NELNET INC - Annual Report: 2009 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal
year ended December 31, 2009
|
Or
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from __________to __________.
|
COMMISSION
FILE NUMBER 001-31924
NELNET,
INC.
(Exact
name of registrant as specified in its charter)
NEBRASKA
(State
or other jurisdiction of incorporation or organization)
|
84-0748903
(I.R.S.
Employer Identification No.)
|
121
SOUTH 13TH STREET, SUITE 201
LINCOLN,
NEBRASKA
(Address
of principal executive offices)
|
68508
(Zip
Code)
|
Registrant’s
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 [ ] No [X]
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 [ ] No [X]
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant’s
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.
[ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. Large accelerated filer
[ ] Accelerated filer [X] Non-accelerated filer
[ ] Smaller reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the Registrant’s voting common stock held by
non-affiliates of the Registrant on June 30, 2009 (the last business day of the
Registrant’s most recently completed second fiscal quarter), based upon the
closing sale price of the Registrant’s Class A Common Stock on that date of
$13.59 per share, was $375,157,182. For purposes of this calculation, the
Registrant’s directors, executive officers, and greater than 10 percent
shareholders are deemed to be affiliates.
As of
January 31, 2010, there were 38,392,691 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 Registrant’s definitive Proxy Statement to be filed for its 2010 Annual
Meeting of Shareholders, scheduled to be held May 27, 2010, are incorporated by
reference into Part III of this Form 10-K.
NELNET,
INC.
FORM
10-K
TABLE
OF CONTENTS
PART
I
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|||
Item
1.
|
Business
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1
|
|
Item
1A.
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Risk
Factors
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14
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|
Item
1B.
|
Unresolved
Staff Comments
|
28
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|
Item
2.
|
Properties
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28
|
|
Item
3.
|
Legal
Proceedings
|
29
|
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Item
4.
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Submission
of Matters to a Vote of Security Holders
|
30
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PART
II
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|||
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
|
30 | |
Item
6.
|
Selected
Financial Data
|
33
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
34 | |
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
85
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
90
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
91 | |
Item
9A.
|
Controls
and Procedures
|
91
|
|
Item
9B.
|
Other
Information
|
92
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|
PART
III
|
|||
Item
10.
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Directors,
Executive Officers, and Corporate Governance
|
92
|
|
Item
11.
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Executive
Compensation
|
93
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|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
93 | |
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
93
|
|
Item
14.
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Principal
Accounting Fees and Services
|
93
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PART
IV
|
|||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
93
|
|
Signatures
|
100
|
This
report contains forward-looking statements and information that are based on
management’s current expectations as of the date of this
document. Statements that are not historical facts, including
statements about the Company’s 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”); increases in
financing costs; limits on liquidity; any adverse outcomes in any significant
litigation to which the Company is a party; changes in the terms of student
loans and the educational credit marketplace arising from the implementation of,
or changes in, applicable laws and regulations (including changes resulting from
new laws, such as any new laws enacted to implement the Administration’s 2010
budget proposals as they relate to the Federal Family Education Loan Program
(the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the
“Department”)), which may reduce the volume, average term, special allowance
payments, and yields on student loans under the FFELP, 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 Company’s ability to maintain
its credit facilities or obtain new facilities; the ability of lenders under the
Company’s 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; uncertainties inherent in
forecasting future cash flows from student loan assets and related asset-backed
securitizations; the uncertain nature of estimated expenses that may be incurred
and cost savings that may result from restructuring plans; 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
Nelnet,
Inc (the “Company”) is a transaction processing and finance company focused
primarily on providing quality education related products and services to
students, families, schools, and financial institutions
nationwide. The Company was formed as a Nebraska corporation in
1977. The Company earns its revenues from fee-based processing
businesses, including its loan servicing, payment processing, and lead
generation businesses, and the net interest income on its student loan
portfolio.
Customers
The
Company’s customers consist of:
·
|
Students
and families
|
·
|
Colleges
and universities
|
·
|
Private,
parochial, and other K-12
institutions
|
·
|
Lenders,
holders, and agencies in education
finance
|
An
increase in the size of the education market generally increases the demand for
the Company’s products and services. The education market continues to grow with
rising student enrollment and the rising annual cost of enrollment. In addition,
demand for the Company’s products and services increases as education-related
processes become more complex and schools have a need to become more
efficient.
1
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet1.jpg)
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 Company’s products and services are
designed to simplify the education planning and financing process and provide
value to customers throughout the education life cycle.
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet2.jpg)
2
Operating
Segments
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet3.jpg)
The
Company has five operating segments, as follows:
·
|
Student
Loan and Guaranty Servicing
|
·
|
Tuition
Payment Processing and Campus
Commerce
|
·
|
Enrollment
Services
|
·
|
Software
and Technical Services
|
·
|
Asset
Generation and Management
|
The
Company’s operating segments are defined by the products and services they offer
or the types of customers they serve, and they reflect the manner in which
financial information is currently evaluated by management. Management evaluates
the Company’s 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, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” The Company includes separate
financial information about its operating segments in note 22 of the notes to
the consolidated financial statements included in this Report.
3
Operating Results -
Revenue
Diversification
The
Company ranks among the nation’s 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 the FFEL
Program (as shown below), thereby reducing legislative and political risk
related to the education lending industry. Revenues from these businesses are
primarily generated from products and services offered in the Company’s Tuition
Payment Processing and Campus Commerce and Enrollment Services operating
segments. The following chart summarizes the percent of external revenue earned
by the Company’s operating segments when excluding Corporate
Activity and Overhead and fixed rate floor income included in the Asset
Generation and Management operating segment. See Part II, Item 7A, “Quantitative
and Qualitative Disclosures about Market Risk – Interest Rate Risk” for further
details related to the Company’s fixed rate floor income. The chart shows the
increased contribution of revenue from fee-based segments.
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet4.jpg)
The
following tables summarize the Company’s revenues by operating segment (dollars
in thousands):
Year
ended December 31, 2009
|
||||||||||||||||||||||||
External
|
As
reported
|
|||||||||||||||||||||||
Intersegment
|
by
segment
|
|||||||||||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||||||||
Student
Loan and Guaranty Servicing
|
$ | 114,086 | 19.7 | % | $ | 85,104 | 63.5 | % | $ | 199,190 | 28.0 | % | ||||||||||||
Tuition
Payment Processing and Campus Commerce
|
53,956 | 9.4 | 237 | 0.2 | 54,193 | 7.6 | ||||||||||||||||||
Enrollment
Services
|
119,397 | 20.7 | 555 | 0.4 | 119,952 | 16.9 | ||||||||||||||||||
Software
and Technical Services
|
17,463 | 3.0 | 14,586 | 10.9 | 32,049 | 4.5 | ||||||||||||||||||
Total
revenue from fee-based segments
|
304,902 | 52.8 | 100,482 | 75.0 | 405,384 | 57.0 | ||||||||||||||||||
Asset
Generation and Management
|
300,004 | 51.9 | (2,003 | ) | (1.5 | ) | 298,001 | 41.8 | ||||||||||||||||
Corporate
Activity and Overhead
|
(27,073 | ) | (4.7 | ) | 35,472 | 26.5 | 8,399 | 1.2 | ||||||||||||||||
Total
revenue
|
$ | 577,833 | 100.0 | % | $ | 133,951 | 100.0 | % | $ | 711,784 | 100.0 | % | ||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||||||
External
|
As
reported
|
|||||||||||||||||||||||
Intersegment
|
by
segment
|
|||||||||||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||||||||
Student
Loan and Guaranty Servicing
|
$ | 105,664 | 20.0 | % | $ | 75,361 | 51.6 | % | $ | 181,025 | 26.9 | % | ||||||||||||
Tuition
Payment Processing and Campus Commerce
|
49,844 | 9.5 | 302 | 0.2 | 50,146 | 7.4 | ||||||||||||||||||
Enrollment
Services
|
112,459 | 21.3 | 2 | 0.0 | 112,461 | 16.7 | ||||||||||||||||||
Software
and Technical Services
|
19,731 | 3.7 | 6,831 | 4.7 | 26,562 | 3.9 | ||||||||||||||||||
Total
revenue from fee-based segments
|
287,698 | 54.5 | 82,496 | 56.5 | 370,194 | 54.9 | ||||||||||||||||||
Asset
Generation and Management
|
277,971 | 52.6 | (2,190 | ) | (1.5 | ) | 275,781 | 40.9 | ||||||||||||||||
Corporate
Activity and Overhead
|
(37,503 | ) | (7.1 | ) | 65,574 | 45.0 | 28,071 | 4.2 | ||||||||||||||||
Total
revenue
|
$ | 528,166 | 100.0 | % | $ | 145,880 | 100.0 | % | $ | 674,046 | 100.0 | % | ||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||||||||||
External
|
As
reported
|
|||||||||||||||||||||||
Intersegment
|
by
segment
|
|||||||||||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||||||||
Student
Loan and Guaranty Servicing
|
$ | 133,234 | 23.8 | % | $ | 74,687 | 73.9 | % | $ | 207,921 | 31.4 | % | ||||||||||||
Tuition
Payment Processing and Campus Commerce
|
46,568 | 8.3 | 688 | 0.7 | 47,256 | 7.2 | ||||||||||||||||||
Enrollment
Services
|
104,245 | 18.6 | 891 | 0.9 | 105,136 | 15.9 | ||||||||||||||||||
Software
and Technical Services
|
22,093 | 3.9 | 15,683 | 15.5 | 37,776 | 5.7 | ||||||||||||||||||
Total
revenue from fee-based segments
|
306,140 | 54.6 | 91,949 | 91.0 | 398,089 | 60.2 | ||||||||||||||||||
Asset
Generation and Management
|
278,671 | 49.8 | (3,737 | ) | (3.7 | ) | 274,934 | 41.6 | ||||||||||||||||
Corporate
Activity and Overhead
|
(24,705 | ) | (4.4 | ) | 12,777 | 12.7 | (11,928 | ) | (1.8 | ) | ||||||||||||||
Total
revenue
|
$ | 560,106 | 100.0 | % | $ | 100,989 | 100.0 | % | $ | 661,095 | 100.0 | % |
4
Fee-Based Operating
Segments
Student
Loan and Guaranty Servicing
|
The
Company’s Student Loan and Guaranty Servicing operating segment provides for the
servicing of the Company’s student loan portfolio and the portfolios of third
parties and servicing provided to guaranty agencies. The loan servicing
activities include loan origination activities, loan conversion activities,
application processing, borrower updates, payment processing, due diligence
procedures, and claim processing. These activities are performed internally for
the Company’s portfolio in addition to generating fee revenue when performed for
third-party clients. The guaranty servicing 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 Company’s 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”).
In June
2009, the Department of Education named the Company as one of four private
sector companies awarded a servicing contract to service all federally-owned
student loans, including FFELP loans purchased by the Department pursuant to the
Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”). ECASLA
enabled the Department to purchase FFELP loans in an effort to bring liquidity
and stability back to the student loan market. No later than August 2010, the
Company expects to also begin servicing new loans originated under the Federal
Direct Loan Program (the “Direct Loan Program”). Under the Direct Loan Program,
the Federal government lends money directly to students and families. The
contract spans five years with one, five-year renewal option. The Company began
servicing loans for the Department under this contract in September
2009.
The four
primary product offerings of this operating segment and each one’s percentage of
total third-party Student Loan and Guaranty Servicing revenue provided during
the year ended December 31, 2009 are as follows:
·
|
Origination
and servicing of commercial FFEL Program loans
(54.0%)
|
·
|
Origination
and servicing of non-federally insured student loans
(7.5%)
|
·
|
Servicing
of loans for the Department of Education
(1.5%)
|
·
|
Servicing
and support outsourcing for guaranty agencies
(37.0%)
|
5
The
following chart summarizes the Company’s loan servicing volumes (dollars in
millions):
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet5.jpg)
(a)
|
As
of December 31, 2009, the Company was servicing $464.2 million of loans
owned by the Company and $809.3 million of loans for third
parties that were disbursed on or after July 1, 2009 and may be eligible
to be sold to the Department of Education pursuant to its 2009-2010
academic year Loan Purchase Commitment Program. The Company
expects to retain the servicing on all 2009-2010 loans sold to the
Department which are currently being serviced by the
Company.
|
(b)
|
As
of December 31, 2009 and March 1, 2010, the Company was
servicing approximately $3.4 billion and $6.3 billion, respectively, of
loans under the Department’s servicing contract, which includes
approximately $1.5 billion and $4.3 billion of loans not previously serviced by
the Company that were sold by third parties to the Department as part of
the ECASLA Purchase Program.
|
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 Company’s loan servicing and
origination volume at schools with which the Company does business.
The
Company serviced FFELP loans on behalf of approximately 80 third-party servicing
customers as of December 31, 2009 and 2008. The Company’s FFELP servicing
customers include national and regional banks, credit unions, and various state
and non-profit secondary markets. The majority of the Company’s external FFELP
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. In recent years, 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.
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), non-federally insured 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
non-federally insured loans on behalf of approximately 15 third-party servicing
customers as of December 31, 2009 and 2008.
The
Direct Loan Program has historically used one provider for the origination and
servicing of loans. For the
federal fiscal year ended September 30, 2009, the estimated volume for the
Direct Loan Program was approximately $38 billion, an increase of 110% from the
federal fiscal year ended September 30, 2008. This increase was the
result of schools shifting from the FFELP to the Direct Loan Program as a result
of lenders exiting the FFELP marketplace due to legislation and capital market
disruptions. Regardless of the outcome of the currently proposed legislation
(see "Recent Developments - Legislation"), the Direct Loan Program volume is
expected to increase substantially in the next few years, which would lead to an
increase in servicing volume for the Department’s four private sector servicers.
Servicing
volume has initially been allocated by the Department to the four servicers and
performance factors such as customer satisfaction levels and default rates will
determine volume allocations over time.
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 are responsible for paying the claims made on defaulted
loans. The Department has designated approximately 30 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
Company’s 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, 2008.
Top
FFELP Loan Servicers
|
|||||
Rank
|
Name
|
$
millions
|
(a) | ||
1
|
Sallie
Mae
|
178,191
|
(b)
|
||
2
|
AES/PHEAA
|
60,063
|
(b)
|
||
3
|
ACS
Education Services (formerly reported under AFSA)
|
55,600
|
|||
4
|
Great
Lakes
|
41,554
|
(b)
|
||
5
|
Nelnet
|
35,889
|
(b)
|
||
6
|
Citibank,
The Student Loan Corporation
|
24,889
|
|||
7
|
Wells
Fargo Education Financial Services
|
18,064
|
|||
8
|
EdFinancial
Services
|
9,779
|
|||
9
|
Xpress
Loan Servicing
|
8,996
|
|||
10
|
Kentucky
Higher Education Student Loan Corporation
|
8,186
|
Source:
2009 SLSA Servicing Volume Survey and company filings
|
|
(a) | As of December 31, 2008, except for ACS Education Services and Citibank, The Student Loan Corporation which are as of June 30, 2009. |
(b)
|
Represent
the four private sector companies awarded a servicing contract
to service Direct Loan Program
loans.
|
The
principal competitor for existing and prospective FFELP 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.
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.
Tuition
Payment Processing and Campus Commerce
The
Company’s 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 4,500 K-12 educational
institutions.
7
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 700 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 client’s 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 220 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 Company’s 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 offices 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
Company’s principal competitive advantages are (i) the service it provides to
institutions, (ii) the information management tools provided with the Company’s
service, and (iii) the Company’s ability to interface with the institution’s
clients. The Company believes its clients select products primarily on
technological superiority and feature functionality, but price and service also
impact the selection process.
Enrollment
Services
The
Company’s Enrollment Services operating segment offers products and services
that are focused on helping colleges recruit and retain students (lead
generation and recruitment services) and helping students plan and prepare for
life after high school (content management and publishing and editing services).
The Company’s enrollment products and services include the
following:
Lead Generation
· Vendor
lead management services
· Admissions
lead generation
Recruitment Services
· Pay
per click marketing management
· Email
marketing
· List
marketing services
· Admissions
consulting
|
Content
Management
· Online
courses
· Licensing
of scholarship data
· Call
center services
Publishing and Editing
Services
· Test
preparation study guides
· Essay
editing services
|
As with
all of the Company’s products and services, the Company’s 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 Company’s products
in this segment are distributed online; however, products such as test
preparation study guides are distributed as printed materials.
8
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.
Software
and Technical Services
The
Company’s 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, legacy modernization, technical
consulting services, and Enterprise Content Management solutions.
The
Company’s clients within the education loan marketplace include large and small
financial institutions, secondary markets, loan originators, and loan servicers.
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 Company’s 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 Company’s 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 Company’s software either
directly or indirectly. Management believes the Company’s 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
Company’s 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 Company’s competition consists primarily of consulting firms that
offer services and not products.
Asset Generation and
Management Operating Segment
The Asset
Generation and Management Operating Segment includes the origination,
acquisition, management, and ownership of the Company’s student loan assets,
which has historically been the Company’s largest product and service offering.
The Company generates a substantial portion of its earnings from the spread,
referred to as the Company’s student loan spread, between the yield it receives
on its student loan portfolio and the 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. During 2009, the Company also
generated a significant gain from the sale of certain loans, as discussed
further below. 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.
Student
loans consist of federally insured student loans and non-federally insured
student loans. Federally insured student loans are made under the
FFEL Program. The Company’s portfolio of federally insured student
loans is subject to minimal credit risk as these loans are guaranteed by the
Department of Education at levels ranging from 97% to
100%. Substantially all of the Company’s loan portfolio (99% as of
December 31, 2009) is federally insured. The Company’s portfolio of
non-federally insured loans is subject to credit risk similar to other consumer
loan assets.
9
The
Higher Education Act regulates every aspect of the federally guaranteed student
loan program, including communications with borrowers, loan originations, and
default aversion. Failure to service a student loan properly could jeopardize
the guarantee on federal student loans. In the case of death, disability, or
bankruptcy of the borrower, the guarantee covers 100% of the loan’s principal
and accrued interest.
FFELP
loans are guaranteed by state agencies or non-profit companies designated as
guarantors, with the Department providing reinsurance to the guarantor.
Guarantors are responsible for performing certain functions necessary to ensure
the program’s soundness and accountability. These functions include reviewing
loan application data to detect and prevent fraud and abuse and to assist
lenders in preventing default by providing counseling to borrowers. Generally,
the guarantor is responsible for ensuring that loans are serviced in compliance
with the requirements of the Higher Education Act. When a borrower defaults on a
FFELP loan, the Company submits a claim to the guarantor who provides
reimbursements of principal and accrued interest subject to the applicable risk
share percentage.
The
Company’s historical balance of student loans outstanding is summarized
below.
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet6.jpg)
Future
cash flow from portfolio
The
majority of the Company’s portfolio of student loans is funded in asset backed
securitizations that are structured to substantially match the maturity of the
funded assets and there are minimal liquidity issues related to these
facilities. In addition, due to the difference between the yield the Company
receives on the loans and cost of financing within these transactions, the
Company has created a portfolio that will generate earnings and significant cash
flow over the life of these transactions.
