N.A., as Bank of America
Alternate Lender, Bank of America, N.A., as Bank of America Facility Agent, Gemini Securitization Corp., as Deutsche Bank Conduit Lender, Deutsche Bank AG, New York Branch, as Deutsche Bank Alternate Lender, Deutsche Bank AG, New York Branch, as Deutsche Bank Facility Agent, Barton Capital Corporation, as Societe Generale Conduit Lender, Societe
Generale, as Societe Generale Alternate Lender, Societe Generale, as Societe Generale Facility Agent, and Bank of America, N.A., as Administrative Agent, dated as of May 1, 2003. Incorporated by reference to Exhibit 10.16 to the registrants Form S-1 Registration Statement. |
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10.2 |
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Marketing Expense Reimbursement Agreement, dated as of January 1, 1999, by and between Union Bank and Trust Company and National Education Loan Network, Inc. Incorporated by reference to Exhibit 10.27 to the registrants Form S-1 Registration Statement. |
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10.3 |
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First Amendment of Marketing Expense Reimbursement Agreement, dated as of April 1, 2001, by and between Union Bank and Trust Company and NELnet, Inc. (f/k/a National Education Loan Network, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.28 to the registrants Form S-1 Registration
Statement. |
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10.4 |
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Second Amendment of Marketing Expense Reimbursement Agreement, dated as of December 21, 2001, by and between Union Bank and Trust Company and NELnet, Inc. (f/k/a National Education Loan Network, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.29 to the registrants Form S-1 Registration
Statement. |
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10.5 |
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Amended and Restated Participation Agreement, dated as of June 1, 2001, by and between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.30 to the registrants Form S-1 Registration Statement. |
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Exhibit No. |
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Description |
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10.6 |
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First Amendment of Amended and Restated Participation Agreement, dated as of December 19, 2001, by and between Union Bank and Trust Company and NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.31 to the registrants Form S-1 Registration Statement. |
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10.7 |
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Second Amendment of Amended and Restated Participation Agreement, dated as of December 1, 2002, by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.32 to the registrants Form S-1 Registration Statement. |
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10.8 |
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Alternative Loan Participation Agreement, dated as of June 29, 2001, by and between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.33 to the registrants Form S-1 Registration Statement. |
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10.9 |
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Amended and Restated Agreement, dated as of January 1, 1999, by and between Union Bank and Trust Company and National Education Loan Network, Inc. Incorporated by reference to Exhibit 10.34 to the registrants Form S-1 Registration Statement. |
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10.10 |
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Guaranteed Purchase Agreement, dated as of March 19, 2001, by and between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.36 to the registrants Form S-1 Registration Statement. |
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10.11 |
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First Amendment of Guaranteed Purchase Agreement, dated as of February 1, 2002, by and between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.37 to the registrants Form S-1 Registration Statement. |
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10.12 |
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Second Amendment of Guaranteed Purchase Agreement, dated as of December 1, 2002, by and between Nelnet, Inc. (f/k/a/ NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.38 to the registrants Form S-1 Registration Statement. |
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10.13 |
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Agreement For Use of Revolving Purchase Facility, dated as of January 1, 1999, by and between Union Bank and Trust Company and National Education Loan Network, Inc. Incorporated by reference to Exhibit 10.78 to the registrants Form S-1 Registration Statement. |
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10.14 |
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Guaranty Agreement, by and among Charter Account Systems, Inc., ClassCredit, Inc., EFS, Inc., EFS Services, Inc., GuaranTec LLP, Idaho Financial Associates, Inc., InTuition, Inc., National Higher Educational Loan Program, Inc., Nelnet Canada, Inc., Nelnet Corporation (subsequently renamed Nelnet Corporate Services, Inc.), Nelnet Guarantee
Services, Inc., Nelnet Marketing Solutions, Inc., Student Partner Services, Inc., UFS Securities, LLC and Shockley Financial Corp., dated as of September 25, 2003. Incorporated by reference to Exhibit 10.86 to the registrants Form S-1 Registration Statement. |
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10.15 |
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Letter Agreement by and between Nelnet Education Loan Funding, Inc. and Bank of America, N.A., dated as of June 25, 2003, relating to the increase of the Warehouse Note Purchase and Security Agreement dated as of May 1, 2003. Incorporated by reference to Exhibit 10.90 to the registrants Form S-1 Registration Statement. |
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10.16 |
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Letter Agreement by and between Nelnet Education Loan Funding, Inc. and Deutsche Bank AG, New York Branch, dated as of June 25, 2003, relating to the increase of the Warehouse Note Purchase and Security Agreement dated as of May 1, 2003. Incorporated by reference to Exhibit 10.91 to the registrants Form S-1 Registration Statement. |
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10.17 |
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Letter Agreement by and between Nelnet Education Loan Funding, Inc. and Societe Generale, dated as of June 25, 2003, relating to the increase of the Warehouse Note Purchase and Security Agreement dated as of May 1, 2003. Incorporated by reference to Exhibit 10.92 to the registrants Form S-1 Registration Statement. |
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10.18 |
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Amendment to Application and Agreement for Standby Letter of Credit, Loan Purchase Agreements, and Standby Student Loan Purchase Agreements, dated effective October 21, 2003, by and among National Education Loan Network, Inc., Nelnet, Inc., Nelnet Education Loan Funding, Inc., Union Bank and Trust Company, and Bank of America, N.A. Incorporated by
reference to Exhibit 10.94 to the registrants Form S-1 Registration Statement. |
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10.19 |
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Letter Agreement between Nelnet Education Loan Funding, Inc. and Deutsche Bank AG, dated as of February 20, 2004. Incorporated by reference to Exhibit 10.56 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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10.20 |
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Letter Agreement between Nelnet Education Loan Funding, Inc. and Bank of America, N.A., dated as of February 20, 2004. Incorporated by reference to Exhibit 10.57 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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Exhibit No. |
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Description |
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10.21 |
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Letter Agreement between Nelnet Education Loan Funding, Inc. and Societe Generale, dated as of February 20, 2004. Incorporated by reference to Exhibit 10.58 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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10.22 |
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Third Amendment to Amended and Restated Participation Agreement between National Education Loan Network, Inc. and Union Bank and Trust Company, dated as of February 5, 2004. Incorporated by reference to Exhibit 10.61 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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10.23 |
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February 2004 Amendment to Application and Agreement for Standby Letter of Credit, Loan Purchase Agreements and Standby Student Loan Purchase Agreements, dated as of February 20, 2004, among National Education Loan Network, Inc., Nelnet, Inc., Nelnet Education Loan Funding, Inc., Union Bank and Trust Company, and Bank of America, N.A.
Incorporated by reference to Exhibit 10.62 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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10.24 |
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Amendment to Application and Agreement for Standby Letter of Credit, Loan Purchase Agreements, and Standby Student Loan Purchase Agreements, dated effective November 20, 2003, by and among National Education Loan Network, Inc., Nelnet, Inc., Nelnet Education Loan Funding, Inc., Union Bank and Trust Company, and Bank of America, N.A. Incorporated
by reference to Exhibit 10.63 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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10.25 |
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Amendment to Application and Agreement for Standby Letter of Credit, Loan Purchase Agreements, and Standby Student Loan Purchase Agreements, dated effective December 19, 2003, by and among National Education Loan Network, Inc., Nelnet, Inc., Nelnet Education Loan Funding, Inc., Union Bank and Trust Company, and Bank of America, N.A. Incorporated
by reference to Exhibit 10.64 to the registrants annual report for the year ended December 31, 2003, filed on Form 10-K. |
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10.26 |
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April 2004 Amendment to Application and Agreement for Standby Letter of Credit, Loan Purchase Agreements, and Standby Purchase Agreements, dated effective April 15, 2004, among Bank of America, N.A., Nelnet Education Loan Funding, Inc., National Education Loan Network, Inc, Nelnet, Inc., and Union Bank and Trust Company. Incorporated by reference
to Exhibit 10.67 to the registrants quarterly report for the period ended March 31, 2004, filed on Form 10-Q. |
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10.27 |
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Loan Sale and Commitment Agreement among Union Bank and Trust Company and Student Loan Acquisition Authority of Arizona, dated as of April 1, 2002, relating to student loan sale terms. Incorporated by reference to Exhibit 10.68 to the registrants quarterly report for the period ended March 31, 2004, filed on Form 10-Q. |
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10.28 |
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Letter Agreement among National Education Loan Network, Inc., Student Loan Acquisition Authority of Arizona, LLC, and Union Bank and Trust Company, dated as of April 19, 2004, relating to student loan sale terms. Incorporated by reference to Exhibit 10.69 to the registrants quarterly report for the period ended March 31, 2004, filed on Form 10-Q. |
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10.29 |
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Agreement to Extend Termination Date for the Warehouse Note Purchase and Security Agreement, dated as of May 1, 2004, among Nelnet Education Loan Funding, Inc., Bank of America, N.A., Deutsche Bank AG, New York Branch, and Societe Generale. Incorporated by reference to Exhibit 10.71 to the registrants quarterly report for the period ended March
31, 2004, filed on Form 10-Q. |
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10.30 |
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Stock Purchase Agreement, dated as of April 5, 2004, between National Education Loan Network, Inc. and infiNET Integrated Solutions, Inc. Incorporated by reference to Exhibit 10.72 to the registrants quarterly report for the period ended March 31, 2004, filed on Form 10-Q. |
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10.31 |
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Amendment of Agreements dated as of February 4, 2005, by and between National Education Loan Network, Inc. and Union Bank and Trust Company. Incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on February 10, 2005. |
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10.32 |
* |
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Amended and Restated Aircraft Management Agreement, dated as of September 30, 2008, by and between National Education Loan Network, Inc., Duncan Aviation, Inc., and Union Financial Services, Inc. |
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10.33 |
* |
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Amended and Restated Aircraft Joint Ownership Agreement, dated as of September 30, 2008, by and between National Education Loan Network, Inc. and Union Financial Services, Inc. |
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Exhibit No. |
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Description |
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10.34 |
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Amendment of Agreements dated as of February 4, 2005, by and between Union Bank and Trust Company and National Education Loan Network, Inc., filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed on February 10, 2005 and incorporated herein by reference. |
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10.35 |
+ |
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Nelnet, Inc. Employee Share Purchase Plan, as amended. Incorporated by reference to Exhibit 10.1 to the registrants quarterly report for the period ended September 30, 2005, filed on Form 10-Q. |
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10.36 |
+ |
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Summary of Named Executive Officer Compensation for 2006. Incorporated by reference to Exhibit 10.78 to the registrants annual report for the year ended December 31, 2005, filed on Form 10-K. |
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10.37 |
+ |
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Summary of Non-Employee Director Compensation for 2006. Incorporated by reference to Exhibit 10.79 to the registrants annual report for the year ended December 31, 2005, filed on Form 10-K. |
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10.38 |
+ |
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Amended Nelnet, Inc. Directors Stock Compensation Plan. Incorporated by reference to Exhibit 10.80 to the registrants annual report for the year ended December 31, 2005, filed on Form 10-K. |
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10.39 |
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Replacement Capital Covenant of Nelnet, Inc. dated September 27, 2006, filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed on September 28, 2006 and incorporated by reference herein. |
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10.40 |
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Office Building Lease dated June 21, 1996 between Miller & Paine and Union Bank and Trust Company, filed as Exhibit 10.3 to the registrants Current Report on Form 8-K filed on October 16, 2006 and incorporated by reference herein. |
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10.41 |
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Amendment to Office Building Lease dated June 11, 1997 between Miller & Paine and Union Bank and Trust Company, filed as Exhibit 10.4 to the registrants Current Report on Form 8-K filed on October 16, 2006 and incorporated by reference herein. |
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10.42 |
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Lease Amendment Number Two dated February 8, 2001 between Miller & Paine and Union Bank and Trust Company, filed as Exhibit 10.5 to the registrants Current Report on Form 8-K filed on October 16, 2006 and incorporated by reference herein. |
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10.43 |
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Lease Amendment Number Three dated May 23, 2005 between Miller & Paine, LLC and Union Bank and Trust Company, filed as Exhibit 10.6 to the registrants Current Report on Form 8-K filed on October 16, 2006 and incorporated by reference herein. |
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10.44 |
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Lease Agreement dated May 20, 2005 between Miller & Paine, LLC and Union Bank and Trust Company, filed as Exhibit 10.7 to the registrants Current Report on Form 8-K filed on October 16, 2006 and incorporated by reference herein. |
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10.45 |
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Office Sublease dated April 30, 2001 between Union Bank and Trust Company and Nelnet, Inc., filed as Exhibit 10.8 to the registrants Current Report on Form 8-K filed on October 16, 2006 and incorporated by reference herein. |
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10.46 |
+ |
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Executive Officers Bonus Plan as amended, filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed on November 20, 2006 and incorporated herein by reference. |
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10.47 |
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Commercial Paper Dealer Agreement between Nelnet, Inc. and Banc of America Securities LLC. dated as of December 29, 2006, filed as Exhibit 10.2 to the registrants Current Report on Form 8-K filed on January 30, 2007 and incorporated herein by reference. |
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10.48 |
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Commercial Paper Issuing and Paying Agent Agreement between Nelnet, Inc. and Deutsche Bank Trust Company Americas dated as of December 29, 2006, filed as Exhibit 10.3 to the registrants Current Report on Form 8-K filed on January 30, 2007 and incorporated herein by reference. |
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10.49 |
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Commercial Paper Dealer Agreement between Nelnet, Inc. and SunTrust Capital Markets, Inc. dated as of December 29, 2006, filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed on January 30, 2007 and incorporated herein by reference. |
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10.50 |
+ |
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Nelnet, Inc. Share Retention Policy, as amended. Incorporated by reference to Exhibit 10.72 to the registrants annual report for the year ended December 31, 2006, filed on Form 10-K. |
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10.51 |
+ |
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Nelnet, Inc. Employee Stock Purchase Loan Plan, amended effective February 28, 2007. Incorporated by reference to Exhibit 10.1 to the registrants quarterly report for the period ended March 31, 2007, filed on Form 10-Q. |
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Exhibit No. |
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Description |
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10.52 |
+ |
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Nelnet, Inc. Restricted Stock Plan, As amended through March 22, 2007. Incorporated by reference to Exhibit 10.2 to the registrants quarterly report for the period ended March 31, 2007, filed on Form 10-Q. |
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10.53 |
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Amended and Restated Credit Agreement for $750 million line of credit dated as of May 8, 2007 among Nelnet, Inc., JPMorgan Chase Bank, N.A., individually and as Administrative Agent, Citibank, N.A., individually and as Syndication Agent, and various lender parties thereto, filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed
on May 10, 2007 and incorporated herein by reference. |
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10.54 |
+ |
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Nelnet, Inc. Restricted Stock Plan, as amended through May 24, 2007, filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed on May 31, 2007 and incorporated herein by reference. |
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10.55 |
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Real Estate Purchase Agreement dated as of October 31, 2007 between Union Bank and Trust Company and First National Life of the USA, filed as Exhibit 10.1 to the registrants Current Report on Form 8-K filed on November 2, 2007 and incorporated herein by reference. |
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10.56 |
+ |
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Employment Agreement, dated as of June 10, 2005, between FACTS Management Co. and Timothy A. Tewes. Incorporated by reference to Exhibit 10.1 to the registrants quarterly report for the period ended March 31, 2008, filed on Form 10-Q. |
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10.57 |
+ |
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Non-competition Agreement, dated as of June 10, 2005, between FACTS Management Co. and Timothy A. Tewes. Incorporated by reference to Exhibit 10.2 to the registrants quarterly report for the period ended March 31, 2008, filed on Form 10-Q. |
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10.58 |
+ |
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First Amendment to Employment Agreement, dated November 22, 2006, between FACTS Management Co. and Timothy A. Tewes. Incorporated by reference to Exhibit 10.3 to the registrants quarterly report for the period ended March 31, 2008, filed on Form 10-Q. |
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10.59 |
+ |
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Separation Agreement, dated as of December 13, 2007, by and between David Bottegal and Nelnet, Inc. Incorporated by reference to Exhibit 10.4 to the registrants quarterly report for the period ended March 31, 2008, filed on Form 10-Q. |
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10.60 |
+ |
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Employment Agreement, dated as of October 31, 2007, by and between John R. Kline and National Education Loan Network, Inc. or its designated affiliated company. Incorporated by reference to Exhibit 10.5 to the registrants quarterly report for the period ended March 31, 2008, filed on Form 10-Q. |
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10.61 |
+ |
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Nelnet, Inc. Directors Stock Compensation Plan, as amended through April 18, 2008, filed as Exhibit 99.1 to Nelnet, Inc.s Registration Statement on Form S-8 filed on June 27, 2008 and incorporated herein by reference. |
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10.62 |
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Seventh Amendment of Amended and Restated Participation Agreement, dated as of July 1, 2008, by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.2 to the registrants quarterly report for the period ended June 30,
2008, filed on Form 10-Q. |
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10.63 |
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Fourth Amendment of Amended and Restated Participation Agreement, dated as of August 1, 2005, by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.1 to the registrants quarterly report for the period ended September
30, 2008, filed on Form 10-Q. |
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10.64 |
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Fifth Amendment of Amended and Restated Participation Agreement, dated as of November 1, 2005, by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.2 to the registrants quarterly report for the period ended September
30, 2008, filed on Form 10-Q. |
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10.65 |
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Sixth Amendment of Amended and Restated Participation Agreement, dated as of December 12, 2005, by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.). Incorporated by reference to Exhibit 10.3 to the registrants quarterly report for the period ended
September 30, 2008, filed on Form 10-Q. |
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10.66 |
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Master Participation Agreement, dated as of August 14, 2008, by and between the United States Department of Education and Nelnet, Inc. Incorporated by reference to Exhibit 10.4 to the registrants quarterly report for the period ended September 30, 2008, filed on Form 10-Q. |
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10.67 |
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Master Loan Sale Agreement, dated as of August 14, 2008, by and between the United States Department of Education and Nelnet, Inc. Incorporated by reference to Exhibit 10.5 to the registrants quarterly report for the period ended September 30, 2008, filed on Form 10-Q. |
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Exhibit No. |
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Description |
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10.68 |
+ |
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Separation Agreement, dated as of July 21, 2008, by and between Matthew D. Hall and Nelnet, Inc. Incorporated by reference to Exhibit 10.6 to the registrants quarterly report for the period ended September 30, 2008, filed on Form 10-Q. |
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10.69 |
* |
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Eighth Amendment of Amended and Restated Participation Agreement, dated as of December 24, 2008, by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.). |
|
|
|
|
|
|
10.70 |
+* |
|
Separation Agreement, dated as of August 4, 2008, by and between Raymond J. Ciarvella and Nelnet, Inc. |
|
|
|
|
|
|
10.71 |
* |
|
Loan Purchase Agreement, dated as of November 25, 2008, by and between Nelnet Education Loan Funding, Inc., f/k/a NEBHELP, INC., a Nebraska corporation, acting, where applicable, by and through Wells Fargo Bank, National Association, not individually but as Eligible Lender Trustee for the Seller under the Warehouse Agreement or Eligible Lender
Trust Agreement, and Union Bank and Trust Company, a Nebraska state bank and trust company, acting in its individual capacity and as trustee. |
|
|
|
|
|
|
10.72 |
* |
|
Loan Servicing Agreement, dated as of November 25, 2008, by and between Nelnet, Inc. and Union Bank and Trust Company. |
|
|
|
|
|
|
10.73 |
* |
|
Assurance Commitment Agreement, dated as of November 25, 2008, by and among Jay L. Dunlap, individually, Angie Muhleisen, individually, and Michael S. Dunlap, individually, Nelnet, Inc., Union Bank and Trust Company, and Farmers & Merchants Investment Inc. |
|
|
|
|
|
|
12.1 |
* |
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
|
|
|
21.1 |
* |
|
Subsidiaries of Nelnet, Inc. |
|
|
|
|
|
|
23.1 |
* |
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
|
|
|
|
|
|
31.1 |
* |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Michael S. Dunlap. |
|
|
|
|
|
|
31.2 |
* |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer Terry J. Heimes. |
|
|
|
|
|
|
32* |
* |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
+ |
|
Indicates a management contract or compensatory plan or arrangement contemplated by Item
15(a)(3) of Form 10-K. |
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: March 2, 2009
|
|
|
|
|
|
NELNET, INC.
|
|
|
By: |
/s/ MICHAEL S. DUNLAP
|
|
|
|
Name: |
Michael S. Dunlap |
|
|
|
Title: |
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ MICHAEL S. DUNLAP
Michael S. Dunlap
|
|
Chairman and
Chief Executive Officer
(Principal Executive Officer)
|
|
March 2, 2009 |
|
|
|
|
|
/s/ TERRY J. HEIMES
Terry J. Heimes
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
March 2, 2009 |
|
|
|
|
|
/s/ STEPHEN F. BUTTERFIELD
Stephen F. Butterfield
|
|
Vice Chairman
|
|
March 2, 2009 |
|
|
|
|
|
/s/ JAMES P. ABEL
James P. Abel
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ KATHLEEN A. FARRELL
Kathleen A. Farrell
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ THOMAS E. HENNING
Thomas E. Henning
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ BRIAN J. OCONNOR
Brian J. OConnor
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ KIMBERLY K. RATH
Kimberly K. Rath
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ MICHAEL D. REARDON
Michael D. Reardon
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ JAMES H. VANHORN
James H. VanHorn
|
|
Director
|
|
March 2, 2009 |
95
NELNET, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
|
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Page |
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F-2 |
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F-3 |
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|
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F-4 |
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F-5 |
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F-6 |
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|
F-7 |
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Nelnet, Inc.:
We have audited the accompanying consolidated balance sheets of Nelnet, Inc. and subsidiaries (the
Company) as of December 31, 2008 and 2007, and the related consolidated statements of income,
shareholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Nelnet, Inc. and subsidiaries as of December 31, 2008
and 2007, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Nelnet, Inc.s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 2, 2009 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
Lincoln, Nebraska
March 2, 2009
F-2
NELNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands, except share data) |
|
Assets: |
|
|
|
|
|
|
|
|
Student loans receivable (net of allowance for loan losses of $50,922 in 2008 and $45,592 in 2007) |
|
$ |
25,413,008 |
|
|
|
26,736,122 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and cash equivalents not held at a related party |
|
|
13,129 |
|
|
|
38,305 |
|
Cash and cash equivalents held at a related party |
|
|
176,718 |
|
|
|
73,441 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
189,847 |
|
|
|
111,746 |
|
Restricted cash and investments |
|
|
997,272 |
|
|
|
927,247 |
|
Restricted cash due to customers |
|
|
160,985 |
|
|
|
81,845 |
|
Accrued interest receivable |
|
|
471,878 |
|
|
|
593,322 |
|
Accounts receivable (net of allowance for doubtful accounts of $1,005 in 2008 and $947 in 2007) |
|
|
42,088 |
|
|
|
49,084 |
|
Goodwill |
|
|
175,178 |
|
|
|
164,695 |
|
Intangible assets, net |
|
|
77,054 |
|
|
|
112,830 |
|
Property and equipment, net |
|
|
38,747 |
|
|
|
55,797 |
|
Other assets |
|
|
113,666 |
|
|
|
107,624 |
|
Fair value of derivative instruments |
|
|
175,174 |
|
|
|
222,471 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
27,854,897 |
|
|
|
29,162,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Bonds and notes payable |
|
$ |
26,787,959 |
|
|
|
28,115,829 |
|
Accrued interest payable |
|
|
81,576 |
|
|
|
129,446 |
|
Other liabilities |
|
|
179,336 |
|
|
|
220,899 |
|
Due to customers |
|
|
160,985 |
|
|
|
81,845 |
|
Fair value of derivative instruments |
|
|
1,815 |
|
|
|
5,885 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
27,211,671 |
|
|
|
28,553,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
37,794,067 shares in 2008 and 37,980,617 shares in 2007 |
|
|
378 |
|
|
|
380 |
|
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding
11,495,377 shares in 2008 and 2007 |
|
|
115 |
|
|
|
115 |
|
Additional paid-in capital |
|
|
103,762 |
|
|
|
96,185 |
|
Retained earnings |
|
|
540,521 |
|
|
|
515,317 |
|
Employee notes receivable |
|
|
(1,550 |
) |
|
|
(3,118 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
643,226 |
|
|
|
608,879 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
27,854,897 |
|
|
|
29,162,783 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands, except share data) |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
1,176,383 |
|
|
|
1,667,057 |
|
|
|
1,455,715 |
|
Investment interest |
|
|
37,998 |
|
|
|
80,219 |
|
|
|
93,918 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,214,381 |
|
|
|
1,747,276 |
|
|
|
1,549,633 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bonds and notes payable |
|
|
1,026,489 |
|
|
|
1,502,662 |
|
|
|
1,241,174 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
187,892 |
|
|
|
244,614 |
|
|
|
308,459 |
|
Less provision for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
15,308 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
162,892 |
|
|
|
216,436 |
|
|
|
293,151 |
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
104,176 |
|
|
|
128,069 |
|
|
|
121,593 |
|
Other fee-based income |
|
|
178,699 |
|
|
|
160,888 |
|
|
|
102,318 |
|
Software services income |
|
|
19,757 |
|
|
|
22,669 |
|
|
|
15,890 |
|
Other income |
|
|
4,760 |
|
|
|
15,612 |
|
|
|
7,232 |
|
Gain (loss) on sale of loans |
|
|
(51,414 |
) |
|
|
3,597 |
|
|
|
16,133 |
|
Derivative market value, foreign currency, and put option adjustments
and derivative settlements, net |
|
|
66,484 |
|
|
|
45,483 |
|
|
|
(7,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
322,462 |
|
|
|
376,318 |
|
|
|
255,523 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
183,393 |
|
|
|
236,631 |
|
|
|
214,676 |
|
Other operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing |
|
|
68,596 |
|
|
|
59,378 |
|
|
|
39,198 |
|
Depreciation and amortization |
|
|
43,669 |
|
|
|
47,451 |
|
|
|
39,436 |
|
Professional and other services |
|
|
35,553 |
|
|
|
40,102 |
|
|
|
25,993 |
|
Occupancy and communications |
|
|
19,215 |
|
|
|
25,395 |
|
|
|
20,827 |
|
Impairment expense |
|
|
18,834 |
|
|
|
49,504 |
|
|
|
21,488 |
|
Postage and distribution |
|
|
12,384 |
|
|
|
17,371 |
|
|
|
21,505 |
|
Trustee and other debt related fees |
|
|
10,408 |
|
|
|
11,450 |
|
|
|
11,802 |
|
Other |
|
|
48,562 |
|
|
|
48,327 |
|
|
|
51,354 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
|
257,221 |
|
|
|
298,978 |
|
|
|
231,603 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
440,614 |
|
|
|
535,609 |
|
|
|
446,279 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
44,740 |
|
|
|
57,145 |
|
|
|
102,395 |
|
Income tax expense |
|
|
17,896 |
|
|
|
21,716 |
|
|
|
36,237 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest |
|
|
26,844 |
|
|
|
35,429 |
|
|
|
66,158 |
|
Minority interest in subsidiary income |
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
26,844 |
|
|
|
35,429 |
|
|
|
65,916 |
|
Income (loss) from discontinued operations, net of tax |
|
|
1,818 |
|
|
|
(2,575 |
) |
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,662 |
|
|
|
32,854 |
|
|
|
68,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.54 |
|
|
|
0.71 |
|
|
|
1.23 |
|
|
Income (loss) from discontinued operations, net
of tax |
|
|
0.04 |
|
|
|
(0.05 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.58 |
|
|
|
0.66 |
|
|
|
1.27 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity and Comprehensive Income
Years ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Employee |
|
|
other |
|
|
Total |
|
|
|
stock |
|
|
Common stock shares |
|
|
Preferred |
|
|
common |
|
|
common |
|
|
paid-in |
|
|
Retained |
|
|
notes |
|
|
comprehensive |
|
|
shareholders |
|
|
|
shares |
|
|
Class A |
|
|
Class B |
|
|
stock |
|
|
stock |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
receivable |
|
|
income |
|
|
equity |
|
|
|
(Dollars in thousands, except share data) |
|
Balance as of December 31, 2005 |
|
|
|
|
|
|
40,040,841 |
|
|
|
13,962,954 |
|
|
$ |
|
|
|
|
400 |
|
|
|
140 |
|
|
|
220,346 |
|
|
|
428,186 |
|
|
|
|
|
|
|
420 |
|
|
|
649,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,155 |
|
|
|
|
|
|
|
|
|
|
|
68,155 |
|
Other comprehensive income related to
foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,057 |
|
Adjustment to initially apply FASB Statement
No. 158, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
(191 |
) |
Issuance of common stock, net of forfeitures |
|
|
|
|
|
|
477,386 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
17,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,521 |
|
Compensation expense for stock based awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,185 |
|
Repurchase of common stock |
|
|
|
|
|
|
(1,940,200 |
) |
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
(62,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,389 |
) |
Conversion of common stock |
|
|
|
|
|
|
457,142 |
|
|
|
(457,142 |
) |
|
|
|
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to employees for purchases of
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,825 |
) |
|
|
|
|
|
|
(2,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
|
|
|
|
39,035,169 |
|
|
|
13,505,812 |
|
|
|
|
|
|
|
390 |
|
|
|
135 |
|
|
|
177,678 |
|
|
|
496,341 |
|
|
|
(2,825 |
) |
|
|
131 |
|
|
|
671,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,854 |
|
|
|
|
|
|
|
|
|
|
|
32,854 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(322 |
) |
|
|
(322 |
) |
Non-pension post retirement
benefit plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,723 |
|
Cash dividend on Class A and Class B
common stock $0.28 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,817 |
) |
|
|
|
|
|
|
|
|
|
|
(13,817 |
) |
Adjustment to adopt provisions of FASB
Interpretation No. 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
(61 |
) |
Reserve for uncertain income tax positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,519 |
|
Issuance of common stock, net of forfeitures |
|
|
|
|
|
|
781,561 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
5,698 |
|
|
|
|
|
|
|
(725 |
) |
|
|
|
|
|
|
4,981 |
|
Compensation expense for stock based awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,810 |
|
Repurchase of common stock |
|
|
|
|
|
|
(3,372,122 |
) |
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
(82,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,051 |
) |
Conversion of common stock |
|
|
|
|
|
|
2,010,435 |
|
|
|
(2,010,435 |
) |
|
|
|
|
|
|
20 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of enterprise under common control |
|
|
|
|
|
|
(474,426 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(12,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,507 |
) |
Payments received on employee stock loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432 |
|
|
|
|
|
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
37,980,617 |
|
|
|
11,495,377 |
|
|
|
|
|
|
|
380 |
|
|
|
115 |
|
|
|
96,185 |
|
|
|
515,317 |
|
|
|
(3,118 |
) |
|
|
|
|
|
|
608,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,662 |
|
|
|
|
|
|
|
|
|
|
|
28,662 |
|
Cash dividend on Class A and Class B
common stock $0.07 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,458 |
) |
|
|
|
|
|
|
|
|
|
|
(3,458 |
) |
Issuance of common stock, net of forfeitures |
|
|
|
|
|
|
201,654 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
3,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,828 |
|
Compensation expense for stock based awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,283 |
|
Repurchase of common stock |
|
|
|
|
|
|
(388,204 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(1,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,536 |
) |
Reduction of
employee notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568 |
|
|
|
|
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
|
|
|
|
37,794,067 |
|
|
|
11,495,377 |
|
|
$ |
|
|
|
|
378 |
|
|
|
115 |
|
|
|
103,762 |
|
|
|
540,521 |
|
|
|
(1,550 |
) |
|
|
|
|
|
|
643,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Net income |
|
$ |
28,662 |
|
|
|
32,854 |
|
|
|
68,155 |
|
Income (loss) from discontinued operations |
|
|
1,818 |
|
|
|
(2,575 |
) |
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
26,844 |
|
|
|
35,429 |
|
|
|
65,916 |
|
Adjustments to reconcile income from continuing operations to net cash provided
by operating activities, net of business acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including loan premiums and deferred origination costs |
|
|
141,605 |
|
|
|
261,385 |
|
|
|
167,185 |
|
Derivative market value adjustment |
|
|
38,576 |
|
|
|
(139,146 |
) |
|
|
(43,908 |
) |
Foreign currency transaction adjustment |
|
|
(52,886 |
) |
|
|
108,712 |
|
|
|
70,374 |
|
Change in value of put options issued in business acquisitions |
|
|
3,483 |
|
|
|
3,628 |
|
|
|
4,640 |
|
Proceeds from termination of derivative instruments |
|
|
20,368 |
|
|
|
50,843 |
|
|
|
|
|
Proceeds from sale of floor contracts |
|
|
|
|
|
|
|
|
|
|
8,580 |
|
Payments to terminate derivative instruments |
|
|
(16,367 |
) |
|
|
(8,100 |
) |
|
|
|
|
Impairment expense |
|
|
18,834 |
|
|
|
49,504 |
|
|
|
21,488 |
|
Loss on sale of business |
|
|
|
|
|
|
8,291 |
|
|
|
|
|
Gain on sale of equity method investment |
|
|
|
|
|
|
(3,942 |
) |
|
|
|
|
Loss (gain) on sale of student loans |
|
|
51,414 |
|
|
|
(3,087 |
) |
|
|
(15,886 |
) |
Non-cash compensation expense |
|
|
7,320 |
|
|
|
6,686 |
|
|
|
2,495 |
|
Deferred income tax benefit |
|
|
(9,468 |
) |
|
|
(24,979 |
) |
|
|
(7,012 |
) |
Provision for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
15,308 |
|
Other non-cash items |
|
|
1,788 |
|
|
|
(2,643 |
) |
|
|
(56 |
) |
Decrease (increase) in accrued interest receivable |
|
|
121,444 |
|
|
|
(89,924 |
) |
|
|
(108,735 |
) |
Decrease (increase) in accounts receivable |
|
|
6,996 |
|
|
|
(6,659 |
) |
|
|
(12,276 |
) |
Decrease (increase) in other assets |
|
|
1,608 |
|
|
|
(5,324 |
) |
|
|
8,779 |
|
(Decrease) increase in accrued interest payable |
|
|
(47,870 |
) |
|
|
9,235 |
|
|
|
25,930 |
|
(Decrease) increase in other liabilities |
|
|
(17,581 |
) |
|
|
(1,310 |
) |
|
|
5,678 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities continuing operations |
|
|
321,103 |
|
|
|
276,777 |
|
|
|
208,500 |
|
Net cash flows from operating activities discontinued operations |
|
|
|
|
|
|
(3,717 |
) |
|
|
6,742 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
321,103 |
|
|
|
273,060 |
|
|
|
215,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities, net of business acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Originations, purchases, and consolidations of student loans, including loan premiums
and deferred origination costs |
|
|
(2,685,876 |
) |
|
|
(5,042,378 |
) |
|
|
(6,276,416 |
) |
Purchases of student loans, including loan premiums, from a related party |
|
|
(212,888 |
) |
|
|
(260,985 |
) |
|
|
(588,564 |
) |
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other |
|
|
2,247,031 |
|
|
|
2,122,033 |
|
|
|
2,446,126 |
|
Proceeds from sale of student loans |
|
|
1,807,813 |
|
|
|
118,649 |
|
|
|
782,124 |
|
Purchases of property and equipment, net |
|
|
(5,141 |
) |
|
|
(20,061 |
) |
|
|
(41,815 |
) |
(Increase) decrease in restricted cash and investments, net |
|
|
(70,025 |
) |
|
|
590,604 |
|
|
|
(128,802 |
) |
Purchases of equity method investments |
|
|
(2,988 |
) |
|
|
|
|
|
|
|
|
Distributions from equity method investments |
|
|
|
|
|
|
747 |
|
|
|
149 |
|
Sale of business, net of cash sold |
|
|
|
|
|
|
14,497 |
|
|
|
|
|
Business acquisitions, net of cash acquired |
|
|
(18,000 |
) |
|
|
(1,773 |
) |
|
|
(100,531 |
) |
Proceeds from sale of equity method investment |
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities continuing operations |
|
|
1,059,926 |
|
|
|
(2,468,667 |
) |
|
|
(3,907,729 |
) |
Net cash flows from investing activities discontinued operations |
|
|
|
|
|
|
(294 |
) |
|
|
(10,130 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
1,059,926 |
|
|
|
(2,468,961 |
) |
|
|
(3,917,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on bonds and notes payable |
|
|
(6,879,826 |
) |
|
|
(5,750,423 |
) |
|
|
(5,040,778 |
) |
Proceeds from issuance of bonds and notes payable |
|
|
5,640,865 |
|
|
|
8,121,833 |
|
|
|
8,721,060 |
|
(Payments) proceeds from issuance of notes payable due to a related party, net |
|
|
(35,772 |
) |
|
|
(50,796 |
) |
|
|
108,089 |
|
Payments of debt issuance costs |
|
|
(14,886 |
) |
|
|
(15,160 |
) |
|
|
(19,907 |
) |
Dividends paid |
|
|
(3,458 |
) |
|
|
(13,817 |
) |
|
|
|
|
Payment on settlement of put option |
|
|
(9,600 |
) |
|
|
(15,875 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
710 |
|
|
|
1,467 |
|
|
|
1,645 |
|
Repurchases of common stock |
|
|
(1,536 |
) |
|
|
(76,648 |
) |
|
|
(62,389 |
) |
Payments received on employee stock notes receivable |
|
|
575 |
|
|
|
432 |
|
|
|
|
|
Loans to employees for purchases of common stock |
|
|
|
|
|
|
|
|
|
|
(2,825 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities continuing operations |
|
|
(1,302,928 |
) |
|
|
2,201,013 |
|
|
|
3,704,895 |
|
Net cash flows from financing activities discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(1,302,928 |
) |
|
|
2,201,013 |
|
|
|
3,704,895 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash |
|
|
|
|
|
|
548 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
78,101 |
|
|
|
5,660 |
|
|
|
2,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
111,746 |
|
|
|
106,086 |
|
|
|
103,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
189,847 |
|
|
|
111,746 |
|
|
|
106,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
1,056,640 |
|
|
|
1,369,287 |
|
|
|
1,160,482 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
24,058 |
|
|
|
36,999 |
|
|
|
51,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable assumed in connection with acquisition of entities
under common control (2007) and purchase of property (2006) |
|
$ |
|
|
|
|
14,110 |
|
|
|
5,134 |
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in consideration for notes receivable |
|
$ |
|
|
|
|
725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash operating, investing, and financing activities regarding the
Companys business acquisitions are contained in note 5.