Based on
cash flow models developed to reflect management’s current estimate of, among
other factors, prepayments, defaults, deferment, forbearance, and interest
rates, the Company currently expects future undiscounted cash flows from its
portfolio to be approximately $1.43 billion. See Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources” for further details related to the estimated
future cash flow from the Company’s portfolio.
Impact
of Legislation and Capital Market Disruptions
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 reduced special allowance payments received by lenders and increased
origination fees paid by lenders. 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. Beginning in August 2007, the capital markets have experienced
unprecedented disruptions, which have had an adverse impact on the Company’s
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.
In an
effort to bring liquidity and stability back to the student loan program, in
August 2008, the Department implemented the Purchase and Participation Programs
pursuant to ECASLA. Under the Department’s 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. Loans funded under the
Participation Program for the 2008-2009 academic year were required to be either
refinanced by the lender or sold to the Department pursuant to the Purchase
Program prior to its expiration on October 15, 2009. To be eligible for purchase
or participation under the Department’s 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.
10
On
October 7, 2008, legislation was enacted to extend the Department’s 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 funded under the Department's Participation
Program were required to be refinanced or sold to the Department prior to
October 15, 2009. On November 8, 2008, the Department announced the
replication of the terms of the Participation and Purchase Programs, in
accordance with the October 7, 2008 legislation, which will include FFELP
student loans made for the 2009-2010 academic year.
During
2009, the Company sold $2.1 billion of its 2008-2009 academic year loans under
the Purchase Program and recognized a gain of $36.6 million. In
addition, the Company has reliable sources of liquidity available for new FFELP
Stafford and PLUS loan originations for the 2009-2010 academic year under the
Department’s Participation and Purchase Programs. These programs are allowing
the Company to continue originating new federal student loans to all students
regardless of the school they attend.
Interest
Rate Risk Management
Because
the Company generates a significant portion of its earnings from its student
loans spread, the interest rate sensitivity of the Company’s balance sheet is
very important to its operations. The current and future interest
rate environment can and will affect the Company’s 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.”
Floor
Income
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 loan’s repayment status, and funding
sources for the loan. The Company generally finances its student loan portfolio
with variable rate debt. In low and/or declining interest rate environments,
when the fixed borrower rate is higher than the rate produced by the SAP
formula, the Company’s student loans earn at a fixed rate while the interest on
the variable rate debt typically continues to decline. In these interest rate
environments, the Company may earn additional spread income that it refers to as
floor income.
Depending
on the type of loan and when it was originated, the borrower rate is either
fixed to term or is reset to an annual rate each July 1. As a result, for loans
where the borrower rate is fixed to term, the Company may earn floor income for
an extended period of time, which the Company refers to as fixed rate floor
income, and for those loans where the borrower rate is reset annually on July 1,
the Company may earn floor income to the next reset date, which the Company
refers to as variable rate floor income. In accordance with 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. The Company uses derivative instruments as part of its
overall risk management strategy, including interest rate swaps to hedge a
portion of its floor income. See Part II, Item 7A, “Quantitative and Qualitative
Disclosures about Market Risk – Interest Rate Risk.”
11
The
Company’s core student loan spread (variable student loan spread including fixed
rate floor contribution) and variable student loan spread (net interest margin
excluding fixed rate floor income) during 2008 and 2009 is summarized
below.
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet7.jpg)
During
the years ended December 31, 2009 and 2008, loan interest income includes $145.1
million (58 basis points of spread contribution) and $37.5 million (14 basis
points of spread contribution), respectively, of fixed rate floor
income. The increase in fixed rate floor income throughout 2009 is
due to a decrease in interest rates. The Company’s variable student
loan spread increased throughout 2009 as a result of the tightening of the
commercial paper rate, which is the primary rate the Company earns on its
student loan portfolio, and the LIBOR rate, which is the primary rate the
Company pays to fund its student loan assets. See Part II, Item 7, “Management’s
Discussion and Analysis – Asset Generation and Management Operating Segment –
Results of Operations – Student Loan Spread Analysis.” If interest rates remain
low, the Company anticipates continuing to earn significant fixed rate floor
income in future periods.
Competition
There are
two loan delivery programs that provide federal government guaranteed student
loans: the FFELP and the Direct Loan Program. FFELP loans are provided by
private sector institutions and are ultimately guaranteed by the Department,
except for the risk sharing loss, as discussed previously. Direct Loan Program
loans are provided to borrowers directly by the Department on terms similar to
student loans provided under the FFELP.
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’s fee-based businesses, primarily revenue earned by the Company’s loan
and guaranty servicing operations, tuition management services, and enrollment
services operations, are subject to seasonal fluctuations which correspond, or
are related, to the traditional school year. In addition, the
Company’s loan and guaranty servicing operation earns revenue related to
rehabilitation collections on defaulted loans and servicing conversions and
transfers. These types of activities occur at various times
throughout the year. Thus, revenue from these services can vary from
period to period.
Recent
Developments - Legislation
On
February 26, 2009, the President introduced a fiscal year 2010 Federal budget
proposal calling for the elimination of the FFEL Program and a recommendation
that all new student loan originations be funded through the Direct Loan
Program. On September 17, 2009, the House of Representatives passed
H.R. 3221, the Student Aid and Fiscal Responsibility Act (“SAFRA”), which would
eliminate the FFEL Program and require that, after July 1, 2010, all new federal
student loans be made through the Direct Loan Program. The Senate is expected to
begin its consideration of similar student loan reform legislation sometime in
2010. In addition to the House-passed legislation, there are several
other proposals for changes to the education financing framework that may be
considered that would maintain a role for private lenders in the origination of
federal student loans. These include a possible extension of ECASLA, which
expires on July 1, 2010, and the Student Loan Community Proposal, a proposal
endorsed by a cross-section of FFELP service providers (including the Company)
as an alternative to the 100% federal direct lending proposal included in
SAFRA.
12
Elimination
of the FFEL Program would impact the Company’s operations and profitability by,
among other things, reducing the Company’s interest revenues as a result of the
inability to add new FFELP loans to the Company’s portfolio and reducing
guarantee and third-party FFELP servicing fees as a result of reduced FFELP loan
servicing and origination volume. Additionally, the elimination of the FFEL
Program could reduce education loan software licensing opportunities and related
consulting fees received from lenders using the Company’s software products and
services.
In June
2009, the Department of Education named the Company as one of four private
sector companies awarded a servicing contract to service student loans. No later
than August 2010, the Company expects to also begin servicing new loans
originated under the Direct Loan Program. If legislation is passed mandating
that all new student loan originations be funded through the Direct Loan
Program, revenue from servicing loans under this contract will partially offset
the loss of revenue if the FFEL Program is eliminated.
Intellectual
Property
The
Company owns numerous trademarks and service marks (“Marks”) to identify its
various products and services. As of December 31, 2009, the Company had four
pending and 99 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
Company’s 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 Company’s 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 Company’s employees are trained in the fundamentals of intellectual
property, intellectual property protection, and infringement issues. The
Company’s 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 Company’s proprietary rights.
Employees
As of
December 31, 2009, the Company had approximately 2,000 employees. Approximately
350 of these employees held professional and management positions while
approximately 1,650 were in support and operational positions. None of the
Company’s 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 Company’s 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
Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Corporate
Governance Guidelines, Audit Committee Charter, Compensation Committee Charter,
Nominating and Corporate Governance Committee Charter, and the Finance Committee
Charter are also posted on its Web site.
Information
on the Company’s Web site is not incorporated by reference into this Report and
should not be considered part of this Report.
13
ITEM
1A. RISK FACTORS
The risk
factors section highlights specific risks that could affect the
Company. Although this section attempts to highlight key risk
factors, please be aware that other risks may prove to be important in the
future. New risks may emerge at any time and the Company cannot predict such
risks or estimate the extent to which they may affect the financial performance
of the Company. These risk factors should be read in conjunction with
the other information set forth in this Report. For convenience of
reference, the sub-captions which briefly describe these risk factors are listed
immediately below, followed by the discussion of each risk factor.
·
|
The
Company is exposed to interest rate risk in the form of basis risk and
repricing risk because the interest rate characteristics of the Company’s
assets do not match the interest rate characteristics of the funding for
the assets.
|
·
|
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.
|
·
|
Characteristics
unique to certain asset-backed securitizations, namely auction rate
securities and variable rate demand notes, may negatively affect the
Company’s earnings.
|
·
|
The
Company’s derivative instruments may not be successful in managing
interest and foreign currency exchange rate risks, which may negatively
impact the Company’s operations.
|
·
|
Higher
rates of prepayments of student loans, including consolidations by third
parties or the Department of Education through the Direct Loan Program,
could reduce the Company’s profits.
|
·
|
The
costs and effects of litigation, investigations, or similar matters, or
adverse facts and developments related thereto, could materially affect
the Company’s financial position and results of
operations.
|
·
|
Exposure
related to certain tax issues could decrease the Company’s net
income.
|
·
|
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
Company’s consolidated financial statements could materially affect the
reported amounts of asset and liabilities, the reported amounts of income
and expenses, and related
disclosures.
|
·
|
Security
and privacy breaches in systems or system failures may damage client
relations and the Company’s
reputation.
|
·
|
Changes
in student lending legislation and regulations or the elimination of the
FFEL Program by the Federal Government could have a negative impact upon
the Company’s business and may affect its earnings and
operations.
|
·
|
Federal
and state regulations can restrict the Company’s business and
noncompliance with these regulations could result in penalties,
litigation, and reputation damage.
|
·
|
A
failure to properly manage operations and growth could have a material
adverse effect on the Company’s ability to retain existing customers and
attract new business opportunities.
|
·
|
The
Company and its operating segments are highly dependent upon information
technology systems and
infrastructure.
|
·
|
The
Company faces liquidity and funding risk to meet its financial
obligations.
|
·
|
The
ratings of the Company or of any securities issued by the Company may
change, which may increase the Company’s costs of capital and may reduce
the liquidity of the Company’s
securities.
|
·
|
There
are risks inherent in owning the Company’s common
stock.
|
·
|
Changes
in industry structure and market conditions could lead to charges related
to discontinuances of certain products or businesses and asset impairment,
including goodwill.
|
·
|
The
Company faces counterparty risk.
|
14
·
|
The
Company is subject to foreign currency exchange risk and such risk could
lead to increased costs.
|
·
|
Managing
assets for third parties has inherent risks that, if not properly managed,
could negatively affect the Company’s
business.
|
·
|
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.
|
·
|
Future
losses due to defaults on loans held by the Company, or loans sold to
third parties which the Company is obligated to repurchase in
the event of certain delinquencies, present credit risk which
could adversely affect the Company’s
earnings.
|
·
|
A
failure to attract and retain necessary technical personnel, skilled
management, and qualified subcontractors may have an adverse impact on the
Company’s future growth.
|
·
|
The
Company’s government contracts are subject to termination rights, audits,
and investigations, and, if terminated, could negatively impact the
Company’s reputation and reduce its ability to compete for new
contracts.
|
·
|
The
Company may face operational and security risks from its reliance on
vendors to complete specific business
operations.
|
·
|
The
markets in which the Company competes are highly competitive, which could
affect revenue and profit margins.
|
·
|
Transactions
with affiliates and potential conflicts of interest of certain of the
Company’s officers and directors, including the Company’s Chief Executive
Officer, pose risks to the Company’s shareholders that the Company may not
enter into transactions on the same terms that the Company could receive
from unrelated third-parties.
|
·
|
The
Company’s Chairman and Chief Executive Officer owns a substantial
percentage of the Company’s Class A and Class B common stock and
is able to control all matters subject to a shareholder
vote.
|
·
|
Negative
publicity could damage the Company’s reputation and adversely affect its
operating segments and their financial
results.
|
·
|
A
continued economic recession could reduce demand for Company products and
services and lead to lower revenue and
earnings.
|
·
|
The
Company may not be able to successfully protect its intellectual property
and may be subject to infringement
claims.
|
The
Company is exposed to interest rate risk in the form of basis risk and repricing
risk because the interest rate characteristics of the Company’s assets do not
match the interest rate characteristics of the funding for 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 Company’s student loan assets is generally driven by short term
indices (treasury bills and commercial paper) that are different from those
which affect the Company’s liabilities (generally LIBOR), which creates basis
risk. Moreover, the Company 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 Company’s student loan spread to compress, while in a rising rate
environment, it may cause the spread to increase.
By 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, at points in recent history,
they have been volatile and less correlated. There can be no assurance the
indices will maintain a high level of correlation in the future due to capital
market dislocations or other factors not within the Company’s control. In such
circumstances, the Company’s 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 liabilities and the majority of its assets
since the derivatives needed to hedge this risk are generally illiquid or
non-existent and the relationship between the indices for most of the Company’s
assets and liabilities has been highly correlated over a long period of time.
Any spread widening could have a significant impact on the net spread of the
Company’s student loan portfolio.
15
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 Company’s student loans
earn at a fixed rate while the interest on the variable rate debt typically
continues to decline. In these interest rate environments, the Company may earn
additional spread income that it refers to as floor income.
Depending
on the type of loan and when it was originated, the borrower rate is either
fixed to term or is reset to an annual rate each July 1. As a result, for loans
where the borrower rate is fixed to term, the Company may earn floor income for
an extended period of time, which the Company refers to as fixed rate floor
income, and for those loans where the borrower rate is reset annually on
July 1, the Company may earn floor income to the next reset date, which the
Company refers to as variable rate floor income. In accordance with legislation
enacted in 2006, lenders are required to rebate fixed rate floor income and
variable rate floor income to the Department for all new FFELP loans first
originated on or after April 1, 2006.
Absent
the use of derivative instruments and ignoring potential repricing benefits
associated with the mismatch between the reset of the loan assets and debt
securities, 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.
Characteristics
unique to certain asset-backed securitizations, namely auction rate securities
and variable rate demand notes, may negatively affect the Company’s
earnings.
The
interest rates on certain of the Company’s asset-backed securities are set and
periodically reset via a “dutch auction” (“Auction Rate Securities”) or through
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 Company’s
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 Company’s 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.
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, commercial paper, 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 of its Auction Rate Securities. If there is no
demand for the Company’s 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.
16
The
Company’s derivative instruments may not be successful in managing interest and
foreign currency exchange rate risks, which may negatively impact the Company’s
operations.
When the
Company utilizes derivative instruments, it utilizes them to manage interest and
foreign currency exchange rate sensitivity. The Company’s derivative instruments
are intended as economic hedges but do not qualify for hedge accounting;
consequently, the change in fair value, called the “mark-to-market”, of these
derivative instruments is included in the Company’s operating results. Changes
or shifts in the forward yield curve and foreign currency exchange rates can and
have significantly impacted the valuation of the Company’s 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.
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 Company’s 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
different 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, nor have the desired beneficial impact on its results of
operations or financial condition.
Higher
rates of prepayments of student loans, including consolidations by third parties
or the Department of Education through the Direct Loan Program, could reduce the
Company’s 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 Company’s
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 Company’s profits could be adversely
affected by higher prepayments, which may reduce the amount of net interest
income the Company receives.
The
Company’s 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. As a result, the Company
may lose student loans in its portfolio that are consolidated by the Direct Loan
Program or, if market conditions were to improve, competing FFELP lenders.
Increased consolidations of student loans by the Company’s 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.
The costs and effects of litigation,
investigations, or similar matters, or adverse facts and developments related
thereto, could materially affect the Company’s financial position and results of
operations.
The
Company may be involved from time to time in a variety of lawsuits,
investigations, or similar matters arising out of business
operations. The Company’s insurance may not cover all claims that may
be asserted against it, and any claims asserted against the Company, regardless
of merit or eventual outcome, may harm the Company’s reputation. Should the
ultimate judgments or settlements in any litigation or investigation
significantly exceed insurance coverage, they could have a material adverse
effect on the Company’s financial position. In addition, the Company
may not be able to obtain appropriate types or levels of insurance in the
future, and may not be able to obtain adequate replacement policies with
acceptable terms, if at all.
The
outcome of legal proceedings may differ from the Company’s expectations because
the resolution of such matters is 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 to make
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 Company’s results of
operations or cash flows in any particular period. For further
information, see Part I Item 3 “Legal Proceedings.”
17
Exposure
related to certain tax issues could decrease the Company’s 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 Company’s 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 Company’s 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. The nexus
standards and the sourcing of receipts from intangible personal property and
services have 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. Changes in income tax
regulations could negatively impact the Company’s 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.
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 Company’s 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 authoritative accounting guidance, 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 Company’s reserves could have a material effect on the
Company’s financial statements.
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 Company’s consolidated
financial statements could materially affect the reported amounts of asset and
liabilities, the reported amounts of income and expenses, and related
disclosures.
The
Company’s 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 Company’s 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, “Management’s
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 Company’s 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.
18
Security
and privacy breaches in systems or system failures may damage client relations
and the Company’s reputation.
The
uninterrupted operation of processing systems and the confidentiality of the
customer information is critical to the Company’s business. The
Company has security, backup, recovery systems, business continuity, and
incident response plans in place. Additionally, several of the Company’s
operating segments must comply with Payment Card Industry Data Security
Standards and National Institute of Standards in Technology security
controls. Any failures in security, privacy, or a
disruption in service could have a material adverse effect on customer contracts
and the Company’s reputation and financial results.
While the
Company believes applications it uses are proven and designed for data security
and integrity to process electronic transactions, there can be no assurance that
these applications will be sufficient to counter all current and emerging
technology threats designed to interrupt service or breach systems in order to
gain access to confidential client information or intellectual property or
assurance that these applications will be sufficient to address the security and
privacy concerns of existing and potential customers.
Changes
in student lending legislation and regulations or the elimination of the FFEL
Program by the Federal Government could have a negative impact upon the
Company’s business and may affect its earnings and operations.
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.
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. 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
Company’s business.
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.
Federal regulations implementing certain requirements of this law became
effective in February 2010. This law and the accompanying regulations
may affect the Company’s profitability by increasing costs as a result of
required changes to the Company’s operations. Provisions in the HEOA
include, but are not limited to, the following:
·
|
School
code of conduct requirements applicable to FFELP and private education
loan lending
|
·
|
Disclosure
and reporting requirements for lenders and schools participating in
preferred lender arrangements
|
·
|
Enumerated
permissible and prohibited inducement activities by FFELP lenders, private
education lenders, and FFELP guaranty
agencies
|
·
|
Additional
loan origination and repayment disclosures that FFELP and private
education lenders must provide to
borrowers
|
·
|
Additional
FFELP loan servicing requirements
|
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 and originators of FFELP loans. For example, changes
could be made to the rate of interest or special allowance payments paid on
FFELP loans, the level of insurance provided by guaranty agencies, the fees
assessed to FFEL Program lenders, or the servicing requirements for FFELP
loans.
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 placed additional restrictions on lending and business practices
between schools and lenders of FFELP and private education loans and required
changes to the Company’s 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 agencies may institute rules
or take actions which adversely impact holders of FFELP or private education
loans.
The
Company has also entered into separate agreements with the Nebraska and New York
State Attorneys General in relation to its student 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
impact of the legislative changes and federal and state investigations, 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.