See accompanying notes to consolidated financial statements.
F-6
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, unless otherwise noted)
1. Description of Business
Nelnet, Inc. and its subsidiaries (Nelnet or the Company) is an education planning and
financing company focused on providing quality products and services to students, families,
schools, and financial institutions nationwide. Built through a focus on long term organic growth
and further enhanced by strategic acquisitions, the Company earns its revenues from fee-based
revenues related to its diversified education finance and service operations and from net interest
income on its portfolio of student loans.
The Company offers a broad range of pre-college, in-college, and post-college products and services
that help students and families plan and pay for their education and plan their careers. The
Companys products and services are designed to simplify the education planning and financing
process and provide value to customers throughout the education life cycle.
In recent years, the Companys acquisitions have enhanced its position as a vertically-integrated
industry leader. Management believes these acquisitions continue to allow the Company to expand
products and services delivered to customers and further diversify revenue and asset generation
streams.
The Company has five operating segments as defined in Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131), as follows: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus
Commerce, Enrollment Services, Software and Technical Services, and Asset Generation and
Management. See note 21 for additional information on the Companys segment reporting.
Fee-Based Operating Segments
Student Loan and Guaranty Servicing
The Company services its student loan portfolio and the portfolios of third parties. The Company
also provides servicing and support outsourcing for guaranty agencies. Servicing activities include
application processing, underwriting, disbursement of funds, customer service, account maintenance,
federal reporting and billing collections, payment processing, default aversion, claim filing, and
recovery/collection services. These activities are performed internally for the Companys portfolio
in addition to generating fee revenue when performed for third-party clients.
Tuition Payment Processing and Campus Commerce
The Companys Tuition Payment Processing and Campus Commerce operating segment provides products
and services to help institutions and education-seeking families manage the payment of education
costs during the pre-college and college stages of the education life cycle. The Company provides
actively managed tuition payment solutions, online payment processing, detailed information
reporting, and data integration services to K-12 and higher educational institutions, families, and
students. In addition, the Company provides financial needs analysis for students applying for aid
in private and parochial K-12 schools.
Enrollment Services
The Companys Enrollment Services segment offers products and services that are focused on helping
(i) students plan and prepare for life after high school (content management) and (ii) colleges
recruit and retain students (lead generation). Content management products and services include
test preparation study guides and online courses, admissions consulting, licensing of scholarship
data, essay and resume editing services, and call center services. Lead generation products and
services include vendor lead management services, pay per click marketing management, email
marketing, admissions lead generation, and list marketing services.
Software and Technical Services
The Companys Software and Technical Services operating segment develops student loan servicing
software, which is used internally by the Company and also licensed to third-party student loan
holders and servicers. This segment also provides information technology products and services,
with core areas of business in educational loan software solutions, business intelligence,
technical consulting services, and Enterprise Content Management (ECM) solutions.
F-7
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Asset Generation and Management Operating Segment
The Asset Generation and Management segment includes the acquisition, management, and ownership of
the Companys student loan assets. This operating segment is the Companys largest product and
service offering and has historically driven the majority of the Companys earnings. The Company
owns a large portfolio of student loan assets through a series of education lending subsidiaries.
The Company obtains loans through direct origination or through acquisition of loans. The education
lending subsidiaries primarily invest in student loans, through an eligible lender trustee, made
under Title IV of the Higher Education Act of 1965, as amended (the Higher Education Act).
Certain subsidiaries also invest in non-federally insured student loans.
Student loans beneficially owned by the education lending subsidiaries include those originated
under the FFEL Program, including the Stafford Loan Program, the PLUS Loan program, the
Supplemental Loans for Students (SLS) program, and loans that consolidate certain borrower
obligations (Consolidation). Title to the student loans is held by eligible lender trustees under
the Higher Education Act for the benefit of the education lending subsidiaries. The financed
eligible loan borrowers are geographically located throughout the United States. The bonds and
notes outstanding are payable primarily from interest and principal payments on the student loans,
as specified in the resolutions authorizing the sale of the bonds and notes.
2. Discontinued Operations
On May 25, 2007, the Company sold EDULINX Canada Corporation (EDULINX), a Canadian student loan
service provider and a subsidiary of the Company, for initial proceeds of $19.0 million. The
Company recognized an initial net loss of $8.3 million related to this transaction. During 2008,
the Company earned $2.0 million in additional consideration as a result of the sale of EDULINX.
This payment represented contingent consideration earned by the Company based on EDULINX meeting
certain performance measures. As a result of the sale of EDULINX, the results of operations for
EDULINX, including the contingent payment earned in 2008, are reported as discontinued operations
in the accompanying consolidated statements of income.
The components of income (loss) from discontinued operations are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income of discontinued operations |
|
$ |
|
|
|
|
9,278 |
|
|
|
4,474 |
|
Income tax on operations |
|
|
|
|
|
|
(3,562 |
) |
|
|
(2,235 |
) |
Gain (loss) on disposal |
|
|
1,966 |
|
|
|
(8,316 |
) |
|
|
|
|
Income tax on disposal |
|
|
(148 |
) |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
$ |
1,818 |
|
|
|
(2,575 |
) |
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
The following operations of EDULINX have been segregated from continuing operations and reported as
discontinued operations through the date of disposition. Interest expense was not allocated to
EDULINX and, therefore, all of the Companys interest expense is included within continuing
operations.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
124 |
|
|
|
232 |
|
Other income |
|
|
31,511 |
|
|
|
68,966 |
|
Operating expenses |
|
|
(22,357 |
) |
|
|
(55,122 |
) |
Impairment expense |
|
|
|
|
|
|
(9,602 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,278 |
|
|
|
4,474 |
|
Income tax expense |
|
|
3,562 |
|
|
|
2,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income of discontinued
operations, net of tax |
|
$ |
5,716 |
|
|
|
2,239 |
|
|
|
|
|
|
|
|
F-8
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
3. Summary of Significant Accounting Policies and Practices
Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation. Certain
amounts previously reported have been reclassified to conform to the current year presentation.
The Companys education lending subsidiaries are engaged in the securitization of education finance
assets. These education lending subsidiaries hold beneficial interests in eligible loans, subject
to creditors with specific interests. The liabilities of the Companys education lending
subsidiaries are not the direct obligations of Nelnet, Inc. or any of its other subsidiaries. Each
education lending subsidiary is structured to be bankruptcy remote, meaning that they should not be
consolidated in the event of bankruptcy of the parent company or any other subsidiary. The
transfers of student loans to the eligible lender trusts do not qualify as sales under the
provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS No. 140), as the trusts continue to be under the effective
control of the Company. Accordingly, all the financial activities and related assets and
liabilities, including debt, of the securitizations are reflected in the Companys consolidated
financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make a number of estimates and assumptions
that affect the reported amounts of assets and liabilities, reported amounts of revenues and
expenses, and other disclosures. Actual results could differ from those estimates.
Student Loans Receivable
Investments in student loans, including unamortized premiums and deferred origination costs, are
recorded at amortized cost, net of the allowance for loan losses. Student loans consist of
federally insured student loans, non-federally insured student loans, and student loan
participations. If the Company has the ability and intent to hold loans for the foreseeable future,
such loans are held for investment and, therefore, carried at amortized cost. Any loans held for
sale are carried at the lower of cost or fair value. As of December 31, 2008, 2007, and 2006, no
loans were held for sale.
Federally insured loans may be made under the FFEL Program by certain lenders as defined by the
Higher Education Act. These loans, including related accrued interest, are guaranteed at their
maximum level permitted under the Higher Education Act by an authorized guaranty agency, which has
a contract of reinsurance with the Department. The terms of the loans, which vary on an individual
basis, generally provide for repayment in monthly installments of principal and interest over a
period of up to 30 years. Interest rates on loans may be fixed or variable, dependent upon type,
terms of loan agreements, and date of origination. Interest rates on loans currently range from
2.9% to 12.0% (the weighted average rate was 5.1% and 5.5% as of December 31, 2008 and 2007,
respectively). For FFELP loans, the education lending subsidiaries have entered into trust
agreements in which unrelated financial institutions serve as the eligible lender trustees. As
eligible lender trustees, the financial institutions act as the eligible lender in acquiring
certain eligible student loans as an accommodation to the subsidiaries, which hold beneficial
interests in the student loan assets as the beneficiaries of such trusts.
Substantially all FFELP loan principal and related accrued interest is guaranteed as defined by the
Higher Education Act. These guarantees are made subject to the performance of certain loan
servicing procedures stipulated by applicable regulations. If these due diligence procedures are
not met, affected student loans may not be covered by the guarantees should the borrower default.
The Company and its education lending subsidiaries retain and enforce recourse provisions against
servicers and lenders under certain circumstances. Such student loans are subject to cure
procedures and reinstatement of the guaranty under certain circumstances.
Student loans receivable also includes non-federally insured loans. The terms of the non-federally
insured loans, which vary on an individual basis, generally provide for repayment in monthly
installments of principal and interest over a period of up to 30 years. The non-federally insured
loans are not covered by guarantees or collateral should the borrower default.
F-9
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable losses on student loans.
This evaluation process is subject to numerous estimates and judgments. 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.
The allowance for the federally insured loan portfolio is based on periodic evaluations of the
Companys loan portfolios considering past experience, trends in student loan claims rejected for
payment by guarantors, changes to federal student loan programs, current economic conditions, and
other relevant factors. The federal government currently guarantees 97% of the principal of and the
interest on federally insured student loans disbursed on and after July 1, 2006 (and 98% for those
loans disbursed prior to July 1, 2006), which limits the Companys loss exposure on the outstanding
balance of the Companys federally insured portfolio. Also, in accordance with the Student Loan
Reform Act of 1993, student loans disbursed prior to October 1, 1993 are fully insured.
Effective June 1, 2004, the Company was designated as an Exceptional Performer by the U.S.
Department of Education (the Department) in recognition of its exceptional level of performance
in servicing FFELP loans. As a result of this designation, the Company received 100% reimbursement
on all eligible FFELP default claims submitted for reimbursement.
Pursuant to the terms of the Higher Education Act, the FFEL Program is periodically amended, and
the Higher Education Act is generally reauthorized by Congress every five to six years in order to
prevent sunset of that Act. Historically, the United States Congress makes changes to the
provisions of the Higher Education Act during the reauthorization process. On February 8, 2006, the
Higher Education Reconciliation Act (HERA) of 2005 was enacted into law. HERA effectively
reauthorized the Title IV provisions of the FFEL Program through 2012. One of the provisions of
HERA was to lower the guaranty rates on FFELP loans, including a decrease in insurance and
reinsurance on portfolios receiving the benefit of Exceptional Performance designation by 1%, from
100% to 99% of principal and accrued interest (effective July 1, 2006), and a decrease in insurance
and reinsurance on portfolios not subject to the Exceptional Performance designation by 1%, from
98% to 97% of principal and accrued interest (effective for all loans first disbursed on and after
July 1, 2006). In February 2006, as a result of the change in these legislative provisions, the
Company recorded an expense of $6.9 million to increase the Companys allowance for loan losses.
On September 27, 2007, the President signed into law the College Cost Reduction and Access Act of
2007 (the College Cost Reduction Act). Among other things, this legislation eliminates all
provisions relating to Exceptional Performer status, and the monetary benefit associated with it,
effective October 1, 2007. In September 2007, the Company recorded an expense of $15.7 million to
increase the Companys allowance for loan losses related to the increase in risk share as a result
of the elimination of the Exceptional Performer program.
In determining the adequacy of the allowance for loan losses on the non-federally insured loans,
the Company considers several factors including: loans in repayment versus those in a nonpaying
status, months in repayment, delinquency status, type of program, and trends in defaults in the
portfolio based on Company and industry data. The Company places a non-federally insured loan on
nonaccrual status and charges off the loan when the collection of principal and interest is 120
days past due.
The evaluation of the allowance for loan losses is inherently subjective, as it requires material
estimates that may be subject to significant changes. The provision for loan losses reflects the
activity for the applicable period and provides an allowance at a level that the Companys
management believes is adequate to cover probable losses inherent in the loan portfolio.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all investments
with maturities when purchased of three months or less to be cash equivalents.
Restricted Cash and Investments
The Companys restricted investments are held by trustees in various accounts subject to use
restrictions imposed by the trust indenture and consist of guaranteed investment contracts, which
are classified as held-to-maturity. Due to the characteristics of the investments, there is no
available or active market for this type of financial instrument. These investments are purchased
at par value, which equals
their cost as of December 31, 2008 and 2007. All restricted cash and investments held by the
trustees are included on the consolidated balance sheets.
F-10
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Restricted Cash Due to Customers
As a servicer of student loans, the Company collects student loan remittances and subsequently
disburses these remittances to the appropriate lending entities. In addition, the Company requests
funding from lenders and subsequently disburses loan funds to borrowers and schools on behalf of
borrowers. The Company also collects tuition payments and subsequently remits these payments to the
appropriate schools. Cash collected for customers and the related liability are included in the
accompanying consolidated balance sheets. Interest income earned, net of service charges, by the
Company on this cash for the years ended December 31, 2008, 2007, and 2006 was $2.7 million, $8.7
million, and $11.5 million, respectively.
Accounts Receivable
Accounts receivable are presented at their net realizable values, which includes allowances for
doubtful accounts. Allowance estimates are based upon individual customer experience, as well as
age of receivables and likelihood of collection.
Equity Method Investment
On September 28, 2007, the Company sold its 50% membership interests in Premiere Credit of North
America, LLC (Premiere) for initial proceeds of $10.0 million. Premiere is a collection services
company that specializes in collection of education-related debt. The Company recognized an initial
gain on the sale of Premiere of $3.9 million which is included in other income in the
accompanying consolidated statements of income. In January 2009, the Company earned $3.5 million in
additional consideration as a result of the sale of Premiere. This payment represented contingent
consideration that was owed to the Company if Premiere was awarded a collections contract as
defined in the purchase agreement. The $3.5 million of contingent consideration will be recognized
by the Company in the first quarter of 2009.
Goodwill and Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, pursuant to which goodwill and intangible assets with
indefinite lives are not amortized but must be tested for impairment annually or more frequently if
an event indicates that the asset(s) might be impaired. Goodwill is tested for impairment using a
fair value approach at the reporting unit level. A reporting unit is the operating segment, or a
business one level below that operating segment if discrete financial information is prepared and
regularly reviewed by segment management. However, components are aggregated as a single reporting
unit if they have similar economic characteristics. The Company recognizes an impairment charge for
any amount by which the carrying amount of a reporting units goodwill exceeds its fair value. The
Company uses quoted market prices and/or discounted cash flows to establish fair values. When
available and as appropriate, the Company uses comparative market multiples to corroborate
discounted cash flow results. Intangible assets with indefinite lives are tested annually for
impairment and written down to fair value as required. Intangible assets with finite lives are
amortized over their estimated lives. Such assets are amortized using a method of amortization that
reflects the pattern in which the economic benefits of the intangible asset is consumed or
otherwise used up. If that pattern cannot be reliably determined, the Company uses a straight-line
amortization method.
The Company uses estimates to determine the fair value of acquired assets to allocate the purchase
price to acquired intangible assets. Such estimates are generally based on estimated future cash
flows or cost savings associated with particular assets and are discounted to a present value using
an appropriate discount rate. The estimates of future cash flows associated with intangible assets
are generally prepared using a cost savings method, a lost income method, or an excess return
method, as appropriate. In utilizing such methods, management must make certain assumptions about
the amount and timing of estimated future cash flows and other economic benefits from the assets,
the remaining economic useful life of the assets, and general economic factors concerning the
selection of an appropriate discount rate. The Company may also use replacement cost or market
comparison approaches to estimating fair value if such methods are determined to be more
appropriate.
F-11
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation. Maintenance and
repairs are charged to expense as incurred, and major improvements, including leasehold
improvements, are capitalized. Gains and losses from the sale of property and equipment are
included in determining net income. The Company uses accelerated and straight-line methods for
recording depreciation and amortization. Accelerated methods are used for certain equipment and
software when this method is believed to provide a better matching of income and expenses.
Leasehold improvements are amortized over the lesser of their useful life or the related lease
period.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, such as property and equipment and purchased intangibles
subject to amortization, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell, and depreciation
ceases.
Software Developed or Obtained for Internal-Use
Direct development costs associated with internal-use software are capitalized, including external
direct costs of services and internal payroll costs for employees devoting time to the software
projects. These costs are included in property and equipment and are amortized over the expected
future period of benefit beginning when the asset is placed into service. During the years ended
December 31, 2008, 2007, and 2006, the Company capitalized $0.5 million, $8.9 million, and $11.7
million, respectively, in costs related to internal-use software development. Amortization of
internal-use software was $4.3 million, $4.1 million, and $1.3 million during the years ended
December 31, 2008, 2007, and 2006, respectively.
Other Assets
Other assets are recorded at cost or amortized cost and consist primarily of prepaid expenses,
database development costs, and debt issuance costs. Debt issuance costs are amortized using the
effective interest method.
Revenue Recognition
Loan Interest Income Loan interest is paid by the Department or the borrower, depending on the
status of the loan at the time of the accrual. In addition, the Department makes quarterly interest
subsidy payments on certain qualified FFELP loans until the student is required under the
provisions of the Higher Education Act to begin repayment. Borrower repayment of FFELP loans
normally begins within six months after completion of the loan holders course of study, leaving
school, or ceasing to carry at least one-half the normal full-time academic load, as determined by
the educational institution. Borrower repayment of PLUS and Consolidation loans normally begins
within 60 days from the date of loan disbursement. Borrower repayment of non-federally insured
loans typically begins six months following a borrowers graduation from a qualified institution
and the interest is either paid by the borrower or capitalized annually or at repayment.
The Department provides a special allowance to lenders participating in the FFEL Program. The
special allowance is accrued based upon the fiscal quarter average rate of 13-week Treasury Bill
auctions (for loans originated prior to January 1, 2000) or the fiscal quarter average rate of
daily H15 financial commercial paper rates (for loans originated on and after January 1, 2000)
relative to the yield of the student loan.
The Company recognizes student loan income as earned, net of amortization of loan premiums and
deferred origination costs. Loan income is recognized based upon the expected yield of the loan
after giving effect to borrower utilization of incentives such as timely payments (borrower
benefits) and other yield adjustments. Loan premiums, deferred origination costs, and borrower
benefits are amortized over the estimated life of the loan in accordance with SFAS No. 91,
Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases, which includes an estimate of prepayment speeds. The Company
periodically evaluates the assumptions used to estimate the life of the loans and prepayment
speeds.
F-12
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The Company also pays the Department an annual 105 basis point rebate fee on Consolidation loans.
These rebate fees are netted against loan interest income.
Loan and Guaranty Servicing Income Loan servicing fees are determined according to individual
agreements with customers and are calculated based on the dollar value or number of loans serviced
for each customer. Guaranty servicing fees are calculated based on the number of loans serviced, volume of loans serviced, or
amounts collected. Revenue is recognized when earned pursuant to applicable agreements, and when
ultimate collection is assured.
Other Fee-Based Income Other fee-based income primarily consists of the following items:
|
|
|
Borrower late fee income Borrower late fee income earned by the education
lending subsidiaries is recognized when payments are collected from the borrower. |
|
|
|
Payment management services Fees for payment management services are recognized
over the period in which services are provided to customers. |
|
|
|
List and print product sales Revenue from the sale of lists and print products
is generally earned and recognized, net of estimated returns, upon shipment or
delivery. |
|
|
|
Subscription-based products and services Revenues from sales of
subscription-based products and services are recognized ratably over the term of the
subscription. Subscription revenue received or receivable in advance of the delivery
of services is included in deferred revenue. |
|
|
|
Multiple deliverable arrangements Revenue from multiple deliverable
arrangements is recognized separately for separate units of accounting based on the
units relative fair value. |
Software Services Software services income is determined from individual agreements with
customers and includes license and maintenance fees associated with student loan software products.
The Company accounts for software revenues in accordance with the AICPAs Statement of Position
97-2, Software Revenue Recognition (SOP 97-2). SOP 97-2 provides guidance on when and in what
amounts income should be recognized for licensing, selling, leasing, or otherwise marketing
computer software. Income for contracts with customers that does not require significant
production, modification, or customization of software is recognized when all the following
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, vendors fee
is fixed and determinable, and collectability is probable. Income paid on maintenance and
enhancement agreements for services to be performed in subsequent periods is deferred and
recognized in income over the life of the agreements. Computer and software consulting services are
recognized over the period in which services are provided to customers.
Derivative Accounting
The Company accounts for its derivatives in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS No.
133). SFAS No. 133 requires that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded at fair value on the balance sheet as either
an asset or liability. The Company determines the fair value for its derivative contracts using
either (i) pricing models that consider current market conditions and the contractual terms of the
derivative contract or (ii) counterparty valuations. These factors include interest rates, time
value, forward interest rate curve, and volatility factors, as well as foreign exchange rates.
Pricing models and their underlying assumptions impact the amount and timing of unrealized gains
and losses recognized, and the use of different pricing models or assumptions could produce
different financial results. Management has structured all of the Companys derivative transactions
with the intent that each is economically effective. However, the Companys derivative instruments
do not qualify for hedge accounting under SFAS No. 133. Accordingly, changes in the fair value of
derivative instruments are reported in current period earnings. Net settlements on derivatives are
included in derivative market value, foreign currency, and put option adjustments and derivative
settlements, net on the consolidated statements of income.
F-13
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Foreign Currency
The Companys foreign subsidiary, EDULINX, used the Canadian dollar as its functional currency. The
assets and liabilities of EDULINX were translated to U.S. dollars at the exchange rate in effect at
the balance sheet date. Revenues and expenses were translated at the average exchange rate during
the period. As discussed in note 2, the Company sold EDULINX in May 2007. As a result of this
transaction, the results of operations for EDULINX are reported as discontinued operations. Prior
to the sale of EDULINX, translation gains or losses were reflected in the consolidated financial
statements as a component of accumulated other comprehensive income.
During 2006, the Company issued Euro-denominated bonds. Transaction gains and losses resulting from
exchange rate changes when re-measuring these bonds to U.S. dollars at the balance sheet date are
included in derivative market value, foreign currency, and put option adjustments and derivative
settlements, net on the consolidated statements of income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Income tax expense includes deferred tax expense, which represents the net change in the deferred
tax asset or liability balance during the year, plus any change made in the valuation allowance,
and current tax expense, which represents the amount of tax currently payable to or receivable from
a tax authority plus amounts for expected tax deficiencies (including both tax and interest).
4. Restructuring Charges
Legislative Impact
On September 6, 2007, the Company announced a strategic initiative to create efficiencies and lower
costs in advance of the enactment of the College Cost Reduction Act, which impacted FFEL Program in
which the Company participates. In anticipation of the federally driven cuts to the student loan
programs, management initiated a variety of strategies to modify the Companys student loan
business model, including lowering the cost of student loan acquisition, creating efficiencies in
the Companys asset generation business, and decreasing operating expenses through a reduction in
workforce and realignment of operating facilities. These strategies resulted in the net reduction
of approximately 400 positions in the Companys overall work force. In addition, the Company
simplified its operating structure to leverage its larger facilities and technology by closing five
small origination offices and downsizing its presence in Indianapolis. Implementation of the plan
began immediately and was completed as of December 31, 2007. As a result of these strategic
decisions, the Company recorded a restructuring charge of $20.3 million in 2007 and income of $0.2
million in 2008 to recognize adjustments from initial estimates.
F-14
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Selected information relating to the restructuring charge and accrual follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
Write-down |
|
|
|
|
|
|
termination |
|
|
Lease |
|
|
of property |
|
|
|
|
|
|
benefits |
|
|
terminations |
|
|
and equipment |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs recognized in 2007 |
|
$ |
6,315 |
(a) |
|
|
3,916 |
(b) |
|
|
10,060 |
(c) |
|
|
20,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of assets to net realizable value |
|
|
|
|
|
|
|
|
|
|
(10,060 |
) |
|
|
(10,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment from initial estimate of charges |
|
|
(134) |
(a) |
|
|
(16) |
(b) |
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(4,988 |
) |
|
|
(218 |
) |
|
|
|
|
|
|
(5,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual as of December 31, 2007 |
|
|
1,193 |
|
|
|
3,682 |
|
|
|
|
|
|
|
4,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment from initial estimate of charges |
|
|
(191) |
(a) |
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(1,002 |
) |
|
|
(791 |
) |
|
|
|
|
|
|
(1,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual as of December 31, 2008 |
|
$ |
|
|
|
|
2,891 |
|
|
|
|
|
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Employee termination benefits are included in salaries and
benefits in the consolidated statements of income. |
|
(b) |
|
Lease termination costs are included in occupancy and
communications in the consolidated statements of income. |
|
(c) |
|
Costs related to the write-down of assets are included in
impairment expense in the consolidated statements of income. |
Selected information relating to the restructuring charge by operating segment and Corporate
Activity overhead follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
Adjustment |
|
|
|
|
|
|
|
|
|
|
Adjustment |
|
|
|
|
|
|
|
|
|
|
costs |
|
|
Write-down of |
|
|
from initial |
|
|
|
|
|
|
Restructuring |
|
|
from initial |
|
|
|
|
|
|
Restructuring |
|
|
|
recognized |
|
|
assets to net |
|
|
estimate of |
|
|
Cash |
|
|
accrual as of |
|
|
estimate of |
|
|
Cash |
|
|
accrual as of |
|
Operating segment |
|
in 2007 |
|
|
realizable value |
|
|
charges |
|
|
payments |
|
|
December 31, 2007 |
|
|
charges |
|
|
payments |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Loan and Guaranty Servicing |
|
$ |
1,840 |
|
|
|
|
|
|
|
(95 |
) |
|
|
(1,276 |
) |
|
|
469 |
|
|
|
(72 |
) |
|
|
(397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition Payment Processing and
Campus Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enrollment Services |
|
|
929 |
|
|
|
|
|
|
|
|
|
|
|
(848 |
) |
|
|
81 |
|
|
|
(15 |
) |
|
|
(34 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and Technical Services |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Generation and Management |
|
|
2,654 |
|
|
|
(248 |
) |
|
|
(25 |
) |
|
|
(2,003 |
) |
|
|
378 |
|
|
|
(40 |
) |
|
|
(330 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Activity and Overhead |
|
|
14,810 |
|
|
|
(9,812 |
) |
|
|
(30 |
) |
|
|
(1,021 |
) |
|
|
3,947 |
|
|
|
(64 |
) |
|
|
(1,032 |
) |
|
|
2,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,291 |
|
|
|
(10,060 |
) |
|
|
(150 |
) |
|
|
(5,206 |
) |
|
|
4,875 |
|
|
|
(191 |
) |
|
|
(1,793 |
) |
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Markets Impact
On January 23, 2008, the Company announced a plan to further reduce operating expenses related to
its student loan origination and related businesses as a result of ongoing disruptions in the
credit markets. Management developed a restructuring plan related to its asset generation and
supporting businesses which reduced marketing, sales, service, and related support costs through a
reduction in workforce of approximately 300 positions and realignment of certain operating
facilities. Implementation of the plan began immediately and was completed as of June 30, 2008. As
a result of these strategic decisions, the Company recorded a restructuring charge of $26.1 million
in 2008.
F-15
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Selected information relating to the restructuring charge and accrual follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
termination |
|
|
Lease |
|
|
Write-down |
|
|
|
|
|
|
benefits |
|
|
terminations |
|
|
of assets |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs recognized in 2008 |
|
$ |
5,865 |
(a) |
|
|
1,398 |
(b) |
|
|
18,834 |
(c) |
|
|
26,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of assets to net realizable value |
|
|
|
|
|
|
|
|
|
|
(18,834 |
) |
|
|
(18,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(5,865 |
) |
|
|
(809 |
) |
|
|
|
|
|
|
(6,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual as of December 31, 2008 |
|
$ |
|
|
|
|
589 |
|
|
|
|
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Employee termination benefits are included in salaries and
benefits in the consolidated statements of income. |
|
(b) |
|
Lease termination costs are included in occupancy and
communications in the consolidated statements of income. |
|
(c) |
|
Costs related to the write-down of assets are included in
impairment expense in the consolidated statements of income. |
Selected information relating to the restructuring charge by operating segment and Corporate
Activity and Overhead follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
costs |
|
|
Write-down of |
|
|
|
|
|
|
Restructuring |
|
|
|
recognized |
|
|
assets to net |
|
|
Cash |
|
|
accrual as of |
|
Operating segment |
|
in 2008 |
|
|
realizable value |
|
|
payments |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Loan and Guaranty Servicing |
|
$ |
5,906 |
|
|
|
(5,074 |
) |
|
|
(786 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition Payment Processing and
Campus Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enrollment Services |
|
|
297 |
|
|
|
|
|
|
|
(310 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and Technical Services |
|
|
510 |
|
|
|
|
|
|
|
(511 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Generation and Management |
|
|
11,235 |
|
|
|
(9,351 |
) |
|
|
(1,878 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Activity and Overhead |
|
|
8,149 |
|
|
|
(4,409 |
) |
|
|
(3,189 |
) |
|
|
551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,097 |
|
|
|
(18,834 |
) |
|
|
(6,674 |
) |
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Business and Certain Asset Acquisitions
The Company has positioned itself for growth by building a strong foundation through business and
certain asset acquisitions. Although the Companys assets, loan portfolios, net interest income,
and fee-based revenues increase through such transactions, a key aspect of each transaction is its
impact on the Companys prospective organic growth and the development of its integrated platform
of services. The acquisitions described below expand the Companys products and services offered to
education and financial institutions and students and families throughout the education and
education finance process. In addition, these acquisitions diversify the Companys asset generation
streams and/or diversify revenue by offering other products and services that are not dependent on
government programs, which reduces the Companys exposure to legislation and political risk. The
Company also expects to reduce costs from these acquisitions through economies of scale and by
integrating certain support services.
infiNET Integrated Solutions, Inc. (infiNET)
On April 20, 2004, the Company purchased 50% of the stock of infiNET for $4.9 million. On February
17, 2006, the Company purchased the remaining 50% of the stock of infiNET. 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 was $9.5 million in cash and 95,380 restricted shares of the Companys
Class A common stock. Under the terms of the purchase agreement, the 95,380 shares of Class A
common stock issued in the acquisition are 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 is less than $104.8375 per share and has 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 must pay additional cash to the sellers of infiNET for each share of Class A
common stock issued in an amount representing the difference between
F-16
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
$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 as defined in the agreement. Based on the closing price of the
Companys Class A common stock as of December 31, 2008 of $14.33 per share, the Companys
obligation under this stock price guarantee would have been approximately $6.0 million
(($104.8375-$41.9335) x 95,380 shares). Any payment on the guaranty is reduced by the aggregate of
any dividends or other distributions made by the Company to the sellers. In connection with the
acquisition, the Company entered into employment agreements with two of the infiNET sellers, in
which the guaranteed value related to the shares of Class A common stock issued is dependent on
their continued employment with the Company. Accordingly, the guaranteed value associated with the
shares of Class A common stock of $5.7 million issued to these employees was recorded as unearned
compensation included in additional paid-in capital in the accompanying consolidated balance sheet
and is being recognized by the Company as compensation expense over the three-year term of the
employment agreements. The expense recognized was $1.9
million, $1.9
million, and $1.7
million in
2008, 2007, and 2006, respectively. The total purchase price recorded by the Company to acquire the
remaining interest in infiNET was $13.8 million, which represents the $9.5 million in cash and $4.3
million attributable to the guaranteed value of the shares of Class A common stock issued to the
infiNET shareholders other than the two shareholders who entered into employment agreements with
the Company. Any cash paid by the Company in consideration of satisfying the guaranteed value of
stock issued for this acquisition would be recorded by the Company as a reduction to additional
paid-in capital.
Prior to purchasing the remaining 50% of the common stock of infiNET, the Company accounted for
this investment under the equity method. The purchase of the remaining 50% of the stock of infiNET
was accounted for under purchase accounting and the results of operations have been included in the
consolidated financial statements from January 31, 2006, the effective date of the acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition for the remaining 50% of the stock of infiNET.
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,266 |
|
Restricted cash due to customers |
|
|
16,343 |
|
Accounts receivable |
|
|
558 |
|
Intangible assets |
|
|
4,172 |
|
Property and equipment |
|
|
134 |
|
Other assets |
|
|
576 |
|
Excess cost over fair value of net assets acquired (goodwill) |
|
|
12,474 |
|
Due to customers |
|
|
(16,343 |
) |
Other liabilities |
|
|
(2,334 |
) |
Previously recorded investment in equity interest |
|
|
(5,047 |
) |
|
|
|
|
|
|
$ |
13,799 |
|
|
|
|
|
As of the date of acquisition, the $4.2 million of acquired intangible assets had a weighted
average useful life of approximately seven years. The intangible assets that made up this amount
included non-competition agreements of $2.0 million (5-year useful life), customer relationships of
$1.6 million (10-year useful life), computer software of $0.4 million (5-year useful life), and
trade names of $0.2 million (3-year useful life). All intangible assets are amortized using a
straight-line amortization method with the exception of customer relationships. The customer
relationships intangible asset is amortized over the period of projected revenues and expenses
(cash flows) attributable to this asset as of the date of acquisition. Because of customer
attrition, the estimated annual cash flows related to customer relationships diminish as time
extends from the date of acquisition. As such, the Company uses an accelerated amortization method
that reflects the pattern in which the estimated economic benefits of this acquired asset is used
by the Company.
The $12.5 million of goodwill was assigned to the Tuition Payment Processing and Campus Commerce
operating segment and is not deductible for tax purposes.
F-17
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Student Marketing Group, Inc. (SMG) and National Honor Roll, L.L.C. (NHR)
On March 29, 2005, the Company purchased 100% of the capital stock of SMG and 100% of the
membership interests of NHR. The initial consideration paid by the Company was $27.1 million,
including $0.1 million of direct acquisition costs. SMG and NHR were entities owned under common
control. SMG is a full service direct marketing agency providing a wide range of products and
services to help businesses reach the middle school, high school, college bound high school,
college, and young adult marketplace. In addition, SMG provides marketing services and college
bound student lists to college and university admissions offices nationwide. NHR recognizes middle
and high school students for exceptional academic success by providing publication in the National
Honor Roll Commemorative Edition, scholarships, a college admissions notification service, and
notices to local newspapers and elected officials. In addition to the initial purchase price,
additional payments were paid by the Company based on the operating results of SMG and NHR as
defined in the purchase agreement. In 2007 and 2008, the Company paid additional consideration of
$6.0 million and $18.0 million, respectively. These payments satisfy all of the Companys
obligations related to the contingencies per the terms of the agreement. Including the contingency
payments, total consideration paid by the Company for the acquisition of SMG and NHR was $51.1
million.
The acquisitions of SMG and NHR were accounted for under purchase accounting and the results of
operations have been included in the consolidated financial statements from March 1, 2005, the
effective date of the acquisitions.
The following table summarizes the fair values of the assets acquired and liabilities assumed at
the date of acquisition, and includes the additional consideration paid in 2007 and 2008 as a
result of the contingency payments:
|
|
|
|
|
Cash and cash equivalents |
|
$ |
157 |
|
Accounts receivable |
|
|
1,212 |
|
Intangible assets |
|
|
13,111 |
|
Property and equipment |
|
|
545 |
|
Other assets |
|
|
4,891 |
|
Excess cost over fair value of net assets acquired (goodwill) |
|
|
34,150 |
|
Other liabilities |
|
|
(2,991 |
) |
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
51,075 |
|
|
|
|
|
Of the $13.1 million of acquired intangible assets, $2.2 million was assigned to trade names that
are not subject to amortization. The remaining $10.9 million of acquired intangible assets on the
date of acquisition had a weighted-average useful life of approximately 5 years. The intangible
assets that made up this amount included student lists of $8.2 million (4-year useful life),
customer relationships of $2.0 million (7-year useful life), non-competition agreements of $0.4
million (5-year useful life), and an other asset of $0.3 million (11-year useful life). All
intangible assets are amortized using a straight-line amortization method.
The $34.2 million of goodwill was assigned to the Enrollment Services operating segment and is
expected to be deductible for tax purposes.
FACTS Management Co. (FACTS)
On June 10, 2005, the Company purchased 80% of the capital stock of FACTS for $56.1 million,
including $0.1 million of direct acquisition costs. On February 17, 2006, the Company purchased the
remaining 20% of the stock of FACTS. FACTS provides actively managed tuition payment solutions,
online payment processing, detailed information reporting, and data integration services to K-12
and post secondary educational institutions, families, and students. In addition, FACTS provides
financial needs analysis for students applying for aid in private and parochial K-12 schools.
Consideration for the purchase of the remaining 20% of FACTS was $5.6 million in cash and 238,237
restricted shares of the Companys Class A common stock valued at $9.9 million. The value of the
common shares issued was determined based on the closing market price of the Companys common
shares over the 2-day period before and after the terms of the acquisition were agreed to and
announced. Under the terms of the purchase agreement, the 238,237 shares of Class A common stock
issued in the acquisition were subject to put option arrangements whereby during the 30-day period
beginning February 28, 2010 the holders of such shares could require the Company to repurchase all
or part of the shares at a price of
$83.95 per share. The value of the put option as of the acquisition of the remaining 20% of the
stock of FACTS was $7.5 million and was recorded by the Company as additional purchase price. The
value of the put option was valued by the Company on the date of acquisition using a Black-Scholes
pricing model using the following assumptions: risk-free interest rate of 5.1 percent, volatility
of 34 percent, and no dividend yield. The total consideration recorded by the Company for the
remaining 20% of the stock of FACTS was $23.0 million, which represents the $5.6 million in cash,
the value of the Class A common stock of $9.9 million, and the value of the put option arrangements
of $7.5 million.
F-18
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
As further discussed in note 10, in July 2007, the Company paid $15.9 million to redeem 238,237
shares of the Companys Class A common stock that were subject to this put option. The decrease in
the fair value of the put option of $0.3 million during 2007 (until settled in July) and increase
of $3.3 million in 2006 (from the date of acquisition) is included in derivative market value,
foreign currency, and put option adjustments and derivative settlements, net in the accompanying
consolidated statements of income.
This acquisition was accounted for under purchase accounting and the results of operations have
been included in the consolidated financial statements from June 1, 2005, the effective date of the
acquisition. Minority interest presented by the Company in 2006 reflects the proportionate share of
shareholders equity and net income attributable to the minority shareholders of FACTS until the
Company purchased the remaining 20% of the stock of FACTS in February 2006.
The following table summarizes the fair values of the assets acquired and liabilities assumed at
the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial 80% |
|
|
Remaining 20% |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,466 |
|
|
|
|
|
|
|
2,466 |
|
Restricted cash due to customers |
|
|
11,034 |
|
|
|
|
|
|
|
11,034 |
|
Accounts receivable |
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Intangible assets |
|
|
36,438 |
|
|
|
8,374 |
|
|
|
44,812 |
|
Property and equipment |
|
|
321 |
|
|
|
|
|
|
|
321 |
|
Other assets |
|
|
24 |
|
|
|
|
|
|
|
24 |
|
Excess cost over fair value of net assets acquired (goodwill) |
|
|
28,689 |
|
|
|
16,487 |
|
|
|
45,176 |
|
Due to customers |
|
|
(11,034 |
) |
|
|
|
|
|
|
(11,034 |
) |
Other liabilities |
|
|
(11,901 |
) |
|
|
(2,699 |
) |
|
|
(14,600 |
) |
Minority interests ownership in net assets acquired |
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
Previously recorded minority interest |
|
|
|
|
|
|
868 |
|
|
|
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
56,069 |
|
|
|
23,030 |
|
|
|
79,099 |
|
|
|
|
|
|
|
|
|
|
|
Of the $44.8 million of acquired intangible assets, $11.6 million was assigned to trade names that
are not subject to amortization. The remaining $33.2 million of acquired intangible assets on the
date of acquisition had a weighted-average useful life of approximately 14 years. The intangible
assets that made up this amount included customer relationships of $19.2 million (20-year useful
life), non-competition agreements of $12.6 million (5-year useful life), and computer software of
$1.4 million (3-year useful life). All intangible assets are amortized using a straight-line
amortization method with the exception of customer relationships. The customer relationships
intangible asset is amortized over the projected revenues and expenses (cash flows) attributable to
this asset as of the date of acquisition. Because of customer attrition, the estimated annual cash
flows related to customer relationships diminish the further from the date of acquisition. As such,
the Company uses an accelerated amortization method that reflects the pattern in which the
estimated economic benefits of this acquired asset is used by the Company.
The $45.2 million of goodwill was assigned to the Tuition Payment Processing and Campus Commerce
operating segment and is not deductible for tax purposes.
CUnet, LLC (CUnet)
On June 30, 2006, the Company purchased 100% of the membership interests of CUnet. The initial
consideration paid by the Company was $40.1 million in cash, including $0.1 million of direct
acquisition costs. CUnet provides campus locations and online schools with performance-based
educational marketing, web-based marketing, lead generation, and vendor management services to
enhance their brands and improve student recruitment and retention.
F-19
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
In addition to the initial purchase price, additional payments were paid by the Company based on
the operating results of CUnet. The Company records contingency payments when the applicable
contingency is resolved and additional consideration is issued or issuable or the outcome of the
contingency is determined beyond a reasonable doubt. In 2007, the Company issued 62,446 restricted
shares of its Class A common stock valued at $1.1 million and paid cash of $4.0 million to satisfy
all of the Companys remaining obligations related to the contingencies included in the original
purchase agreement. The value of the common shares issued was determined based on the closing
market price of the Companys common shares over the 2-day period before and after the date in
which the number of shares to be issued were known as determined per the terms of the purchase
agreement. In connection with the acquisition, the Company entered into employment agreements with
certain sellers, in which these contingency payments were related to their continued employment
with the Company. Accordingly, these contingency payments are recognized by the Company as
compensation expense over the remaining term of the employment agreements.
This acquisition was accounted for under purchase accounting and the results of operations have
been included in the consolidated financial statements from the date of the acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition.
|
|
|
|
|
Accounts receivable |
|
$ |
5,154 |
|
Intangible assets |
|
|
14,962 |
|
Property and equipment |
|
|
360 |
|
Other assets |
|
|
520 |
|
Excess cost over fair value of net assets acquired (goodwill) |
|
|
23,910 |
|
Other liabilities |
|
|
(4,818 |
) |
|
|
|
|
|
|
$ |
40,088 |
|
|
|
|
|
As of the date of acquisition, the $15.0 million of acquired intangible assets had a
weighted-average useful life of approximately seven years. The intangible assets that made up this
amount included customer relationships of $10.4 million (8-year useful life), non-competition
agreements of $2.6 million (5-year useful life), trade names of $1.7 million (4-year useful life),
and computer software of $0.3 million (3-year useful life). All intangible assets are amortized
using a straight-line amortization method with the exception of customer relationships. The
customer relationships intangible asset is amortized over the period of projected revenues and
expenses (cash flows) attributable to this asset as of the date of acquisition. Because of customer
attrition, the estimated annual cash flows related to customer relationships diminish as time
extends from the date of acquisition. As such, the Company uses an accelerated amortization method
that reflects the pattern in which the estimated economic benefits of this acquired asset is used
by the Company.
The $23.9 million of goodwill was assigned to the Enrollment Services operating segment and is
expected to be deductible for tax purposes.
Petersons
On July 27, 2006, the Company purchased certain assets and assumed certain liabilities from Thomson
Learning Inc. The initial consideration paid by the Company was $38.7 million in cash, including
$0.1 million of direct acquisition costs. The final purchase price of Petersons was subject to
certain purchase price adjustments as defined in the purchase agreement. During 2007, the purchase
price for Petersons was finalized per the terms of the purchase agreement and the Company received
a $2.2 million working capital settlement. As such, the total consideration paid by the Company for
Petersons was $36.5 million. Petersons provides a comprehensive suite of education and
career-related solutions in the areas of education search, test preparation, admissions, financial
aid information, and career assistance. Petersons provides its customers with publications and
online information about colleges and universities, career schools, graduate programs, distance
learning, executive training, private secondary schools, summer opportunities, study abroad,
financial aid, test preparation, and career exploration resources. This acquisition was accounted
for as a business combination under purchase accounting and the results of operations have been
included in the consolidated financial statements from the date of the acquisition.
F-20
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition.
|
|
|
|
|
Accounts receivable |
|
$ |
7,055 |
|
Intangible assets |
|
|
18,920 |
|
Property and equipment |
|
|
2,349 |
|
Other assets |
|
|
2,375 |
|
Excess cost over fair value of net assets acquired (goodwill) |
|
|
19,954 |
|
Other liabilities |
|
|
(14,173 |
) |
|
|
|
|
|
|
$ |
36,480 |
|
|
|
|
|
As of the date of acquisition, the $18.9 million of acquired intangible assets had a
weighted-average useful life of approximately four years. The intangible assets that made up this
amount included database and content of $9.5 million (5-year useful life), computer software of
$6.2 million (3-year useful life), customer relationships of $1.7 million (10-year useful life),
trade names of $0.8 million (3-year useful life), and a non-competition agreement of $0.7 million
(3-year useful life). All intangible assets are amortized using a straight-line amortization method
with the exception of customer relationships. The customer relationships intangible asset is
amortized over the period of projected revenues and expenses (cash flows) attributable to this
asset as of the date of acquisition. Because of customer attrition, the estimated annual cash flows
related to customer relationships diminish as time extends from the date of acquisition. As such,
the Company uses an accelerated amortization method that reflects the pattern in which the
estimated economic benefits of this acquired asset is used by the Company.
The $20.0 million of goodwill was assigned to the Enrollment Services operating segment and is
expected to be deductible for tax purposes. In 2007, the Company recognized an impairment on the
goodwill recorded from this acquisition. See note 6 for additional information.
6. Intangible Assets and Goodwill
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
average |
|
|
|
|
|
|
remaining |
|
|
|
|
|
|
useful life as of |
|
|
|
|
|
|
December 31, |
|
|
As of December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2007 |
|
|
|
(months) |
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (net of accumulated amortization of $29,737
and $20,299, respectively) |
|
|
106 |
|
|
$ |
50,623 |
|
|
|
60,061 |
|
Trade names (net of accumulated amortization of $5,478
and $1,258, respectively) |
|
|
43 |
|
|
|
11,581 |
|
|
|
1,609 |
|
Covenants not to compete (net of accumulated amortization of $14,887
and $11,815, respectively) |
|
|
19 |
|
|
|
8,735 |
|
|
|
15,425 |
|
Database and content (net of accumulated amortization of $5,447
and $3,193, respectively) |
|
|
23 |
|
|
|
4,033 |
|
|
|
6,287 |
|
Computer software (net of accumulated amortization of $7,441
and $4,898, respectively) |
|
|
9 |
|
|
|
1,561 |
|
|
|
4,189 |
|
Student lists (net of accumulated amortization of $7,855
and $5,806, respectively) |
|
|
2 |
|
|
|
342 |
|
|
|
2,391 |
|
Other (net of accumulated amortization of $95 and $71, respectively) |
|
|
86 |
|
|
|
179 |
|
|
|
203 |
|
Loan origination rights (net of accumulated amortization of $8,180) |
|
|
|
|
|
|
|
|
|
|
8,473 |
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
80 months |
|
|
|
77,054 |
|
|
|
98,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable intangible assets trade names |
|
|
|
|
|
|
|
|
|
|
14,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,054 |
|
|
|
112,830 |
|
|
|
|
|
|
|
|
|
|
|
|
F-21
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
During the first quarter of 2008, management determined that the trade names not subject to
amortization have a finite useful life. As such, these assets will be amortized prospectively over
their estimated remaining useful lives. In 2008, these assets were reclassed to
amortizable intangible assets trade names and are included in the above table.
The Company recorded amortization expense on its intangible assets of $26.2 million, $30.4 million,
and $25.1 million, during the years ended December 31, 2008, 2007, and 2006, respectively. The
Company will continue to amortize intangible assets over their remaining useful lives. As of
December 31, 2008, the Company estimates it will record amortization expense as follows:
|
|
|
|
|
2009 |
|
$ |
22,318 |
|
2010 |
|
|
15,985 |
|
2011 |
|
|
10,031 |
|
2012 |
|
|
9,029 |
|
2013 |
|
|
6,168 |
|
2014 and thereafter |
|
|
13,523 |
|
|
|
|
|
|
|
|
$ |
77,054 |
|
|
|
|
|
The change in the carrying amount of goodwill by operating segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
Asset |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Generation |
|
|
|
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
and |
|
|
|
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Management |
|
|
Total |
|
|
Balance as of December 31, 2006 |
|
$ |
|
|
|
|
57,858 |
|
|
|
82,416 |
|
|
|
8,596 |
|
|
|
42,550 |
|
|
|
191,420 |
|
Goodwill from prior period acquisition
allocated during the period |
|
|
|
|
|
|
228 |
|
|
|
(15,552 |
) |
|
|
|
|
|
|
|
|
|
|
(15,324 |
) |
Impairment charge |
|
|
|
|
|
|
|
|
|
|
(11,401 |
) |
|
|
|
|
|
|
|
|
|
|
(11,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
|
|
|
|
58,086 |
|
|
|
55,463 |
|
|
|
8,596 |
|
|
|
42,550 |
|
|
|
164,695 |
|
Additional contingent consideration paid (a) |
|
|
|
|
|
|
|
|
|
|
11,150 |
|
|
|
|
|
|
|
|
|
|
|
11,150 |
|
Impairment charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667 |
) |
|
|
(667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
|
|
|
|
58,086 |
|
|
|
66,613 |
|
|
|
8,596 |
|
|
|
41,883 |
|
|
|
175,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In January 2008, the Company paid $18.0 million (of which $6.8 million was
accrued as of December 31, 2007) of additional consideration related to its 2005
acquisitions of Student Marketing Group, Inc. and National Honor Roll, L.L.C. This
payment satisfies all of the Companys obligations related to the contingencies per the
terms of the purchase agreement. |
F-22
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
On September 27, 2007, the President signed into law the College Cost Reduction Act. This
legislation contained provision with significant implication for participants in the FFEL Program
including reducing special allowance payments received by lenders, increasing origination fees paid
by lenders, and eliminating the designation of Exceptional Performer status and the monetary
benefit associated with it. As a result of this legislation and the student loan business model
modifications the Company implemented as a result of these legislative changes (see note 4), the
Company recorded an impairment charge of $39.4 million during 2007. This charge is included in
impairment expense in the Companys consolidated statements of income. Information related to the
impairment charge follows:
|
|
|
|
|
|
|
|
|
Operating |
|
Impairment |
|
Asset |
|
segment |
|
charge |
|
Amortizable intangible assets: |
|
|
|
|
|
|
Covenants not to compete |
|
Asset Generation and Management |
|
$ |
13,581 |
|
Loan origination rights |
|
Asset Generation and Management |
|
|
11,555 |
|
|
|
|
|
|
|
|
Unamortizable intangible assets trade names |
|
Asset Generation and Management |
|
|
2,907 |
|
|
|
|
|
|
|
|
Goodwill |
|
Enrollment Services |
|
|
11,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment charge
related to legislative
changes |
|
|
|
$ |
39,444 |
|
|
|
|
|
|
|
The fair value of the intangible assets and reporting unit within the Enrollment Services operating
segment were estimated using the expected present value of future cash flows.
As disclosed in note 4, as a result of the disruptions in the debt and secondary markets and the
student loan business model modifications the Company implemented due to the disruptions, the
Company recorded an impairment charge of $18.8 million during the first quarter of 2008. This
charge is included in impairment expense in the Companys consolidated statements of income.
Information related to the impairment charge follows:
|
|
|
|
|
|
|
|
|
Operating |
|
Impairment |
|
Asset |
|
segment |
|
charge |
|
Amortizable intangible assets: |
|
|
|
|
|
|
Covenants not to compete |
|
Student Loan and Guaranty Servicing |
|
$ |
4,689 |
|
Covenants not to compete |
|
Asset Generation and Management |
|
|
336 |
|
Loan origination rights |
|
Asset Generation and Management |
|
|
8,336 |
|
Computer software |
|
Asset Generation and Management |
|
|
12 |
|
|
|
|
|
|
|
|
Goodwill |
|
Asset Generation and Management |
|
|
667 |
|
|
|
|
|
|
|
|
Property and equipment |
|
Student Loan and Guaranty Servicing |
|
|
385 |
|
Property and equipment |
|
Corporate activities |
|
|
4,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment charge |
|
|
|
$ |
18,834 |
|
|
|
|
|
|
|
The fair value of the intangible assets and reporting unit within the Asset Generation and
Management operating segment were estimated using the expected present value of future cash flows.