19
On
September 17, 2009, SAFRA was passed by the House of
Representatives. This bill prohibits the disbursement, making, or
insuring on or after July 1, 2010 of any new FFEL Program loans. If
SAFRA becomes law, new student loan originations would be funded through the
Direct Loan Program and loan servicing would be provided by private sector
companies through performance-based contracts with the
Department. The Senate has not yet proposed its own version of a
student loan reform bill. In addition to the House-passed legislation, there are
several other proposals for changes to the education financing framework that
may be considered that would maintain a role for private lenders in the
origination of federal student loans. These include a possible extension
of ECASLA, which expires on July 1, 2010, and the Student Loan Community
Proposal, a proposal endorsed by a cross-section of FFELP service providers
(including the Company) as an alternative to the 100% federal direct lending
proposal included in SAFRA. The Company cannot currently predict whether this or
any other proposals to eliminate the FFEL Program will ultimately be
enacted.
Elimination
of the FFEL Program would significantly impact the Company’s operations and
profitability by, among other things, reducing the Company’s interest revenues
as a result of the inability to add new FFELP loans to the Company’s portfolio
and reducing guarantee fees as a result of reduced FFELP loan servicing and
origination volume. Additionally, the elimination of the FFEL Program would
reduce education loan software licensing opportunities and related consulting
fees received from lenders using the Company’s software products and
services. In addition, without an extension of ECASLA, the Company’s
ability to fund federal student loan originations would be limited.
Federal
and state regulations can restrict the Company’s business and noncompliance with
these regulations could result in penalties, litigation, and reputation
damage.
The
Company, its operating segments, and commercial customers are heavily regulated
by federal and state governments and regulatory agencies. This regulation and
legislation is proposed or enacted to protect consumers and the financial
industry as a whole, not necessarily the Company and its
stockholders. Consequently, this regulation and legislation can
significantly alter the regulatory environment, limit business operations,
increase costs of doing business, and could lead to the Company being fined or
penalized if the Company is found to be out of compliance.
The
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) limits the types of non-audit
services the Company’s outside auditors may provide to the Company in order to
preserve their independence. If the Company’s auditors were found not
to be “independent” under SEC rules, the Company could be required to engage new
auditors and file new financial statements and audit reports with the SEC. The
Company could be out of compliance with SEC rules until new financial statements
and audit reports were filed, limiting the Company’s ability to raise capital
and resulting in other adverse consequences. Sarbanes-Oxley also
requires the Company’s management to evaluate the Company’s disclosure controls
and procedures and its internal control over financial reporting and requires
auditors to issue a report on the Company’s internal control over financial
reporting. The Company is required to disclose, in its annual report
on Form 10-K filed with the SEC, the existence of any “material weaknesses” in
its internal controls. The Company cannot provide assurance that it will not
find one or more material weaknesses as of the end of any given year, nor can
the Company predict the effect on its stock price of disclosure of a material
weakness.
The
Patriot Act, which was enacted in the wake of the September 2001 terrorist
attacks, requires the Company and its financial customers to implement new or
revised policies and procedures relating to anti-money laundering, compliance,
suspicious activities, and currency transaction reporting and due diligence on
customers. Complying with this regulation could increase operating
costs and restrict business operations.
Historically,
the Company’s principal business has been comprised of originating, acquiring,
holding, and servicing student loans made and guaranteed pursuant to the FFEL
Program. 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. In addition, under contract with the
Department, the Company services loans pursuant to the FFEL, Federal Direct
Loan, Federal Perkins Loan, and TEACH Grant programs. The Higher
Education Act created these programs and governs many aspects of the Company’s
operations. The Company is also subject to rules of the agencies that act as
guarantors of the student loans, known as guaranty agencies. 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. 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 Company’s right to
participate in the FFEL Program or to participate as a servicer, negative
publicity, and potential legal claims or actions brought by the Company’s
servicing customers and borrowers. 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 Department’s change in
position, the Department could potentially impose sanctions upon the Company
that could negatively impact the Company’s business.
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 privacy protection, information security, restrictions on access to
customer information, and, specifically with respect to the Company’s
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.
20
The
Company is subject to federal and state credit card industry laws, regulations,
association rules, or industry standards. Changes to statutes,
regulations, or industry standards, including interpretation and implementation
of statutes, regulations, or standards, could increase the cost of doing
business or affect the competitive balance. The Company cannot
predict whether new legislation will be enacted or whether any credit card
association rule or other industry standard will change, and if enacted or
changed, the effect that it would have on the Company’s financial position or
results of operations. These changes may require the Company to incur
significant expenses to redevelop products. Also, failure to comply with laws,
rules, and regulations or standards could result in fines, sanctions, or other
penalties, which could have a material adverse affect on the Company’s
reputation, financial position, and operating results.
Laws and
regulations that apply to Internet communications, lead generations, school
recruitment, privacy, commerce, and advertising are becoming more prevalent.
These regulations could increase the costs of conducting business on the
Internet and could decrease demand for the Company’s interactive marketing and
subscription services.
The
Company maintains systems and procedures designed to ensure compliance with
applicable laws and regulations. However, some legal and regulatory frameworks
provide for the imposition of fines or penalties for noncompliance even though
the noncompliance was inadvertent or unintentional and even though systems and
procedures designed to ensure compliance were in place at the time of
noncompliance. Therefore, the establishment and maintenance of systems and
procedures reasonably designed to ensure compliance cannot guarantee fines or
penalties will be avoided. There may be other negative consequences
resulting from a finding of noncompliance, including restrictions on certain
activities or reputation damage.
A
failure to properly manage operations and growth could have a material adverse
effect on the Company’s ability to retain existing customers and attract new
business opportunities.
While
recently the Company has focused on managing costs and expenses, over the
long term, the Company intends to add personnel and other resources to
meet the requirements of customer contracts and expand products and
services into new and existing markets. The Company is likely
to recognize costs associated with these investments earlier than some of
the anticipated benefits and the return on these investments may be lower,
or may develop more slowly, than is expected. If the
anticipated benefits of these investments are delayed or are not realized,
operating results may be adversely
affected.
|
In order
to manage growth effectively, the Company must design, develop, implement and
improve operational systems, which may include the design, development, and
implementation of software and timely development and implementation of
procedures and controls. If the Company fails to design, develop, and
implement and improve systems, it may not be able to maintain required customer
service levels, hire and retain new employees, pursue new business
opportunities, complete future acquisitions or operate its businesses
effectively. Failure to properly transition new clients to systems,
properly budget transition costs, or accurately estimate new contract
operational costs, could result in delays in contract performance, impair
long-lived assets, or result in contracts with profit margins which do not meet
Company or market expectations.
Additionally,
the Company’s success depends on its ability to develop and implement services
and solutions that anticipate and respond to continuing changes in technology,
industry developments, and client needs. The Company may not successfully
anticipate or respond to these developments in a timely manner, and offerings
may not be successful in the marketplace. Also, services, solutions,
and technologies offered by current or future competitors may make Company
services or solutions uncompetitive or obsolete. As a result of any
of these complications associated with expansion, the Company’s financial
condition, results of operations, and cash flow could be materially and
adversely affected.
The
Company and its operating segments are highly dependent upon information
technology systems and infrastructure.
The
success of the Company depends, in part, on the ability to successfully and
cost-effectively improve its system infrastructure and deliver products and
services to customers. The widespread adoption of new technologies
and market demands could require substantial expenditures to enhance system
infrastructure and existing products and services. If the Company
fails to enhance its system infrastructure or products and services, its
operating segments may lose their competitive advantage and this could adversely
affect financial and operating results.
Additionally,
the Company faces the risk of business disruption if failures in its information
systems occur as a result of changes in infrastructure, relocation of
infrastructure, or failure to perform required services, which could have a
material impact upon its business and operations. 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 Company’s
business. Additionally, loss of information systems for a sustained
period of time could have a negative impact on the Company’s performance and
ultimately on cash flow in the event the Company were unable to process
transactions and/or provide services to customers.
21
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 Company’s student loan portfolios
and, as a result, have had and may continue to have an adverse effect on the
Company’s liquidity, results of operations, and financial condition. Such
adverse conditions may continue or worsen in the future.
The
Company’s primary funding needs are those required to finance new student loan
originations and acquisitions and satisfy certain debt obligations, specifically
its unsecured senior notes and unsecured line of credit. In general, the amount,
type, and cost of the Company’s funding, including securitizations and unsecured
financing from the capital markets and borrowings from financial institutions,
have a direct impact on the Company’s operating expenses and financial results
and can limit the Company’s ability to increase its student loan assets. The
Company relies upon secured financing vehicles as its most significant source of
funding for student loans. The Company’s 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
August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year through the Department’s
Participation and Purchase Programs pursuant to the ECASLA. Under the
Department’s Purchase Program, the Department purchases 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
were required to be either refinanced by the lender or sold to the Department
pursuant to the Purchase Program prior to its expiration on October 15, 2009. To
be eligible for purchase or participation under the Department’s 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 Department’s
authority to finance and acquire FFELP student loans made for the 2009-2010
academic year by extending the Participation and Purchase Programs from
September 30, 2009 to September 30, 2010. The Department indicated
that loans for the 2008-2009 academic year which were funded under the
Department’s Participation Program had to be refinanced or sold to the
Department prior to October 15, 2009. On November 8, 2008, the Department
announced the replication of the terms of the Participation and Purchase
Programs, in accordance with the October 7th legislation, to include FFELP
student loans made for the 2009-2010 academic year. Loans for the 2009-2010
academic year must be refinanced or sold to the Department prior to October 15,
2010. With respect to the origination of new FFELP student loans for
the 2008-2009 and 2009-2010 academic years, the Company has utilized the
Department’s Participation and Purchase Programs.
On August
3, 2009, the Company entered into a FFELP warehouse facility (the “2009 FFELP
Warehouse Facility”). The 2009 FFELP Warehouse Facility has a maximum financing
amount of $500.0 million, with a revolving financing structure supported by
364-day liquidity provisions, which expire on August 2, 2010. The final maturity
date of the facility is August 3, 2012. In the event the Company is unable to
renew the liquidity provisions by August 2, 2010, the facility would become a
term facility at a stepped-up cost, with no additional student loans being
eligible for financing, and the Company would be required to refinance the
existing loans in the facility by August 3, 2012.
The 2009
FFELP Warehouse Facility provides for formula based advance rates depending on
FFELP loan type, up to a maximum of 92 percent to 98 percent of the principal
and interest of loans financed. The advance rates for collateral may increase or
decrease based on market conditions. The facility contains financial covenants
relating to levels of the Company’s consolidated net worth, ratio of adjusted
EBITDA to corporate debt interest, and unencumbered cash. Any violation of these
covenants could result in a requirement for the immediate repayment of any
outstanding borrowings under the facility. Unlike the Company’s prior FFELP
warehouse facility, the new facility does not require the Company to refinance
or remove a percentage of the pledged student loan collateral on an annual
basis. Continued disruptions in the credit and financial markets may
cause additional volatility in the loan valuation formula under the warehouse
facility and a decline in advance rates may adversely affect the Company’s
liquidity position.
22
In
January 2009, the Department published summary terms for its program 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 had to be first
disbursed on or after October 1, 2003, but not later than June 30, 2009, and
fully disbursed before September 30, 2009, and meet certain other requirements.
The Conduit Program was launched on May 11, 2009. Funding for the Conduit
Program is provided by the capital markets at a cost based on market rates, with
the Company being advanced 97 percent of the student loan face amount. Excess
amounts needed to fund the remaining 3 percent of the student loan balances are
contributed by the Company. The Conduit Program has a term of five years and
expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”)
issued by the Conduit Program are supported by a combination of (i)
notes backed by FFELP loans, (ii) a liquidity agreement with the Federal
Financing Bank, and (iii) a put agreement provided by the
Department. If the conduit does not have sufficient funds to pay all
Student Loan Notes, then those Student Loan Notes will be repaid with funds from
the Federal Financing Bank. The Federal Financing Bank will hold the
notes for a short period of time and, if at the end of that time, the Student
Loan Notes still cannot be paid off, the underlying FFELP loans that serve as
collateral to the Conduit Program will be sold to the Department through the Put
Agreement at a price of 97 percent of the face amount of the loans.
The
Company has a $750.0 million unsecured line of credit that terminates in May
2012. Upon termination in 2012, there can be no assurance that the Company will
be able to maintain this line of credit, find alternative funding, or increase
the amount outstanding under the line, if necessary. The line of credit
agreement contains certain financial covenants that, if not met, lead to an
event of default under the agreement. The covenants include maintaining a
minimum consolidated net worth, minimum adjusted EBITDA to corporate debt
interest (over the last four rolling quarters), limitation on subsidiary
indebtedness, and limitation on the percentage of non-guaranteed loans in the
Company’s portfolio. A default on the 2009 FFELP Warehouse Facility would result
in an event of default on the Company’s unsecured line of credit that would
result in the outstanding balance on the line becoming immediately due and
payable.
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 Company’s results of operations.
In addition, the Company’s ability to originate and acquire student loans would
be limited or could be eliminated.
The
ratings of the Company or of any securities issued by the Company may change,
which may increase the Company’s costs of capital and may reduce the liquidity
of the Company’s 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 Company’s 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 agency’s
judgment, circumstances so warrant. If the Company’s credit ratings are lowered
or withdrawn, the Company may experience an increase in the interest rate paid
on the Company’s 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 Company’s operations. Moreover, if the unsecured ratings
of the Company are lowered or withdrawn, it may affect the terms of the
Company’s 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
Company’s securities.
There
are risks inherent in owning the Company’s common stock.
From
January 1, 2009 to March 1, 2010, the closing daily sales price of
the Company’s Class A common stock as reported by the New York Stock
Exchange ranged from a low of $4.25 per share to a high of
$17.78 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 Company’s control. These factors
include:
|
·
|
Changes
in interest rates and credit market conditions affecting the cost and
availability of financing for the Company’s student loan
assets
|
·
|
Changes
in the education financing regulatory
framework
|
·
|
Changes
in the education financing or other products and services that the Company
offers
|
·
|
Variations
in the Company’s quarterly operating
results
|
·
|
Changes
in financial estimates by securities
analysts
|
·
|
Changes
in market valuations of comparable
companies
|
·
|
Changes
in the amounts and frequency of share repurchases or
dividends
|
In
December 2009, Company announced that it was reinstating 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
Company’s board of directors and will continue to depend on the Company’s
earnings, capital requirements, financial condition, and other factors. In
addition, the payment of dividends is subject to the terms of the
Company’s outstanding junior subordinated hybrid securities, which
generally provide that if the Company defers interest payments on those
securities it cannot pay dividends on its capital
stock.
|
23
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 Company’s
Class A common stock could decline as a
result.
|
Changes
in industry structure and market conditions could lead to charges related to
discontinuances of certain products or businesses and asset impairment,
including goodwill.
In
response to changes in industry and market conditions, the Company may be
required to strategically realign its resources and consider restructuring,
disposing of, or otherwise exiting businesses. Any decision to limit
investment in or dispose of or otherwise exit businesses may result in the
recording of special charges, such as workforce reduction costs, charges
relating to consolidation of excess facilities, or impairments of intangible
assets. Estimates with respect to the useful life or ultimate
recoverability of the carrying basis of assets, including purchased intangible
assets, could change as a result of such assessments and
decisions. Additionally, the Company is required to perform goodwill
impairment tests on an annual basis and between annual tests in certain
circumstances, and future goodwill impairment tests may result in a charge to
earnings.
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 Company’s
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.
The
lending commitment for the Company’s unsecured line of credit is provided by a
total of thirteen banks, with no individual bank representing more than 11% of
the total lending commitment. The bank lending group includes Lehman Brothers
Bank (“Lehman”), a subsidiary of Lehman Brothers Holdings Inc., which represents
approximately 7% of the lending commitment under the line of credit. On
September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code.
The Company does not expect Lehman to fund future borrowing
requests.
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 participates loans to Union Bank to the extent of
availability under the grantor trusts. 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.
The
restricted cash in many of the Company’s asset backed securitizations is
invested in guaranteed investment contracts (“GICs”), These GICs are primarily
with three financial institutions, although the Company’s risk is concentrated
with one institution which is the provider of approximately 85% of the Company’s
investment contracts. All of the institutions are currently at least A rated.
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 Company’s investment
and have a material adverse effect on the Company’s results of operations and
financial condition.
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.
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 Company’s 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 Company’s 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 Company’s risk committee. The Company also has a policy requiring that all
derivative contracts be governed by an International Swaps and Derivatives
Association, Inc. Master Agreement.
24
The
Company is subject to foreign currency exchange risk and such risk could lead to
increased costs.
As a
result of the Company’s 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. The principal and accrued interest
on these notes is re-measured at each reporting period and recorded on the
Company’s balance sheet in U.S. dollars based on the foreign currency exchange
rate on that date. 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 previously, such swaps may not always be
effective.
Managing
assets for third parties has inherent risks that, if not properly managed, could
negatively affect the Company’s business.
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 Company’s
overall business.
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 Company’s federally insured
loans is conditional based on the Company’s 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 Department’s and guaranty agency regulations may risk
partial or complete loss of the guaranty. 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 borrower’s 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 borrower’s 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 Company’s fiscal operations.
Future
losses due to defaults on loans held by the Company, or loans sold to third
parties which the Company is obligated to repurchase in the
event of certain delinquencies, present credit risk which could
adversely affect the Company’s earnings.
Over 99%
of the Company’s 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 Company’s 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 Company’s loss exposure
on the outstanding balance of the Company’s federally insured portfolio. Student
loans disbursed prior to October 1, 1993 are fully insured for both
principal and interest.
The
Company’s non-federally insured loans are unsecured and are not guaranteed or
reinsured under any government or 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, delinquency status, loan program type, and trends in defaults
in the portfolio based on company and industry data. The Company places a
non-federally insured loan on nonaccrual status when the collection of principal
and interest is 30 days past due and charges off the loan when the
collection of principal and interest is 120 days past due.
25
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 Company’s 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 Company’s
estimate of the allowance for loan losses and the related provision for loan
losses in the Company’s statement of operations.
The
Company has participated non-federally insured loans to third parties. Loans
participated under these agreements have been accounted for by the Company as
loan sales. Accordingly, the participation interests sold are not included on
the Company’s consolidated balance sheet. Per the terms of the
servicing agreements, the Company’s servicing operations are obligated to
repurchase loans subject to the participation interests when such loans become
60 or 90 days delinquent. The evaluation of the reserve related to
these participated loans is inherently subjective, as it requires estimates that
may be subject to changes. If actual performance is worse than
estimated, it could negatively affect the Company’s results of
operations.
A
failure to attract and retain necessary technical personnel, skilled management,
and qualified subcontractors may have an adverse impact on the Company’s future
growth.
Because
the Company operates in intensely competitive markets, its success depends, to a
significant extent, upon its ability to attract, retain, and motivate highly
skilled and qualified personnel and to subcontract with qualified, competent
subcontractors. If the Company fails to attract, train, and retain sufficient
numbers of qualified engineers, technical and operational staff, and sales and
marketing representatives or is unable to contract with qualified, competent
subcontractors, the Company’s business, financial condition, and results of
operations could be materially and adversely affected. The Company’s success
also depends on the skills, experience, and performance of key members of its
management team. The loss of any key employee or the loss of a key subcontractor
relationship could have an adverse effect on the Company’s business, financial
condition, cash flow, results of operations, and future prospects.