7. Student Loans Receivable
Student loans receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Federally insured loans |
|
$ |
24,787,941 |
|
|
|
26,054,398 |
|
Non-federally insured loans |
|
|
273,108 |
|
|
|
274,815 |
|
|
|
|
|
|
|
|
|
|
|
25,061,049 |
|
|
|
26,329,213 |
|
Unamortized loan premiums and deferred origination costs |
|
|
402,881 |
|
|
|
452,501 |
|
Allowance for loan losses federally insured loans |
|
|
(25,577 |
) |
|
|
(24,534 |
) |
Allowance for loan losses non-federally insured loans |
|
|
(25,345 |
) |
|
|
(21,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,413,008 |
|
|
|
26,736,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured allowance as a percentage of ending balance of federally insured loans |
|
|
0.10 |
% |
|
|
0.09 |
% |
Non-federally insured allowance as a percentage of ending balance of non-federally insured loans |
|
|
9.28 |
% |
|
|
7.66 |
% |
Total allowance as a percentage of ending balance of total loans |
|
|
0.20 |
% |
|
|
0.17 |
% |
F-23
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The Company has provided for an allowance for loan losses related to its student loan portfolio.
Activity in the allowance for loan losses for the years ended December 31, 2008, 2007, and 2006 is
shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Beginning balance |
|
$ |
45,592 |
|
|
|
26,003 |
|
|
|
13,390 |
|
Provision for loan losses |
|
|
25,000 |
|
|
|
28,178 |
|
|
|
15,308 |
|
Loans charged off, net of recoveries |
|
|
(18,920 |
) |
|
|
(7,418 |
) |
|
|
(2,695 |
) |
Sale of loans |
|
|
(750 |
) |
|
|
(1,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
50,922 |
|
|
|
45,592 |
|
|
|
26,003 |
|
|
|
|
|
|
|
|
|
|
|
On January 19, 2007, the Company entered into a Settlement Agreement with the Department to resolve
an audit of the Companys portfolio of student loans receiving 9.5% special allowance payments.
Under the terms of the Settlement Agreement, the Company is permitted to retain the 9.5% special
allowance payments that it received from the Department prior to July 1, 2006. In addition, the
Settlement Agreement eliminates all 9.5% special allowance payments with respect to the Companys
portfolios of student loans for periods on and after July 1, 2006. As a result of the Settlement
Agreement, in December 2006, the Company recognized an impairment charge of $21.7 million related
to loan premiums paid on loans acquired in 2005 from the acquisition of LoanSTAR Funding Group,
Inc. that were previously considered eligible for 9.5% special allowance payments.
Loan Sales
As part of the Companys asset management strategy, the Company periodically sells student loan
portfolios to third parties. During the years ended December 31, 2008, 2007, and 2006, the Company
sold $1.8 billion (par value), $115.3 million (par value), and $748.5 million (par value),
respectively, of student loans resulting in the recognition of a loss of $51.4 million in 2008 and
gains of $3.6 million and $16.1 million in 2007 and 2006, respectively.
As a result of the disruptions in the debt and secondary markets, the Company sold loan portfolios
in 2008 in order to reduce the amount of student loans remaining under the Companys multi-year
committed financing facility for FFELP loans, which reduced the Companys exposure related to
certain equity support provisions included in this facility (see note 8 for additional information
related to these equity support provisions).
8. Bonds and Notes Payable
The following tables summarize the Companys outstanding bonds and notes payable by type of
instrument:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
Carrying |
|
|
Interest rate |
|
|
|
|
amount |
|
|
range |
|
Final maturity |
Variable-rate bonds and notes (a): |
|
|
|
|
|
|
|
|
Bonds and notes based on indices |
|
$ |
20,509,073 |
|
|
0.75% 5.02% |
|
09/25/13 06/25/41 |
Bonds and notes based on auction or remarketing (b) |
|
|
2,713,285 |
|
|
0.00% 6.00% |
|
11/01/09 07/01/43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable-rate bonds and notes |
|
|
23,222,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper FFELP facility (c) |
|
|
1,445,327 |
|
|
1.32% 2.94% |
|
05/09/10 |
Commercial paper private loan facility (c) |
|
|
95,020 |
|
|
2.49% |
|
03/14/09 |
Fixed-rate bonds and notes (a) |
|
|
202,096 |
|
|
5.30% 6.68% |
|
11/01/09 05/01/29 |
Unsecured fixed rate debt |
|
|
475,000 |
|
|
5.13% and 7.40% |
|
06/01/10 and 09/15/61 |
Unsecured line of credit |
|
|
691,500 |
|
|
0.98% 2.41% |
|
05/08/12 |
Department of Education Participation |
|
|
622,170 |
|
|
3.37% |
|
09/30/09 |
Other borrowings |
|
|
34,488 |
|
|
1.25% 5.47% |
|
05/22/09 11/01/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,787,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
Carrying |
|
|
Interest rate |
|
|
|
|
|
|
amount |
|
|
range |
|
|
Final maturity |
|
Variable-rate bonds and notes (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes based on indices |
|
$ |
17,508,810 |
|
|
|
4.73% 5.78% |
|
|
|
09/25/12 06/25/41 |
|
Bonds and notes based on auction or remarketing |
|
|
2,905,295 |
|
|
|
2.96% 7.25% |
|
|
|
11/01/09 07/01/43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable-rate bonds and notes |
|
|
20,414,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper FFELP facility (c) |
|
|
6,629,109 |
|
|
|
5.22% 5.98% |
|
|
|
05/09/10 |
|
Commercial paper private loan facility (c) |
|
|
226,250 |
|
|
|
5.58% |
|
|
|
03/14/09 |
|
Fixed-rate bonds and notes (a) |
|
|
214,476 |
|
|
|
5.20% 6.68% |
|
|
|
11/01/09 05/01/29 |
|
Unsecured fixed rate debt |
|
|
475,000 |
|
|
|
5.13% and 7.40% |
|
|
|
06/01/10 and 09/15/61 |
|
Unsecured line of credit |
|
|
80,000 |
|
|
|
5.40% 5.53% |
|
|
|
05/08/12 |
|
Other borrowings |
|
|
76,889 |
|
|
|
4.65% 5.20% |
|
|
|
09/28/08 11/01/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,115,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Issued in asset-backed securitizations |
|
(b) |
|
As of December 31, 2008, the Company had $115.2 million
of bonds based on an auction rate of 0%, due to the Maximum Rate
auction provisions in the underlying documents for such financings. The
Maximum Rate provisions include multiple components, one of which is
based on T-bill rates. The T-bill component calculation for these bonds
produced negative rates, which resulted in auction rates of zero
percent for the applicable period. |
|
(c) |
|
Loan warehouse facilities |
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 Companys 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
Companys secured financing vehicles are loan warehouse facilities and asset-backed securitizations
(as further discussed below).
Most 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. The student loan interest margin notes, included in fixed
rate bonds and notes in the above tables, are secured by the rights to residual cash flows from
certain variable rate bonds and notes and fixed rate notes. Certain variable rate bonds and notes
and fixed rate bonds of $1.0 billion and $1.1 billion as of December 31, 2008 and 2007,
respectively, are secured by financial guaranty insurance policies or a letter of credit and
reimbursement agreement issued by Municipal Bond Investors Assurance Corporation, Ambac Assurance
Corporation, and State Street.
On July 31, 2008, the Company did not renew its liquidity provisions on its FFELP loan warehouse
facility. Accordingly, the facility became a term facility and no new loan originations could be
funded with this facility. In August 2008, the Company began to fund FFELP student loan
originations for the 2008-2009 academic year pursuant to the Department of Educations Loan
Participation Program (Participation Program) and an existing participation agreement with Union
Bank and Trust Company (Union Bank), an entity under common control with the Company.
Loan warehouse facilities
Student loan warehousing has historically allowed the Company to buy and manage student loans prior
to transferring them into more permanent financing arrangements. The Company has historically
relied upon three conduit warehouse loan financing vehicles to support its funding needs on a short
term basis: a multi-year committed facility for FFELP loans, a $250.0 million private loan
warehouse for non-federally insured student loans, and a single-seller extendible commercial paper
conduit for FFELP loans.
F-25
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
FFELP Warehouse facility
The Companys multi-year committed facility for FFELP loans terminates in May 2010 and was
supported by 364-day liquidity which was scheduled for renewal on May 9, 2008. The Company obtained
an extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the
liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a
term facility with a final maturity date of May 9, 2010. Pursuant to the terms of the agreement,
since liquidity was not renewed, the Companys cost of financing under this facility increased 10
basis points. The agreement also includes provisions which allow the banks to
charge a rate equal to LIBOR plus 128.5 basis points if they choose to finance their portion of the
facility with sources of funds other than their commercial paper conduit. As of December 31, 2008,
$1.4 billion was outstanding under this facility.
The terms and conditions of the Companys warehouse facility for FFELP loans provides for formula
based advance rates based on market conditions. While the Company does not believe that the loan
valuation formula is reflective of the actual fair value of its loans, it is subject to compliance
with such mark-to-formula provisions of the warehouse facility agreement. As of December 31, 2008,
the Company had $280.6 million restricted as a result of equity funding support for this facility.
The Company has utilized its $750.0 million unsecured line of credit to fund equity advances on its
warehouse facility. As of December 31, 2008, the Company had $691.5 million outstanding under this
line of credit. The unsecured line of credit terminates in May 2012.
Continued dislocations in the credit markets may cause additional volatility in the loan valuation
formula. Should a significant change in the valuation of loans result in additional required equity
funding support for the warehouse facility greater than what the Company can provide, the warehouse
facility could be subject to an event of default resulting in a termination of the facility and an
acceleration of the repayment provisions. A default on the FFELP warehouse facility would result in
an event of default on the Companys unsecured line of credit that would result in the outstanding
balance on the line of credit becoming immediately due and payable. The Company continues to look
at various alternatives to remove loans from the warehouse facility including other financing
arrangements and/or selling loans to third parties.
Private Loan Warehouse Facility
As of December 31, 2008, the Company had $154.2 million of student loans in its private loan
warehouse facility and $95.0 million borrowed under the facility. On February 25, 2009, the Company
paid all debt outstanding on this facility with operating cash and terminated the facility.
Commercial Paper Warehouse Program
In August 2006, the Company established a $5.0 billion extendable commercial paper warehouse
program for FFELP loans, under which it can issue one or more short term extendable secured
liquidity notes. As of December 31, 2008, no notes were outstanding under this warehouse program.
As a result of the disruption of the credit markets, there is no market for the issuance of notes
under this facility. Management believes it is currently unlikely a market will exist in the
foreseeable future.
Department of Educations Loan Participation and Purchase Commitment Programs
In August 2008, the Department implemented the Loan Purchase Commitment Program (the Purchase
Program) and the Loan Participation Program pursuant to the Ensuring Continued Access to Student
Loans Act of 2008 (ECASLA). Under the Departments Purchase Program, the Department will purchase
loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent
origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Under the
Participation Program, the Department provides interim short term liquidity to FFELP lenders by
purchasing participation interests in pools of FFELP loans. FFELP lenders are charged a rate of
commercial paper plus 50 basis points on the principal amount of participation interests
outstanding. Loans funded under the Participation Program must be either refinanced by the lender
or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30,
2009. To be eligible for purchase or participation under the Departments programs, loans were
originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009, first
disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.
F-26
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7th legislation,
which will include FFELP student loans made for the 2009-2010 academic year.
As of December 31, 2008, the Company had $622.2 million of FFELP loans funded using the
Participation Program. The Company plans to continue to use the Participation Program to fund loans
originated for the 2008-2009 and 2009-2010 academic years. These programs are allowing the Company
to continue originating new federal student loans to all students regardless of the school they
attend.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, 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 has the option to purchase the participation
interests from the grantor trusts at the end of a 364-day period upon termination of the
participation certificate. As of December 31, 2008, $548.4 million 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 Banks 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. Loans participated under this agreement qualify as a sale
pursuant to the provisions of SFAS No. 140. Accordingly, the participation interests sold are not
included on the Companys consolidated balance sheet.
Asset-backed Securitizations
During 2008 and 2007, the Company completed asset-backed securities transactions totaling $4.5
billion and $3.8 billion, respectively. Notes issued in these transactions carry interest rates
based on a spread to LIBOR. As part of the Companys issuance of asset-backed securitizations in
March 2008 and May 2008, due to credit market conditions when these notes were issued, the Company
purchased the Class B subordinated notes of $36 million (par value) and $41 million (par value),
respectively. These notes are not included on the Companys consolidated balance sheet. If the
credit market conditions improve, the Company anticipates selling these notes to third parties.
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. Upon sale, these notes would be shown as bonds and notes
payable on the Companys consolidated balance sheet. Unless there is a significant market
improvement, the Company believes the market value of such notes will be less than par value. The
difference between the par value and market value would be recognized by the Company as interest
expense over the life of the bonds.
Notes
issued during 2006 included 773.2 million (950 million in U.S. dollars) with variable
interest rates initially based on a spread to EURIBOR (the Euro Notes). As of December 31, 2008
and 2007, the Euro Notes were recorded on the Companys balance sheet at $1.1 billion. The changes
in the principal amount of Euro Notes as a result of the fluctuation of the foreign currency
exchange rate were a decrease of $52.9 million for the year ended December 31, 2008 and increases
of $108.7 million and $70.4 million for the years ended December 31, 2007 and 2006, respectively,
and are included in the derivative market value, foreign currency, and put option adjustments and
derivative settlements, net in the consolidated statements of income. Concurrently with the
issuance of the Euro Notes, the Company entered into cross-currency interest rate swaps which are
further discussed in note 9.
In May and October 2002, the Company consummated debt offerings of student loan asset-backed notes
of $1.0 billion and $1.2 billion, respectively. In connection with these debt offerings, the
Company entered into agreements with certain investment banks pursuant to which the Company will
pay the investment banks a fee equal in the aggregate to 0.01% and 0.0075% per annum of the
principal balance of the May and October 2002 notes, respectively. These fees are for credit
enhancements to the notes whereby the investment banks will provide liquidity advances to the
Company in the instance of disintermediation in the spread between student loan interest rates and
the notes interest rates as defined in the agreement. The total net amount paid by the Company
under these agreements was approximately $42,000, $54,000, and $61,000 during the years ended
December 31, 2008, 2007, and 2006, respectively.
F-27
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The interest rates on certain of the Companys asset-backed securities are set and periodically
reset via a dutch auction (Auction Rate Securities) or through a remarketing utilizing
remarketing agents (Variable Rate Demand Notes). The Company is currently sponsor on
approximately $1.9 billion of Auction Rate Securities and $0.8 billion of Variable Rate Demand
Notes.
For Auction Rate Securities, investors and potential investors submit orders through a
broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various
interest rates. The broker-dealers submit their clients orders to the auction agent, who then
determines the clearing interest rate for the upcoming period. Interest rates on these Auction Rate
Securities are reset periodically, generally every 7 to 35 days, by the auction agent or agents.
During the first quarter of 2008, as part of the credit market crisis, auction rate securities from
various issuers failed to receive sufficient order interest from potential investors to clear
successfully, resulting in failed auction status. Since February 8, 2008, all of the Companys Auction
Rate Securities have failed in this manner. Under normal conditions, banks have historically
purchased these securities when investor demand is weak. However, since February 2008, banks have
been allowing auctions to fail.
As a result of a failed auction, the Auction Rate Securities will generally pay interest to the
holder at a maximum rate as defined by the indenture. While these rates will vary, they will
generally be based on a spread to LIBOR or Treasury Securities. Based on the relative levels of
these indices as of December 31, 2008, the rates expected to be paid by the Company range from
91-day T-Bill plus 125 basis points, on the low end, to LIBOR plus 250 basis points, on the high
end. These maximum rates are subject to increase if the credit ratings on the bonds are downgraded.
The Company cannot predict whether future auctions related to its Auction Rate Securities will be
successful, but management believes it is likely auctions will continue to fail indefinitely. The
Company is currently seeking alternatives for reducing its exposure to the auction rate market, but
may not be able to achieve alternate financing for some or all of its Auction Rate Securities.
For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to
investors. If there are insufficient potential bid orders to purchase all of the notes offered for
sale, the Company could be subject to interest costs substantially above the anticipated and
historical rates paid on these types of securities. The maximum rate for Variable Rate Demand Notes
is based on a spread to certain indexes as defined in the underlying documents, with the highest to
the Company being Prime plus 200 basis points.
Unsecured Line of Credit
The Company has a $750.0 million unsecured line of credit that terminates in May 2012. As of
December 31, 2008, there was $691.5 million outstanding on this line. The weighted average interest
rate on this line of credit was 1.25% as of December 31, 2008. 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. As discussed previously,
the Company may need to fund certain loans or provide additional equity funding support related to
advance rates on its warehouse facilities. As of December 31, 2008, the Company had contributed
$329.7 million in equity funding support to these facilities. The Company has funded these
contributions primarily by advances on its operating line of credit. The lending commitment under
the Companys 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. On
September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. Since the bankruptcy filing, the Company has
experienced funding delays from Lehman for its portion of the lending commitment under the line of
credit and the Company does not expect Lehman to fund future borrowing requests. As of December 31,
2008, excluding Lehman Banks lending commitment, the Company has $51.2 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:
|
(i) |
|
A minimum consolidated net worth; |
|
|
(ii) |
|
A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters); |
|
|
(iii) |
|
A limitation on subsidiary indebtedness; and |
|
|
(iv) |
|
A limitation on the percentage of non-guaranteed loans in the Companys portfolio. |
F-28
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
As of December 31, 2008, the Company was in compliance with all of these requirements. Many of
these covenants are duplicated in the Companys other lending facilities, including its FFELP and
private loan warehouses.
As previously discussed, continued dislocations in the credit markets may cause additional
volatility in the loan valuation formula included in the Companys FFELP warehouse facility. Should
a significant change in the valuation of loans result in additional required equity funding support
for the warehouse facility greater than what the Company can provide, the warehouse facility could
be subject to an event of default resulting in a termination of the facility and an acceleration of
the repayment provisions. A default on the FFELP warehouse facility would result in an event of
default on the Companys unsecured line of credit that would result in the outstanding balance on
the line of credit becoming immediately due and payable.
The Companys operating line of credit does not have any covenants related to unsecured debt
ratings. However, changes in the Companys ratings (as well as the amounts the Company borrows)
have modest implications on the pricing level at which the Company obtains funding.
Unsecured Fixed Rate Debt
On May 25, 2005, the Company issued $275.0 million in aggregate principal amount of Senior Notes
due June 1, 2010 (the Notes). The Notes are unsecured obligations of the Company. The interest
rate on the Notes is 5.125%, payable semiannually. At the Companys option, the Notes are
redeemable in whole at any time or in part from time to time at the redemption price described in
its prospectus supplement.
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 is 7.40%, payable semi-annually. Beginning September 29, 2011
through September 29, 2036, the scheduled maturity date, the interest rate on the Hybrid
Securities will be 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 Companys option, the Hybrid Securities are redeemable (i) in whole or
in part, at 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, or (ii) in whole, but not in part, prior to
September 29, 2011, after certain events involving taxation (as described in the Hybrid Securities
prospectus).
Other Borrowings
As of December 31, 2008 and 2007, bonds and notes payable includes $21.5 million and $57.3 million,
respectively, of notes due to Union Bank. The Company has used the proceeds from these notes to
invest in student loan assets via a participation agreement. This participation agreement is in
addition to the $750 million FFELP Participation Agreement, and participations under this
participation agreement do not qualify as sales pursuant to SFAS No. 140.
On October 13, 2006, the Company purchased a building in which its corporate headquarters is
located. In connection with the acquisition of the building, the Company assumed the outstanding
note on the property. As of December 31, 2008 and 2007, the outstanding balance on the note was
$5.0 million.
F-29
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Maturity Schedule
Bonds and notes outstanding as of December 31, 2008 are due in varying amounts as shown below.
|
|
|
|
|
2009 |
|
$ |
792,970 |
|
2010 |
|
|
1,742,676 |
|
2011 |
|
|
98,900 |
|
2012 |
|
|
703,348 |
|
2013 |
|
|
111,285 |
|
2014 and thereafter |
|
|
23,338,780 |
|
|
|
|
|
|
|
|
$ |
26,787,959 |
|
|
|
|
|
Generally, the Companys secured financing instruments bearing interest at variable rates can be
redeemed on any interest payment date at par plus accrued interest. Subject to certain provisions,
all bonds and notes are subject to redemption prior to maturity at the option of certain education
lending subsidiaries.
One of the Companys education lending subsidiaries has irrevocably escrowed funds to make the
remaining principal and interest payments on previously issued bonds and notes. Accordingly,
neither these obligations nor the escrowed funds are included on the accompanying consolidated
balance sheets. As of December 31, 2008 and 2007, $31.9 million and $29.7 million, respectively, of
defeased debt remained outstanding.
Certain bond resolutions contain, among other requirements, covenants relating to restrictions on
additional indebtedness, limits as to direct and indirect administrative expenses, and maintaining
certain financial ratios. Management believes the Company is in compliance with all covenants of
the bond indentures and related credit agreements as of December 31, 2008.
9. Derivative Financial Instruments
The Company maintains an overall risk management strategy that incorporates the use of derivative
instruments to reduce the economic effect of interest rate volatility and fluctuations in foreign
currency exchange rates. Derivative instruments used as part of the Companys risk management
strategy include interest rate swaps, basis swaps, interest rate floor contracts, and
cross-currency interest rate swaps.
Interest Rate Swaps
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 index plus a fixed
spread that is dependent upon when the loan was originated, the loans 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 Companys 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 new legislation enacted in 2006, lenders are
required to rebate fixed rate floor income and variable rate floor income to the Department for all
new 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.
F-30
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
As previously discussed, the Company reached a Settlement Agreement with the Department to resolve
an audit related to the Companys portfolio of student loans receiving 9.5% special allowance
payments. Under the terms of the Agreement, the Company will no longer receive 9.5% special
allowance payments. In December 2006, in consideration of not receiving the 9.5% special allowance
payments on a prospective basis, the Company entered into a series of off-setting interest rate
swaps that mirrored the $2.45 billion in pre-existing interest rate swaps that the Company had
utilized to hedge its loan portfolio receiving 9.5% special allowance payments against increases in
interest rates. During 2007, the Company entered into a series of off-setting interest rate swaps
that mirrored the remaining interest rate swaps utilized to hedge the Companys student loan
portfolio against increases in interest rates. The net effect of the offsetting derivatives was to
lock in a series of future income streams on underlying trades through their respective maturity
dates. The following table summarizes these derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average fixed |
|
|
|
|
|
|
average fixed |
|
|
|
Notional |
|
|
rate paid by |
|
|
Notional |
|
|
rate received by |
|
Maturity |
|
amount |
|
|
the Company |
|
|
amount |
|
|
the Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
512,500 |
|
|
|
3.42 |
% |
|
$ |
512,500 |
|
|
|
5.25 |
% |
2008 |
|
|
462,500 |
|
|
|
3.76 |
|
|
|
462,500 |
|
|
|
5.34 |
|
2009 |
|
|
312,500 |
|
|
|
4.01 |
|
|
|
312,500 |
|
|
|
5.37 |
|
2010 |
|
|
1,137,500 |
|
|
|
4.25 |
|
|
|
1,137,500 |
|
|
|
4.75 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
275,000 |
|
|
|
4.31 |
|
|
|
275,000 |
|
|
|
4.76 |
|
2013 |
|
|
525,000 |
|
|
|
4.36 |
|
|
|
525,000 |
|
|
|
4.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,225,000 |
|
|
|
4.05 |
% |
|
$ |
3,225,000 |
|
|
|
4.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2007, the Company terminated all interest rate swaps summarized above for net proceeds of
$50.8 million.
In December 2007 and January 2008, the Company entered into the following interest rate derivatives
to hedge fixed rate student loan assets earning fixed rate floor income or variable rate floor
income. All derivatives included below had effective dates subsequent to December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average fixed |
|
|
|
Notional |
|
|
rate paid by |
|
Maturity |
|
Amount |
|
|
the Company (b) |
|
|
|
|
|
|
|
|
|
|
2008 (a) |
|
$ |
2,000,000 |
|
|
|
4.18 |
% |
2009 |
|
|
500,000 |
|
|
|
4.08 |
|
2010 |
|
|
700,000 |
|
|
|
3.44 |
|
2011 |
|
|
500,000 |
|
|
|
3.57 |
|
2012 |
|
|
250,000 |
|
|
|
3.86 |
|
|
|
|
|
|
|
|
|
|
$ |
3,950,000 |
|
|
|
3.94 |
% |
|
|
|
|
|
|
|
|
|
|
(a) |
|
The maturity date on these derivatives was June 30, 2008. |
|
(b) |
|
For all interest rate derivatives, the Company received discrete three-month LIBOR. |
During 2008, with the exception of the derivatives that expired on June 30, 2008, the Company paid
$7.0 million (net) to terminate all remaining derivatives included in the table above.
Basis Swaps
The Company has entered into basis swaps in which the Company (i) receives three-month LIBOR set
discretely in advance and pays a daily weighted average three-month LIBOR less a spread as defined
in the individual agreements (the Average/Discrete Basis Swaps); and (ii) receives three-month
LIBOR and pays one-month LIBOR less a spread as defined in the agreements (the 3/1 Basis Swaps).
The Company entered into these derivative instruments to better match the interest rate
characteristics on its student loan assets and the debt funding such assets.
F-31
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The following table summarizes the Companys basis swaps outstanding as of December 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
Notional Amount |
|
|
|
Average/Discrete |
|
|
|
|
Maturity |
|
Basis Swaps |
|
|
3/1 Basis Swaps |
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
4,500,000 |
|
|
|
|
|
2011 |
|
|
2,700,000 |
|
|
|
|
|
2012 |
|
|
2,400,000 |
|
|
|
|
|
2018 |
|
|
|
|
|
|
1,300,000 |
|
2023 |
|
|
|
|
|
|
1,250,000 |
|
2028 |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,600,000 |
|
|
|
2,650,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
Notional Amount |
|
|
|
Average/Discrete |
|
|
|
|
Maturity |
|
Basis waps |
|
|
3/1 Basis Swaps |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
4,000,000 |
|
|
|
|
|
2009 |
|
|
6,000,000 |
|
|
|
|
|
2010 |
|
|
6,500,000 |
|
|
|
|
|
2011 |
|
|
4,050,000 |
|
|
|
|
|
2012 |
|
|
3,900,000 |
|
|
|
|
|
2016 |
|
|
|
|
|
|
1,000,000 |
|
2017 |
|
|
|
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,450,000 |
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
During
2008, the Company terminated certain basis swaps for net proceeds of
$11.0 million
Interest Rate Floor Contracts
In June 2006, the Company entered into interest rate floor contracts in which the Company received
an upfront fee of $8.6 million. These contracts were structured to monetize on an upfront basis the
potential floor income associated with certain consolidation loans. On January 30, 2007, the
Company paid $8.1 million to terminate these interest rate floor contracts.
Cross-Currency Interest Rate Swaps
The Company entered into derivative instruments in 2006 as a result of the issuance of the Euro
Notes as discussed in note 8. Under the terms of these derivative instrument agreements, the
Company receives from a counterparty a spread to the EURIBOR index based on a notional amount of
420.5 million and 352.7 million, respectively, and pays a spread to the LIBOR index based
on a notional amount 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 these notes.
Accounting for Derivative Financial Instruments
The Company accounts for derivative instruments under SFAS No. 133, which requires that every
derivative instrument be recorded on the balance sheet as either an asset or liability measured at
its fair value. Management has structured all of the Companys derivative transactions with the
intent that each is economically effective; however, the Companys derivative instruments do not
qualify for hedge accounting under SFAS No. 133. As a result, the change in fair value of
derivative instruments is recorded in the consolidated statements of income at each reporting date.
Upon termination of a derivative instrument, any proceeds received or payments made by the Company
are included in derivative market value, foreign currency, and put option adjustments and
derivative settlements, net on the consolidated statements of income and is accounted for as a
change in fair value on such derivative.
F-32
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The following table summarizes the net fair value of the Companys derivative portfolio:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
|
(2,695 |
) |
Basis swaps |
|
|
6,039 |
|
|
|
27,525 |
|
Interest rate floor contracts |
|
|
|
|
|
|
|
|
Cross-currency interest rate swaps |
|
|
167,320 |
|
|
|
191,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value |
|
$ |
173,359 |
|
|
|
216,586 |
|
|
|
|
|
|
|
|
The change in the fair value of the Companys derivative portfolio included in derivative market
value, foreign currency, and put option adjustments and derivative settlements, net on the
Companys consolidated statements of income resulted in a loss of $38.6 million and gains of $139.1
million and $43.9 million for the years ended December 31, 2008, 2007, and 2006, respectively.
The following table summarizes the net derivative settlements for the years ended December 31,
2008, 2007, and 2006, which are included in the derivative market value, foreign currency, and put
option adjustments and derivative settlements, net in the consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(15,037 |
) |
|
|
16,803 |
|
|
|
40,476 |
|
Basis swaps |
|
|
46,751 |
|
|
|
8,534 |
|
|
|
(645 |
) |
Cross-currency interest rate swaps |
|
|
23,942 |
|
|
|
(6,660 |
) |
|
|
(14,406 |
) |
Other (a) |
|
|
|
|
|
|
|
|
|
|
(1,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
settlements received (paid), net |
|
$ |
55,656 |
|
|
|
18,677 |
|
|
|
23,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In connection with the issuance of the Hybrid Securities during 2006 as described
in note 8, the Company entered into a derivative instrument to economically lock into a
fixed interest rate of 7.65% prior to the actual pricing of the transaction. Upon
pricing of the Hybrid Securities, the Company terminated this derivative instrument. The
consideration paid by the Company to terminate this derivative was $2.0 million. |
By using derivative instruments, the Company is exposed to credit and market risk. When the fair
value of a derivative contract is positive, this generally indicates that the counterparty owes the
Company. If the counterparty fails to perform, credit risk is equal to the extent of the fair value
gain in a derivative less any collateral held by the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and, therefore, it has no credit risk. The
Company minimizes the credit (or repayment) risk in derivative instruments by entering into
transactions with high-quality counterparties that are reviewed periodically by the
Companys risk committee. The Company also maintains a policy of requiring that all derivative
contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.
Market risk is the adverse effect that a change in interest rates, or implied volatility rates, has
on the value of a financial instrument. The Company manages market risk associated with interest
rates by establishing and monitoring limits as to the types and degree of risk that may be
undertaken.
10. Shareholders Equity
Classes of Common Stock
The Companys common stock is divided into two classes. The Class B common stock has ten votes per
share and the Class A common stock has one vote per share. Each Class B share is convertible at any
time at the holders option into one Class A share. With the exception of the voting rights and the
conversion feature, the Class A and Class B shares are identical in terms of other rights,
including dividend and liquidation rights.
F-33
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Conversion of Class B Common Stock
During 2007 and 2006, principal shareholders gifted 10,435 shares and 57,142 shares of Class B
common stock, respectively, to certain charitable organizations. Per the articles of incorporation,
these shares were voluntarily converted to Class A shares upon transfer. In September 2006, a
principal shareholder sold 400,000 Class B shares of common stock to another principal shareholder
in a private transaction. Per the articles of incorporation, these shares automatically converted
to Class A shares upon transfer. Also, in February 2007, in anticipation of selling shares to the
Company under the Companys stock repurchase program in a private transaction, a principal
shareholder voluntarily converted 2,000,000 shares of Class B common stock to shares of Class A
common stock.
Related Party Transaction
On May 31, 2007, the Company entered into an agreement with Packers Service Group, Inc.
(Packers), under which the Company agreed to acquire Packers in exchange for the issuance of
10,594,178 shares of the Companys Class A common stock to the shareholders of Packers.
Packers was owned by 30 individual shareholders, the most significant of whom included Michael S.
Dunlap, an executive officer, member of the Board of Directors, and a substantial shareholder of
the Company, and Angela L. Muhleisen, a substantial shareholder of the Company and a sister of
Mr. Dunlap.
Packers was primarily a holding company, whose principal asset was an investment in
11,068,604 shares of the Companys Class A common stock. Upon acquisition, these shares are not
included in total shares outstanding for accounting purposes. Packers also owned all of the
outstanding capital stock of First National Life Insurance Company of the USA (First National
Life), which writes credit life and credit accident and health insurance policies. First National
Lifes net assets as of May 31, 2007 were $1.6 million. In addition, Packers had outstanding debt
of $14.1 million, which the Company assumed.
The Company accounted for this transaction as exchanges of assets or equity instruments between
enterprises under common control and, accordingly, recorded the assets acquired and liabilities
assumed from this transaction at Packers historical carrying values. This transaction resulted in
a $12.5 million decrease to the Companys consolidated shareholders equity and a decrease of
474,426 shares of the Companys Class A common stock outstanding.
Put Option Settlements
On July 19, 2007, the Company paid $15.9 million to redeem 238,237 shares of the Companys Class A
common stock that were subject to put option agreements exercisable in February 2010 at $83.95 per
share. These shares were issued by the Company in February 2006 in consideration for the purchase
of the remaining 20% interest of FACTS. The 238,237 shares of Class A common stock purchased by the
Company were retired resulting in a $5.4 million decrease to the Companys consolidated
shareholders equity.
In addition, on November 10, 2008, the Company paid $9.6 million to redeem 258,760 shares of the
Companys Class A common stock that were subject to put option agreements exercisable in November
2008 at $37.10 per share. These shares were issued by the Company in November 2005 in consideration
for the purchase of 5280 Solutions, Inc. The 258,760 shares of Class A common stock purchased by
the Company were retired.
Stock Repurchase Program
The Company has a stock repurchase program that expires on May 24, 2010 in which it can repurchase
up to a total of 10 million shares of the Companys Class A common stock, on the open market, through private transactions, or otherwise. During the years ended
December 31, 2008, 2007, and 2006, the Company repurchased and retired 388,204 shares, 3,372,122
shares, and 1,940,200 shares of Class A common stock, respectively, for $11.1 million (average
price of $28.69 per share), $82.1 million (average price of $24.33 per share), and $62.4 million
(average price of $32.12 per share), respectively. The 2008 shares repurchased included 258,760 shares that were subject to put option agreements as discussed above, and 54,863 shares withheld to satisfy tax withholding requirements. The 2007 shares repurchased included 2,725,000
shares repurchased from certain members of management of the Company in private transactions under the stock repurchase program and
238,237 shares that were subject to put option agreements as discussed previously.
F-34
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
11. Earnings per Common Share
Basic earnings per common share (basic EPS) is computed by dividing net income by the weighted
average number of shares of common stock outstanding during each period. SFAS No. 128, Earnings Per
Share (SFAS No. 128), requires that nonvested restricted stock that vests solely upon continued
service be excluded from basic EPS but reflected in diluted earnings per common share (diluted
EPS) by application of the treasury stock method.
A reconciliation of weighted average shares outstanding for the years ended December 31, 2008,
2007, and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
49,455,978 |
|
|
|
49,800,434 |
|
|
|
53,593,056 |
|
Less: Nonvested restricted stock vesting solely upon
continued service |
|
|
356,011 |
|
|
|
182,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used
to compute basic EPS |
|
|
49,099,967 |
|
|
|
49,618,107 |
|
|
|
53,593,056 |
|
Diluted effect of nonvested restricted stock |
|
|
14,241 |
|
|
|
10,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS |
|
|
49,114,208 |
|
|
|
49,628,802 |
|
|
|
53,593,056 |
|
|
|
|
|
|
|
|
|
|
|
Included in the Companys weighted average shares outstanding during the years ended December 31,
2008, 2007, and 2006 is 54,573 shares, 24,412 shares, and 10,793 shares, respectively, of
restricted stock units issued to certain associates of the Company and phantom shares that will
be issued to nonemployee directors upon their termination from the board of directors under the
Companys nonemployee directors compensation plan (see note 17).
12. Restricted Investments
The Companys restricted investments by contractual maturity are shown below:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
Over 1 year through 5 years |
|
$ |
31,111 |
|
|
|
85,821 |
|
After 5 years through 10 years |
|
|
238,561 |
|
|
|
117,752 |
|
After 10 years |
|
|
340,196 |
|
|
|
333,047 |
|
|
|
|
|
|
|
|
|
|
|
$ |
609,868 |
|
|
|
536,620 |
|
|
|
|
|
|
|
|
13. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
As of December 31, |
|
|
|
life |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software |
|
3-5 years |
|
$ |
83,200 |
|
|
|
87,182 |
|
Office furniture and equipment |
|
3-7 years |
|
|
13,206 |
|
|
|
14,491 |
|
Leasehold improvements |
|
1-10 years |
|
|
11,949 |
|
|
|
12,147 |
|
Transportation equipment |
|
3-10 years |
|
|
3,771 |
|
|
|
3,845 |
|
Land and buildings |
|
39 years |
|
|
9,234 |
|
|
|
9,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,360 |
|
|
|
126,804 |
|
Accumulated depreciation |
|
|
|
|
|
|
82,613 |
|
|
|
71,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,747 |
|
|
|
55,797 |
|
|
|
|
|
|
|
|
|
|
|
|
F-35
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Depreciation expense for the years ended December 31, 2008, 2007, and 2006 related to property and
equipment was $17.4 million, $17.0 million, and $14.3 million, respectively.
14. Income Taxes
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income tax
positions. This interpretation requires the Company to recognize in the consolidated financial
statements only those tax positions determined to be more likely than not of being sustained upon
examination, based on the technical merits of the positions. It further requires that a change in
judgment related to the expected ultimate resolution of uncertain tax positions be recognized in
earnings in the quarter of such change. Upon adoption, the Company recognized approximately $61,000
of tax liabilities for positions that were previously recognized, of which the Company accounted
for as a reduction to retained earnings.
As of December 31, 2008, the total amount of gross unrecognized tax benefits (excluding the federal
benefit received from state positions) was $8.3 million. Of this total, $4.5 million (net of the
federal benefit on state issues) represents the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective tax rate in future periods. The Company currently
anticipates uncertain tax positions will decrease by $2.4 million prior to December 31, 2009 as a
result of a lapse of applicable statute of limitations, settlements, correspondence with examining
authorities, and recognition or measurement considerations with federal and state jurisdictions;
however, actual developments in this area could differ from those currently expected. Approximately
$1.1 million, if recognized, would affect the Companys effective tax rate. A reconciliation of the
beginning and ending amount of gross unrecognized tax benefits for the years ended December 31,
2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Gross balance beginning of year |
|
$ |
8,359 |
|
|
|
10,838 |
|
Additions based on tax positions of prior years |
|
|
938 |
|
|
|
299 |
|
Additions based on tax positions related to the current year |
|
|
999 |
|
|
|
723 |
|
Settlements with taxing authorities |
|
|
(62 |
) |
|
|
|
|
Reductions for tax positions of prior years |
|
|
(858 |
) |
|
|
(48 |
) |
Reductions based on tax positions related to the current year |
|
|
|
|
|
|
|
|
Reductions due to lapse of applicable statute of limitations |
|
|
(1,101 |
) |
|
|
(3,453 |
) |
|
|
|
|
|
|
|
Gross balance end of year |
|
$ |
8,275 |
|
|
|
8,359 |
|
|
|
|
|
|
|
|
Substantially all of the reduction due to the lapse of statute of limitations shown above impacted
the effective tax rate.
The Companys policy is to recognize interest and penalties accrued on uncertain tax positions as
part of interest expense and other expense, respectively. As of December 31, 2008 and 2007,
approximately $1.6 million and $1.5 million in accrued interest and penalties, respectively, was
included in other liabilities. The Company recognized interest related to uncertain tax positions
of approximately $72,000 and $80,000 for the years ended December 31, 2008 and 2007, respectively.
No penalties were accrued in 2008 and 2007. The impact of timing differences and tax attributes are
considered when calculating interest and penalty accruals associated with the unrecognized tax
benefits.
F-36
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The Company and its subsidiaries file a consolidated federal income tax
return in the U.S. and the
Company or one of its subsidiaries files income tax returns in various state, local, and foreign
jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years
prior to 2005. With few exceptions, the Company is no longer subject to U.S. state/local income tax
examinations by tax authorities prior to 2004. As of December 31, 2008, the tax years subject to
examination by a significant jurisdiction are as follows:
|
|
|
|
|
Internal Revenue Service |
|
2005 and 2006 |
California |
|
2004 through 2006 |
New York |
|
2004 through 2006 |
The provision for income taxes from continuing operations for the years
ended December 31, 2008,
2007, and 2006 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
25,073 |
|
|
|
45,016 |
|
|
|
40,881 |
|
State |
|
|
2,270 |
|
|
|
1,674 |
|
|
|
340 |
|
Foreign |
|
|
21 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision |
|
|
27,364 |
|
|
|
46,695 |
|
|
|
41,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(7,256 |
) |
|
|
(24,105 |
) |
|
|
(4,708 |
) |
State |
|
|
(2,217 |
) |
|
|
(874 |
) |
|
|
(276 |
) |
Foreign |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit) |
|
|
(9,468 |
) |
|
|
(24,979 |
) |
|
|
(4,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense |
|
$ |
17,896 |
|
|
|
21,716 |
|
|
|
36,237 |
|
|
|
|
|
|
|
|
|
|
|
The differences between the income tax provision from continuing operations
computed at the
statutory federal corporate tax rate and the financial statement provision for income taxes for the
years ended December 31, 2008, 2007, and 2006 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense at federal rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State tax, net of federal income tax benefit |
|
|
0.9 |
|
|
|
2.2 |
|
|
|
1.2 |
|
Resolution of uncertain federal and state tax matters |
|
|
(0.9 |
) |
|
|
(0.4 |
) |
|
|
(2.8 |
) |
Tax credits |
|
|
(1.9 |
) |
|
|
(3.6 |
) |
|
|
(0.5 |
) |
Put option |
|
|
4.2 |
|
|
|
3.4 |
|
|
|
2.1 |
|
Other, net |
|
|
2.7 |
|
|
|
1.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
40.0 |
% |
|
|
38.0 |
% |
|
|
35.4 |
% |
|
|
|
|
|
|
|
|
|
|
F-37
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The Companys net deferred income tax liability, which is included in other liabilities on the
consolidated balance sheets, consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Student loans |
|
$ |
20,229 |
|
|
|
17,839 |
|
Accrued expenses |
|
|
5,283 |
|
|
|
5,455 |
|
Depreciation |
|
|
969 |
|
|
|
1,726 |
|
Deferred revenue |
|
|
536 |
|
|
|
990 |
|
Stock compensation |
|
|
875 |
|
|
|
701 |
|
Foreign tax credit |
|
|
1,339 |
|
|
|
803 |
|
Net operating loss carryforwards |
|
|
1,165 |
|
|
|
773 |
|
Other |
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
30,537 |
|
|
|
28,287 |
|
Less, valuation allowance |
|
|
(1,988 |
) |
|
|
(773 |
) |
|
|
|
|
|
|
|
Deferred tax assets |
|
|
28,549 |
|
|
|
27,514 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Loan origination services |
|
|
55,793 |
|
|
|
61,348 |
|
Basis in certain derivative contracts |
|
|
17,152 |
|
|
|
13,788 |
|
Amortization |
|
|
3,185 |
|
|
|
9,447 |
|
Prepaid expenses |
|
|
477 |
|
|
|
946 |
|
Other |
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
76,607 |
|
|
|
85,691 |
|
|
|
|
|
|
|
|
Net deferred income tax liability |
|
$ |
(48,058 |
) |
|
|
(58,177 |
) |
|
|
|
|
|
|
|
The Company received $2.0 million in 2008 as contingent consideration in connection with the sale
of EDULINX (see note 2). The Company incurred $1.1 million of tax expense related to this
consideration and generated additional foreign tax credits of $1.8 million, of which a valuation
allowance of $0.8 million was established to offset these credits. The net tax expense of $0.1
million was included in the loss on disposal of EDULINX within discontinued operations.
The Company has performed an evaluation of the recoverability of deferred tax assets. In assessing
the realizability of the Companys deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during
the period in which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected taxable income, carry back
opportunities, and tax planning strategies in making the assessment of the amount of the valuation
allowance. With the exception of the Companys state net operating loss and foreign tax credit
carry forwards, it is managements opinion that it is more likely than not that the deferred tax
assets will be realized and should not be reduced by a valuation allowance. As of December 31,
2008, various subsidiaries have state net operating loss carry forwards of $1.8 million expiring
through tax year 2027 and foreign tax credit carry forwards of $0.8 million expiring in 2018. A
valuation allowance has been established to reduce deferred income tax assets to amounts expected
to be realized.
The valuation allowance for deferred tax assets as of December 31, 2008 and 2007 was $2.0 million
and $0.8 million, respectively. The increase in the total valuation allowance is $1.2 million, of
which $0.4 million is related to additional state net operating loss carry forwards and was
included in continuing operations as a tax benefit offset. The other $0.8 million is related to
foreign tax credit carry forwards and was included in discontinued operations as previously
discussed. Any future reversal of valuation allowance for deferred tax
assets will be included as a tax benefit in continuing operations.
As of December 31, 2008 and 2007, current income taxes payable of $5.3 million and $1.1 million are
included in other liabilities respectively, on the consolidated balance sheets.
F-38
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
15. Fair Value of Financial Instruments
The following table summarizes the fair values of the Companys financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Fair value |
|
|
Carrying value |
|
|
Fair value |
|
|
Carrying value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans receivable |
|
$ |
25,743,732 |
|
|
|
25,413,008 |
|
|
|
27,061,783 |
|
|
|
26,736,122 |
|
Cash and cash equivalents |
|
|
189,847 |
|
|
|
189,847 |
|
|
|
111,746 |
|
|
|
111,746 |
|
Restricted cash and investments |
|
|
997,272 |
|
|
|
997,272 |
|
|
|
927,247 |
|
|
|
927,247 |
|
Restricted cash due to customers |
|
|
160,985 |
|
|
|
160,985 |
|
|
|
81,845 |
|
|
|
81,845 |
|
Accrued interest receivable |
|
|
471,878 |
|
|
|
471,878 |
|
|
|
593,322 |
|
|
|
593,322 |
|
Derivative instruments |
|
|
175,174 |
|
|
|
175,174 |
|
|
|
222,471 |
|
|
|
222,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes payable |
|
|
26,512,082 |
|
|
|
26,787,959 |
|
|
|
28,106,745 |
|
|
|
28,115,829 |
|
Accrued interest payable |
|
|
81,576 |
|
|
|
81,576 |
|
|
|
129,446 |
|
|
|
129,446 |
|
Due to customers |
|
|
160,985 |
|
|
|
160,985 |
|
|
|
81,845 |
|
|
|
81,845 |
|
Derivative instruments |
|
|
1,815 |
|
|
|
1,815 |
|
|
|
5,885 |
|
|
|
5,885 |
|
Cash and Cash Equivalents, Restricted Cash Due to Customers, 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.
Student Loans Receivable
The fair value of student loans receivable is estimated at amounts recently paid and/or received by
the Company to acquire and/or sell similar loans in the market and/or the characteristics of the
portfolio.
Restricted Cash and Investments
The carrying amount for restricted cash approximates fair value due to the variable rate of
interest and/or the short maturities of these instruments. The restricted investments are
investments for which there is no available or active market, due to the characteristics of the
investments. These investments are guaranteed and are purchased at par value, which equals their
cost.
Derivative Instruments
The fair values of derivative financial instruments are 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. It is the Companys policy to compare its
derivative fair values to those received by its counterparties in order to validate the models
outputs. Fair value of derivative instruments is comprised of market value less accrued interest
and excludes collateral.
Bonds and Notes Payable
The fair value of the bonds and notes payable is based on market prices for securities that possess
similar credit risk and interest rate risk.
Limitations
The fair value of a financial instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements.
F-39
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
16. Fair Value
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value, and
expands disclosure requirements about fair value measurements. The Company elected to delay the
application of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities, as allowed by FASB
Staff Position SFAS No. 157-2. SFAS No. 157 applies when other accounting pronouncements require or
permit fair value measurements; it does not require new fair value measurements.
Fair value under SFAS No. 157 is defined as the price to sell an asset or transfer a liability in
an orderly transaction between willing and able market participants. The Company determines fair
value using valuation techniques which are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Companys market assumptions. Transaction costs are not included in the determination
of fair value. When possible, the Company seeks to validate the models output to market
transactions. Depending on the availability of observable inputs and prices, different valuation
models could produce materially different fair value estimates. The values presented may not
represent future fair values and may not be realizable. Additionally, there may be inherent
weaknesses in any calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect the results of
current or future values.
Under SFAS No. 157, the Company categorizes its fair value estimates based on a hierarchal
framework associated with three levels of price transparency utilized in measuring financial
instruments at fair value. Classification is based on the lowest level of input that is significant
to the fair value of the instrument. The three levels include:
|
|
|
Level 1: Quoted prices for identical instruments in active markets. The types of
financial instruments included in Level 1 are highly liquid instruments with quoted prices. |
|
|
|
Level 2: Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active; and model derived
valuations whose inputs are observable or whose primary value drivers are observable. |
|
|
|
Level 3: Instruments whose primary value drivers are unobservable. Inputs are developed
based on the best information available; however, significant judgment is required by
management in developing the inputs. |
The following table presents the Companys financial assets and liabilities that are measured at
fair value on a recurring basis. All financial assets and liabilities that are measured at fair
value are categorized as Level 1 or 2 based on the above hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (a) |
|
$ |
4,941 |
|
|
|
3,876 |
|
|
|
|
|
|
|
8,817 |
|
Fair value of derivative instruments (b) |
|
|
|
|
|
|
175,174 |
|
|
|
|
|
|
|
175,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,941 |
|
|
|
179,050 |
|
|
|
|
|
|
|
183,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments (b) |
|
$ |
|
|
|
|
1,815 |
|
|
|
|
|
|
|
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
|
1,815 |
|
|
|
|
|
|
|
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other assets includes investments recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices. Level 1 investments include
investments traded on an active exchange, such as the New York Stock Exchange, and U.S.
Treasury securities that are traded by dealers or brokers in active over-the-counter
markets. Level 2 investments include corporate debt securities. |
(b) |
|
All derivatives are accounted for at fair value in the financial statements. The
fair values of derivative financial instruments are 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. It is the
Companys policy to compare its derivative fair values to those received by its
counterparties in order to validate the models outputs. Fair value of derivative
instruments is comprised of market value less accrued interest and excludes collateral. |
F-40
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
17. Employee Benefit Plans
Defined Contribution Plans
The Company has a 401(k) savings plan that cover substantially all of its U.S. employees. Employees
may contribute up to 100% of their pre-tax salary, subject to IRS limitations. The Company made
contributions to the plan of $3.5 million, $4.5 million, and $3.2 million during the years ended
December 31, 2008, 2007, and 2006, respectively. Union Bank & Trust Company, an entity under common
control with the Company, serves as the trustee for the plan.
Prior to joining the Companys 401(k) plan, Petersons had a 401(k) savings plan in which employees
were eligible to contribute up to 100% of their pre-tax salary, subject to IRS limitations.
Petersons made contributions to the plan of approximately $53,000 for the period from July 27,
2006 (the Companys date of acquisition of Petersons) to August 31, 2006 (the end date for the
plan).
Prior to joining the Companys 401(k) plan on January 1, 2007, FACTS had a 401(k) savings plan in
which employees could contribute up to 100% of their pre-tax salary, subject to IRS limitations.
FACTS made contributions to the plan of approximately $367,000 for the year ended December 31,
2006.
Employee Share Purchase Plan
The Company has an employee share purchase plan pursuant to which employees are entitled to
purchase common stock from payroll deductions at a 15% discount from market value. The employee
share purchase plan is intended to enhance the Companys ability to attract and retain employees
and to better enable such persons to participate in the Companys long term success and growth.
A total of 1,000,000 Class A common stock shares are reserved for issuance under the employee share
purchase plan, subject to equitable adjustment by the compensation committee in the event of stock
dividends, recapitalizations, and other similar corporate events. All employees, other than those
whose customary employment is 20 hours or less per week, who have been employed for at least six
months, or another period determined by the Companys compensation committee not in excess of two
years, are eligible to purchase Class A common stock under the plan. During the years ended
December 31, 2008, 2007, and 2006, the Company recognized compensation expense of approximately
$186,000, $279,000, and $311,000, respectively, in connection with issuing 71,172 shares,
86,909 shares, and 57,363 shares, respectively, under this plan.
Restricted Stock Plan
The Company has a restricted stock plan that is intended to provide incentives to attract, retain,
and motivate employees in order to achieve long term growth and profitability objectives. The
restricted stock plan provides for the grant to eligible employees of awards of restricted shares
of Class A common stock. An aggregate of 2,000,000 shares of Class A common stock have been
reserved for issuance under the restricted stock plan, subject to antidilution adjustments in the
event of certain changes in capital structure.
During the years ended December 31, 2008, 2007, and 2006, the Company issued 79,162 shares, 563,022
shares, and 79,529 shares, respectively, of its Class A common stock under the restricted stock
plan. In addition, 169,961 shares, 55,230 shares, and 1,256 shares were forfeited in 2008, 2007,
and 2006, respectively. To date, the shares issued under this plan vest immediately or vest in
either three or ten years. The Company records unearned compensation in shareholders equity
(additional paid-in capital) upon issuance of restricted stock and recognizes compensation expense
over the vesting period. For the years ended December 31, 2008, 2007, and 2006, the Company
recognized compensation expense of $2.4 million, $2.6 million, and $0.4 million, respectively,
related to shares issued under the restricted stock plan.
Employee Stock Purchase Loan Plan
The Company has entered into loan agreements with employees pursuant to the Companys Employee
Stock Purchase Loan Plan (the Loan Plan). The Loan Plan was approved by the Companys board of
directors and shareholders at the annual shareholders meeting in May 2006. A total of $40.0 million
in loans may be made under the Loan Plan, and a total of 1,000,000 shares of Class A common stock
are reserved for issuance under the Loan Plan. Shares may be purchased directly from the Company or
in the open market through a broker at prevailing market prices at the time of purchase. Loans
under this plan mature ten years from grant date and bear interest equal to the three-month LIBOR
rate plus 50 basis points. As of December 31, 2008 and 2007, the balance of the loans granted under
the Loan Plan was $1.6 million and $3.1 million, respectively, and is reflected as a reduction to
stockholders equity on the consolidated balance sheets.
F-41
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Non-employee Directors Compensation Plan
The Company has a compensation plan for non-employee directors pursuant to which non-employee
directors can elect to receive their annual retainer fees in the form of cash or Class A common
stock. Up to 400,000 shares may be issued under the plan, subject to antidilution adjustments in
the event of certain changes in capital structure. If a nonemployee director elects to receive
Class A common stock, the number of shares of Class A common stock that are awarded is equal to the
amount of the annual retainer fee otherwise payable in cash divided by 85% of the fair market value
of a share of Class A common stock on the date the fee is payable. Non-employee directors who
choose to receive Class A common stock may also elect to defer receipt of the Class A common stock
until termination of their service on the board of directors.
During the years ended December 31, 2008, 2007, and 2006, the Company issued 17,837 shares, 13,691
shares, and 8,133 shares, respectively, of its Class A common stock to non-employee directors under
this plan. These shares were issued to directors that elected to receive shares and did not defer
receipt of the shares. In addition, during the years ended December 31, 2008, 2007, and 2006, the
Company allocated 35,806 shares, 7,974 shares, and 4,066 shares, respectively, to directors that
elected to defer receipt of their shares until their termination from the board of directors. The
deferred shares are included in the Companys weighted average
shares outstanding calculation. For the years ended December 31, 2008, 2007, and 2006, the Company
recognized approximately $494,000, $459,000, and $483,000, respectively, of expense related to this
plan.
18. Commitments
The Company is committed under noncancelable operating leases for office and warehouse space and
equipment. Total rental expense incurred by the Company for the years ended December 31, 2008,
2007, and 2006 was $11.9 million, $13.4 million, and $13.8 million, respectively. Minimum future
rentals as of December 31, 2008, under noncancelable operating leases are shown below:
|
|
|
|
|
2008 |
|
$ |
9,425 |
|
2009 |
|
|
8,806 |
|
2010 |
|
|
6,883 |
|
2011 |
|
|
6,116 |
|
2012 |
|
|
5,431 |
|
2013 and thereafter |
|
|
2,711 |
|
|
|
|
|
|
|
$ |
39,372 |
|
|
|
|
|
Future rental commitments for leases have not been reduced by minimum non-cancelable sublease
rentals aggregating approximately $2.6 million as of December 31, 2008.
19. 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 Departments 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 Companys management that the disposition or ultimate determination of these
claims, lawsuits, and proceedings will not have a material adverse effect on the Companys
business, financial position, or results of operations.
F-42
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Municipal Derivative Bid Practices Investigation
On February 8, 2008, Shockley Financial Corp. (SFC), an indirect, wholly-owned subsidiary of the
Company that provides investment advisory services for the investment of proceeds from the issuance
of municipal and corporate bonds, received a grand jury subpoena issued by the U.S. District Court
for the Southern District of New York upon application of the Antitrust Division of the U.S.
Department of Justice (DOJ). The subpoena seeks certain information and documents from SFC in
connection with DOJs criminal investigation of the bond industry with respect to possible
anti-competitive practices related to awards of guaranteed investment contracts (GICs) and other
products for the investment of proceeds from bond issuances. SFC currently has one employee. The
Company and SFC are cooperating with the investigation.
On March 5, 2008, SFC received a subpoena from the Securities and Exchange Commission (the SEC)
related to a similar investigation, on June 6, 2008 and June 12, 2008, SFC received subpoenas from
the New York Attorney General and the Florida
Attorney General, respectively, relating to their similar investigations. Each of the subpoenas
seeks information similar to that of the DOJ. The Company and SFC are cooperating with these
investigations.
SFC was also named as a defendant in a number of substantially identical purported class action
lawsuits, which as of June 16, 2008 have been consolidated before the U.S. District Court for the
Southern District of New York, under the caption In re Municipal Derivatives Antitrust Litigation.
The consolidated suit (the Suit) alleges several financial institutions and financial service
provider defendants engaged in a conspiracy not to compete and to fix prices and rig bids for
municipal derivatives (including GICs) sold to issuers of municipal bonds. The Suit also asserts
claims for violations of Section 1 of the Sherman Act, fraudulent concealment, unfair competition
and violation of the California Cartwright Act. On January 30, 2009, SFC entered into a Tolling and
Cooperation Agreement (Tolling Agreement) with a number of the plaintiffs involved in the Suit.
In connection with the Tolling Agreement, on February 5, 2009 SFC was voluntarily dismissed from
the Suit, without prejudice, on motion of the plaintiffs who are parties to the Tolling Agreement.
To the extent SFC is not dismissed by other plaintiffs, SFC intends to vigorously contest the Suit.
SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory
agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to
predict the ultimate outcome of the investigations or the Suit.
Department of Education Review
The Department of Education periodically reviews participants in the FFEL Program for compliance
with program provisions. On June 28, 2007, the Department notified the Company that it would be
conducting a review of the Companys administration of the FFEL Program under the Higher Education
Act. The Company understands that the Department selected several schools and lenders for review.
Specifically, the Department indicated it was reviewing the Companys practices in connection with
the prohibited inducement provisions of the Higher Education Act and the provisions of the Higher
Education Act and the associated regulations which allow borrowers to have a choice of lenders. The
Company responded to the Departments requests for information and documentation and has cooperated
with their review.
While the Company cannot predict the ultimate outcome of the review, the Company believes its
activities have materially complied with the Higher Education Act, the rules and regulations
adopted by the Department of Education thereunder, and the Departments guidance regarding those
rules and regulations.
Department of Justice
In connection with the Companys settlement with the Department of Education in January 2007 to
resolve the Office of Inspector General of the Department of Education (the OIG) audit report
with respect to the Companys student loan portfolio receiving special allowance payments at a
minimum 9.5% interest rate, the Company was informed in February 2007 by the Department of
Education that a civil attorney with the Department of Justice had opened a file regarding the
issues set forth in the OIG report, which the Company understands is common procedure following an
OIG audit report. The Company has engaged in discussions with and provided information to the DOJ
in connection with the review.
By letter dated November 18, 2008, the DOJ requested that the Company provide the DOJ certain
documents and information related to the Companys compliance with the prohibited inducement
provisions of the Higher Education Act and associated regulations. The Company responded to the
DOJs requests and is cooperating with their review.
While the Company is unable to predict the ultimate outcome of these reviews, the Company believes
its practices complied with applicable law, including the provisions of the Higher Education Act,
the rules and regulations adopted by the Department of Education thereunder, and the Departments
guidance regarding those rules and regulations.
F-43
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
20. Related Parties
On November 25, 2008, the Company sold approximately $500 million of FFELP student loans (the
FFELP Loans) to Union Bank & Trust Company, an entity under common control with the Company.
These loans were sold for a purchase price of 100 percent of the outstanding unpaid principal
balance plus accrued and unpaid borrower interest. The Company recognized a loss on this loan sale
of $3.5 million, which represented unamortized loan costs on this portfolio.