The
Company’s government contracts are subject to termination rights, audits, and
investigations, and, if terminated, could negatively impact the Company’s
reputation and reduce its ability to compete for new contracts.
The Company has entered into
new contracts with government agencies and has plans to expand its government
agency services. For example, in June 2009, the Department of Education
named the Company as one of four private sector companies awarded a servicing
contract to service all federally-owned student loans. Federal and state
governments and their agencies may have the right to terminate contracts at any
time, without cause. These contracts, upon their expiration or termination, are
typically subject to bidding processes in which the Company may not be
successful. Also, the Department of Education and other federal
contracts are subject to the approval of appropriations by the United States
Congress to fund the expenditures of the federal government under these
contracts. Additionally, government contracts are generally subject
to audits and investigations by government agencies. If the
government discovers improper or illegal activities in the course of audits or
investigations, the Company may be subject to various civil and criminal
penalties and administrative sanctions, which may include termination of
contracts, forfeiture of profits, suspension of payments, fines and suspensions,
or debarment from doing business with the government. Further, the
negative publicity that arises from findings in such audits or investigations,
or the penalties or sanctions which result, could have an adverse effect on the
Company’s reputation in the industry and reduce the ability to compete for new
contracts. Any resulting reputation damage, penalties, or sanctions
could have a material adverse effect on the Company’s financial condition,
results of operations, and cash flows.
The
Company may face operational and security risks from its reliance on vendors to
complete specific business operations.
The
Company relies on outside vendors to provide some of the key components of
business operations. Several of these key vendors are provided access
to the Company’s customer data to complete the operations required by their
contracts, such as banking services, electronic and paper correspondence, credit
reporting, skip tracing, and secure storage of proprietary and customer
information. The Company’s vendors must comply with the Company’s
defined servicing levels, security policies, and the Company’s industry
regulations. However, disruptions in vendor services, changes in
servicing contracts, security, or non-compliance with industry regulations could
hinder the Company’s ability to meet customer obligations, service levels, or
lead to financial or reputation damage. Financial or operational difficulties of
an outside vendor could also hurt operations if those difficulties interfere
with the vendor’s services.
26
The
markets in which the Company competes are highly competitive, which could affect
revenue and profit margins.
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’s operating
segments seek to penetrate, or who may have better brand recognition and greater
financial resources. Demand for the Company’s products and services can be
affected by following competitive factors:
·
|
Development
and timely introduction of competitive products and
services
|
·
|
Ability
to reduce operating costs
|
·
|
Product
and servicing performance
|
·
|
Ability
to provide value-added features
|
·
|
Response
to pricing pressures
|
·
|
Changes
in customer discretionary spending
|
·
|
Changes
in customers’ preferences, including the success of products and services
offered by competitors
|
·
|
Availability
of capital
|
Additionally,
if the Company fails to deliver results that are superior to its competitors,
the Company could lose clients and experience a decline in revenue and profit
margins.
Transactions
with affiliates and potential conflicts of interest of certain of the Company’s
officers and directors, including the Company’s Chief Executive Officer, pose
risks to the Company’s 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 Company’s 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 Company’s 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
Company’s Chairman and Chief Executive Officer owns a substantial percentage of
the Company’s Class A and Class B common stock and is able to control
all matters subject to a shareholder vote.
Michael
S. Dunlap, the Company’s Chairman, Chief Executive Officer, and a principal
shareholder, beneficially owns a substantial percentage of the Company’s
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
Company’s shareholders. As a result, Mr. Dunlap is able to control all
matters requiring approval by the Company’s 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. Stephen F. Butterfield, the Company’s Vice
Chairman, also owns a substantial number of shares of Class B common
stock.
Negative
publicity could damage the Company’s reputation and adversely affect its
operating segments and their financial results.
Reputation
risk, or the risk to earnings and capital from negative public opinion, is
inherent in the Company’s business. Negative public opinion
could adversely affect the Company’s ability to keep and attract customers and
expose the Company to adverse legal and regulatory
consequences. Negative public opinion could result from actual or
alleged conduct in any number of activities, including lending practices,
corporate governance, regulatory compliance, mergers and acquisitions, and
disclosure, sharing or inadequate protection of customer information, and from
actions taken by government regulators and community organizations in response
to that conduct. Because the Company conducts most of its businesses
under the “Nelnet” brand, negative public opinion about one operating segment
could affect other operating segments.
Over the
last several years, the student lending industry has been the subject of various
investigations and reports. The publicity associated with these investigations
and reports may have a negative impact on the Company’s reputation and its
operating segments. To the extent that potential or existing customers decide
not to utilize the Company’s products or services as a result of such publicity,
the Company’s overall operating results may be adversely affected.
27
A continued economic recession could
reduce demand for Company products and services and lead to lower revenue and
earnings.
The
Company generates revenue from the interest earned on loans and fees charged for
other products and services it sells. When the economy slows, the demand for
products and services can fall, reducing fee revenue and earnings. An economic
downturn can also impede on the ability of customers to repay their loans or to
afford fee-based products and services. Additionally, the Company may be exposed
to credit risk from business customers. 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.
The
Company may not be able to successfully protect its intellectual property and
may be subject to infringement claims.
The
Company relies on a combination of contractual rights and copyrights,
trademarks, patents, and trade secret laws to establish and protect its
proprietary technology and other intellectual property. Despite the
Company’s efforts to protect its intellectual property, third parties may
infringe or misappropriate intellectual property or may develop software or
technology competitive to the Company’s products. The Company’s
competitors may independently develop similar technology, duplicate products or
services, or design around intellectual property rights. The Company
may have to litigate to enforce and protect its intellectual property rights,
trade secrets, and know-how or to determine their scope, validity, or
enforceability, which is expensive and could cause a diversion of resources and
may not prove successful. The loss of intellectual property
protection or the inability to secure or enforce intellectual property
protection could harm the Company’s operating segments and ability to
compete.
The
Company may also be subject to costly litigation in the event its products and
technology infringe upon another party’s proprietary rights. Third parties may
have, or may eventually be issued, patents or other proprietary rights that
would be infringed by the Company’s products or technology. Any of
these third parties could make a claim of infringement against the Company. The
Company may also be subject to claims by third parties for breach of copyright,
trademark, or license usage rights. Any such claims and any resulting litigation
could subject the Company to significant liability for damages. An
adverse determination in any litigation of this type could require the Company
to design around a third party’s intellectual property or to license alternative
technology from another party. In addition, litigation is time consuming and
expensive to defend and could divert management’s attention away from other
critical business operations. Any claim by third parties may result in
limitations on the Company’s ability to use the intellectual property subject to
these claims.
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.
Location
|
Primary Function or Segment
|
Approximate
square feet
|
Lease
expiration
date
|
||||||
Lincoln,
NE
|
Corporate
Headquarters, Asset Generation and Management, Student Loan
and
Guaranty Servicing, Tuition Payment Processing and Campus
Commerce
|
154,000 | – | ||||||
Aurora,
CO
|
Student
Loan and Guaranty Servicing, Software and Technical
Services
|
96,000 |
February
2015
|
||||||
Jacksonville,
FL
|
Student
Loan and Guaranty Servicing, Software and Technical
Services
|
106,000 |
January
2014
|
||||||
Lawrenceville,
NJ
|
Enrollment
Services
|
62,000 |
April
2011
|
28
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 was subleased to third parties as of December 31, 2009. The
sublease expired in January 2010. 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
Company’s principal office is located at 121 South 13th
Street, Suite 201, Lincoln, Nebraska 68508.
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 of
Education thereunder, and the Department’s guidance regarding those rules and
regulations. On the basis of present information, anticipated insurance
coverage, and advice received from counsel, it is the opinion of the Company’s
management that the disposition or ultimate determination of these claims,
lawsuits, and proceedings will not have a material adverse effect on the
Company’s business, financial position, or results of operations.
Regulatory
Reviews
The
Department of Education periodically reviews participants in the FFELP for
compliance with program provisions. On June 28, 2007, the Department
notified the Company that it would be conducting a review of the Company’s
practices in connection with the prohibited inducement provisions of the Higher
Education Act and the associated regulations that allow borrowers to have a
choice of lenders. The Company understands that the Department
selected several schools and lenders for review. The Company
responded to the Department’s requests for information and documentation and
cooperated with their review. On May 1, 2009, the Company received
the Department’s preliminary program review report, which covered the
Department’s review of the period from October 1, 2002 to September 30,
2007. The preliminary program review report contained certain initial
findings of noncompliance with the Higher Education Act’s prohibited inducement
provisions and required that the Company provide an explanation for the basis of
the arrangements noted in the preliminary program review report. The
Company has responded and provided an explanation of the arrangements noted in
the Department of Education’s initial findings and follow-up requests. The
Department of Education is expected to issue a final program review
determination letter and advise the Company whether it intends to take any
additional action. To the extent any findings are contained in a
final letter, the additional action may include the assessment of fines or
penalties, or the limitation, suspension, and termination of the Company’s
participation in the FFELP.
In
connection with the Company’s settlement agreement with the Department of
Education in January 2007 to resolve an audit report by the Office of
Inspector General of the Department of Education (the “OIG”) with respect to the
Company’s student loan portfolio receiving special allowance payments at a
minimum 9.5% interest rate (the “Settlement Agreement”), 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 Department of Justice in connection with the
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 Department’s guidance regarding those rules and
regulations.
United
States ex rel Oberg v. Nelnet, Inc. et al
On
September 28, 2009, the Company was served with a Summons and First Amended
Complaint naming the Company as one of ten defendants in a “qui tam” action
brought by Jon H. Oberg on behalf of the United States of America. Qui tam
actions assert claims by an individual on behalf of the federal government, and
are filed under seal until the government decides, if at all, to intervene in
the case.
29
An
original complaint in the action was filed under seal in the U.S. District Court
for the Eastern District of Virginia on September 21, 2007, and was unsealed on
August 26, 2009 upon the government’s filing of a Notice of Election to Decline
Intervention in the matter. The First Amended Complaint (the “Oberg
Complaint”) was filed on August 24, 2009 and alleges the defendant student loan
lenders submitted false claims for payment to the Department of Education in
order to obtain special allowance payments on certain student loans at a
rate of 9.5%, which the Oberg Complaint alleges is in excess of amounts
permitted by law. The Oberg Complaint seeks the imposition of civil
penalties and treble the amount of damages sustained by the government in
connection with the alleged overbilling by the defendants for special allowance
payments. The Oberg Complaint alleges that approximately $407
million in unlawful 9.5% special allowance payment claims
were submitted by the Company to the Department of
Education.
The 9.5%
special allowance payments received by the Company were disclosed by the Company
on multiple occasions beginning in 2003. In January, 2007, the
Company entered into the Settlement Agreement. The Settlement Agreement
resolved the issues now raised by the Oberg Complaint, and contains an
acknowledgment by the Department of Education that the Company acted in good
faith in connection with its billings for 9.5% special allowance
payments.
The
Company believes the allegations in the above qui tam action to be frivolous and
without merit and intends to vigorously defend the claim. However, the
Company cannot currently predict the ultimate outcome of this matter
or any liability which may result, which could have a material adverse effect on
the Company's results of operations and financial condition.
United
States ex rel Vigil v. Nelnet, Inc. et al
On
November 4, 2009, the Company was served with a Summons and Third Amended
Complaint naming the Company as one of three defendants in an unrelated qui tam
action brought by Rudy Vigil (the “Vigil Complaint”). This matter was
filed under seal in the U.S. District Court for the District of Nebraska on July
11, 2007 and was unsealed on October 15, 2009 following the government’s notice
that it declined to intervene in the matter. The Vigil Complaint,
filed by a former employee of the Company, appears to allege that the Company
engaged in false advertising and offered prohibited inducements to student loan
borrowers in order to increase the Company’s loan holdings, and subsequently
submitted false claims to the Department of Education in order to obtain special
allowance payments and default claim payments on such loans.
The
Company believes the allegations in the above qui tam action to be frivolous and
without merit and intends to vigorously defend the claim. However, the
Company cannot currently predict the ultimate outcome of this matter
or any liability which may result, which could have a material adverse effect on
the Company's results of operations and financial condition.
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 2009.
PART
II.
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s 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 Company’s Class A Common Stock
and Class B Common Stock as of January 31, 2010 was 777 and nine, respectively.
Because many shares of the Company’s 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
Company’s Class A Common Stock for each full quarterly period in 2009 and
2008.
2009
|
2008
|
|||||||||||||||||||||||||||||||
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|||||||||||||||||||||||||
High
|
$ | 14.87 | $ | 13.61 | $ | 15.41 | $ | 17.78 | $ | 13.66 | $ | 14.11 | $ | 16.06 | $ | 14.80 | ||||||||||||||||
Low
|
4.25 | 5.51 | 12.44 | 12.15 | 9.00 | 10.35 | 9.37 | 9.21 |
In the
first quarter of 2007, the Company began paying dividends of $0.07 per share on
the Company's 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. On November 5,
2009, the Company's Board of Directors voted to reinstate the quarterly dividend
program. Accordingly, a dividend of $0.07 per share on the Company's Class
A and Class B Common Stock was paid on December 15, 2009 to all holders of
record as of December 1, 2009. The Company currently plans to
continue making quarterly dividend payments, subject to future earnings, capital
requirements, financial condition, and other factors. In addition,
the payment of dividends is subject to the terms of the Company’s outstanding
junior subordinated hybrid securities, which generally provide that if the
Company defers interest payments on those securities it cannot pay dividends on
its capital stock.
30
Performance
Graph
The
following graph compares the change in the cumulative total shareholder return
on the Company’s 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 Company’s Class
A Common Stock and each index was $100 on December 31, 2004 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
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet8.jpg)
Company/Index
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
||||||||||||||||||
Nelnet,
Inc.
|
$ | 100.00 | $ | 151.06 | $ | 101.60 | $ | 47.90 | $ | 54.34 | $ | 65.60 | ||||||||||||
Dow
Jones U.S. Total Market Index
|
100.00 | 106.32 | 122.88 | 130.26 | 81.85 | 105.42 | ||||||||||||||||||
Dow
Jones U.S. Financial Services Index
|
100.00 | 108.38 | 138.46 | 116.16 | 48.27 | 73.13 |
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 2009 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, 2009
|
1,156 | $ | 13.63 | 1,156 | 7,433,639 | |||||||||||
November
1 - November 30, 2009
|
2,056 | 16.71 | 1,610 | 6,932,471 | ||||||||||||
December
1 - December 31, 2009
|
3,986 | 17.45 | 118 | 6,949,403 | ||||||||||||
Total
|
7,198 | $ | 16.62 | 2,884 |
(1)
|
The
total number of shares includes: (i) shares purchased pursuant to the 2006
Plan discussed in footnote (2) below; (ii) shares owned and tendered by
employees to satisfy tax withholding obligations on the vesting of
restricted shares; and (iii) 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 2009. Shares of Class A common stock
purchased pursuant to the 2006 Plan included 1,156 shares, 1,610 shares,
and 118 shares in October, November, and December, respectively, that had
been issued to the Company’s 401(k) plan and allocated to employee
participant accounts pursuant to the plan’s 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. Shares of Class A common stock tendered by
employees to satisfy tax withholding obligations included 446 shares and
3,868 shares in November and December, respectively. Unless otherwise
indicated, shares owned and tendered by employees to satisfy tax
withholding obligations were purchased at the closing price of the
Company’s shares on the date of
vesting.
|
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 Company’s Class A common stock (the “2006
Plan”). On February 7, 2007, the Company’s 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 Company’s 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 Company's 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.
|
As
of
|
Maximum
number of
shares
that may yet be
purchased
under the
2006
Plan
(A)
|
Approximate
dollar
value
of shares that
may
yet be
purchased
under
the
2006 ESLP
(B)
|
Closing
price on
the
last trading
day
of the
Company's
Class
A
Common Stock
(C)
|
(B
/ C)
Approximate
number
of
shares
that
may
yet be
purchased
under
the
2006 ESLP
(D)
|
(A
+ D)
Approximate
number
of shares
that
may yet be
purchased
under
the
2006 Plan and
2006
ESLP
|
|||||||||||||||
October
31, 2009
|
4,835,635 | $ | 36,450,000 | $ | 14.03 | 2,598,004 | 7,433,639 | |||||||||||||
November
30, 2009
|
4,834,025 | 36,450,000 | 17.37 | 2,098,446 | 6,932,471 | |||||||||||||||
December
31, 2009
|
4,833,907 | 36,450,000 | 17.23 | 2,115,496 | 6,949,403 |
Equity
Compensation Plans
For
information regarding the Company’s equity compensation plans, see Part III,
Item 12 of this Report.
32
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 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in this Report.
Management evaluates the Company’s 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.