Including the loans sold in this transaction, Union Bank may purchase up to $750 million in FFELP
loans from the Company in accordance with an affiliate transaction exemption granted by the Federal
Reserve Board. In connection with the exemption and the loan purchase by Union Bank, an Assurance
Commitment Agreement (the Commitment Agreement) was also entered into, by and among, the Company,
Union Bank, and Michael S. Dunlap, the Companys Chairman, Chief Executive Officer, and a principal
shareholder of the Company. Per the terms of the Commitment Agreement, the Company provided certain
assurances to Union Bank designed to mitigate potential losses related to the FFELP Loans,
including holding amounts in escrow equal to the unguaranteed portion and reimbursing Union Bank
for losses, if any, related to the portfolio.
On February 4, 2005, the Company entered into an agreement to amend certain existing contracts with
Union Bank, an entity under common control with the Company. Under the agreement, Union Bank
committed to transfer to the Company substantially all of the remaining balance of Union Banks
origination rights in guaranteed student loans to be originated in the future, except for student
loans previously committed for sale to others. Union Bank will continue to originate student loans,
and such guaranteed student loans not previously committed for sale to others are to be sold by
Union Bank to the Company in the future. Union Bank also granted to the Company exclusive rights as
marketing agent for student loans on behalf of Union Bank.
The Company serviced loans for Union Bank of $533.1 million and $31.3 million as of December 31,
2008 and 2007, respectively. Income earned by the Company from servicing loans for Union Bank was
$0.3 million for each of the years ended December 31, 2008, 2007, and 2006. As of December 31, 2008
and 2007, accounts receivable includes $0.2 million and $0.1 million, respectively from Union Bank
for loan servicing. The loan servicing terms with Union Bank were similar to those terms with
unrelated entities. On November 25, 2008, the Company entered into an additional loan servicing
agreement with Union Bank to service the FFELP Loans. Under this agreement the Company will receive
a servicing fee of 34 basis points per year related to the FFELP Loans. Fees received in
conjunction with this agreement are included in the servicing income for the year ended December
31, 2008 noted above.
During the years ended December 31, 2008, 2007, and 2006, the Company purchased student loans of
$208.0 million, $252.5 million, and $577.8 million, respectively, from Union Bank. Premiums paid on
these loans totaled $4.9 million, $8.5 million, and $10.8 million, respectively. The purchases from
Union Bank were made on terms similar to those made with unrelated entities.
The Company has sold to Union Bank, as trustee, participation interests with balances of
approximately $569.9 million and $367.9 million as of December 31, 2008 and 2007, respectively (see
note 8).
The Company participates in the Short term Federal Investment Trust (STFIT) of the Student Loan
Trust Division of Union Bank, which is included in cash and cash equivalents held at a related
party and restricted cash due to customers on the accompanying consolidated balance sheets. As
of December 31, 2008 and 2007, the Company had approximately $176.4 million and $72.7 million,
respectively, invested in the STFIT or deposited at Union Bank in operating accounts, of which
approximately $24.1 million as of December 31, 2008 represented cash collected for customers. The
Companys participation in the STFIT had similar terms and investment yields as those prevailing
for other nonaffiliated customers. Interest income earned by the Company on the amounts invested in
the STFIT for the years ended December 31, 2008, 2007, and 2006 was $3.9 million, $7.0 million, and
$7.9 million, respectively.
During the years ended December 31, 2008, 2007, and 2006, Union Bank reimbursed the Company
$4.6 million, $3.1 million, and $2.0 million, respectively, for marketing services and fees related
to the Nebraska College Savings Plan.
F-44
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
On October 13, 2006, the Company purchased its corporate headquarters building and assumed certain
existing lease agreements pursuant to which Union Bank leases office and storage space. The leases
assumed by the Company provided for the lease to Union
Bank of a total of approximately 15,000 square feet through June 30, 2008. The lease was amended to
reduce the space leased to 4,000 square feet. Union Bank paid the Company approximately $141,000,
$173,000, and $28,000 for commercial rent and storage income during 2008, 2007 and 2006,
respectively. The amended lease agreement expires on June 30, 2018.
In December 2007, the Company sold a building to Union Bank for $600,000. Prior to the sale, the
Company leased office space in that building to Union Bank for a total rental amount of
approximately $34,000 during 2007. The Company recognized a gain of approximately $431,000 upon
sale of the building.
On March 1, 2006, the Company entered into an agreement to acquire participation interests in
non-federally insured loans from First National Bank Northeast at a price equal to the outstanding
principal balance and accrued interest of such loans. The term of this agreement is for 364 days.
As of December 31, 2007 the balance of loans participated under this agreement was $0.1 million,
and is included in student loans receivable on the Companys consolidated balance sheets. There was
no activity under this agreement during 2008. Michael S. Dunlap is a director and indirectly a
significant shareholder of First National Bank Northeast.
During the years ended December 31, 2008, 2007, and 2006, the Company paid entities under common
control with the Company $0.3 million, $0.4 million, and $0.6 million, respectively, for payroll
costs and miscellaneous fees and commissions. During the years ended December 31, 2008, 2007, and
2006, entities under common control with the Company paid the Company $0.2 million, $0.2 million,
and $0.3 million, respectively, for consulting services.
In December 2007, the Company approved an assignment of a lease, to Union Financial Services Inc.,
a corporation of which Michael S. Dunlap owns 50%, and Stephen F. Butterfield, Vice Chairman and a
member of the Board of Directors of the Company, owns the other 50%. The lease is for approximately
3,100 square feet at a current base rent of $23.50 per square foot per year. The lease provides
that base rent shall be subject to specified increases through the termination date of the lease on
August 31, 2010.
21. Segment Reporting
The Company has five operating segments as defined in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, as follows: Student Loan and Guaranty Servicing, Tuition
Payment Processing and Campus Commerce, Enrollment Services, Software and Technical Services, and
Asset Generation and Management. The Companys 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
Companys operating segments are the same as those described in the summary of significant
accounting policies. 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 management reporting process measures the performance of the Companys 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 Companys chief operating
decision maker, evaluates the performance of the Companys operating segments based on their
profitability. As discussed further below, management measures the profitability of the Companys
operating segments based on base net income. Accordingly, information regarding the Companys
operating segments is provided based on base net income. The Companys base net income is not a
defined term within 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.
In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of
the Company. As a result of this transaction, the results of operations for EDULINX are reported as
discontinued operations for all periods presented. The operating results of EDULINX were included
in the Student Loan and Guaranty Servicing operating segment. The Company presents base net
income excluding discontinued operations since the operations and cash flows of EDULINX have been
eliminated from the ongoing operations of the Company. Therefore, the results of operations for the
Student Loan and Guaranty Servicing segment exclude the operating results of EDULINX for all
periods presented. See note 2 for additional information concerning EDULINXs detailed operating
results that have been segregated from continuing operations and reported as discontinued
operations.
F-45
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Historically, the Company generated the majority of its revenue from net interest income earned in
its Asset Generation and Management operating segment. In recent years, the Company has made
several acquisitions that have expanded the Companys products and services and has diversified its
revenue primarily from fee-based businesses. The Company currently offers a broad range of
pre-college, in-college, and post-college products and services to students, families, schools, and
financial institutions. These products and services help students and families plan and pay for
their education and students plan their careers. The Companys products and services are designed
to simplify the education planning and financing process and are focused on providing value to
students, families, and schools throughout the education life cycle. The Company continues to
diversify its sources of revenue, including those generated from businesses that are not dependent
upon government programs, reducing legislative and political risk.
Fee-Based Operating Segments
Student Loan and Guaranty Servicing
The Student Loan and Guaranty Servicing segment provides for the servicing of the Companys student
loan portfolios and the portfolios of third parties and servicing provided to guaranty agencies.
The servicing and business process outsourcing activities include loan origination activities,
application processing, borrower updates, payment processing, due diligence procedures, and claim
processing. These activities are performed internally for the Companys portfolio in addition to
generating fee revenue when performed for third-party clients. The guaranty servicing, servicing
support, and business process outsourcing activities include providing software and data center
services, borrower and loan updates, default aversion tracking services, claim processing services,
and post-default collection services to guaranty agencies. The following are the primary product
and service offerings the Company offers as part of its Student Loan and Guaranty Servicing
segment:
|
|
|
Origination and servicing of FFELP loans |
|
|
|
Servicing of non-federally insured student loans |
|
|
|
Servicing and support outsourcing for guaranty agencies |
Tuition Payment Processing and Campus Commerce
The Tuition Payment Processing and Campus Commerce segment provides products and services to help
institutions and education-seeking families manage the payment of education costs during the
pre-college and college stages of the education life cycle. The Company provides actively managed
tuition payment solutions, online payment processing, detailed information reporting, financial
needs analysis, and data integration services to K-12 and higher educational institutions,
families, and students. In addition, the Company provides customer-focused electronic transactions,
information sharing, and account and bill presentment to colleges and universities.
Enrollment Services
The Companys Enrollment Services segment offers products and services that are focused on helping
(i) students plan and prepare for life after high school (content management) and (ii) colleges
recruit and retain students (lead generation). Content management products and services include
test preparation study guides and online courses, admissions consulting, licensing of scholarship
data, essay and resume editing services, and call center services. Lead generation products and
services include vendor lead management services, pay per click marketing management, email
marketing, admissions lead generation, and list marketing services.
F-46
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Software and Technical Services
The Software and Technical Services segment provides information technology products and
full-service technical consulting, with core areas of business in educational loan software
solutions, business intelligence, technical consulting services, and Enterprise Content Management
solutions.
Asset Generation and Management Operating Segment
The Asset Generation and Management segment includes the acquisition, management, and ownership of
the Companys student loan assets. Revenues are primarily generated from the Companys earnings
from the spread, referred to as the Companys student loan spread, between the yield received on
the student loan portfolio and the costs associated with originating,
acquiring, and financing its student loan portfolio. The Company generates student loan assets
through direct origination or through acquisitions. The student loan assets are held in a series of
education lending subsidiaries designed specifically for this purpose. In addition to the student
loan portfolio, all costs and activity associated with the generation of assets, funding of those
assets, and maintenance of the debt transactions are included in this segment. This includes
derivative activity and the related derivative market value and foreign currency adjustments. The
Company is also able to leverage its capital market expertise by providing investment advisory
services and other related services to third parties through a licensed broker dealer subsidiary.
Revenues and expenses for those functions are also included in the Asset Generation and Management
segment.
Segment
Operating Results Base Net Income
The tables below include the operating results of each of the Companys 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
Companys 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 Companys 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. Reconciliation of the segment totals to the
Companys operating results in accordance with GAAP are also included in the tables below.
Base net income is the primary financial performance measure used by management to develop the
Companys 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 Companys 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. Reconciliation of the segment totals to the
Companys operating results in accordance with GAAP are also included in the tables below.
F-47
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Segment Results and Reconciliations to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
1,377 |
|
|
|
1,689 |
|
|
|
17 |
|
|
|
24 |
|
|
|
3,107 |
|
|
|
1,164,329 |
|
|
|
6,810 |
|
|
|
(2,190 |
) |
|
|
42,325 |
|
|
|
1,214,381 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986,556 |
|
|
|
42,123 |
|
|
|
(2,190 |
) |
|
|
|
|
|
|
1,026,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
1,377 |
|
|
|
1,689 |
|
|
|
17 |
|
|
|
24 |
|
|
|
3,107 |
|
|
|
177,773 |
|
|
|
(35,313 |
) |
|
|
|
|
|
|
42,325 |
|
|
|
187,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
1,377 |
|
|
|
1,689 |
|
|
|
17 |
|
|
|
24 |
|
|
|
3,107 |
|
|
|
152,773 |
|
|
|
(35,313 |
) |
|
|
|
|
|
|
42,325 |
|
|
|
162,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
104,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,287 |
|
|
|
16 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
104,176 |
|
Other fee-based income |
|
|
|
|
|
|
48,435 |
|
|
|
112,405 |
|
|
|
|
|
|
|
160,840 |
|
|
|
17,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,699 |
|
Software services income |
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
19,707 |
|
|
|
19,744 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
19,757 |
|
Other income |
|
|
51 |
|
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
(229 |
) |
|
|
(448 |
) |
|
|
5,437 |
|
|
|
|
|
|
|
|
|
|
|
4,760 |
|
Gain (loss) on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,035 |
) |
|
|
1,621 |
|
|
|
|
|
|
|
|
|
|
|
(51,414 |
) |
Intersegment revenue |
|
|
75,361 |
|
|
|
302 |
|
|
|
2 |
|
|
|
6,831 |
|
|
|
82,496 |
|
|
|
|
|
|
|
63,385 |
|
|
|
(145,881 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
10,361 |
|
|
|
10,827 |
|
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,622 |
|
|
|
|
|
|
|
|
|
|
|
(9,965 |
) |
|
|
55,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
179,699 |
|
|
|
48,457 |
|
|
|
112,444 |
|
|
|
26,538 |
|
|
|
367,138 |
|
|
|
30,480 |
|
|
|
70,329 |
|
|
|
(145,881 |
) |
|
|
396 |
|
|
|
322,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
51,320 |
|
|
|
23,290 |
|
|
|
24,379 |
|
|
|
18,081 |
|
|
|
117,070 |
|
|
|
8,316 |
|
|
|
54,910 |
|
|
|
98 |
|
|
|
2,999 |
|
|
|
183,393 |
|
Restructure expense severance and contract
termination costs |
|
|
747 |
|
|
|
|
|
|
|
282 |
|
|
|
487 |
|
|
|
1,516 |
|
|
|
1,845 |
|
|
|
3,706 |
|
|
|
(7,067 |
) |
|
|
|
|
|
|
|
|
Impairment expense |
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
|
|
9,351 |
|
|
|
4,409 |
|
|
|
|
|
|
|
|
|
|
|
18,834 |
|
Other expenses |
|
|
33,922 |
|
|
|
9,879 |
|
|
|
76,189 |
|
|
|
2,489 |
|
|
|
122,479 |
|
|
|
35,679 |
|
|
|
53,975 |
|
|
|
24 |
|
|
|
26,230 |
|
|
|
238,387 |
|
Intersegment expenses |
|
|
25,111 |
|
|
|
478 |
|
|
|
3,240 |
|
|
|
37 |
|
|
|
28,866 |
|
|
|
74,609 |
|
|
|
3,733 |
|
|
|
(107,208 |
) |
|
|
|
|
|
|
|
|
Corporate allocations |
|
|
22,626 |
|
|
|
919 |
|
|
|
3,401 |
|
|
|
2,286 |
|
|
|
29,232 |
|
|
|
2,496 |
|
|
|
|
|
|
|
(31,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
138,800 |
|
|
|
34,566 |
|
|
|
107,491 |
|
|
|
23,380 |
|
|
|
304,237 |
|
|
|
132,296 |
|
|
|
120,733 |
|
|
|
(145,881 |
) |
|
|
29,229 |
|
|
|
440,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
42,276 |
|
|
|
15,580 |
|
|
|
4,970 |
|
|
|
3,182 |
|
|
|
66,008 |
|
|
|
50,957 |
|
|
|
(85,717 |
) |
|
|
|
|
|
|
13,492 |
|
|
|
44,740 |
|
Income tax expense (benefit) (a) |
|
|
14,321 |
|
|
|
5,175 |
|
|
|
1,730 |
|
|
|
1,021 |
|
|
|
22,247 |
|
|
|
18,356 |
|
|
|
(28,499 |
) |
|
|
|
|
|
|
5,792 |
|
|
|
17,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
continuing operations |
|
|
27,955 |
|
|
|
10,405 |
|
|
|
3,240 |
|
|
|
2,161 |
|
|
|
43,761 |
|
|
|
32,601 |
|
|
|
(57,218 |
) |
|
|
|
|
|
|
7,700 |
|
|
|
26,844 |
|
Income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,818 |
|
|
|
1,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
27,955 |
|
|
|
10,405 |
|
|
|
3,240 |
|
|
|
2,161 |
|
|
|
43,761 |
|
|
|
32,601 |
|
|
|
(57,218 |
) |
|
|
|
|
|
|
9,518 |
|
|
|
28,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
245,202 |
|
|
|
128,657 |
|
|
|
120,961 |
|
|
|
14,428 |
|
|
|
509,248 |
|
|
|
27,724,122 |
|
|
|
106,965 |
|
|
|
(485,438 |
) |
|
|
|
|
|
|
27,854,897 |
|
|
|
|
(a) |
|
Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is
used to calculate income taxes for each operating segment. |
F-48
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
5,459 |
|
|
|
3,809 |
|
|
|
347 |
|
|
|
18 |
|
|
|
9,633 |
|
|
|
1,730,882 |
|
|
|
7,485 |
|
|
|
(3,737 |
) |
|
|
3,013 |
|
|
|
1,747,276 |
|
Interest expense |
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
14 |
|
|
|
1,465,883 |
|
|
|
40,502 |
|
|
|
(3,737 |
) |
|
|
|
|
|
|
1,502,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
5,459 |
|
|
|
3,802 |
|
|
|
340 |
|
|
|
18 |
|
|
|
9,619 |
|
|
|
264,999 |
|
|
|
(33,017 |
) |
|
|
|
|
|
|
3,013 |
|
|
|
244,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan losses |
|
|
5,459 |
|
|
|
3,802 |
|
|
|
340 |
|
|
|
18 |
|
|
|
9,619 |
|
|
|
236,821 |
|
|
|
(33,017 |
) |
|
|
|
|
|
|
3,013 |
|
|
|
216,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
127,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,775 |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,069 |
|
Other fee-based income |
|
|
|
|
|
|
42,682 |
|
|
|
103,311 |
|
|
|
|
|
|
|
145,993 |
|
|
|
13,387 |
|
|
|
1,508 |
|
|
|
|
|
|
|
|
|
|
|
160,888 |
|
Software services income |
|
|
|
|
|
|
|
|
|
|
594 |
|
|
|
22,075 |
|
|
|
22,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,669 |
|
Other income |
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
8,030 |
|
|
|
11,095 |
|
|
|
|
|
|
|
|
|
|
|
19,209 |
|
Intersegment revenue |
|
|
74,687 |
|
|
|
688 |
|
|
|
891 |
|
|
|
15,683 |
|
|
|
91,949 |
|
|
|
|
|
|
|
9,040 |
|
|
|
(100,989 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,806 |
|
|
|
26,806 |
|
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,628 |
|
|
|
12,049 |
|
|
|
|
|
|
|
|
|
|
|
18,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
202,462 |
|
|
|
43,454 |
|
|
|
104,796 |
|
|
|
37,758 |
|
|
|
388,470 |
|
|
|
28,339 |
|
|
|
33,692 |
|
|
|
(100,989 |
) |
|
|
26,806 |
|
|
|
376,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
85,462 |
|
|
|
20,426 |
|
|
|
33,480 |
|
|
|
23,959 |
|
|
|
163,327 |
|
|
|
23,101 |
|
|
|
49,839 |
|
|
|
(1,747 |
) |
|
|
2,111 |
|
|
|
236,631 |
|
Restructure expense- severance and contract
termination costs |
|
|
1,840 |
|
|
|
|
|
|
|
929 |
|
|
|
58 |
|
|
|
2,827 |
|
|
|
2,406 |
|
|
|
4,998 |
|
|
|
(10,231 |
) |
|
|
|
|
|
|
|
|
Impairment expense |
|
|
|
|
|
|
|
|
|
|
11,401 |
|
|
|
|
|
|
|
11,401 |
|
|
|
28,291 |
|
|
|
9,812 |
|
|
|
|
|
|
|
|
|
|
|
49,504 |
|
Other expenses |
|
|
36,618 |
|
|
|
8,901 |
|
|
|
60,445 |
|
|
|
2,995 |
|
|
|
108,959 |
|
|
|
29,205 |
|
|
|
77,915 |
|
|
|
2,969 |
|
|
|
30,426 |
|
|
|
249,474 |
|
Intersegment expenses |
|
|
10,552 |
|
|
|
364 |
|
|
|
335 |
|
|
|
775 |
|
|
|
12,026 |
|
|
|
74,714 |
|
|
|
5,240 |
|
|
|
(91,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
134,472 |
|
|
|
29,691 |
|
|
|
106,590 |
|
|
|
27,787 |
|
|
|
298,540 |
|
|
|
157,717 |
|
|
|
147,804 |
|
|
|
(100,989 |
) |
|
|
32,537 |
|
|
|
535,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
73,449 |
|
|
|
17,565 |
|
|
|
(1,454 |
) |
|
|
9,989 |
|
|
|
99,549 |
|
|
|
107,443 |
|
|
|
(147,129 |
) |
|
|
|
|
|
|
(2,718 |
) |
|
|
57,145 |
|
Income tax expense (benefit) (a) |
|
|
27,910 |
|
|
|
6,675 |
|
|
|
(553 |
) |
|
|
3,796 |
|
|
|
37,828 |
|
|
|
40,828 |
|
|
|
(57,285 |
) |
|
|
|
|
|
|
345 |
|
|
|
21,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before minority interest |
|
|
45,539 |
|
|
|
10,890 |
|
|
|
(901 |
) |
|
|
6,193 |
|
|
|
61,721 |
|
|
|
66,615 |
|
|
|
(89,844 |
) |
|
|
|
|
|
|
(3,063 |
) |
|
|
35,429 |
|
Minority interest in subsidiary income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations |
|
|
45,539 |
|
|
|
10,890 |
|
|
|
(901 |
) |
|
|
6,193 |
|
|
|
61,721 |
|
|
|
66,615 |
|
|
|
(89,844 |
) |
|
|
|
|
|
|
(3,063 |
) |
|
|
35,429 |
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,575 |
) |
|
|
(2,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
45,539 |
|
|
|
10,890 |
|
|
|
(901 |
) |
|
|
6,193 |
|
|
|
61,721 |
|
|
|
66,615 |
|
|
|
(89,844 |
) |
|
|
|
|
|
|
(5,638 |
) |
|
|
32,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
206,008 |
|
|
|
119,084 |
|
|
|
121,202 |
|
|
|
21,186 |
|
|
|
467,480 |
|
|
|
28,696,640 |
|
|
|
48,147 |
|
|
|
(49,484 |
) |
|
|
|
|
|
|
29,162,783 |
|
|
|
|
(a) |
|
Income taxes are based on a percentage of net income before tax for the individual operating
segment. |
F-49
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
8,957 |
|
|
|
4,029 |
|
|
|
531 |
|
|
|
105 |
|
|
|
13,622 |
|
|
|
1,534,423 |
|
|
|
4,446 |
|
|
|
(2,858 |
) |
|
|
|
|
|
|
1,549,633 |
|
Interest expense |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
1,215,529 |
|
|
|
28,495 |
|
|
|
(2,858 |
) |
|
|
|
|
|
|
1,241,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8,957 |
|
|
|
4,021 |
|
|
|
531 |
|
|
|
105 |
|
|
|
13,614 |
|
|
|
318,894 |
|
|
|
(24,049 |
) |
|
|
|
|
|
|
|
|
|
|
308,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan losses |
|
|
8,957 |
|
|
|
4,021 |
|
|
|
531 |
|
|
|
105 |
|
|
|
13,614 |
|
|
|
303,586 |
|
|
|
(24,049 |
) |
|
|
|
|
|
|
|
|
|
|
293,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income |
|
|
121,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,593 |
|
Other fee-based income |
|
|
|
|
|
|
35,090 |
|
|
|
55,361 |
|
|
|
|
|
|
|
90,451 |
|
|
|
11,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,318 |
|
Software services income |
|
|
5 |
|
|
|
|
|
|
|
157 |
|
|
|
15,490 |
|
|
|
15,652 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,890 |
|
Other income |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
19,966 |
|
|
|
3,302 |
|
|
|
|
|
|
|
|
|
|
|
23,365 |
|
Intersegment revenue |
|
|
63,545 |
|
|
|
503 |
|
|
|
1,000 |
|
|
|
17,877 |
|
|
|
82,925 |
|
|
|
|
|
|
|
662 |
|
|
|
(83,587 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,075 |
) |
|
|
(31,075 |
) |
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,381 |
|
|
|
5,051 |
|
|
|
|
|
|
|
|
|
|
|
23,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
185,240 |
|
|
|
35,593 |
|
|
|
56,518 |
|
|
|
33,367 |
|
|
|
310,718 |
|
|
|
50,452 |
|
|
|
9,015 |
|
|
|
(83,587 |
) |
|
|
(31,075 |
) |
|
|
255,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
83,988 |
|
|
|
17,607 |
|
|
|
15,510 |
|
|
|
22,063 |
|
|
|
139,168 |
|
|
|
53,036 |
|
|
|
32,979 |
|
|
|
(12,254 |
) |
|
|
1,747 |
|
|
|
214,676 |
|
Impairment expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,687 |
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
21,488 |
|
Other expenses |
|
|
32,419 |
|
|
|
8,371 |
|
|
|
30,854 |
|
|
|
3,238 |
|
|
|
74,882 |
|
|
|
51,085 |
|
|
|
59,086 |
|
|
|
|
|
|
|
25,062 |
|
|
|
210,115 |
|
Intersegment expenses |
|
|
12,577 |
|
|
|
1,025 |
|
|
|
17 |
|
|
|
|
|
|
|
13,619 |
|
|
|
52,857 |
|
|
|
4,857 |
|
|
|
(71,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
128,984 |
|
|
|
27,003 |
|
|
|
46,381 |
|
|
|
25,301 |
|
|
|
227,669 |
|
|
|
178,665 |
|
|
|
96,723 |
|
|
|
(83,587 |
) |
|
|
26,809 |
|
|
|
446,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
65,213 |
|
|
|
12,611 |
|
|
|
10,668 |
|
|
|
8,171 |
|
|
|
96,663 |
|
|
|
175,373 |
|
|
|
(111,757 |
) |
|
|
|
|
|
|
(57,884 |
) |
|
|
102,395 |
|
Income tax expense (benefit) (a) |
|
|
24,780 |
|
|
|
4,791 |
|
|
|
4,054 |
|
|
|
3,105 |
|
|
|
36,730 |
|
|
|
66,642 |
|
|
|
(46,902 |
) |
|
|
|
|
|
|
(20,233 |
) |
|
|
36,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before minority interest |
|
|
40,433 |
|
|
|
7,820 |
|
|
|
6,614 |
|
|
|
5,066 |
|
|
|
59,933 |
|
|
|
108,731 |
|
|
|
(64,855 |
) |
|
|
|
|
|
|
(37,651 |
) |
|
|
66,158 |
|
Minority interest in subsidiary income |
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
40,433 |
|
|
|
7,578 |
|
|
|
6,614 |
|
|
|
5,066 |
|
|
|
59,691 |
|
|
|
108,731 |
|
|
|
(64,855 |
) |
|
|
|
|
|
|
(37,651 |
) |
|
|
65,916 |
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,239 |
|
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40,433 |
|
|
|
7,578 |
|
|
|
6,614 |
|
|
|
5,066 |
|
|
|
59,691 |
|
|
|
108,731 |
|
|
|
(64,855 |
) |
|
|
|
|
|
|
(35,412 |
) |
|
|
68,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
398,939 |
|
|
|
177,105 |
|
|
|
152,962 |
|
|
|
29,359 |
|
|
|
658,365 |
|
|
|
26,174,592 |
|
|
|
37,268 |
|
|
|
(200,661 |
) |
|
|
27,309 |
|
|
|
26,796,873 |
|
|
|
|
(a) |
|
Income taxes are based on a percentage of net income before tax for the individual operating
segment. |
Corporate Activity and Overhead in the previous tables primarily 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 and overhead functions such as executive management, human
resources, accounting and finance, legal, marketing, and corporate technology support |
The assets held at the corporate level are not identified with any of the operating segments.
Accordingly, these assets are included in the reconciliation of segment assets to total
consolidated assets. These assets consist primarily of cash, investments, property and equipment,
and other assets.
F-50
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
The adjustments required to reconcile from the Companys base net income measure to its GAAP
results of operations relate to differing treatments for derivatives, foreign currency transaction
adjustments, discontinued operations, and certain other items that management does not consider in
evaluating the Companys operating results. The following tables reflect adjustments associated
with these areas by operating segment and Corporate Activity and Overhead for the years ended
December 31, 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Generation |
|
|
Activity |
|
|
|
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
and |
|
|
and |
|
|
|
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Management |
|
|
Overhead |
|
|
Total |
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments (1) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,844 |
) |
|
|
3,483 |
|
|
|
(10,361 |
) |
Amortization of intangible assets (2) |
|
|
4,751 |
|
|
|
7,826 |
|
|
|
12,451 |
|
|
|
1,057 |
|
|
|
145 |
|
|
|
|
|
|
|
26,230 |
|
Compensation related to business combinations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,999 |
|
|
|
2,999 |
|
Variable-rate floor income, net of settlements on derivatives (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,360 |
) |
|
|
|
|
|
|
(32,360 |
) |
Discontinued
operations, net of tax (5) |
|
|
(1,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,818 |
) |
Net tax effect (6) |
|
|
(1,590 |
) |
|
|
(2,615 |
) |
|
|
(4,185 |
) |
|
|
(354 |
) |
|
|
16,770 |
|
|
|
(2,234 |
) |
|
|
5,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
1,343 |
|
|
|
5,211 |
|
|
|
8,266 |
|
|
|
703 |
|
|
|
(29,289 |
) |
|
|
4,248 |
|
|
|
(9,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments (1) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,224 |
) |
|
|
(2,582 |
) |
|
|
(26,806 |
) |
Amortization of intangible assets (2) |
|
|
5,094 |
|
|
|
5,815 |
|
|
|
12,692 |
|
|
|
1,191 |
|
|
|
5,634 |
|
|
|
|
|
|
|
30,426 |
|
Compensation related to business combinations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,111 |
|
|
|
2,111 |
|
Variable-rate floor income, net of settlements on derivatives (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,013 |
) |
|
|
|
|
|
|
(3,013 |
) |
Discontinued operations, net of tax (5) |
|
|
2,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,575 |
|
Net tax effect (6) |
|
|
(1,936 |
) |
|
|
(2,209 |
) |
|
|
(4,823 |
) |
|
|
(452 |
) |
|
|
8,209 |
|
|
|
1,556 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
5,733 |
|
|
|
3,606 |
|
|
|
7,869 |
|
|
|
739 |
|
|
|
(13,394 |
) |
|
|
1,085 |
|
|
|
5,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments (1) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,483 |
|
|
|
25,592 |
|
|
|
31,075 |
|
Amortization of intangible assets (2) |
|
|
5,641 |
|
|
|
5,968 |
|
|
|
4,573 |
|
|
|
1,263 |
|
|
|
7,617 |
|
|
|
|
|
|
|
25,062 |
|
Compensation related to business combinations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,747 |
|
|
|
1,747 |
|
Variable-rate floor income, net of settlements on derivatives (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax (5) |
|
|
(2,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,239 |
) |
Net tax effect (6) |
|
|
(2,143 |
) |
|
|
(2,268 |
) |
|
|
(1,738 |
) |
|
|
(480 |
) |
|
|
(4,978 |
) |
|
|
(8,626 |
) |
|
|
(20,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
1,259 |
|
|
|
3,700 |
|
|
|
2,835 |
|
|
|
783 |
|
|
|
8,122 |
|
|
|
18,713 |
|
|
|
35,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivative market value, foreign currency, and put option adjustments: Base
net income excludes the periodic unrealized gains and losses that are caused by the
change in fair value on derivatives in which the Company does not qualify for hedge
treatment under GAAP. Included in base net income are the economic effects of the
Companys 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 Companys Euro-denominated bonds to U.S. dollars and the change
in fair value of put options issued by the Company for certain business acquisitions. |
|
(2) |
|
Amortization of intangible assets: Base net income excludes the amortization of
acquired intangibles. |
|
(3) |
|
Compensation related to business combinations: The Company has structured certain
business combinations in which the consideration paid has been dependent on the sellers
continued employment with the Company. As such, the value of the consideration paid is
recognized as compensation expense by the Company over the term of the applicable
employment agreement. Base net income excludes this expense. |
|
(4) |
|
Variable rate floor income: Loans that reset annually on July 1 can generate
excess spread income compared with the rate based on the special allowance payment
formula in declining interest rate environments. The Company refers to this additional
income as variable rate floor income. The Company excludes variable rate floor income,
net of settlements paid on derivatives used to hedge student loan assets earning
variable rate floor income, from its base net income since the timing and amount of
variable rate floor income (if any) is uncertain, it has been eliminated by legislation
for all loans originated on and after April 1, 2006, and it is in excess of expected
spreads. In addition, because variable rate floor income is subject to the underlying
rate for the subject loans being reset annually on July 1, it is a factor beyond the
Companys control which can affect the period-to-period comparability of results of
operations. |
F-51
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
|
|
|
|
|
Variable rate floor income was calculated by the Company on a statutory maximum basis.
However, as a result of the disruption in the capital markets beginning in August
2007, the full benefit of variable rate floor income calculated on a statutory maximum
basis has not been realized by the Company due to the widening of the spread between
short term interest rate indices and the Companys actual cost of funds. As a result
of the ongoing volatility of interest rates, effective October 1, 2008, the Company
changed its calculation of variable rate floor income to better reflect the economic
benefit received by the Company related to this income taking into consideration the
volatility of certain rate indices which offset the value received. For the year ended
December 31, 2008, the economic benefit received by the Company related to variable
rate floor income was $25.7 million. There was no economic benefit received by the
Company related to variable rate floor income for the three months ended December 31,
2008. Variable rate floor income calculated on a statutory maximum basis for the
three months and year ended December 31, 2008 was $2.2 million and $44.5 million,
respectively. Beginning October 1, 2008, the economic benefit used by the Company has
been used to determine core student loan spread and base net income. |
|
(5) |
|
Discontinued operations: In May 2007, the Company sold EDULINX. As a result of
this transaction, the results of operations for EDULINX are reported as discontinued
operations for all periods presented. The Company presents base net income excluding
discontinued operations since the operations and cash flows of EDULINX have been
eliminated from the ongoing operations of the Company. |
|
(6) |
|
Beginning in 2008, tax effect is computed using the Companys consolidated
effective tax rate for each applicable quarterly period. In prior periods, tax effect
was computed at 38% and the change in the value of the put options for prior periods
(included in Corporate Activity and Overhead) was not tax effected as this is not
deductible for income tax purposes. |
21. Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
16,525 |
|
|
|
73,338 |
|
|
|
59,570 |
|
|
|
38,459 |
|
Less provision for loan losses |
|
|
5,000 |
|
|
|
6,000 |
|
|
|
7,000 |
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
11,525 |
|
|
|
67,338 |
|
|
|
52,570 |
|
|
|
31,459 |
|
Other income |
|
|
80,188 |
|
|
|
72,263 |
|
|
|
81,979 |
|
|
|
72,962 |
|
Gain (loss) on sale of loans |
|
|
(47,474 |
) |
|
|
48 |
|
|
|
|
|
|
|
(3,988 |
) |
Derivative market value, foreign currency, and put option adjustments
and derivative settlements, net |
|
|
(16,598 |
) |
|
|
20,192 |
|
|
|
6,874 |
|
|
|
56,016 |
|
Operating expenses |
|
|
(110,003 |
) |
|
|
(97,922 |
) |
|
|
(103,669 |
) |
|
|
(110,186 |
) |
Impairment expense |
|
|
(18,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
31,371 |
|
|
|
(19,195 |
) |
|
|
(13,969 |
) |
|
|
(16,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(69,825 |
) |
|
|
42,724 |
|
|
|
23,785 |
|
|
|
30,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
981 |
|
|
|
|
|
|
|
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(69,825 |
) |
|
|
43,705 |
|
|
|
23,785 |
|
|
|
30,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(1.42 |
) |
|
|
0.87 |
|
|
|
0.48 |
|
|
|
0.62 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1.42 |
) |
|
|
0.89 |
|
|
|
0.48 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
67,984 |
|
|
|
67,976 |
|
|
|
64,399 |
|
|
|
44,255 |
|
Less provision for loan losses |
|
|
2,753 |
|
|
|
2,535 |
|
|
|
18,340 |
|
|
|
4,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
65,231 |
|
|
|
65,441 |
|
|
|
46,059 |
|
|
|
39,705 |
|
Other income |
|
|
81,335 |
|
|
|
77,647 |
|
|
|
83,519 |
|
|
|
84,737 |
|
Gain (loss) on sale of loans |
|
|
1,787 |
|
|
|
1,010 |
|
|
|
492 |
|
|
|
308 |
|
Derivative market value, foreign currency, and put option adjustments
and derivative settlements, net |
|
|
(7,890 |
) |
|
|
10,743 |
|
|
|
16,113 |
|
|
|
26,517 |
|
Operating expenses |
|
|
(121,229 |
) |
|
|
(120,646 |
) |
|
|
(123,941 |
) |
|
|
(120,289 |
) |
Impairment expense |
|
|
|
|
|
|
|
|
|
|
(49,504 |
) |
|
|
|
|
Income tax (expense) benefit |
|
|
(7,264 |
) |
|
|
(13,306 |
) |
|
|
10,664 |
|
|
|
(11,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
11,970 |
|
|
|
20,889 |
|
|
|
(16,598 |
) |
|
|
19,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
2,810 |
|
|
|
(6,135 |
) |
|
|
909 |
|
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
14,780 |
|
|
|
14,754 |
|
|
|
(15,689 |
) |
|
|
19,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.23 |
|
|
|
0.42 |
|
|
|
(0.34 |
) |
|
|
0.39 |
|
Income (loss) from discontinued operations |
|
|
0.06 |
|
|
|
(0.12 |
) |
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.29 |
|
|
|
0.30 |
|
|
|
(0.32 |
) |
|
|
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23. Condensed Parent Company Financial Statements
The following represents the condensed balance sheets as of December 31, 2008 and 2007 and
condensed statements of income and cash flows for each of the years in the three-year period ended
December 31, 2008 for Nelnet, Inc.
The Company is limited in the amount of funds that can be transferred to it by its subsidiaries
through intercompany loans, advances, or cash dividends. These limitations relate to the
restrictions by trust indentures under the education lending subsidiaries debt financing
arrangements. The amounts of cash and investments restricted in the respective reserve accounts of
the education lending subsidiaries are shown on the consolidated balance sheets as restricted cash
and investments.
F-53
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Balance Sheets
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
130,394 |
|
|
|
50,677 |
|
Restricted cash |
|
|
17,607 |
|
|
|
|
|
Restricted cash due to customers |
|
|
132,336 |
|
|
|
57,529 |
|
Investment in subsidiaries |
|
|
657,020 |
|
|
|
652,047 |
|
Intangible assets, net |
|
|
28,168 |
|
|
|
34,434 |
|
Accounts receivable |
|
|
13,447 |
|
|
|
22,453 |
|
Other assets |
|
|
980,070 |
|
|
|
464,040 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,959,042 |
|
|
|
1,281,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
1,166,500 |
|
|
|
569,550 |
|
Accrued interest payable |
|
|
5,232 |
|
|
|
5,153 |
|
Other liabilities |
|
|
11,748 |
|
|
|
40,069 |
|
Due to customers |
|
|
132,336 |
|
|
|
57,529 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,315,816 |
|
|
|
672,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock |
|
|
493 |
|
|
|
495 |
|
Additional paid-in capital |
|
|
103,762 |
|
|
|
96,185 |
|
Retained earnings |
|
|
540,521 |
|
|
|
515,317 |
|
Employee notes receivable |
|
|
(1,550 |
) |
|
|
(3,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
643,226 |
|
|
|
608,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,959,042 |
|
|
|
1,281,180 |
|
|
|
|
|
|
|
|
Statements of Income
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating revenues |
|
$ |
133,942 |
|
|
|
220,985 |
|
|
|
206,528 |
|
Operating expenses |
|
|
104,803 |
|
|
|
143,329 |
|
|
|
186,399 |
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
|
29,139 |
|
|
|
77,656 |
|
|
|
20,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
(8,030 |
) |
|
|
(31,429 |
) |
|
|
(16,001 |
) |
Derivative market value, foreign currency, and put option adjustments
and derivative settlements, net |
|
|
14,406 |
|
|
|
35,581 |
|
|
|
11,497 |
|
Equity in earnings (loss) of subsidiaries |
|
|
5,445 |
|
|
|
(14,243 |
) |
|
|
57,598 |
|
Income tax expense |
|
|
14,116 |
|
|
|
32,136 |
|
|
|
7,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
26,844 |
|
|
|
35,429 |
|
|
|
65,916 |
|
Income (loss) on discontinued operations, net of tax |
|
|
1,818 |
|
|
|
(2,575 |
) |
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,662 |
|
|
|
32,854 |
|
|
|
68,155 |
|
|
|
|
|
|
|
|
|
|
|
F-54
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts, unless otherwise noted)
Statements of Cash Flows
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,662 |
|
|
|
32,854 |
|
|
|
68,155 |
|
Income (loss) from discontinued operations |
|
|
1,818 |
|
|
|
(2,575 |
) |
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
26,844 |
|
|
|
35,429 |
|
|
|
65,916 |
|
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities, net of business acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,477 |
|
|
|
7,606 |
|
|
|
8,258 |
|
Derivative market value adjustment |
|
|
13,868 |
|
|
|
(13,818 |
) |
|
|
21,761 |
|
Proceeds from termination of derivative instruments |
|
|
20,368 |
|
|
|
50,843 |
|
|
|
|
|
Proceeds from sale of floor contracts |
|
|
|
|
|
|
|
|
|
|
8,580 |
|
Payments to terminate derivative instruments |
|
|
(16,367 |
) |
|
|
(8,100 |
) |
|
|
|
|
Impairment expense |
|
|
2,448 |
|
|
|
8,643 |
|
|
|
|
|
Equity in (earnings) loss of subsidiaries |
|
|
(5,445 |
) |
|
|
14,243 |
|
|
|
(57,598 |
) |
Gain on sale of equity method investment |
|
|
|
|
|
|
(3,942 |
) |
|
|
|
|
Non-cash compensation expense |
|
|
7,320 |
|
|
|
6,686 |
|
|
|
2,495 |
|
Other non-cash items |
|
|
4,133 |
|
|
|
(320 |
) |
|
|
4,149 |
|
Decrease (increase) in accounts receivable |
|
|
9,006 |
|
|
|
3,613 |
|
|
|
(1,751 |
) |
Decrease (increase) in other assets |
|
|
(542,104 |
) |
|
|
69,271 |
|
|
|
(309,207 |
) |
(Decrease) increase in accrued interest payable |
|
|
79 |
|
|
|
(1,893 |
) |
|
|
5,266 |
|
(Decrease) increase in other liabilities |
|
|
(8,992 |
) |
|
|
(5,099 |
) |
|
|
17,399 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(483,365 |
) |
|
|
163,162 |
|
|
|
(234,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities, net of business acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash |
|
|
(17,607 |
) |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net |
|
|
2,510 |
|
|
|
(9 |
) |
|
|
|
|
Distribution from equity method investment |
|
|
|
|
|
|
747 |
|
|
|
149 |
|
Capital contributions to/from subsidiary, net |
|
|
12,515 |
|
|
|
309,413 |
|
|
|
(240,732 |
) |
Business acquisitions, net of cash acquired |
|
|
(18,000 |
) |
|
|
(4,950 |
) |
|
|
(13,130 |
) |
Proceeds from sale of equity method investment |
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(20,582 |
) |
|
|
315,201 |
|
|
|
(253,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(14,550 |
) |
|
|
(597,297 |
) |
|
|
|
|
Proceeds from issuance of notes payable |
|
|
611,500 |
|
|
|
230,383 |
|
|
|
564,464 |
|
Payments of debt issuance costs |
|
|
23 |
|
|
|
(114 |
) |
|
|
(3,156 |
) |
Dividends paid |
|
|
(3,458 |
) |
|
|
(13,817 |
) |
|
|
|
|
Payment on settlement of put option |
|
|
(9,600 |
) |
|
|
(15,875 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
710 |
|
|
|
1,467 |
|
|
|
1,645 |
|
Repurchases of common stock |
|
|
(1,536 |
) |
|
|
(76,648 |
) |
|
|
(62,389 |
) |
Payments received on employee stock notes receivable |
|
|
575 |
|
|
|
432 |
|
|
|
|
|
Loans to employees for purchases of common stock |
|
|
|
|
|
|
|
|
|
|
(2,825 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
583,664 |
|
|
|
(471,469 |
) |
|
|
497,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
79,717 |
|
|
|
6,894 |
|
|
|
9,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
50,677 |
|
|
|
43,783 |
|
|
|
34,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
130,394 |
|
|
|
50,677 |
|
|
|
43,783 |
|
|
|
|
|
|
|
|
|
|
|
F-55
APPENDIX A
Description of
The Federal Family Education Loan Program
The Federal Family Education Loan Program
The Higher Education Act provides for a program of federal insurance for student loans as well as
reinsurance of student loans guaranteed or insured by state agencies or private non-profit
corporations.
The Higher Education Act currently authorizes certain student loans to be covered under the Federal
Family Education Loan Program (FFELP). The Higher Education Opportunity Act of 2008 extended the
authorization for the Federal Family Education Loan Program through September 30, 2014. Congress
has extended similar authorization dates in prior versions of the Higher Education Act. However,
the current authorization dates may not again be extended and the other provisions of the Higher
Education Act may not be continued in their present form.
Generally, a student is eligible for loans made under the Federal Family Education Loan Program
only if he or she:
|
|
|
has been accepted for enrollment or is enrolled in good standing at an eligible
institution of higher education; |
|
|
|
is carrying or planning to carry at least one-half the normal full-time workload, as
determined by the institution, for the course of study the student is pursuing; |
|
|
|
is not in default on any federal education loans; |
|
|
|
has not committed a crime involving fraud in obtaining funds under the Higher
Education Act which funds have not been fully repaid; and |
|
|
|
meets other applicable eligibility requirements. |
Eligible institutions include higher educational institutions and vocational schools that comply
with specific federal regulations. Each loan is to be evidenced by an unsecured note.
The Higher Education Act also establishes maximum interest rates for each of the various types of
loans. These rates vary not only among loan types, but also within loan types depending upon when
the loan was made or when the borrower first obtained a loan under the Federal Family Education
Loan Program. The Higher Education Act allows lesser rates of interest to be charged.
Types of loans
Four types of loans are currently available under the Federal Family Education Loan Program:
|
|
|
Subsidized Stafford Loans |
|
|
|
Unsubsidized Stafford Loans |
These loan types vary as to eligibility requirements, interest rates, repayment periods, loan
limits, and eligibility for interest subsidies and special allowance payments. Some of these loan
types have had other names in the past. References to these various loan types include, where
appropriate, their predecessors.
The primary loan under the Federal Family Education Loan Program is the Subsidized Stafford Loan.
Students who are not eligible for Subsidized Stafford Loans based on their economic circumstances
may be able to obtain Unsubsidized Stafford Loans. Graduate or professional students and parents
of dependent undergraduate students may be able to obtain PLUS Loans. Consolidation Loans are
available to borrowers with existing loans made under the Federal Family Education Loan Program and
other federal programs to consolidate repayment of the borrowers existing loans. Prior to July 1,
1994, the Federal Family Education Loan Program also
offered Supplemental Loans for Students (SLS Loans) to graduate and professional students and
independent undergraduate students and, under certain circumstances, dependent undergraduate
students, to supplement their Stafford Loans.
A-1
Subsidized Stafford Loans
General. Subsidized Stafford Loans are eligible for insurance and reinsurance under the Higher
Education Act if the eligible student to whom the loan is made has been accepted or is enrolled in
good standing at an eligible institution of higher education or vocational school and is carrying
at least one-half the normal full-time workload at that institution. Subsidized Stafford Loans
have limits as to the maximum amount which may be borrowed for an academic year and in the
aggregate for both undergraduate and graduate or professional study. Both annual and aggregate
limitations exclude loans made under the PLUS Loan Program. The Secretary of Education has
discretion to raise these limits to accommodate students undertaking specialized training requiring
exceptionally high costs of education.
Subsidized Stafford Loans are made only to student borrowers who meet the needs tests provided in
the Higher Education Act. Provisions addressing the implementation of needs analysis and the
relationship between unmet need for financing and the availability of Subsidized Stafford Loan
Program funding have been the subject of frequent and extensive amendment in recent years. Further
amendment to such provisions may materially affect the availability of Subsidized Stafford Loan
funding to borrowers or the availability of Subsidized Stafford Loans for secondary market
acquisition.
Interest rates for Subsidized Stafford Loans. For Stafford Loans first disbursed to a new
borrower (a new borrower is defined for purposes of this section as one who has no outstanding
balance on a Federal Family Education Loan Program loan on the date the new promissory note is
signed) for a period of enrollment beginning before January 1, 1981, the applicable interest rate
is fixed at 7%.
For Stafford Loans first disbursed to a new borrower, for a period of enrollment beginning on or
after January 1, 1981, but before September 13, 1983, the applicable interest rate is fixed at 9%.
For Stafford Loans first disbursed to a new borrower, for a period of enrollment beginning on or
after September 13, 1983, but before July 1, 1988, the applicable interest rate is fixed at 8%.
For Stafford Loans first disbursed to a borrower with an outstanding balance on a PLUS, SLS, or
Consolidation Loan, but not on a Stafford Loan, where the new loan is intended for a period of
enrollment beginning before July 1, 1988, the applicable interest rate is fixed at 8%.
For Stafford Loans first disbursed before October 1, 1992, to a new borrower or to a borrower
with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not a Stafford Loan, where
the new loan is intended for a period of enrollment beginning on or after July 1, 1988, the
applicable interest rate is as follows:
|
|
|
Original fixed interest rate of 8% for the first 48 months of repayment. Beginning
on the first day of the 49th month of repayment, the interest rate increased
to a fixed rate of 10% thereafter. Loans in this category were subject to excess
interest rebates and have been converted to a variable interest rate based on the bond
equivalent rate of the 91-day Treasury bill auctioned at the final auction before the
preceding June 1, plus 3.25%. The variable interest rate is adjusted annually on July
1. The maximum interest rate for loans in this category is 10%. |
For Stafford Loans first disbursed on or after July 23, 1992, but before July 1, 1994, to a
borrower with an outstanding Stafford Loan made with a 7%, 8%, 9%, or 8%/10% fixed interest rate,
the original, applicable interest rate is the same as the rate provided on the borrowers previous
Stafford Loan (i.e., a fixed rate of 7%, 8%, 9%, or 8%/10%). Loans in this category were subject
to excess interest rebates and have been converted to a variable interest rate based on the bond
equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding
June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum
interest rate for a loan in this category is equal to the loans previous fixed rate (i.e., 7%, 8%,
9%, or 10%).
For Stafford Loans first disbursed on or after October 1, 1992, but before December 20, 1993, to a
borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford
Loan, the original, applicable interest rate is fixed at 8%. Loans in this category were subject
to excess interest rebates and have been converted to a variable interest rate based on the bond
equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding
June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum
interest rate for a loan in this category is 8%.
For Stafford Loans first disbursed on or after October 1, 1992, but before July 1, 1994, to a new
borrower, the applicable interest rate is variable and is based on the bond equivalent rate of the
91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The
variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in
this category is 9%.
A-2
For Stafford Loans first disbursed on or after December 20, 1993, but before July 1, 1994, to a
borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford
Loan, the applicable interest rate is variable and is based on the bond equivalent rate of the
91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The
variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in
this category is 9%.
For Stafford Loans first disbursed on or after July 1, 1994, but before July 1, 1995, where the
loan is intended for a period of enrollment that includes or begins on or after July 1, 1994, the
applicable interest rate is variable and is based on the bond equivalent rate of the 91-day
Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable
interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this
category is 8.25%.
For Stafford Loans first disbursed on or after July 1, 1995, but before July 1, 1998, the
applicable interest rate is as follows:
|
|
|
When the borrower is in school, in grace, or in an authorized period of deferment,
the applicable interest rate is variable and is based on the bond equivalent rate of the
91-day Treasury bill auctioned at the final auction before the preceding June 1, plus
2.5%. The variable interest rate is adjusted annually on July 1. The maximum interest
rate is 8.25%. |
|
|
|
When the borrower is in repayment or in a period of forbearance, the applicable
interest rate is variable and is based on the bond equivalent rate of the 91-day
Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%.
The variable interest rate is adjusted annually on July 1. The maximum interest rate is
8.25%. |
For Stafford Loans first disbursed on or after July 1, 1998, but before July 1, 2006, the
applicable interest rate is as follows:
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When the borrower is in school, in grace, or in an authorized period of deferment,
the applicable interest rate is variable and is based on the bond equivalent rate of the
91-day Treasury bill auctioned at the final auction before the preceding June 1, plus
1.7%. The variable interest rate is adjusted annually on July 1. The maximum interest
rate is 8.25%. |
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When the borrower is in repayment or in a period of forbearance, the applicable
interest rate is variable and is based on the bond equivalent rate of the 91-day
Treasury bill auctioned at the final auction before the preceding June 1, plus 2.3%.
The variable interest rate is adjusted annually on July 1. The maximum interest rate is
8.25%. |
For Stafford Loans first disbursed on or after July 1, 2006, the applicable interest rate is fixed
at 6.80%. However, for Stafford Loans for undergraduates, the applicable interest rate is reduced
in phases for which the first disbursement is made on or after:
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July 1, 2008 and before July 1, 2009, the applicable interest rate is fixed at 6.00%, |
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July 1, 2009 and before July 1, 2010, the applicable interest rate will be fixed at
5.60%, |
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July 1, 2010 and before July 1, 2011, the applicable interest rate will be fixed at
4.50%, |
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July 1, 2011 and before July 1, 2012, the applicable interest rate will be fixed at
3.40%. |
Interest rates for Stafford Loans made to undergraduate borrowers first disbursed on or after July
1, 2012, will revert to 6.80%.
Unsubsidized Stafford Loans
General. The Unsubsidized Stafford Loan program was created by Congress in 1992 for students who
do not qualify for Subsidized Stafford Loans due to parental and/or student income and assets in
excess of permitted amounts. These students are entitled to borrow the difference between the
Stafford Loan maximum for their status (dependent or independent) and their Subsidized Stafford
Loan eligibility through the Unsubsidized Stafford Loan Program. The general requirements for
Unsubsidized Stafford Loans, including special allowance payments, are essentially the same as
those for Subsidized Stafford Loans. However, the terms of the Unsubsidized Stafford Loans differ
materially from Subsidized Stafford Loans in that the federal government will not make interest
subsidy payments and the loan limitations are determined without respect to the expected family
contribution. The borrower will be required to either pay interest from the time the loan is
disbursed or the accruing interest will be capitalized when repayment begins and during periods of
deferment and forbearance. Unsubsidized Stafford Loans were not available before October 1, 1992.
A student meeting the general eligibility requirements for a loan under the Federal Family
Education Loan Program is eligible for an Unsubsidized Stafford Loan without regard to need.
Interest rates for Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to the
same interest rate provisions as Subsidized Stafford Loans, with the exception of Unsubsidized
Stafford Loans first disbursed on or after July 1, 2008, which retain a fixed interest rate of
6.80%.
A-3
PLUS Loans
General. PLUS Loans are made to parents, and under certain circumstances spouses of remarried
parents, of dependent undergraduate students. Effective July 1, 2006, graduate and professional
students are eligible borrowers under the PLUS Loan program. For PLUS Loans made on or after July
1, 1993, the borrower must not have an adverse credit history as determined by criteria established
by the Secretary of Education. The basic provisions applicable to PLUS Loans are similar to those
of Stafford Loans with respect to the involvement of guarantee agencies and the Secretary of
Education in providing federal insurance and reinsurance on the loans. However, PLUS Loans differ
significantly, particularly from the Subsidized Stafford Loans, in that federal interest subsidy
payments are not available under the PLUS Loan Program and special allowance payments are more
restricted.
Interest rates for PLUS Loans. For PLUS Loans first disbursed on or after January 1, 1981, but
before October 1, 1981, the applicable interest rate is fixed at 9%.
For PLUS Loans first disbursed on or after October 1, 1981, but before November 1, 1982, the
applicable interest rate is fixed at 14%.
For PLUS Loans first disbursed on or after November 1, 1982, but before July 1, 1987, the
applicable interest rate is fixed at 12%.
Beginning July 1, 2001, for PLUS Loans first disbursed on or after July 1, 1987, but before October
1, 1992, the applicable interest rate is variable and is based on the weekly average one-year
constant maturity Treasury bill yield for the last calendar week ending on or before June 26
preceding July 1 of each year, plus 3.25%. The variable interest rate is adjusted annually on July
1. The maximum interest rate is 12%. Prior to July 1, 2001, PLUS Loans in this category had
interest rates which were based on the 52-week Treasury bill auctioned at the final auction held
prior to the preceding June 1, plus 3.25%. The annual (July 1) variable interest rate adjustment
was applicable prior to July 1, 2001, as was the maximum interest rate of 12%. PLUS Loans
originally made at a fixed interest rate, which have been refinanced for purposes of securing a
variable interest rate, are subject to the variable interest rate calculation described in this
paragraph.
Beginning July 1, 2001, for PLUS Loans first disbursed on or after October 1, 1992, but before July
1, 1994, the applicable interest rate is variable and is based on the weekly average one-year
constant maturity Treasury yield for the last calendar week ending on or before June 26 preceding
July 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The
maximum interest rate is 10%. Prior to July 1, 2001, PLUS Loans in this category had interest
rates which were based on the 52-week Treasury bill auctioned at the final auction held prior to
the preceding June 1, plus 3.1%. The annual (July 1) variable interest rate adjustment was
applicable prior to July 1, 2001, as was the maximum interest rate of 10%.
Beginning July 1, 2001, for PLUS Loans first disbursed on or after July 1, 1994, but before July 1,
1998, the applicable interest rate is variable and is based on the weekly average one-year constant
maturity Treasury yield for the last calendar week ending on or before June 26 preceding July 1 of
each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum
interest rate is 9%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which
were based on the 52-week Treasury bill auctioned at the final auction held prior to the preceding
June 1, plus 3.1%. The annual (July 1) variable interest rate adjustment was applicable prior to
July 1, 2001, as was the maximum interest rate of 9%.
For PLUS Loans first disbursed on or after July 1, 1998, but before July 1, 2006, the applicable
interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill
auctioned at the final auction before the preceding June 1 of each year, plus 3.1%. The variable
interest rate is adjusted annually on July 1. The maximum interest rate is 9%.
For PLUS Loans first disbursed on or after July 1, 2006, the applicable interest rate is fixed at
8.5%.
SLS Loans
General. SLS Loans were limited to graduate or professional students, independent undergraduate
students, and dependent undergraduate students, if the students parents were unable to obtain a
PLUS Loan. Except for dependent undergraduate students, eligibility for SLS Loans was determined
without regard to need. SLS Loans were similar to Stafford Loans with respect to the involvement
of guarantee agencies and the Secretary of Education in providing federal insurance and reinsurance
on the loans. However, SLS Loans differed significantly, particularly from Subsidized Stafford
Loans, because federal interest subsidy payments were not available under the SLS Loan Program and
special allowance payments were more restricted. The SLS Loan Program was discontinued on July 1,
1994.
Interest rates for SLS Loans. The applicable interest rates on SLS Loans made before October 1,
1992, and on SLS Loans originally made at a fixed interest rate, which have been refinanced for
purposes of securing a variable interest rate, are identical to the applicable interest rates
described for PLUS Loans made before October 1, 1992.
A-4
For SLS Loans first disbursed on or after October 1, 1992, but before July 1, 1994, the applicable
interest rate is as follows:
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Beginning July 1, 2001, the applicable interest rate is variable and is based on the
weekly average one-year constant maturity Treasury yield for the last calendar week
ending on or before June 26 preceding July 1 of each year, plus 3.1%. The variable
interest rate is adjusted annually on July 1. The maximum interest rate is 11%. Prior
to July 1, 2001, SLS Loans in this category had interest rates which were based on the
52-week Treasury bill auctioned at the final auction held prior to the preceding June 1,
plus 3.1%. The annual (July 1) variable interest rate adjustment was applicable prior
to July 1, 2001, as was the maximum interest rate of 11%. |
Consolidation Loans
General. The Higher Education Act authorizes a program under which certain borrowers may
consolidate their various federally insured education loans into a single loan insured and
reinsured on a basis similar to Stafford Loans. Consolidation Loans may be obtained in an amount
sufficient to pay outstanding principal, unpaid interest, late charges, and collection costs on
federally insured or reinsured student loans incurred under the Federal Family Education Loan and
Direct Loan Programs, including PLUS Loans made to the consolidating borrower, as well as loans
made under the Perkins Loan (formally National Direct Student Loan Program), FISL, Nursing Student
Loan (NSL), Health Education Assistance Loan (HEAL), and Health Professions Student Loan (HPSL)
Programs. To be eligible for a FFELP Consolidation Loan, a borrower must:
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have outstanding indebtedness on student loans made under the Federal Family
Education Loan Program and/or certain other federal student loan programs; and |
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be in repayment status or in a grace period on loans that are to be consolidated. |
Borrowers who are in default on loans that are to be consolidated must first make satisfactory
arrangements to repay the loans to the respective holder(s) or must agree to repay the
consolidating lender under an income-sensitive repayment arrangement in order to include the
defaulted loans in the Consolidation Loan. For applications received on or after January 1, 1993,
borrowers may add additional loans to a Consolidation Loan during the 180-day period following the
origination of the Consolidation Loan.