Year
ended Decmber 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(dollars
in thousands, except share data)
|
||||||||||||||||||||
Operating
Data:
|
||||||||||||||||||||
Net
interest income before provision for loan losses
|
$ | 235,345 | 187,892 | 244,614 | 308,459 | 328,999 | ||||||||||||||
Loan
and guaranty servicing revenue
|
108,747 | 99,942 | 122,380 | 121,593 | 93,332 | |||||||||||||||
Tuition
payment processing and campus commerce revenue
|
53,894 | 48,155 | 42,766 | 34,784 | 14,088 | |||||||||||||||
Enrollment
services revenue
|
119,397 | 112,405 | 103,905 | 55,361 | 12,349 | |||||||||||||||
Software
services revenue
|
21,164 | 24,115 | 27,764 | 15,890 | 9,170 | |||||||||||||||
Derivative
settlements, net
|
39,286 | 55,657 | 18,677 | 23,432 | (17,008 | ) | ||||||||||||||
Total
revenue
|
577,833 | 528,166 | 560,106 | 559,519 | 440,930 | |||||||||||||||
Other
income
|
68,152 | 22,775 | 30,423 | 19,405 | 16,561 | |||||||||||||||
Gain
(loss) on sale of loans
|
35,148 | (51,414 | ) | 3,597 | 16,133 | 301 | ||||||||||||||
Total
operating expense
|
(405,633 | ) | (440,614 | ) | (535,609 | ) | (446,279 | ) | (267,731 | ) | ||||||||||
Income
tax expense
|
(76,573 | ) | (17,896 | ) | (21,716 | ) | (36,237 | ) | (100,581 | ) | ||||||||||
Income from
continuing operations
|
139,125 | 26,844 | 35,429 | 65,916 | 178,074 | |||||||||||||||
Income
(expense) from discontinued operations
|
— | 1,818 | (2,575 | ) | 2,239 | 3,048 | ||||||||||||||
Net
income
|
139,125 | 28,662 | 32,854 | 68,155 | 181,122 | |||||||||||||||
Earnings
(loss) per common share:
|
||||||||||||||||||||
Basic:
|
||||||||||||||||||||
Continuing
operations
|
$ | 2.79 | 0.54 | 0.71 | 1.23 | 3.31 | ||||||||||||||
Discontinued
operations
|
— | 0.04 | (0.05 | ) | 0.04 | 0.06 | ||||||||||||||
Net
earnings
|
2.79 | 0.58 | 0.66 | 1.27 | 3.37 | |||||||||||||||
Diluted:
|
||||||||||||||||||||
Continuing
operations
|
$ | 2.78 | 0.54 | 0.71 | 1.23 | 3.31 | ||||||||||||||
Discontinued
operations
|
— | 0.04 | (0.05 | ) | 0.04 | 0.06 | ||||||||||||||
Net
earnings
|
2.78 | 0.58 | 0.66 | 1.27 | 3.37 | |||||||||||||||
Dividends
per common share
|
$ | 0.07 | 0.07 | 0.28 | — | — | ||||||||||||||
Other
Data:
|
||||||||||||||||||||
Revenue
from fee-based segments as a percentage of total revenue
|
||||||||||||||||||||
(excluding fixed rate floor income and Corporate Activity and | ||||||||||||||||||||
Overhead)
|
66.3 | % | 54.5 | % | 53.3 | % | 44.0 | % | 33.8 | % | ||||||||||
Fixed
rate floor income
|
$ | 145,098 | 37,457 | 10,347 | 30,234 | 44,694 | ||||||||||||||
Core
student loan spread
|
1.18 | % | 0.99 | % | 1.13 | % | 1.42 | % | 1.51 | % | ||||||||||
Origination
and acquisition volume (a)
|
$ | 2,779,873 | 2,809,082 | 5,152,110 | 6,696,118 | 8,471,121 | ||||||||||||||
Student
loans serviced (at end of period) (b)
|
37,549,563 | 35,888,693 | 33,817,458 | 30,593,592 | 26,988,839 | |||||||||||||||
As
of December 31,
|
||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(dollars
in thousands, except share data)
|
||||||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$ | 338,181 | 189,847 | 111,746 | 102,343 | 96,678 | ||||||||||||||
Student
loans receivables, net
|
23,926,957 | 25,413,008 | 26,736,122 | 23,789,552 | 20,260,807 | |||||||||||||||
Goodwill
and intangible assets
|
197,255 | 252,232 | 277,525 | 353,008 | 243,630 | |||||||||||||||
Total
assets
|
25,876,427 | 27,854,897 | 29,162,783 | 26,796,873 | 22,798,693 | |||||||||||||||
Bonds
and notes payable
|
24,805,289 | 26,787,959 | 28,115,829 | 25,562,119 | 21,673,620 | |||||||||||||||
Shareholders'
equity
|
784,563 | 643,226 | 608,879 | 671,850 | 649,492 | |||||||||||||||
Tangible
shareholders' equity
|
587,308 | 390,994 | 331,354 | 318,842 | 405,862 | |||||||||||||||
Book
value per common share
|
15.73 | 13.05 | 12.31 | 12.79 | 12.03 | |||||||||||||||
Tangible
book value per common share
|
11.77 | 7.93 | 6.70 | 6.07 | 7.52 | |||||||||||||||
Ratios:
|
||||||||||||||||||||
Shareholders'
equity to total assets
|
3.03 | % | 2.31 | % | 2.09 | % | 2.51 | % | 2.85 | % |
(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. The Company sold EDULINX in May 2007. As a result of
this transaction, EDULINX is reported as discontinued
operations.
|
33
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Management’s
Discussion and Analysis of Financial Condition and Results of Operations is for
the years ended December 31, 2009, 2008, and 2007. All dollars are in thousands,
except per share amounts, unless otherwise noted. Certain amounts previously
reported have been reclassified to conform to the current period presentation.
The reclassifications were made to change the income statement presentation to
provide the users of the financial statements additional information related to
the operating results of the Company’s fee-based businesses, which are becoming
more significant to the Company’s operations.) These reclassifications include
reclassifying “tuition payment processing and campus commerce revenue” and
“enrollment services revenue,” which were previously included in “other
fee-based income.” In addition, the “cost to provide enrollment services” was
reclassified from various operating expense accounts, primarily “advertising and
marketing.”
OVERVIEW
The
Company is a transaction processing and finance company focused primarily on
providing quality education related products and services to students, families,
schools, and financial institutions nationwide. The Company earns its
revenue from fee-based processing businesses, including its loan servicing,
payment processing, and lead generation businesses, and the net interest income
on its student loan portfolio.
The
Company has certain business objectives in place that include:
·
|
Grow
and diversify revenue from fee generating
businesses
|
·
|
Manage
operating costs
|
·
|
Maximize
the value of existing portfolio
|
·
|
Eliminate
exposure to liquidity risk and unfunded debt
burden
|
Achieving
these business objectives has impacted the financial condition and operating
results of the Company during the year ended December 31, 2009. In addition,
legislation concerning the student loan industry has impacted and will continue
to impact the financial condition and operating results of the
Company. Each of these items are discussed below.
Grow
and Diversify Revenue from Fee-Based Businesses
In recent
years, the Company has expanded products and services generated from businesses
that are not dependent upon the FFEL Program, thereby reducing legislative and
political risk related to the education lending industry. Revenues from these
businesses are primarily generated from products and services offered in the
Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services
operating segments. As shown below, revenue earned from businesses less
dependent upon the FFEL Program has grown $22.1 million (18.3%) for the year
ended December 31, 2009 compared to the same period in 2008.
Year
ended December 31,
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Tuition
Payment Processing and Campus Commerce
|
$ | 53,894 | 48,155 | 5,739 | ||||||||||||
Enrollment
Services - Lead Generation
|
88,851 | 72,513 | 16,338 | |||||||||||||
142,745 | 120,668 | $ | 22,077 | 18.3 | % | |||||||||||
|
||||||||||||||||
Enrollment
Services - Other
|
30,546 | 39,929 | ||||||||||||||
Student
Loan and Guaranty Servicing
|
113,974 | 104,287 | ||||||||||||||
Software
and Technical Services
|
17,463 | 19,707 | ||||||||||||||
Net
interest
income from fee-based segments
|
174 | 3,107 | ||||||||||||||
Total
revenue from fee-based segments
|
$ | 304,902 | 287,698 |
34
Department
of Education Servicing Contract
In June
2009, the Department of Education named the Company as one of four private
sector servicers awarded a servicing contract to service all federally-owned
student loans, including FFELP loans purchased by the Department pursuant to
ECASLA. No later than August 2010, the Company expects to also begin servicing
new loans originated under the Direct Loan Program. Servicing volume has
initially been allocated by the Department to the four servicers and performance
factors such as customer satisfaction levels and default rates will determine
volume allocations over time. The contract spans five years with one, five-year
renewal option. Servicing loans under this contract will further
diversify the Company’s revenue and customer base.
For the
federal fiscal year ended September 30, 2009, the estimated volume for the
Direct Loan Program was approximately $38 billion, an increase of 110% from the
federal fiscal year ended September 30, 2008. This increase was the
result of schools shifting from the FFELP to the Direct Loan Program as a result
of lenders exiting the FFELP marketplace due to legislation and capital market
disruptions. See discussion under "– Legislation – Recent
Developments.” Regardless of the outcome of the currently proposed
legislation, the Direct Loan Program volume is expected to increase
substantially in the next few years, which would lead to an increase in
servicing volume for the Department’s four private sector
servicers.
The Company began servicing loans for the Department in September
2009 and recognized approximately $1.7 million of revenue under this contract in
2009. As of December 31, 2009 and March 1, 2010, the Company was servicing
approximately $3.4 billion and $6.3 billion, respectively, of loans under the Department’s
servicing contract, which includes approximately $1.5 billion and $4.3 billion, respectively, of loans not previously serviced
by the Company that were sold by third parties to the Department as part of the
ECASLA Purchase Program.
Manage
Operating Costs
The
Company has continued to focus on managing costs and gaining efficiencies and
has continued to benefit from restructuring activities. As shown
below, excluding the cost to provide enrollment services and restructuring and
impairment charges, operating expenses decreased $46.2 million (13.7%) for the
year ended December 31, 2009 compared to the same period in 2008.
Operating
Expenses
Year
ended December 31,
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Salaries
and benefits (a)
|
$ | 151,285 | 177,724 | (26,439 | ) | (14.9 | )% | |||||||||
Other
expenses (b)
|
138,712 | 158,499 | (19,787 | ) | (12.5 | ) | ||||||||||
Operating
expenses, excluding the cost
|
||||||||||||||||
to provide enrollment services and
|
||||||||||||||||
restructure and impairment expenses
|
289,997 | 336,223 | $ | (46,226 | ) | (13.7 | )% | |||||||||
Cost
to provide enrollment services
|
74,926 | 64,965 | ||||||||||||||
Restructure
expense (c)
|
7,982 | 7,067 | ||||||||||||||
Impairment
expense
|
32,728 | 18,834 | ||||||||||||||
Liquidity
contingency planning fees (d)
|
— | 13,525 | ||||||||||||||
Total
operating expenses
|
$ | 405,633 | 440,614 |
(a)
|
Excludes
restructure expenses related to employee termination
benefits.
|
(b)
|
Excludes
liquidity contingency planning fees and restructure expenses related to
lease terminations.
|
(c)
|
Restructure
expense is included in “salaries and benefits” and “occupancy and
communications” in the consolidated statements of
income.
|
(d)
|
Liquidity
contingency planning fees were incurred by the Company to minimize
exposure related to the equity support provisions of the Company’s FFELP
loan warehouse facility. These fees are included in “other”
under “other operating expense” in the consolidated statements of
income.
|
Included
in operating expenses for the year ended December 31, 2009 is an impairment
charge of $32.7 million related to the impairment of goodwill and intangible
assets related to the Company’s direct marketing and list management
business. This business has been negatively affected by the economic
recession and deterioration of the direct-to-consumer student loan
market. As of December 31, 2009, the Company has $143.7 million of
goodwill remaining on its consolidated balance sheet. See note 6 of
the notes to the consolidated financial statements included in this Report,
which provides a summary of the remaining goodwill by operating
segment.
35
Maximize
the Value of Existing Portfolio
Fixed
rate floor income
Loans
originated prior to April 1, 2006 generally earn interest at the higher of a
floating rate based on the Special Allowance Payment or the 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 loan’s repayment
status, and funding sources for the loan. The Company generally
finances its student loan portfolio with variable rate debt. In low
and/or declining interest rate environments, when the fixed borrower rate is
higher than the rate produced by the SAP formula, the Company’s student loans
earn at a fixed rate while the interest on the variable rate debt typically
continues to decline. In these interest rate environments, the
Company earns additional spread income that it refers to as floor
income. For loans where the borrower rate is fixed to term, the
Company earns floor income for an extended period of time, which the Company
refers to as fixed rate floor income.
The
Company’s core student loan spread (variable student loan spread including fixed
rate floor contribution) and variable student loan spread (net interest margin
excluding fixed rate floor income) during 2008 and 2009 is summarized
below.
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet7.jpg)
During
the years ended December 31, 2009 and 2008, loan interest income includes $145.1
million (58 basis points of spread contribution) and $37.5 million (14 basis
points of spread contribution), respectively, of fixed rate floor
income. The increase in fixed rate floor income throughout 2009 is
due to a decrease in interest rates. The Company’s
variable student loan spread increased throughout 2009 as a result of
the tightening of the commercial paper rate, which is the primary rate the
Company earns on its student loan portfolio, and the LIBOR rate, which is the
primary rate the Company pays to fund its student loan assets. See Part II, Item
7, “Management’s Discussion and Analysis – Asset Generation and Management
Operating Segment – Results of Operations – Student Loan Spread Analysis.” If
interest rates remain low, the Company anticipates continuing to earn
significant fixed rate floor income in future periods.
Future
Cash Flow from Portfolio
The
majority of the Company’s portfolio of student loans is funded in asset backed
securitizations that are structured to substantially match the maturity of the
funded assets and there are minimal liquidity issues related to these
facilities. In addition, due to the difference between the yield the Company
receives on the loans and cost of financing within these transactions, the
Company has created a portfolio that will generate earnings and significant cash
flow over the life of these transactions.
Based on
cash flow models developed to reflect management’s current estimate of, among
other factors, prepayments, defaults, deferment, forbearance, and interest
rates, the Company currently expects future undiscounted cash flows from its
portfolio to be approximately $1.43 billion. See Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources” for further details related to the estimated
future cash flow from the Company’s portfolio.
36
Eliminate
Exposure to Liquidity Risk and Unfunded Debt Burden
Reducing
Liquidity Risk
The
Company had a FFELP warehouse facility that was due to expire in May 2010 that
provided for formula-based advance rates based on current market conditions,
which required equity support to be posted to the facility under certain
circumstances. As of December 31, 2008, the Company had $1.6 billion
of student loans in this facility, $1.4 billion borrowed under the facility, and
$280.6 million in cash posted as equity funding support for the
facility. During 2009, the Company reduced its liquidity exposure
under this facility as a result of the following transactions:
·
|
In
March 2009, the Company completed a $294.6 million asset-backed
securitization and refinanced loans previously financed in the
facility.
|
·
|
In
June 2009, the Company accessed the Department’s Conduit Program and
refinanced loans previously financed in the
facility.
|
·
|
In
August 2009, the Company entered into a new $500.0 million FFELP warehouse
facility that expires in August 2012. In August 2009, the
Company utilized the new warehouse facility to refinance all remaining
loans in the old warehouse facility. Refinancing these loans
allowed the Company to terminate the prior facility and withdraw all
remaining equity funding support.
|
In the
fourth quarter of 2009, the Company completed asset-backed securities
transactions totaling $852.9 million. On February 17, 2010, the
Company also completed an asset-backed securities transaction of $523.3 million.
The Company used the proceeds from the sale of these notes to purchase student
loans that were previously financed in the new FFELP warehouse facility and
certain other existing asset-backed securitizations. As of March 1,
2010, $30.5 million was outstanding under the new FFELP warehouse and $469.5
million was available for future use.
In
addition to the new FFELP warehouse, the Company has reliable sources of
liquidity available for new FFELP Stafford and PLUS loan originations for the
2009-2010 academic year under the Department’s 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.
Debt
Repurchases
During
2009, the Company repurchased outstanding debt as summarized below. Gains
recorded by the Company from the repurchase of debt are included in “other
income” on the Company’s consolidated statements of income.
Year
ended December 31, 2009
|
Remaining
balance
|
|||||||||||||||
Notional
amount
|
Purchase
price
|
Gain
|
as
of December 31,
2009
|
|||||||||||||
5.125%
Senior Notes due 2010
|
$ | 208,284 | 196,529 | 11,755 | $ | 66,716 | ||||||||||
Junior
Subordinated Hybrid Securities
|
1,750 | 350 | 1,400 | $ | 198,250 | |||||||||||
Asset-backed
securities
|
348,155 | 319,627 | 28,528 | |||||||||||||
$ | 558,189 | 516,506 | 41,683 |
Subsequent
to December 31, 2009 (through March 1, 2010), the Company has repurchased an
additional $174.5 million (notional amount) of asset-backed securities resulting
in a gain of approximately $6 million.
Legislation
ECASLA
In August
2008, the Department implemented the Loan Purchase Commitment Program and the
Loan Purchase Participation Program pursuant to ECASLA. During the
year ended December 31, 2009, the Company sold $2.1 billion of student loans to
the Department under the Purchase Program, resulting in a gain of $36.6
million. As of December 31, 2009, the Company had $463.9 million of
FFELP loans funded using the Participation Program. The Company plans
to continue to use the Participation Program to fund certain loans originated
for the 2009-2010 academic year.
Recent
Developments
On
February 26, 2009, the President introduced a fiscal year 2010 Federal budget
proposal calling for the elimination of the FFEL Program and a recommendation
that all new student loan originations be funded through the Federal Direct Loan
Program. On September 17, 2009, the House of Representatives passed
H.R. 3221, the Student Aid and Fiscal Responsibility Act ("SAFRA"), which would
eliminate the FFEL Program and require that, after July 1, 2010, all new federal
student loans be made through the Federal Direct Loan Program. The Senate is
expected to begin its consideration of similar student loan reform legislation
sometime in 2010. In addition to the House-passed legislation, there are several
other proposals for changes to the education financing framework that may be
considered that would maintain a role for private lenders in the origination of
federal student loans. These include a possible extension of ECASLA, which
expires on July 1, 2010, and the Student Loan Community Proposal, a proposal
endorsed by a cross-section of FFELP service providers (including the Company)
as an alternative to the 100% federal direct lending proposal included in
SAFRA.
37
Elimination
of the FFEL Program would impact the Company’s operations and profitability by,
among other things, reducing the Company’s interest revenues as a result of the
inability to add new FFELP loans to the Company’s portfolio and reducing
guarantee and third-party FFELP servicing fees as a result of reduced FFELP loan
servicing and origination volume. Additionally, the elimination of the FFEL
Program could reduce education loan software licensing opportunities and related
consulting fees received from lenders using the Company’s software products and
services.
In June
2009, the Department of Education named the Company as one of four private
sector companies awarded a servicing contract to service student
loans. No later than August 2010, the Company expects to begin
servicing new loans originated under the Direct Loan Program. If legislation is
passed mandating that all new student loan originations be funded through the
Direct Loan Program, revenue from servicing loans under this contract will
partially offset the loss of revenue if the FFEL Program is
eliminated.
RESULTS
OF OPERATIONS
The
Company’s 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 Company’s 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 Company’s 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 Company’s consolidated statements of income.
The amortization of debt issuance costs is included in interest expense on the
Company’s consolidated statements of income.
The
Company’s 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
or SAP formula set by the Department of Education 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 loan’s 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
Company’s 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.
In
September 2007, the College Cost Reduction Act was enacted into
law. This legislation reduced the annual yield on FFELP loans
originated after October 1, 2007 and should be considered when reviewing the
Company’s results of operations. The Company has mitigated 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 Company’s balance sheet is
very important to its operations. The current and future interest rate
environment can and will affect the Company’s 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.”
Investment
interest income, which is a component of net interest income, includes income
from unrestricted interest-earning deposits and funds in the Company’s 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 used
by the Company to fund general business operations, certain asset and business
acquisitions, and the repurchase of stock under the Company’s stock repurchase
plan.
38
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 collection 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.
The
allowance for the federally insured loan portfolio is based on periodic
evaluations of the Company’s 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
Company’s loss exposure on the outstanding balance of the Company’s federally
insured portfolio. Student loans disbursed prior to October 1, 1993 are fully
insured.
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, 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 when
the collection of principal and interest is 30 days past due 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 revenue from other sources as summarized
below.
Student Loan and Guaranty Servicing
Revenue – 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.
Tuition Payment Processing and
Campus Commerce Revenue – Tuition payment processing and campus commerce
revenue includes actively managed tuition payment solutions, online payment
processing, detailed information reporting, and data integration
services. Fees for these payment management services are recognized
over the period in which services are provided to customers.
Enrollment Services Revenue –
Enrollment services
revenue primarily consists of the following items:
·
|
Lead generation –
Revenue from lead generation is derived primarily from fees which are
earned through the delivery of qualified leads or clicks. The Company
recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectability
is reasonably assured. Delivery is deemed to have occurred at the time a
qualified lead or click is delivered to the customer provided that no
significant obligations remain. From time to time, the Company may agree
to credit certain leads or clicks if they fail to meet the contractual or
other guidelines of a particular client. The Company has established a
sales reserve based on historical experience. To date, such credits have
been immaterial and within management’s expectations.
For
a portion of its lead revenue, the Company has agreements with providers
of online media or traffic (“Publishers”) used in the generation of leads
or clicks. The Company receives a fee from its customers and pays a fee to
Publishers either on a cost per lead, cost per click, or cost per number
of impressions basis. The Company is the primary obligor in the
transaction. As a result, the fees paid by the Company’s customers are
recognized as revenue and the fees paid to its Publishers are included in
“cost to provide enrollment services” in the Company’s consolidated
statements of income.
|
·
|
Publishing and editing
services - Revenue from the sale of print products and editing
services is generally earned and recognized, net of estimated returns,
upon shipment or delivery.
|
·
|
Content management and
recruitment services – Content management and recruitment services
includes the sale of subscription and performance based products and
services, as well as list sales. Revenues from sales of
subscription and performance based products and services are recognized
ratably over the term of the contract. Subscription and performance based
revenues received or receivable in advance of the delivery of services is
included in deferred revenue. Revenue from the sale of lists is
generally earned and recognized, net of estimated returns, upon
delivery.
|
39
Software Services Revenue –
Software services revenue 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 Company’s student loan portfolio and
its financing transactions, costs incurred to service the Company’s student loan
portfolio and the portfolios of third parties, the cost to provide enrollment
services, costs incurred to provide tuition payment processing, campus commerce,
content management, recruitment, 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. The cost to provide enrollment services, as discussed
previously, consists of costs incurred to provide lead generation and publishing
and editing services in the Company’s Enrollment Services operating
segment. Operating expenses also includes employee termination
benefits, lease termination costs, and the write-down of certain assets related
to the Company’s restructuring initiatives.
Year
ended December 31, 2009 compared to year ended December 31, 2008
Net
Interest Income (Net of settlements on derivatives)
Year
ended December 31,
|
||||||||||||||||
Change
|
||||||||||||||||
2009
|
2008
|
$ | % | |||||||||||||
Interest
income:
|
||||||||||||||||
Loan
interest
|
$ | 609,920 | 1,176,383 | (566,463 | ) | (48.2 | )% | |||||||||
Investment
interest
|
10,287 | 37,998 | (27,711 | ) | (72.9 | ) | ||||||||||
Total
interest income
|
620,207 | 1,214,381 | (594,174 | ) | (48.9 | ) | ||||||||||
Interest
expense:
|
||||||||||||||||
Interest
on bonds and notes payable
|
384,862 | 1,026,489 | (641,627 | ) | (62.5 | ) | ||||||||||
Net
interest income
|
235,345 | 187,892 | 47,453 | 25.3 | ||||||||||||
Provision
for loan losses
|
29,000 | 25,000 | 4,000 | 16.0 | ||||||||||||
Net
interest income after
|
||||||||||||||||
provision
for loan losses
|
206,345 | 162,892 | 43,453 | 26.7 | ||||||||||||
Derivative
settlements, net (a)
|
39,286 | 55,657 | (16,371 | ) | (29.4 | ) | ||||||||||
Net
interest income after
|
||||||||||||||||
provision
for loan losses (net of
|
||||||||||||||||
settlements
on derivatives)
|
$ | 245,631 | 218,549 | 27,082 | 12.4 | % |
(a)
|
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
Company’s derivative transactions with the intent that each is
economically effective; however, the Company’s derivative instruments do
not qualify for hedge accounting. Derivative settlements for
each applicable period should be evaluated with the Company’s net interest
income, as discussed below.
|
40
Net
interest income after provision for loan losses, net of settlements on
derivatives, changed for the year ended December 31, 2009 compared to 2008 as
follows:
Year
ended December 31,
|
||||||||||||||||
Change
|
||||||||||||||||
2009
|
2008
|
$ | % | |||||||||||||
Variable
student loan interest margin, net
|
||||||||||||||||
of
settlements on derivatives (a)
|
$ | 148,181 | 210,217 | (62,036 | ) | (29.5 | )% | |||||||||
Fixed
rate floor income, net of
|
||||||||||||||||
settlements
on derivatives (b)
|
145,098 | 37,457 | 107,641 | 287.4 | ||||||||||||
Investment
interest (c)
|
10,287 | 37,998 | (27,711 | ) | (72.9 | ) | ||||||||||
Corporate
debt interest expense (d)
|
(28,935 | ) | (42,123 | ) | 13,188 | (31.3 | ) | |||||||||
Provision
for loan losses (e)
|
(29,000 | ) | (25,000 | ) | (4,000 | ) | 16.0 | |||||||||
Net
interest income after
|
||||||||||||||||
provision
for loan losses (net of
|
||||||||||||||||
settlements
on derivatives)
|
$ | 245,631 | 218,549 | 27,082 | 12.4 | % |
(a)
|
Variable
student loan spread decreased to 0.63% for the year ended December 31,
2009 compared to 0.91% in 2008 as further discussed in this Item 7 under
“Asset Generation and Management Operating Segment – Results of Operations
– Student Loan Spread Analysis.”
|
(b)
|
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. Due to lower interest rates in the
year ended December 31, 2009 compared to 2008, the Company received
additional fixed rate floor income on a portion of its student loan
portfolio. See Item 7A, “Quantitative and Qualitative
Disclosures about Market Risk – Interest Rate Risk” for additional
information.
|
(c)
|
Investment
interest decreased for the year ended December 31, 2009 compared to 2008
due to lower interest rates in
2009.
|
(d)
|
Corporate
debt interest expense decreased for the year ended December 31, 2009
compared to 2008 as a result of a decrease in interest rates, as well as a
reduction in debt outstanding due to the purchase of unsecured fixed rate
debt. The weighted average interest rate and notes outstanding
on the Company’s unsecured line of credit was 0.73% and $691.5 million,
respectively, as of December 31, 2009 compared to 1.25% and $691.5
million, respectively, as of December 31, 2008. During 2009,
the Company repurchased $208.3 million of its 5.125% Senior Notes due
2010.
|
(e)
|
The
provision for loan losses increased in 2009 compared to 2008 primarily due
to increases in delinquencies.
|
Other
Income
Year
ended December 31,
|
||||||||||||||||
Change
|
||||||||||||||||
2009
|
2008
|
$ | % | |||||||||||||
Loan
and guaranty servicing revenue (a)
|
$ | 108,747 | 99,942 | 8,805 | 8.8 | % | ||||||||||
Tuition
payment processing and campus commerce revenue (b)
|
53,894 | 48,155 | 5,739 | 11.9 | ||||||||||||
Enrollment
services revenue (c)
|
119,397 | 112,405 | 6,992 | 6.2 | ||||||||||||
Software
services revenue (d)
|
21,164 | 24,115 | (2,951 | ) | (12.2 | ) | ||||||||||
Other
income (e)
|
68,152 | 22,775 | 45,377 | 199.2 | ||||||||||||
Gain
(loss) on sale of loans, net (f)
|
35,148 | (51,414 | ) | 86,562 | (168.4 | ) | ||||||||||
Derivative
market value, foreign currency,
|
||||||||||||||||
and
put option adjustments (g)
|
(30,802 | ) | 10,827 | (41,629 | ) | (384.5 | ) | |||||||||
Derivative
settlements, net (h)
|
39,286 | 55,657 | (16,371 | ) | (29.4 | ) | ||||||||||
Total
other income
|
$ | 414,986 | 322,462 | 92,524 | 28.7 | % |
(a)
|
“Loan
and guaranty servicing revenue” increased due to an increase in FFELP loan
servicing revenue. This increase was offset by a decrease in
guaranty servicing revenue related to rehabilitation collections on
defaulted loan assets. See Item 7 under “Student Loan and Guaranty
Servicing Operating Segment – Results of Operations” for additional
information.
|
(b)
|
“Tuition
payment processing and campus commerce revenue” increased due to an
increase in the number of managed tuition payment plans and an increase in
campus commerce transactions processed as discussed in this Item 7 under
“Tuition Payment Processing and Campus Commerce Operating Segment –
Results of Operations.”
|
41
(c)
|
“Enrollment
services revenue” increased due to an increase in lead generation revenue
offset by a reduction in revenue related to other enrollment products and
services as further discussed in this Item 7 under “Enrollment Services
Operating Segment – Results of
Operations.”
|
(d)
|
“Software
and technical services revenue” decreased due to 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 as
further discussed in this Item 7 under “Software and Technical Services
Operating Segment – Results of
Operations.”
|
(e)
|
The
following table summarizes the components of “other
income”.
|
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Gains
on debt repurchases
|
$ | 41,683 | — | |||||
Borrower
late fee income
|
11,305 | 11,515 | ||||||
Gain
on sale of equity method investment
|
3,500 | — | ||||||
Other
|
11,664 | 11,260 | ||||||
Other
income
|
$ | 68,152 | 22,775 |
|
The
change in other income is primarily the result of gains on debt
repurchases. In addition, during 2009, the Company earned $3.5 million
related to the sale of an equity method
investment.
|
(f)
|
“Gain
(loss) on sale of loans” includes a gain of $36.6 million related to the
sale of $2.1 billion of student loans to the Department under the Purchase
Program during the year ended December 31, 2009. In addition,
the Company recognized a loss of $51.4 million during 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.”
|
(g)
|
The
change in “derivative market value, foreign currency, and put option
adjustments” was primarily the result of the change in the fair value of
the Company’s derivative portfolio and transaction gains/losses resulting
from the remeasurement of the Company’s Euro-denominated bonds to U.S.
dollars. These changes are summarized
below.
|
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Change
in fair value of derivatives
|
$ | 6,852 | (38,576 | ) | ||||
Foreign
currency transaction adjustment
|
(37,654 | ) | 52,886 | |||||
Change
in fair value of put options
|
||||||||
issued
in business acquisitions
|
— | (3,483 | ) | |||||
Derivative
market value, foreign currency,
|
||||||||
and
put option adjustments
|
$ | (30,802 | ) | 10,827 |
(h)
|
Further
detail of the components of derivative settlements is included 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 Company’s derivative transactions with the intent
that each is economically effective; however, the Company’s derivative
instruments do not qualify for hedge accounting. Derivative
settlements for each applicable period should be evaluated with the
Company’s net interest income, as discussed
previously.
|
42
Operating
Expenses
Year
ended December 31,
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Salaries
and benefits (a)
|
$ | 151,285 | 177,724 | (26,439 | ) | (14.9 | )% | |||||||||
Other
expenses (b)
|
138,712 | 158,499 | (19,787 | ) | (12.5 | ) | ||||||||||
Operating
expenses, excluding the cost
|
||||||||||||||||
to
provide enrollment services and
|
||||||||||||||||
restructure
and impairment expenses
|
289,997 | 336,223 | $ | (46,226 | ) | (13.7 | )% | |||||||||
Cost
to provide enrollment services
|
74,926 | 64,965 | ||||||||||||||
Restructure
expense (c)
|
7,982 | 7,067 | ||||||||||||||
Impairment
expense
|
32,728 | 18,834 | ||||||||||||||
Liquidity
contingency planning fees (d)
|
— | 13,525 | ||||||||||||||
Total
operating expenses
|
$ | 405,633 | 440,614 |
(a)
|
Excludes
restructure expenses related to employee termination
benefits.
|
(b)
|
Excludes
liquidity contingency planning fees and restructure expenses related to
lease terminations.
|
(c)
|
Restructure
expense is included in “salaries and benefits” and “occupancy and
communications” in the consolidated statements of
income.
|
(d)
|
Liquidity
contingency planning fees were incurred by the Company to minimize
exposure related to the equity support provisions of the Company’s FFELP
loan warehouse facility. These fees are included in “other”
under “other operating expense” in the consolidated statements of
income.
|
Excluding
the cost to provide enrollment services, restructuring and impairment charges,
and liquidity contingency planning fees, operating expenses decreased $46.2
million (13.7%) for the year ended December 31, 2009 compared to 2008. This
decrease was the result of continued focus by the Company on managing costs and
gaining efficiencies and continued benefits from restructuring
activities.
Included
in operating expenses for the years ended December 31, 2009 and 2008 are
impairment charges of $32.7 million and $18.8 million,
respectively. The 2009 impairment charge relates to the impairment of
goodwill and intangible assets related to the Company’s direct marketing and
list management business. This business has been negatively affected
by the economic recession and deterioration of the direct-to-consumer student
loan market. The 2008 impairment charge related to the student loan
business model modifications the Company implemented due to the disruptions in
the debt and secondary markets.
Income
Taxes
The
Company’s effective tax rate was 35.5% and 40.0% for the years ended December
31, 2009 and 2008, respectively. The effective tax rate during 2009 decreased
compared to 2008 due to expenses incurred in 2008 that were not deductible for
tax purposes and a decrease in a valuation allowance in 2009.
Additional
information on the Company’s results of operations is included with the
discussion of the Company’s operating segments in this Item 7 under “Operating
Segments”.
43
Year
ended December 31, 2008 compared to year ended December 31, 2007
Net
Interest Income (Net of settlements on derivatives)
Year
ended December 31,
|
||||||||||||||||
2008
|
2007
|
Change
|
||||||||||||||
$
|
%
|
|||||||||||||||
Interest
income:
|
||||||||||||||||
Loan
interest
|
$ | 1,176,383 | 1,667,057 | (490,674 | ) | (29.4 | )% | |||||||||
Investment
interest
|
37,998 | 80,219 | (42,221 | ) | (52.6 | ) | ||||||||||
Total
interest income
|
1,214,381 | 1,747,276 | (532,895 | ) | (30.5 | ) | ||||||||||
Interest
expense:
|
||||||||||||||||
Interest
on bonds and notes payable
|
1,026,489 | 1,502,662 | (476,173 | ) | (31.7 | ) | ||||||||||
Net
interest income
|
187,892 | 244,614 | (56,722 | ) | (23.2 | ) | ||||||||||
Provision
for loan losses
|
25,000 | 28,178 | (3,178 | ) | (11.3 | ) | ||||||||||
Net
interest income after provision for loan losses
|
162,892 | 216,436 | (53,544 | ) | (24.7 | ) | ||||||||||
Derivative
settlements, net (a)
|
55,657 | 18,677 | 36,980 | 198.0 | ||||||||||||
Net
interest income after provision
for loan losses (net of settlements
on derivatives)
|
$ | 218,549 | 235,113 | (16,564 | ) | (7.0 | )% |
(a)
|
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
Company’s derivative transactions with the intent that each is
economically effective; however, the Company’s derivative instruments do
not qualify for hedge accounting. Derivative settlements for
each applicable period should be evaluated with the Company’s net interest
income, as discussed below.
|
Net
interest income after provision for loan losses, net of settlements on
derivatives, changed for the year ended December 31, 2008 compared to 2007 as
follows:
Year
ended December 31,
|
||||||||||||||||
Change
|
||||||||||||||||
2008
|
2007
|
$ | % | |||||||||||||
Variable
student loan interest margin, net
|
||||||||||||||||
of
settlements on derivatives (a)
|
$ | 210,217 | 213,227 | (3,010 | ) | (1.4 | )% | |||||||||
Fixed
rate floor income, net of
|
||||||||||||||||
settlements
on derivatives (b)
|
37,457 | 10,347 | 27,110 | 262.0 | ||||||||||||
Investment
interest (c)
|
37,998 | 80,219 | (42,221 | ) | (52.6 | ) | ||||||||||
Corporate
debt interest expense (d)
|
(42,123 | ) | (40,502 | ) | (1,621 | ) | 4.0 | |||||||||
Provision
for loan losses (e)
|
(25,000 | ) | (28,178 | ) | 3,178 | (11.3 | ) | |||||||||
Net
interest income after
|
||||||||||||||||
provision
for loan losses (net of
|
||||||||||||||||
settlements
on derivatives)
|
$ | 218,549 | 235,113 | (16,564 | ) | (7.0 | )% |
(a)
|
Variable
student loan spread decreased to 0.91% for the year ended December 31,
2008 compared to 1.10% in 2007 as discussed in this Item 7 under “Asset
Generation and Management Operating Segment – Results of Operations –
Student Loan Spread
Analysis.”
|
(b)
|
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. Due to lower interest rates in the
year ended December 31, 2008 compared to 2007, the Company received
additional fixed rate floor income on a portion of its student loan
portfolio. See Item 7A, “Quantitative and Qualitative
Disclosures about Market Risk – Interest Rate Risk” for additional
information.
|
(c)
|
Investment
interest decreased for the year ended December 31, 2008 compared to 2007
due to lower interest rates in
2008.
|
(d)
|
Corporate
debt interest expense increased for the year ended December 31, 2008
compared to 2007 as a result of an increase in the notes outstanding on
the Company’s unsecured line of credit, offset by a decrease in interest
rates. The weighted average interest rate and notes outstanding
on the Company’s unsecured line of credit was 1.25% and $691.5 million,
respectively, as of December 31, 2008 compared to 5.48% and $80.0 million,
respectively, as of December 31,
2007.
|
44
(e)
|
Excluding
an expense of $15.7 million to increase the Company’s 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 weakening of the U.S.
economy.
|
Other
Income
Year
ended December 31,
|
||||||||||||||||
Change
|
||||||||||||||||
2008
|
2007
|
$ | % | |||||||||||||
Loan
and guaranty servicing revenue (a)
|
$ | 99,942 | 122,380 | (22,438 | ) | (18.3 | )% | |||||||||
Tuition
payment processing and campus commerce revenue (b)
|
48,155 | 42,766 | 5,389 | 12.6 | ||||||||||||
Enrollment
services revenue (c)
|
112,405 | 103,905 | 8,500 | 8.2 | ||||||||||||
Software
services revenue (d)
|
24,115 | 27,764 | (3,649 | ) | (13.1 | ) | ||||||||||
Other
income (e)
|
22,775 | 30,423 | (7,648 | ) | (25.1 | ) | ||||||||||
Gain
(loss) on sale of loans, net (f)
|
(51,414 | ) | 3,597 | (55,011 | ) | (1,529.4 | ) | |||||||||
Derivative
market value, foreign currency,
|
||||||||||||||||
and
put option adjustments (g)
|
10,827 | 26,806 | (15,979 | ) | (59.6 | ) | ||||||||||
Derivative
settlements, net (h)
|
55,657 | 18,677 | 36,980 | 198.0 | ||||||||||||
Total
other income
|
$ | 322,462 | 376,318 | (53,856 | ) | (14.3 | )% |
(a)
|
“Loan
and guaranty servicing revenue” decreased due to decreases in FFELP loan
servicing revenue, non-federally insured loan servicing revenue, and
guaranty servicing revenue as further discussed in this Item 7 under
“Student Loan and Guaranty Servicing Operating Segment – Results of
Operations.”
|
(b)
|
“Tuition
payment processing and campus commerce revenue” increased due to an
increase in the number of managed tuition payment plans and an increase in
campus commerce transactions processed as discussed in this Item 7 under
“Tuition Payment Processing and Campus Commerce Operating Segment –
Results of Operations.”
|
(c)
|
“Enrollment
services revenue” increased due to an increase in lead generation revenue
offset by a reduction in revenue related to other enrollment products and
services as further discussed in this Item 7 under “Enrollment Services
Operating Segment – Results of
Operations.”
|
(d)
|
“Software
and technical services revenue” decreased due to 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 as
further discussed in this Item 7 under “Software and Technical Services
Operating Segment – Results of
Operations.”
|
(e)
|
The
following table summarizes the components of “other
income”.