A married couple who agreed to be jointly liable on a Consolidation Loan for which the application
was received on or after January 1, 1993, but before July 1, 2006, is treated as an individual for
purposes of obtaining a Consolidation Loan.
Interest rates for Consolidation Loans. For Consolidation Loans disbursed before July 1, 1994, the
applicable interest rate is fixed at the greater of:
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The weighted average of the interest rates on the loans being consolidated, rounded
to the nearest whole percent. |
For Consolidation Loans disbursed on or after July 1, 1994, based on applications received by the
lender before November 13, 1997, the applicable interest rate is fixed and is based on the weighted
average of the interest rates on the loans being consolidated, rounded up to the nearest whole
percent.
For Consolidation Loans on which the application is received by the lender between November 13,
1997, and September 30, 1998, inclusive, the applicable interest rate is variable according to the
following:
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For the portion of the Consolidation Loan which is comprised of FFELP, Direct, FISL,
Perkins, HPSL, or NSL loans, the variable interest rate is based on the bond equivalent
rate of the 91-day Treasury bills auctioned at the final auction before the preceding
June 1, plus 3.1%. The variable interest rate for this portion of the Consolidation
Loan is adjusted annually on July 1. The maximum interest rate for this portion of the
Consolidation Loan is 8.25%. |
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For the portion of the Consolidation Loan which is attributable to HEAL Loans (if
applicable), the variable interest rate is based on the average of the bond equivalent
rates of the 91-day Treasury bills auctioned for the quarter ending June 30, plus 3.0%.
The variable interest rate for this portion of the Consolidation Loan is adjusted
annually on July 1. There is no maximum interest rate for the portion of a
Consolidation Loan that is represented by HEAL Loans. |
A-5
For Consolidation Loans on which the application is received by the lender on or after October 1,
1998, the applicable interest rate is determined according to the following:
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For the portion of the Consolidation Loan which is comprised of FFELP, Direct, FISL,
Perkins, HPSL, or NSL loans, the applicable interest rate is fixed and is based on the
weighted average of the interest rates on the non-HEAL loans being
consolidated, rounded up to the nearest one-eighth of one percent. The maximum interest
rate for this portion of the Consolidation Loan is 8.25%. |
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For the portion of the Consolidation Loan which is attributable to HEAL Loans (if
applicable), the applicable interest rate is variable and is based on the average of the
bond equivalent rates of the 91-day Treasury bills auctioned for the quarter ending June
30, plus 3.0%. The variable interest rate for this portion of the Consolidation Loan is
adjusted annually on July 1. There is no maximum interest rate for the portion of the
Consolidation Loan that is represented by HEAL Loans. |
For a discussion of required payments that reduce the return on Consolidation Loans, see Fees
Rebate fee on Consolidation Loans in this Appendix.
Interest rate during active duty
The Higher Education Opportunity Act of 2008 revised the Servicemembers Civil Relief Act to include
FFEL Program loans. Interest charges on FFEL Program loans are capped at 6% during a period of
time on or after August 14, 2008, in which a borrower has served or is serving on active duty in
the Armed Forces, National Oceanic and Atmospheric Administration, Public Health Services, or
National Guard. The interest charge cap includes the interest rate in addition to any fees,
service charges, and other charges related to the loan. The cap is applicable to loans made prior
to the date the borrower was called to active duty.
Maximum loan amounts
Each type of loan is subject to certain limits on the maximum principal amount, with respect to a
given academic year and in the aggregate. Consolidation Loans are currently limited only by the
amount of eligible loans to be consolidated. PLUS Loans are limited to the difference between the
cost of attendance and the other aid available to the student. Stafford Loans, subsidized and
unsubsidized, are subject to both annual and aggregate limits according to the provisions of the
Higher Education Act.
Loan limits for Subsidized Stafford and Unsubsidized Stafford Loans. Dependent and independent
undergraduate students are subject to the same annual loan limits on Subsidized Stafford Loans;
independent students are allowed greater annual loan limits on Unsubsidized Stafford Loans. A
student who has not successfully completed the first year of a program of undergraduate education
may borrow up to $3,500 in Subsidized Stafford Loans in an academic year. A student who has
successfully completed the first year, but who has not successfully completed the second year, may
borrow up to $4,500 in Subsidized Stafford Loans per academic year. An undergraduate student who
has successfully completed the first and second years, but who has not successfully completed the
remainder of a program of undergraduate education, may borrow up to $5,500 in Subsidized Stafford
Loans per academic year.
Dependent students may borrow an additional $2,000 in Unsubsidized Stafford Loans for each year of
undergraduate study. Independent students may borrow an additional $6,000 of Unsubsidized Stafford
Loans for each of the first two years and an additional $7,000 for the third, fourth, and fifth
year of undergraduate study. For students enrolled in programs of less than an academic year in
length, the limits are generally reduced in proportion to the amount by which the programs are less
than one year in length. A graduate or professional student may borrow up to $20,500 in an
academic year where no more than $8,500 is representative of Subsidized Stafford Loan amounts.
The maximum aggregate amount of Subsidized Stafford and Unsubsidized Stafford Loans, including that
portion of a Consolidation Loan used to repay such loans, which a dependent undergraduate student
may have outstanding is $31,000 (of which only $23,000 may be Subsidized Stafford Loans). An
independent undergraduate student may have an aggregate maximum of $57,500 (of which only $23,000
may be Subsidized Stafford Loans). The maximum aggregate amount of Subsidized Stafford and
Unsubsidized Stafford Loans, including the portion of a Consolidation Loan used to repay such
loans, for a graduate or professional student, including loans for undergraduate education, is
$138,000, of which only $65,000 may be Subsidized Stafford Loans. In some instances, schools may
certify loan amounts in excess of the limits, such as for certain health profession students.
Loan limits for PLUS Loans. For PLUS Loans made on or after July 1, 1993, the annual amounts of
PLUS Loans are limited only by the students unmet need. There is no aggregate limit for PLUS
Loans.
Disbursement requirements
The Higher Education Act requires that Stafford Loans and PLUS Loans be disbursed by eligible
lenders in at least two separate installments. The proceeds of a loan made to any first-year
undergraduate student borrowing for the first time under the program must be delivered to the
student no earlier than 30 days after the enrollment period begins, with a few exceptions.
Effective February 8, 2006, the date of enactment of the Higher Education Reconciliation Act of
2005, schools with a cohort default rate of less than 10% for the three most recent fiscal years
for which data is available (with the exception of foreign schools, beginning
July 1, 2006) are permitted to request disbursement in single installments and are excused from the
30-day delayed delivery requirement applicable to first-time, first-year borrowers. As a result of
the Higher Education Opportunity Act of 2008, these same privileges will be available effective
October 1, 2011, for schools with a cohort default rate of less than 15% for the three most recent
fiscal years for which data is available.
A-6
Repayment
Repayment periods. Loans made under the Federal Family Education Loan Program, other than
Consolidation Loans and loans being repaid under an income-based or extended repayment schedule,
must provide for repayment of principal in periodic installments over a period of not less than
five nor more than ten years. A borrower may request, with concurrence of the lender, to repay the
loan in less than five years with the right to subsequently extend the minimum repayment period to
five years. Since the 1998 Amendments, lenders have been required to offer extended repayment
schedules to new borrowers who accumulate outstanding Federal Family Education Loan Program Loans
of more than $30,000, in which case the repayment period may extend up to 25 years, subject to
certain minimum repayment amounts. Consolidation Loans must be repaid within maximum repayment
periods which vary depending upon the principal amount of the borrowers outstanding student loans,
but may not exceed 30 years. For Consolidation Loans for which the application was received prior
to January 1, 1993, the repayment period cannot exceed 25 years. Periods of authorized deferment
and forbearance are excluded from the maximum repayment period. In addition, if the repayment
schedule on a loan with a variable interest rate does not provide for adjustments to the amount of
the monthly installment payment, the maximum repayment period may be extended for up to three
years.
Repayment of principal on a Stafford Loan does not begin until a student drops below at least a
half-time course of study. For Stafford Loans for which the applicable rate of interest is fixed
at 7%, the repayment period begins between nine and twelve months after the borrower ceases to
pursue at least a half-time course of study, as indicated in the promissory note. For other
Stafford Loans, the repayment period begins six months after the borrower ceases to pursue at least
a half-time course of study. These periods during which payments of principal are not due are the
grace periods.
In the case of SLS, PLUS, and Consolidation Loans, the repayment period begins on the date of final
disbursement of the loan, except that the borrower of a SLS Loan who also has a Stafford Loan may
postpone repayment of the SLS Loan to coincide with the commencement of repayment of the Stafford
Loan.
During periods in which repayment of principal is required, unless the borrower is repaying under
an income-based repayment schedule, payments of principal and interest must in general be made at a
rate of at least $600 per year, except that a borrower and lender may agree to a lesser rate at any
time before or during the repayment period. However, at a minimum, the payments must satisfy the
interest that accrues during the year. Borrowers may make accelerated payments at any time without
penalty.
Income-sensitive repayment schedule. Since 1993, lenders have been required to offer
income-sensitive repayment schedules, in addition to standard and graduated repayment schedules,
for Stafford, SLS, and Consolidation Loans. Beginning in 2000, lenders have been required to offer
income-sensitive repayment schedules to PLUS borrowers as well. Use of income-sensitive repayment
schedules may extend the maximum repayment period for up to five years if the payment amount
established from the borrowers income will not repay the loan within the maximum applicable
repayment period.
Income-based repayment schedule. Effective July 1, 2009, a borrower in the Federal Family Education
Loan Program or Federal Direct Loan Program, other than a PLUS Loan made to a parent borrower or
any Consolidation Loan that repaid one or more parent PLUS loans, may qualify for an income-based
repayment schedule regardless of the disbursement dates of the loans if he or she has a partial
financial hardship. A borrower has a financial hardship if the annual loan payment amount based on
a 10-year repayment schedule exceeds 15% of the borrowers adjusted gross income, minus 150% of the
poverty line for the borrowers actual family size. Interest will be paid by the Secretary of
Education for subsidized loans for the first three years for any borrower whose scheduled monthly
payment is not sufficient to cover the accrued interest. Interest will capitalize at the end of the
partial financial hardship period, or when the borrower begins making payments under a standard
repayment schedule. The Secretary of Education will cancel any outstanding balance after 25 years
if a borrower who has made payments under this schedule meets certain criteria.
Deferment periods. No principal payments need be made during certain periods of deferment
prescribed by the Higher Education Act. For a borrower who first obtained a Stafford or SLS loan
which was disbursed before July 1, 1993, deferments are available:
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during a period not exceeding three years while the borrower is a member of the Armed
Forces, an officer in the Commissioned Corps of the Public Health Service or, with
respect to a borrower who first obtained a student loan disbursed on or after July 1,
1987, or a student loan for a period of enrollment beginning on or after July 1, 1987,
an active duty member of the National Oceanic and Atmospheric Administration Corps; |
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during a period not exceeding three years while the borrower is a volunteer under the
Peace Corps Act; |
A-7
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during a period not exceeding three years while the borrower is a full-time paid
volunteer under the Domestic Volunteer Act of 1973; |
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during a period not exceeding three years while the borrower is a full-time volunteer
in service which the Secretary of Education has determined is comparable to service in
the Peace Corp or under the Domestic Volunteer Act of 1970 with an organization which is
exempt from taxation under Section 501(c)(3) of the Internal Revenue Code; |
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during a period not exceeding two years while the borrower is serving an internship
necessary to receive professional recognition required to begin professional practice or
service, or a qualified internship or residency program; |
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during a period not exceeding three years while the borrower is temporarily totally
disabled, as established by sworn affidavit of a qualified physician, or while the
borrower is unable to secure employment because of caring for a dependent who is so
disabled; |
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during a period not exceeding two years while the borrower is seeking and unable to
find full-time employment; |
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during any period that the borrower is pursuing a full-time course of study at an
eligible institution (or, with respect to a borrower who first obtained a student loan
disbursed on or after July 1, 1987, or a student loan for a period of enrollment
beginning on or after July 1, 1987, is pursuing at least a half-time course of study); |
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during any period that the borrower is pursuing a course of study in a graduate
fellowship program; |
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during any period the borrower is receiving rehabilitation training services for
qualified individuals, as defined by the Secretary of Education; |
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during a period not exceeding six months while the borrower is on parental leave; and |
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only with respect to a borrower who first obtained a student loan disbursed on or
after July 1, 1987, or a student loan for a period of enrollment beginning on or after
July 1, 1987, during a period not exceeding three years while the borrower is a
full-time teacher in a public or nonprofit private elementary or secondary school in a
teacher shortage area (as prescribed by the Secretary of Education), and during a
period not exceeding one year for mothers, with preschool age children, who are entering
or re-entering the work force and who are paid at a rate of no more than $1 per hour
more than the federal minimum wage. |
For a borrower who first obtains a loan on or after July 1, 1993, deferments are available:
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during any period that the borrower is pursuing at least a half-time course of study
at an eligible institution; |
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during any period that the borrower is pursuing a course of study in a graduate
fellowship program; |
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during any period the borrower is receiving rehabilitation training services for
qualified individuals, as defined by the Secretary of Education; |
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during a period not exceeding three years while the borrower is seeking and unable to
find full-time employment; and |
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during a period not exceeding three years for any reason which has caused or will
cause the borrower economic hardship. Economic hardship includes working full time and
earning an amount that does not exceed the greater of the federal minimum wage or 150%
of the poverty line applicable to a borrowers family size and state of residence.
Additional categories of economic hardship are based on the receipt of payments from a
state or federal public assistance program, service in the Peace Corps, or until July 1,
2009, the relationship between a borrowers educational debt burden and his or her
income. |
A borrower serving on active duty during a war or other military operation or national emergency,
or performing qualifying National Guard duty during a war or other military operation or national
emergency may obtain a military deferment. Eligible borrowers may receive the deferment for all
outstanding Title IV loans in repayment effective October 1, 2007, for all periods of active duty
service that include that date or begin on or after that date. The deferment period includes the
borrowers service period and 180 days following the demobilization date.
A-8
A borrower serving on or after October 1, 2007, may receive up to 13 months of active duty student
deferment after the completion of military service if he or she meets the following conditions:
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is a National Guard member, Armed Forces reserves member, or retired member of the
Armed Forces; |
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is called or ordered to active duty; and |
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is enrolled at the time of, or was enrolled within six months prior to, the
activation in a program at an eligible institution. |
The active duty student deferment ends the earlier of when the borrower returns to an enrolled
status, or at the end of 13 months.
PLUS Loans first disbursed on or after July 1, 2008, are eligible for the following deferment
options:
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A parent PLUS borrower, upon request, may defer the repayment of the loan during any
period during which the student for whom the loan was borrowed is enrolled at least half
time. Also upon request, the borrower can defer the loan for the six-month period
immediately following the date on which the student for whom the loan was borrowed
ceases to be enrolled at least half time, or if the parent borrower is also a student,
the date after he or she ceases to be enrolled at least half time. |
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A graduate or professional student PLUS borrower may defer the loan for the six-month
period immediately following the date on which he or she ceases to be enrolled at least
half time. This option does not require a request and may be granted each time the
borrower ceases to be enrolled at least half time. |
Prior to the 1992 Amendments, only certain of the deferments described above were available to PLUS
and Consolidation Loan borrowers. Prior to the 1986 Amendments, PLUS Loan borrowers were not
entitled to certain deferments.
Forbearance periods. The Higher Education Act also provides for periods of forbearance during
which the lender, in case of a borrowers temporary financial hardship, may postpone any payments.
A borrower is entitled to forbearance for a period not exceeding three years while the borrowers
debt burden under Title IV of the Higher Education Act (which includes the Federal Family Education
Loan Program) equals or exceeds 20% of the borrowers gross income. A borrower is also entitled to
forbearance while he or she is serving in a qualifying internship or residency program, a national
service position under the National and Community Service Trust Act of 1993, a qualifying position
for loan forgiveness under the Teacher Loan Forgiveness Program, or a position that qualifies him
or her for loan repayment under the Student Loan Repayment Program administered by the Department
of Defense. In addition, mandatory administrative forbearances are provided in exceptional
circumstances such as a local or national emergency, a military mobilization, or when the
geographical area in which the borrower or endorser resides has been designated a disaster area by
the President of the United States or Mexico, the Prime Minister of Canada, or by the governor of a
state.
Interest payments during grace, deferment, and forbearance periods. The Secretary of Education
makes interest payments on behalf of the borrower for certain eligible loans while the borrower is
in school and during grace and deferment periods. Interest that accrues during forbearance periods
and, if the loan is not eligible for interest subsidy payments, during in-school, grace, and
deferment periods, may be paid monthly or quarterly by the borrower. Any unpaid accrued interest
may be capitalized by the lender.
Fees
Guarantee fee and Federal default fee. For loans for which the date of guarantee of principal is
on or after July 1, 2006, a guarantee agency is required to collect and deposit into the Federal
Student Loan Reserve Fund a Federal default fee in an amount equal to 1% of the principal amount of
the loan. The fee is to be collected either by deduction from the proceeds of the loan or by
payment from other non-Federal sources. Federal default fees may not be charged to borrowers of
Consolidation Loans.
Origination fee. Beginning with loans first disbursed on or after July 1, 2006, the maximum
origination fee which may be charged to a Stafford Loan borrower decreases according to the
following schedule:
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1.5% with respect to loans for which the first disbursement is made on or after July
1, 2007, and before July 1, 2008; |
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1.0% with respect to loans for which the first disbursement is made on or after July
1, 2008, and before July 1, 2009; |
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0.5% with respect to loans for which the first disbursement is made on or after July
1, 2009, and before July 1, 2010; and |
|
|
|
0.0% with respect to loans for which the first disbursement is made on or after July
1, 2010. |
A-9
A lender may charge a lesser origination fee to Stafford Loan borrowers as long as the lender does
so consistently with respect to all borrowers who reside in or attend school in a particular state.
Regardless of whether the lender passes all or a portion of the origination fee on to the
borrower, the lender must pay the origination fee owed on each loan it makes to the Secretary of
Education.
An eligible lender is required to charge the borrower of a PLUS Loan an origination fee equal to 3%
of the principal amount of the loan. This fee must be deducted proportionately from each
disbursement of the PLUS Loan and must be remitted to the Secretary of Education.
Lender fee. The lender of any loan made under the Federal Family Education Loan Program is
required to pay a fee to the Secretary of Education. For loans made on or after October 1, 2007,
the fee is equal to 1.0% of the principal amount of such loan. This fee cannot be charged to the
borrower.
Rebate fee on Consolidation Loans. The holder of any Consolidation Loan made on or after October
1, 1993, is required to pay to the Secretary of Education a monthly rebate fee. For loans made on
or after October 1, 1993, from applications received prior to October 1, 1998, and after January
31, 1999, the fee is equal to 0.0875% (1.05% per annum) of the principal and accrued interest on
the Consolidation Loan. For loans made from applications received during the period beginning on
or after October 1, 1998, through January 31, 1999, the fee is 0.0517% (0.62% per annum).
Interest subsidy payments
Interest subsidy payments are interest payments paid on the outstanding principal balance of an
eligible loan before the time that the loan enters repayment and during deferment periods. The
Secretary of Education and the guarantee agencies enter into interest subsidy agreements whereby
the Secretary of Education agrees to pay interest subsidy payments on a quarterly basis to the
holders of eligible guaranteed loans for the benefit of students meeting certain requirements,
subject to the holders compliance with all requirements of the Higher Education Act. Subsidized
Stafford Loans are eligible for interest payments. Consolidation Loans for which the application
was received on or after January 1, 1993, are eligible for interest subsidy payments.
Consolidation Loans made from applications received on or after August 10, 1993, are eligible for
interest subsidy payments only if all underlying loans consolidated are Subsidized Stafford Loans.
Consolidation Loans for which the application is received by an eligible lender on or after
November 13, 1997, are eligible for interest subsidy payments on that portion of the Consolidation
Loan that repays subsidized Federal Family Education Loan Program Loans or similar subsidized loans
made under the Direct Loan Program. The portion of the Consolidation Loan that repays HEAL Loans
is not eligible for interest subsidy, regardless of the date the Consolidation Loan was made.
Special allowance payments
The Higher Education Act provides for special allowance payments (SAP) to be made by the Secretary
of Education to eligible lenders. The rates for special allowance payments are based on formulas
that differ according to the type of loan, the date the loan was originally made or insured, and
the type of funds used to finance the loan (taxable or tax-exempt).
A-10
The effective formulas for special allowance payment rates for Subsidized Stafford and Unsubsidized
Stafford Loans are summarized in the following chart. The T-Bill Rate mentioned in the chart
refers to the average of the bond equivalent yield of the 91-day Treasury bills auctioned during
the preceding quarter.
|
|
|
Date of Loans |
|
Annualized SAP Rate |
|
|
|
On or after October 1, 1981
|
|
T-Bill Rate less Applicable Interest Rate + 3.5% |
|
|
|
On or after November 16, 1986
|
|
T-Bill Rate less Applicable Interest Rate + 3.25% |
|
|
|
On or after October 1, 1992
|
|
T-Bill Rate less Applicable Interest Rate + 3.1% |
|
|
|
On or after July 1, 1995
|
|
T-Bill Rate less Applicable Interest Rate + 3.1%(1) |
|
|
|
On or after July 1, 1998
|
|
T-Bill Rate less Applicable Interest Rate + 2.8%(2) |
|
|
|
On or after January 1, 2000
|
|
3 Month Commercial Paper Rate less Applicable Interest Rate +
2.34%(3) |
|
|
|
On or after October 1, 2007 and held by a
Department of Education certified
not-for-profit holder or Eligible Lender
Trustee holding on behalf of a Department
of Education certified not-for-profit
entity
|
|
3 Month Commercial Paper Rate less
Applicable Interest Rate + 1.94%(4) |
|
|
|
All other loans on or after October 1, 2007
|
|
3 Month Commercial Paper Rate less Applicable Interest Rate +
1.79%(5) |
|
|
|
(1) |
|
Substitute 2.5% in this formula while such loans are in-school, grace, or deferment
status |
|
(2) |
|
Substitute 2.2% in this formula while such loans are in-school, grace, or deferment
status. |
|
(3) |
|
Substitute 1.74% in this formula while such loans are in-school, grace, or deferment
status. |
|
(4) |
|
Substitute 1.34% in this formula while such loans are in-school, grace, or deferment
status. |
|
(5) |
|
Substitute 1.19% in this formula while such loans are in-school, grace, or deferment
status. |
PLUS, SLS, and Consolidation Loans. The formula for special allowance payments on PLUS, SLS, and
Consolidation Loans are as follows:
|
|
|
Date of Loans |
|
Annualized SAP Rate |
|
|
|
On or after October 1, 1992
|
|
T-Bill Rate less Applicable Interest Rate + 3.1% |
|
|
|
On or after January 1, 2000
|
|
3 Month Commercial Paper Rate less Applicable
Interest Rate + 2.64% |
|
|
|
PLUS loans on or after October 1, 2007 and held
by a Department of Education certified
not-for-profit holder or Eligible Lender
Trustee holding on behalf of a Department of
Education certified not-for-profit entity
|
|
3 Month Commercial Paper Rate less Applicable
Interest Rate + 1.94% |
|
|
|
All other PLUS loans on or after October 1, 2007
|
|
3 Month Commercial Paper Rate less Applicable
Interest Rate + 1.79% |
|
|
|
Consolidation loans on or after October 1, 2007
and held by a Department of Education certified
not-for-profit holder or Eligible Lender
Trustee holding on behalf of a Department of
Education certified not-for-profit entity
|
|
3 Month Commercial Paper Rate less Applicable
Interest Rate + 2.24% |
|
|
|
All other Consolidation loans on or after
October 1, 2007
|
|
3 Month Commercial Paper Rate less Applicable
Interest Rate + 2.09% |
For PLUS and SLS Loans made prior to July 1, 1994, and PLUS loans made on or after July 1, 1998,
which bear interest at rates adjusted annually, special allowance payments are made only in
quarters during which the interest rate ceiling on such loans operates to reduce the rate that
would otherwise apply based upon the applicable formula. See Interest Rates for PLUS Loans and
Interest Rates for SLS Loans. Special allowance payments are available on variable rate PLUS
Loans and SLS Loans made on or after July 1, 1987, and before July 1, 1994, and on any PLUS Loans
made on or after July 1, 1998, and before January 1, 2000, only if the variable rate, which is
reset annually, based on the weekly average one-year constant maturity Treasury yield for loans
made before July 1, 1998, and based on the 91-day or 52-week Treasury bill, as applicable for loans
made on or after July 1, 1998, exceeds the applicable maximum borrower rate. The maximum borrower
rate is between 9% and 12% per annum. The portion, if any, of a Consolidation Loan that repaid a
HEAL Loan is ineligible for special allowance payments.
A-11
Recapture of excess interest. The Higher Education Reconciliation Act of 2005 provides that, with
respect to a loan for which the first disbursement of principal is made on or after April 1, 2006,
if the applicable interest rate for any three-month period exceeds the special allowance support
level applicable to the loan for that period, an adjustment must be made by calculating the excess
interest and crediting such amounts to the Secretary of Education not less often than annually.
The amount of any adjustment of interest for any quarter will be equal to:
|
|
|
the applicable interest rate minus the special allowance support level for the loan,
multiplied by |
|
|
|
the average daily principal balance of the loan during the quarter, divided by |
Special allowance payments for loans financed by tax-exempt bonds. The effective formulas for
special allowance payment rates for Stafford Loans and Unsubsidized Stafford Loans differ depending
on whether loans to borrowers were acquired or originated with the proceeds of tax-exempt
obligations. The formula for special allowance payments for loans financed with the proceeds of
tax-exempt obligations originally issued prior to October 1, 1993 is:
T-Bill Rate less Applicable Interest Rate + 3.5%
2
provided that the special allowance applicable to the loans may not be less than 9.5% less the
Applicable Interest Rate. Special rules apply with respect to special allowance payments made on
loans
|
|
|
originated or acquired with funds obtained from the refunding of tax-exempt
obligations issued prior to October 1, 1993, or |
|
|
|
originated or acquired with funds obtained from collections on other loans made or
purchased with funds obtained from tax-exempt obligations initially issued prior to
October 1, 1993. |
Amounts derived from recoveries of principal on loans eligible to receive a minimum 9.5% special
allowance payment may only be used to originate or acquire additional loans by a unit of a state or
local government, or non-profit entity not owned or controlled by or under common ownership of a
for-profit entity and held directly or through any subsidiary, affiliate or trustee, which entity
has a total unpaid balance of principal equal to or less than $100,000,000 on loans for which
special allowances were paid in the most recent quarterly payment prior to September 30, 2005.
Such entities may originate or acquire additional loans with amounts derived from recoveries of
principal until December 31, 2010. Loans acquired with the proceeds of tax-exempt obligations
originally issued after October 1, 1993, receive special allowance payments made on other loans.
Beginning October 1, 2006, in order to receive 9.5% special allowance payments, a lender must
undergo an audit arranged by the Secretary of Education attesting to proper billing for 9.5%
payments on only eligible first generation and second generation loans. First generation loans
include those loans acquired using funds directly from the issuance of the tax-exempt obligation.
Second-generation loans include only those loans acquired using funds obtained directly from
first-generation loans. Furthermore, the lender must certify compliance of its 9.5% billing on
such loans with each request for payment.
Adjustments to special allowance payments. Special allowance payments and interest subsidy
payments are reduced by the amount which the lender is authorized or required to charge as an
origination fee. In addition, the amount of the lender origination fee is collected by offset to
special allowance payments and interest subsidy payments. The Higher Education Act provides that
if special allowance payments or interest subsidy payments have not been made within 30 days after
the Secretary of Education receives an accurate, timely, and complete request, the special
allowance payable to the lender must be increased by an amount equal to the daily interest accruing
on the special allowance and interest subsidy payments due the lender.
A-12
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.32* |
|
Amended and Restated Aircraft Management Agreement, dated as of
September 30, 2008, by and between National Education Loan Network, Inc., Duncan
Aviation, Inc., and Union Financial Services, Inc. |
|
|
|
10.33* |
|
Amended and Restated Aircraft Joint Ownership Agreement, dated as of September 30, 2008, by
and between National Education Loan Network, Inc. and Union Financial Services, Inc. |
|
|
|
10.69* |
|
Eighth Amendment of Amended and Restated Participation Agreement,
dated as of December 24, 2008, by and between Union Bank and Trust
Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.). |
|
|
|
10.70+*
|
|
Separation Agreement, dated as of August 4, 2008, by and between
Raymond J. Ciarvella and Nelnet, Inc. |
|
|
|
10.71*
|
|
Loan Purchase Agreement, dated as of November 25, 2008, by and
between Nelnet Education Loan Funding, Inc., f/k/a NEBHELP, INC.,
a Nebraska corporation, acting, where applicable, by and through
Wells Fargo Bank, National Association, not individually but as
Eligible Lender Trustee for the Seller under the Warehouse
Agreement or Eligible Lender Trust Agreement, and Union Bank and
Trust Company, a Nebraska state bank and trust company, acting in
its individual capacity and as trustee. |
|
|
|
10.72*
|
|
Loan Servicing Agreement, dated as of November 25, 2008, by and
between Nelnet, Inc. and Union Bank and Trust Company. |
|
|
|
10.73*
|
|
Assurance Commitment Agreement, dated as of November 25, 2008, by
and among Jay L. Dunlap, individually, Angie Muhleisen,
individually, and Michael S. Dunlap, individually, Nelnet, Inc.,
Union Bank and Trust Company, and Farmers & Merchants Investment
Inc. |
|
|
|
12.1*
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
21.1*
|
|
Subsidiaries of Nelnet, Inc. |
|
|
|
23.1*
|
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
|
|
|
31.1*
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Executive Officer Michael S. Dunlap. |
|
|
|
31.2*
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Financial Officer Terry J. Heimes. |
|
|
|
32**
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
+ |
|
Indicates a management contract or compensatory plan or arrangement contemplated by Item
15(a)(3) of Form 10-K. |