|
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Borrower
late fee income
|
$ | 11,515 | 8,207 | |||||
Gain
on sale of equity method investment
|
— | 3,942 | ||||||
Administrative
service fee income
|
— | 2,605 | ||||||
Other
|
11,260 | 15,669 | ||||||
Other
income
|
$ | 22,775 | 30,423 |
The
change in other income is primarily the result of 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 decrease in “other” above is
a result of a decrease in income earned on certain investment activities
in 2008 compared to 2007.
|
45
(f)
|
“Gain
(loss) on sale of loans” includes a loss of $51.4 million related to the
sale of $1.8 billion of student loans during the year ended December 31,
2008 as further discussed in this Item 7 under “Asset Generation and
Management Operating Segment – Results of
Operations.”
|
(g)
|
The
change in “derivative market value, foreign currency, and put option
adjustments” was primarily the result of the change in the fair value of
the Company’s derivative portfolio and transaction gains/losses resulting
from the remeasurement of the Company’s Euro-denominated bonds to U.S.
dollars. These changes are summarized
below.
|
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Change
in fair value of derivatives
|
$ | (38,576 | ) | 139,146 | ||||
Foreign
currency transaction adjustment
|
52,886 | (108,712 | ) | |||||
Change
in fair value of put options
|
||||||||
issued
in business acquisitions
|
(3,483 | ) | (3,628 | ) | ||||
Derivative
market value, foreign currency,
|
||||||||
and
put option adjustments
|
$ | 10,827 | 26,806 |
(h)
|
Further
detail of the components of derivative settlements is included 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 Company’s derivative transactions with the intent
that each is economically effective; however, the Company’s derivative
instruments do not qualify for hedge accounting. Derivative
settlements for each applicable period should be evaluated with the
Company’s net interest income, as discussed
previously.
|
Operating
expenses
Year
ended December 31,
|
||||||||||||||||
2008
|
2007
|
$
Change
|
%
Change
|
|||||||||||||
Salaries
and benefits (a)
|
$ | 177,724 | 230,316 | (52,592 | ) | (22.8 | ) % | |||||||||
Other
expenses (b)
|
158,499 | 200,150 | (41,651 | ) | (20.8 | ) | ||||||||||
Operating
expenses, excluding the cost
|
||||||||||||||||
to
provide enrollment services,
|
||||||||||||||||
restructure
and impairment expenses,
|
||||||||||||||||
and
liquidity contingency planning fees
|
336,223 | 430,466 | $ | (94,243 | ) | (21.9 | ) % | |||||||||
Cost
to provide enrollment services
|
64,965 | 45,408 | ||||||||||||||
Restructure
expense (c)
|
7,067 | 10,231 | ||||||||||||||
Impairment
expense
|
18,834 | 49,504 | ||||||||||||||
Liquidity
contingency planning fees (d)
|
13,525 | — | ||||||||||||||
Total
operating expenses
|
$ | 440,614 | 535,609 |
(a)
|
Excludes
restructure expenses related to employee termination
benefits.
|
(b)
|
Excludes
liquidity contingency planning fees and restructure expenses related to
lease terminations.
|
(c)
|
Restructure
expense is included in “salaries and benefits” and “occupancy and
communications” in the consolidated statements of
income.
|
(d)
|
Liquidity
contingency planning fees were incurred by the Company to minimize
exposure related to the equity support provisions of the Company’s FFELP
loan warehouse facility. These fees are included in “other”
under “other operating expense” in the consolidated statements of
income.
|
Excluding
the cost to provide enrollment services, restructuring and impairment charges,
and liquidity contingency planning fees, operating expenses decreased $94.2
million (21.9%) for the year ended December 31, 2008 compared to 2007. This
decrease was 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 Company’s 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.
Included
in operating expenses for the years ended December 31, 2008 and 2007 are
impairment charges of $18.8 million and $49.5 million,
respectively. The 2008 impairment charge related to the student loan
business model modifications the Company implemented due to the disruptions in
the debt and secondary markets. The 2007 impairment charge related to
the student loan business model modifications the Company implemented due to the
passage of the College Cost Reduction Act.
46
Income
Taxes
The
Company’s 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.
Financial
Condition as of December 31, 2009 compared to December 31, 2008
As
of December 31,
|
Change
|
|||||||||||||||
2009
|
2008
|
Dollars
|
Percent
|
|||||||||||||
Assets:
|
||||||||||||||||
Student
loans receivable, net
|
$ | 23,926,957 | 25,413,008 | (1,486,051 | ) | (5.8 | ) % | |||||||||
Cash,
cash equivalents, and investments
|
1,055,414 | 1,348,104 | (292,690 | ) | (21.7 | ) | ||||||||||
Goodwill
|
143,717 | 175,178 | (31,461 | ) | (18.0 | ) | ||||||||||
Intangible
assets, net
|
53,538 | 77,054 | (23,516 | ) | (30.5 | ) | ||||||||||
Fair
value of derivative instruments
|
193,899 | 175,174 | 18,725 | 10.7 | ||||||||||||
Other
assets
|
502,902 | 666,379 | (163,477 | ) | (24.5 | ) | ||||||||||
Total
assets
|
$ | 25,876,427 | 27,854,897 | (1,978,470 | ) | (7.1 | ) % | |||||||||
Liabilities:
|
||||||||||||||||
Bonds
and notes payable
|
$ | 24,805,289 | 26,787,959 | (1,982,670 | ) | (7.4 | ) % | |||||||||
Fair
value of derivative instruments
|
2,489 | 1,815 | 674 | 37.1 | ||||||||||||
Other
liabilities
|
284,086 | 421,897 | (137,811 | ) | (32.7 | ) | ||||||||||
Total
liabilities
|
25,091,864 | 27,211,671 | (2,119,807 | ) | (7.8 | ) | ||||||||||
Shareholders'
equity
|
784,563 | 643,226 | 141,337 | 22.0 | ||||||||||||
Total
liabilities and shareholders' equity
|
$ | 25,876,427 | 27,854,897 | (1,978,470 | ) | (7.1 | ) % |
Total
assets decreased during 2009 primarily due to decreases in student loans
receivable and restricted cash and investments. Student loans
receivable decreased as the result of the sale of $2.1 billion of student loans
to the Department under the Purchase Program during the year ended December 31,
2009. Total liabilities decreased during 2009 primarily due to a decrease in
bonds and notes payable as a result of fewer loans to finance and payments on
debt and debt repurchases, which resulted in a decrease in restricted cash and
investments.
OPERATING
SEGMENTS
The
Company has five operating segments 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 Company’s operating segments are defined by the
products and services they offer or the types of customers they serve, and they
reflect the manner in which financial information is currently evaluated by
management. The accounting policies of the Company’s operating segments are the
same as those described in note 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 Company’s operating
segments based on the management structure of the Company as well as the
methodology used by management to evaluate performance and allocate
resources. Management, including the Company’s chief operating
decision maker, evaluates the performance of the Company’s operating segments
based on their profitability. As discussed further below, management
measures the profitability of the Company’s operating segments on the basis of
“base net income.” Accordingly, information regarding the Company’s
operating segments is provided based on “base net income.” The
Company’s “base net income” is not a defined term within 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.
47
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 EDULINX’s detailed operating results that
have been segregated from continuing operations and reported as discontinued
operations.
Historically,
the Company generated the majority of its revenue from net interest income
earned in its Asset Generation and Management operating segment. The
Company made several acquisitions that have expanded the Company’s products and
services and have 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 Company’s 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 Company’s 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
Company’s 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 Company’s
operating segments. Reconciliation of the segment totals to the
Company’s 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.
Certain
amounts previously reported have been reclassified to conform to the current
period presentation. The reclassifications were made to change the income
statement presentation to provide the users of the financial statements
additional information related to the operating results of the Company’s
fee-based businesses, which are becoming more significant to the Company’s
operations. These reclassifications include reclassifying “tuition payment
processing and campus commerce revenue” and “enrollment services revenue,” which
were previously included in “other fee-based income.” In addition, the “cost to
provide enrollment services” was reclassified from various operating expense
accounts, primarily “advertising and marketing.”
48
Segment
Results and Reconciliations to GAAP
Year
ended December 31, 2009
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
Tuition | ||||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
"Base
net
|
||||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
Software
|
Asset
|
Corporate
|
Eliminations |
income"
|
||||||||||||||||||||||||||||||||||
and
|
and
|
and
|
Total
|
Generation
|
Activity
|
and
|
Adjustments
|
GAAP
|
||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Technical
|
Fee-
|
and
|
and
|
Reclass-
|
to
GAAP
|
Results
of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Services
|
Based
|
Management
|
Overhead
|
ifications
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total
interest income
|
$ | 112 | 62 | — | — | 174 | 609,143 | 5,391 | (2,003 | ) | 7,502 | 620,207 | ||||||||||||||||||||||||||||
Interest
expense
|
— | — | — | — | — | 357,930 | 28,935 | (2,003 | ) | — | 384,862 | |||||||||||||||||||||||||||||
Net
interest income (loss)
|
112 | 62 | — | — | 174 | 251,213 | (23,544 | ) | — | 7,502 | 235,345 | |||||||||||||||||||||||||||||
Less
provision for loan losses
|
— | — | — | — | — | 29,000 | — | — | — | 29,000 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan
losses
|
112 | 62 | — | — | 174 | 222,213 | (23,544 | ) | — | 7,502 | 206,345 | |||||||||||||||||||||||||||||
Other
income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan
and guaranty servicing revenue
|
110,273 | — | — | — | 110,273 | — | (1,526 | ) | — | — | 108,747 | |||||||||||||||||||||||||||||
Tuition
payment processing and campus commerce
revenue
|
— | 53,894 | — | — | 53,894 | — | — | — | — | 53,894 | ||||||||||||||||||||||||||||||
Enrollment
services revenue
|
— | — | 119,397 | — | 119,397 | — | — | — | — | 119,397 | ||||||||||||||||||||||||||||||
Software
services revenue
|
3,701 | — | — | 17,463 | 21,164 | — | — | — | — | 21,164 | ||||||||||||||||||||||||||||||
Other
income
|
644 | — | — | — | 644 | 45,697 | 21,811 | — | — | 68,152 | ||||||||||||||||||||||||||||||
Gain
(loss) on sale of loans, net
|
— | — | — | — | — | 35,148 | — | — | — | 35,148 | ||||||||||||||||||||||||||||||
Intersegment
revenue
|
85,104 | 237 | 555 | 14,586 | 100,482 | — | 33,469 | (133,951 | ) | — | — | |||||||||||||||||||||||||||||
Derivative
market value, foreign currency, and put option
adjustments
|
— | — | — | — | — | — | — | — | (30,802 | ) | (30,802 | ) | ||||||||||||||||||||||||||||
Derivative
settlements, net
|
— | — | — | — | — | 39,286 | — | — | — | 39,286 | ||||||||||||||||||||||||||||||
Total
other income (expense)
|
199,722 | 54,131 | 119,952 | 32,049 | 405,854 | 120,131 | 53,754 | (133,951 | ) | (30,802 | ) | 414,986 | ||||||||||||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries
and benefits
|
54,289 | 25,549 | 23,222 | 21,978 | 125,038 | 6,767 | 24,777 | (1,209 | ) | 159 | 155,532 | |||||||||||||||||||||||||||||
Restructure
expense- severance and contract termination costs
|
5,964 | — | — | 936 | 6,900 | — | 1,082 | (7,982 | ) | — | — | |||||||||||||||||||||||||||||
Impairment
expense
|
— | — | 32,728 | — | 32,728 | — | — | — | — | 32,728 | ||||||||||||||||||||||||||||||
Cost
to provide enrollment services
|
— | — | 74,926 | — | 74,926 | — | — | — | — | 74,926 | ||||||||||||||||||||||||||||||
Other
expenses
|
35,391 | 9,642 | 13,226 | 3,330 | 61,589 | 19,566 | 35,307 | 3,736 | 22,249 | 142,447 | ||||||||||||||||||||||||||||||
Intersegment
expenses
|
37,039 | 2,800 | 2,121 | 2,867 | 44,827 | 81,335 | 2,334 | (128,496 | ) | — | — | |||||||||||||||||||||||||||||
Total
operating expenses
|
132,683 | 37,991 | 146,223 | 29,111 | 346,008 | 107,668 | 63,500 | (133,951 | ) | 22,408 | 405,633 | |||||||||||||||||||||||||||||
Income
(loss) before income taxes
|
67,151 | 16,202 | (26,271 | ) | 2,938 | 60,020 | 234,676 | (33,290 | ) | — | (45,708 | ) | 215,698 | |||||||||||||||||||||||||||
Income
tax (expense) benefit (a)
|
(25,518 | ) | (6,156 | ) | 9,984 | (1,118 | ) | (22,808 | ) | (89,178 | ) | 19,186 | — | 16,227 | (76,573 | ) | ||||||||||||||||||||||||
Net
income (loss) from continuing operations
|
41,633 | 10,046 | (16,287 | ) | 1,820 | 37,212 | 145,498 | (14,104 | ) | — | (29,481 | ) | 139,125 | |||||||||||||||||||||||||||
Income
from discontinued operations, net of tax
|
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net
income (loss)
|
$ | 41,633 | 10,046 | (16,287 | ) | 1,820 | 37,212 | 145,498 | (14,104 | ) | — | (29,481 | ) | 139,125 | ||||||||||||||||||||||||||
(a)
Income taxes are applied based on 38% of income (loss) before taxes for
the individual operating segments.
|
||||||||||||||||||||||||||||||||||||||||
Before
tax operating margin (1):
|
||||||||||||||||||||||||||||||||||||||||
Year
ended December 31, 2009
|
36.6 | % | 29.9 | % | 5.4 | % | 12.1 | % | 24.5 | % | 45.4 | % | ||||||||||||||||||||||||||||
Year
ended December 31, 2008
|
26.6 | % | 31.1 | % | 4.7 | % | 13.8 | % | 19.6 | % | 16.9 | % | ||||||||||||||||||||||||||||
(1)
Before tax operating margin excludes impairment and restructuring charges
and fixed rate floor income.
|
49
Year
ended December 31, 2008
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
Tuition | ||||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
"Base
net
|
||||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
Software
|
Asset
|
Corporate
|
income"
|
|||||||||||||||||||||||||||||||||||
and
|
and
|
and
|
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
||||||||||||||||||||||||||||||||
Guaranty
|
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 revenue
|
99,916 | — | — | — | 99,916 | 26 | — | — | — | 99,942 | ||||||||||||||||||||||||||||||
Tuition
payment processing and campus commerce
revenue
|
— | 48,155 | — | — | 48,155 | — | — | — | — | 48,155 | ||||||||||||||||||||||||||||||
Enrollment
services revenue
|
— | — | 112,405 | — | 112,405 | — | — | — | — | 112,405 | ||||||||||||||||||||||||||||||
Software
services revenue
|
4,371 | — | 37 | 19,707 | 24,115 | — | — | — | — | 24,115 | ||||||||||||||||||||||||||||||
Other
income
|
51 | — | — | — | 51 | 17,401 | 5,323 | — | — | 22,775 | ||||||||||||||||||||||||||||||
Gain
(loss) on sale of loans
|
— | — | — | — | — | (53,035 | ) | 1,621 | — | — | (51,414 | ) | ||||||||||||||||||||||||||||
Intersegment
revenue
|
75,361 | 302 | 2 | 6,831 | 82,496 | — | 63,384 | (145,880 | ) | — | — | |||||||||||||||||||||||||||||
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 | 70,328 | (145,880 | ) | 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 | ||||||||||||||||||||||||||||||
Cost
to provide enrollment services
|
— | — | 64,965 | — | 64,965 | — | — | — | — | 64,965 | ||||||||||||||||||||||||||||||
Other
expenses
|
33,922 | 9,879 | 11,224 | 2,489 | 57,514 | 35,679 | 53,975 | 24 | 26,230 | 173,422 | ||||||||||||||||||||||||||||||
Intersegment
expenses
|
47,737 | 1,397 | 6,641 | 2,323 | 58,098 | 77,105 | 3,732 | (138,935 | ) | — | — | |||||||||||||||||||||||||||||
Total
operating expenses
|
138,800 | 34,566 | 107,491 | 23,380 | 304,237 | 132,296 | 120,732 | (145,880 | ) | 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)
Income taxes are applied to each operating segment based on the
consolidated effective tax rate for the
period.
|
50
Year
ended December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
Tuition | ||||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
"Base
net
|
||||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
Software
|
Asset
|
Corporate
|
income"
|
|||||||||||||||||||||||||||||||||||
and
|
and
|
and
|
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
||||||||||||||||||||||||||||||||
Guaranty
|
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 revenue
|
122,086 | — | — | — | 122,086 | 294 | — | — | — | 122,380 | ||||||||||||||||||||||||||||||
Tuition
payment processing and campus commerce
revenue
|
— | 42,766 | — | — | 42,766 | — | — | — | — | 42,766 | ||||||||||||||||||||||||||||||
Enrollment
services revenue
|
— | — | 103,905 | — | 103,905 | — | — | — | — | 103,905 | ||||||||||||||||||||||||||||||
Software
services revenue
|
5,689 | — | — | 22,075 | 27,764 | — | — | — | — | 27,764 | ||||||||||||||||||||||||||||||
Other
income
|
— | — | — | — | — | 17,820 | 12,603 | — | — | 30,423 | ||||||||||||||||||||||||||||||
Gain
(loss) 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 | ||||||||||||||||||||||||||||||
Cost
to provide enrollment services
|
— | — | 45,408 | — | 45,408 | — | — | — | — | 45,408 | ||||||||||||||||||||||||||||||
Other
expenses
|
36,618 | 8,901 | 15,037 | 2,995 | 63,551 | 29,205 | 77,915 | 2,969 | 30,426 | 204,066 | ||||||||||||||||||||||||||||||
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.
|
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 Company’s GAAP-based financial information, management also evaluates the
Company’s 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, establish corporate performance targets, allocate
resources, track results, evaluate performance, 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 Company’s chief operating decision
maker. The Company’s board of directors utilizes “base net income” to
set performance targets and evaluate management’s performance. The
Company also believes analysts, rating agencies, and creditors use “base net
income” in their evaluation of the Company’s 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
Company’s 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 Company’s operations.
51
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 Company’s
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 Company’s “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
Company’s 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 Company’s
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 Company’s “base net income” measure
to its GAAP results of operations relate to differing treatments for
derivatives, foreign currency transaction adjustments, and certain other items
that management does not consider in evaluating the Company’s 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, 2009
|
||||||||||||||||||||||||||||
Derivative
market value, foreign currency, and put option
adjustments
|
$ | — | — | — | — | 34,569 | (3,767 | ) | 30,802 | |||||||||||||||||||
Amortization
of intangible assets
|
4,315 | 7,440 | 9,961 | 533 | — | — | 22,249 | |||||||||||||||||||||
Compensation
related to business combinations
|
— | — | — | — | — | 159 | 159 | |||||||||||||||||||||
Variable-rate
floor income, net of settlements on derivatives
|
— | — | — | — | (7,502 | ) | — | (7,502 | ) | |||||||||||||||||||
Income
(loss) from discontinued operations, net of tax
|
— | — | — | — | — | — | — | |||||||||||||||||||||
Net
tax effect (a)
|
(1,640 | ) | (2,827 | ) | (3,787 | ) | (202 | ) | (10,285 | ) | 2,514 | (16,227 | ) | |||||||||||||||
Total
adjustments to GAAP
|
$ | 2,675 | 4,613 | 6,174 | 331 | 16,782 | (1,094 | ) | 29,481 | |||||||||||||||||||
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 |
(a)
|
For
2009 and 2007, income taxes are applied based on 38% for each operating
segment and any difference between 38% and the effective tax rate for the
period is reflected in Corporate Activities and Overhead. For 2008, income
taxes are applied to each operating segment (including Corporate
Activities and Overhead) based on the consolidated effective tax rate for
the period.
|
52
Differences
between GAAP and “Base Net Income”
Management’s
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 Company’s 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 Company’s risk management
strategy in which the Company does not qualify for “hedge treatment” under
GAAP. As such, the Company recognizes changes in fair value of
derivative instruments currently in earnings. 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 to
manage interest rate risk includes interest rate swaps and basis swaps.
Management has structured all of the Company's derivative transactions with the
intent that each is economically effective. However, the Company does not
qualify its derivatives for “hedge treatment”, 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 Company’s 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 Company’s consolidated statements of
income.
“Base net
income” excludes the foreign currency transaction gains or losses caused by the
re-measurement of the Company’s 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 Company’s 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 Company’s
business plan and affect the period-to-period comparability of the results of
operations. The re-measurement of the Euro-denominated bonds
generally correlates with the change in fair value of the cross-currency
interest rate swaps. However, the Company will experience unrealized
gains or losses related to the cross-currency interest rate swaps if the two
underlying indices (and related forward curve) do not move in
parallel.
In 2008
and 2007, “base net income” also excluded the change in fair value of put
options issued by the Company for certain business acquisitions. The
put options were valued by the Company each reporting period using a
Black-Scholes pricing model. Therefore, the fair value of those
options were primarily affected by the strike price and term of the underlying
option, the Company’s stock price, and the dividend yield and volatility of the
Company’s stock. The Company believed those point-in-time estimates
of value that were subject to fluctuations made it difficult to evaluate the
ongoing results of operations against the Company’s business plans and affected
the period-to-period comparability of the results of operations. In
2008, the Company settled all of its obligations related to these put
options.
The gains
and/or losses included in “Derivative market value, foreign currency, and put
option adjustments and derivative settlements, net” on the Company’s
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
Company’s acquisitions, since the Company feels that such charges do not drive
the Company’s 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 Company’s results of
operations.
53
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 Company’s
control which can affect the period-to-period comparability of results of
operations.
The
Company has used derivative instruments to hedge variable rate floor income
during certain periods. During the year ended December 31, 2008, the Company
made payments (settlements) of $10.0 million on such
derivatives. These settlements are netted with variable-rate floor
income and are excluded from “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 operating segment provides for the servicing
of the Company’s student loan portfolio and the portfolios of third parties and
servicing provided to guaranty agencies. The loan servicing activities include
loan origination activities, loan conversion activities, application processing,
borrower updates, payment processing, due diligence procedures, and claim
processing. These activities are performed internally for the Company’s
portfolio in addition to generating fee revenue when performed for third-party
clients. The guaranty servicing 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 Company’s 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 the Higher Education Act.
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 and conversion of
loan portfolios. Guaranty servicing fees, generally, are calculated
based on the number of loans serviced, volume of loans serviced, or amounts
collected.
In June
2009, the Department of Education named the Company as one of four private
sector companies awarded a servicing contract to service all federally-owned
student loans, including FFELP loans purchased by the Department pursuant to
ECASLA. No later than August 2010, the Company expects to also begin servicing
new loans originated under the Direct Loan Program. Servicing volume has
initially been allocated by the Department to the four servicers and performance
factors such as customer satisfaction levels and default rates will determine
volume allocations over time. The contract spans five years with one, five-year
renewal option. Servicing loans under this contract will increase revenue earned
by this segment. However, operating margins under this contract are
expected to be lower than historical levels achieved.
The Company began servicing
loans for the Department under this contract in September 2009 and recognized
approximately $1.7 million of revenue during 2009. As of December 31, 2009 and
March 1, 2010, the Company was servicing approximately $3.4 billion and $6.3
billion, respectively, of loans under the Department’s servicing contract, which
includes approximately $1.5 billion and $4.3 billion, respectively, of loans not
previously serviced by the Company that were sold by third parties to the
Department as part of the ECASLA Purchase Program.
54
Student
Loan Servicing Volumes (dollars in millions)
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet5.jpg)
(a)
|
As
of December 31, 2009, the Company was servicing $464.2 million of loans
owned by the Company and approximately $809.3 million of loans for third
parties that were disbursed on or after July 1, 2009 and may be eligible
to be sold to the Department of Education pursuant to its 2009-2010 Loan
Purchase Commitment Program. The Company expects to retain
servicing rights on all loans sold to the Department which are currently
being serviced by the Company.
|
Year
ended December 31, 2009 compared to year ended December 31, 2008
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
$
Change
|
||||||||||
Net
interest income
|
$ | 112 | 1,377 | (1,265 | ) | |||||||
Loan
and guaranty servicing revenue
|
110,273 | 99,916 | 10,357 | |||||||||
Software
services revenue
|
3,701 | 4,371 | (670 | ) | ||||||||
Other
income
|
644 | 51 | 593 | |||||||||
Intersegment
revenue
|
85,104 | 75,361 | 9,743 | |||||||||
Total
other income
|
199,722 | 179,699 | 20,023 | |||||||||
Salaries
and benefits
|
54,289 | 51,320 | 2,969 | |||||||||
Restructure
expense - severance and contract
|
||||||||||||
termination
costs
|
5,964 | 747 | 5,217 | |||||||||
Impairment
expense
|
— | 5,074 | (5,074 | ) | ||||||||
Other
expenses
|
35,391 | 33,922 | 1,469 | |||||||||
Intersegment
expenses
|
37,039 | 47,737 | (10,698 | ) | ||||||||
Total
operating expenses
|
132,683 | 138,800 | (6,117 | ) | ||||||||
"Base
net income" before income taxes
|
67,151 | 42,276 | 24,875 | |||||||||
Income
tax expense
|
(25,518 | ) | (14,321 | ) | (11,197 | ) | ||||||
"Base
net income"
|
$ | 41,633 | 27,955 | 13,678 | ||||||||
Before
Tax Operating Margin
|
33.6 | % | 23.3 | % |
55
Net
interest income. Investment
income decreased as a result of decreases in interest rates on cash held in 2009
compared to 2008.
Loan and
guaranty servicing revenue and intersegment revenue.
Year
ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Origination
revenue
|
Servicing
revenue
|
Total
revenue
|
Origination
revenue
|
Servicing
revenue
|
Total
revenue
|
|||||||||||||||||||
FFELP
servicing (a)
|
$ | 1,893 | 57,630 | 59,523 | 3,754 | 45,346 | 49,100 | |||||||||||||||||
Private
servicing
|
816 | 7,454 | 8,270 | 486 | 7,495 | 7,981 | ||||||||||||||||||
Government
servicing
|
— | 1,679 | 1,679 | — | — | — | ||||||||||||||||||
Guaranty
servicing (b)
|
307 | 40,494 | 40,801 | 442 | 42,393 | 42,835 | ||||||||||||||||||
Loan
and guaranty servicing revenue
|
3,016 | 107,257 | 110,273 | 4,682 | 95,234 | 99,916 | ||||||||||||||||||
Intersegment
revenue (c)
|
8,569 | 76,535 | 85,104 | 5,389 | 69,972 | 75,361 | ||||||||||||||||||
Total
servicing revenue
|
$ | 11,585 | 183,792 | 195,377 | 10,071 | 165,206 | 175,277 |
(a)
|
FFELP
origination revenue decreased in 2009 compared to 2008 due to lenders
exiting the FFELP marketplace as a result of legislative changes and
disruptions in the capital markets. FFELP servicing revenue increased in
2009 due to an increase in servicing volume and the receipt of $6.8
million in conversion fees associated with the loss of life of loan
servicing and transfer related activities for third party clients that
sold loans to the Department of Education under the Purchase
Program.
|
(b)
|
Guaranty
servicing revenue decreased in 2009 due to the receipt of $13.7 million in
fees received from rehabilitation collections on defaulted loan assets in
2008. In 2009, the revenue from rehabilitation collections on
defaulted loans was $7.8 million. This decrease was offset by an increase
in consolidation collection revenue in
2009.
|
(c)
|
Intersegment
origination revenue increased in 2009 compared to the same period in 2008
due to an increase in the Company’s disbursement volume. Intersegment
servicing revenue increased in 2009 compared to the same period in 2008
due to an increase in the number of loans transferred between various
financings as the Company was executing certain financing strategies and
conversion fees received upon the Company selling student loans to the
Department under the Purchase
Program.
|
Operating
expenses. Excluding
restructure and impairment charges and collection fees paid related to
rehabilitation sales, operating expenses decreased $3.0 million (2.4%) for the
year ended December 31, 2009 compared to 2008. This decrease was the result of
cost savings from the Company’s restructuring plans.
Before
tax operating margin. Excluding
restructure and impairment expenses, before tax operating margins were 36.6% and
26.6% for the years ended December 31, 2009 and 2008, respectively.
56
Year
ended December 31, 2008 compared to year ended December 31, 2007
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
$
Change
|
||||||||||
Net
interest income
|
$ | 1,377 | 5,459 | (4,082 | ) | |||||||
Loan
and guaranty servicing revenue
|
99,916 | 122,086 | (22,170 | ) | ||||||||
Software
services revenue
|
4,371 | 5,689 | (1,318 | ) | ||||||||
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
|
47,737 | 10,552 | 37,185 | |||||||||
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 | % |
Net
interest income. Investment
income decreased as a result of an overall decrease in cash held in 2008
compared to 2007, as well as a decrease in interest rates on cash held in 2008
compared to 2007.
Loan and
guaranty servicing revenue and intersegment revenue.
Year
ended December 31,
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
Origination
revenue
|
Servicing
revenue
|
Total
revenue
|
Origination
revenue
|
Servicing
revenue
|
Total
revenue
|
|||||||||||||||||||
FFELP
servicing (a)
|
$ | 3,754 | 45,346 | 49,100 | 7,758 | 47,618 | 55,376 | |||||||||||||||||
Private
servicing
|
486 | 7,495 | 7,981 | 1,635 | 8,661 | 10,296 | ||||||||||||||||||
Government
servicing
|
— | — | — | — | — | — | ||||||||||||||||||
Guaranty
servicing (b)
|
442 | 42,393 | 42,835 | 534 | 55,880 | 56,414 | ||||||||||||||||||
Loan
and guaranty servicing revenue
|
4,682 | 95,234 | 99,916 | 9,927 | 112,159 | 122,086 | ||||||||||||||||||
Intersegment
revenue
|
5,389 | 69,972 | 75,361 | 8,745 | 65,942 | 74,687 | ||||||||||||||||||
Total
servicing revenue
|
$ | 10,071 | 165,206 | 175,277 | 18,672 | 178,101 | 196,773 |
(a)
|
FFELP
origination revenue decreased in 2008 compared to 2007 due to lenders
exiting the FFELP marketplace as a result of legislative changes and
disruptions in the capital markets.
|
(b)
|
Guaranty
servicing revenue decreased in 2008 mainly due to the termination of a
Voluntary Flexible Agreement between the Department and College Assist,
one of the Company’s customers, which decreased certain rates in which the
Company earns revenue. The remaining decrease is due to the receipt of
$16.2 million in fees received from rehabilitation collections on
defaulted loan assets in 2007. In 2008, the revenue from
rehabilitation collections on defaulted loans was $13.7
million.
|
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 and impairment charges
and corporate allocations, operating expenses decreased $22.3 million (16.8%)
for the year ended December 31, 2008 compared to 2007. This decrease was the
result of cost savings from the Company’s restructuring plans.
57
Before
tax operating margin. Excluding
restructure and impairment expenses and 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, the before tax
operating margins were 39.1% and 36.2% for the years ended December 31, 2008 and
2007, respectively.
TUITION
PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT – RESULTS OF
OPERATIONS
The
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.
This
segment of the Company’s 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 electronic commerce subscription services is recognized over the
service period with the highest revenue months being July through September and
December and January. The Company’s operating expenses do not follow
the seasonality of the revenues. This is primarily due to fixed year-round
personnel costs and seasonal marketing costs.
Year
ended December 31, 2009 compared to year ended December 31, 2008
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
$
Change
|
||||||||||
Net
interest income
|
$ | 62 | 1,689 | (1,627 | ) | |||||||
Tuition
payment processing and campus commerce revenue
|
53,894 | 48,155 | 5,739 | |||||||||
Intersegment
revenue
|
237 | 302 | (65 | ) | ||||||||
Total
other income
|
54,131 | 48,457 | 5,674 | |||||||||
Salaries
and benefits
|
25,549 | 23,290 | 2,259 | |||||||||
Other
expenses
|
9,642 | 9,879 | (237 | ) | ||||||||
Intersegment
expenses
|
2,800 | 1,397 | 1,403 | |||||||||
Total
operating expenses
|
37,991 | 34,566 | 3,425 | |||||||||
"Base
net income" before income taxes
|
16,202 | 15,580 | 622 | |||||||||
Income
tax expense
|
(6,156 | ) | (5,175 | ) | (981 | ) | ||||||
"Base
net income"
|
$ | 10,046 | 10,405 | (359 | ) | |||||||
Before
Tax Operating Margin
|
29.9 | % | 31.1 | % |
Net
interest income. Investment
income decreased as a result of decreases in interest rates on cash held in 2009
compared to 2008.
Tuition
payment processing and campus commerce revenue. Tuition payment
processing and campus commerce revenue increased in 2009 compared to the same
period in 2008 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, 2009
compared to 2008 as a result of incurring additional costs associated with
salaries and benefits to support the increase in the number of managed tuition
payment plans and campus commerce transactions. In addition, the
Company continues to invest in new products and services to meet customer needs
and expand product and service offerings. These investments increased
operating expenses for the year ended December 31, 2009 compared to
2008.
Before
tax operating margin. Excluding net
interest income, the before tax operating margins were 29.8% and 28.7% for the
years ended December 31, 2009 and 2008, respectively. Net interest income earned
by the Company during any given period is subject to the underlying interest
rate earned on cash and is a factor beyond the Company’s control which can
affect the period-to-period comparability of results of operations.
58
Year
ended December 31, 2008 compared to year ended December 31, 2007
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
$
Change
|
||||||||||
Net
interest income
|
$ | 1,689 | 3,802 | (2,113 | ) | |||||||
Tuition
payment processing and campus commerce revenue
|
48,155 | 42,766 | 5,389 | |||||||||
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
|
1,397 | 364 | 1,033 | |||||||||
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 | % |
Net
interest income. Investment
income decreased as a result of decreases in interest rates on cash held in 2008
compared to 2007.
Tuition
payment processing and campus commerce revenue. Tuition payment
processing and campus commerce revenue increased in 2008 compared to the same
periods 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 2007 as a result of incurring additional costs associated with
salaries and benefits to support the increase in the number of managed tuition
payment plans and campus commerce transactions. In addition, the
Company continues to invest in new products and services to meet customer needs
and expand product and service offerings. These investments increased
operating expenses for the year ended December 31, 2008 compared to
2007.
Before
tax operating margin. Excluding net interest
income and 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, the before tax operating margins were 30.6%
and 31.7% for the years ended December 31, 2008 and 2007, respectively. Net
interest income earned by the Company during any given period is subject to the
underlying interest rate earned on cash and is a factor beyond the Company’s
control which can affect the period-to-period comparability of results of
operations.
59
ENROLLMENT
SERVICES OPERATING SEGMENT – RESULTS OF OPERATIONS
The
Enrollment Services segment offers products and services that are focused on
helping colleges recruit and retain students (lead generation and recruitment
services and helping students plan and prepare for life after high school
(content management and publishing and editing services). Lead generation
products and services include vendor lead management services and admissions
lead generation. Recruitment services include pay per click marketing
management, email marketing, list marketing services, and admissions consulting.
Content management products and services include online courses and related
services. Publishing and editing services include test preparation study guides
and essay and resume editing services.
Year
ended December 31, 2009 compared to year ended December 31, 2008
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
$
Change
|
||||||||||
Net
interest income
|
$ | — | 17 | (17 | ) | |||||||
Enrollment
services revenue
|
119,397 | 112,405 | 6,992 | |||||||||
Software
services revenue
|
— | 37 | (37 | ) | ||||||||
Intersegment
revenue
|
555 | 2 | 553 | |||||||||
Total
other income
|
119,952 | 112,444 | 7,508 | |||||||||
Salaries
and benefits
|
23,222 | 24,379 | (1,157 | ) | ||||||||
Restructure
expense - severance and
|
||||||||||||
and contract termination costs
|
— | 282 | (282 | ) | ||||||||
Impairment
expense
|
32,728 | — | 32,728 | |||||||||
Cost
to provide enrollment services
|
74,926 | 64,965 | 9,961 | |||||||||
Other
expenses
|
13,226 | 11,224 | 2,002 | |||||||||
Intersegment
expenses
|
2,121 | 6,641 | (4,520 | ) | ||||||||
Total
operating expenses
|
146,223 | 107,491 | 38,732 | |||||||||
"Base
net income (loss)" before income taxes
|
(26,271 | ) | 4,970 | (31,241 | ) | |||||||
Income
tax (expense) benefit
|
9,984 | (1,730 | ) | 11,714 | ||||||||
"Base
net income (loss)"
|
$ | (16,287 | ) | 3,240 | (19,527 | ) | ||||||
Before
Tax Operating Margin
|
(21.9 | %) | 4.4 | % |
60
Enrollment
services revenue, cost to provide enrollment services, and gross
profit.
Year
ended December 31, 2009
|
||||||||||||||||||||
Publishing
|
Content
|
|||||||||||||||||||
and
|
management
|
|||||||||||||||||||
Lead
|
editing
|
and
recruitment
|
||||||||||||||||||
generation
(a)
|
services
(b)
|
Subtotal
|
services
(c)
|
Total
|
||||||||||||||||
Enrollment
services revenue
|
$ | 88,851 | 10,906 | 99,757 | 19,640 | 119,397 | ||||||||||||||
Cost
to provide enrollment services
|
70,663 | 4,263 | 74,926 | |||||||||||||||||
Gross
profit
|
$ | 18,188 | 6,643 | 24,831 | ||||||||||||||||
Gross
profit %
|
20.5 | % | 60.9 | % | 24.9 | % | ||||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||
Publishing
|
Content
|
|||||||||||||||||||
and
|
management
|
|||||||||||||||||||
Lead
|
editing
|
and
recruitment
|
||||||||||||||||||
generation
(a)
|
services
(b)
|
Subtotal
|
services
(c)
|
Total
|
||||||||||||||||
Enrollment
services revenue
|
$ | 72,513 | 15,114 | 87,627 | 24,778 | 112,405 | ||||||||||||||
Cost
to provide enrollment services
|
58,668 | 6,297 | 64,965 | |||||||||||||||||
Gross
profit
|
$ | 13,845 | 8,817 | 22,662 | ||||||||||||||||
Gross
profit %
|
19.1 | % | 58.3 | % | 25.9 | % |
(a)
|
Lead
generation revenue increased $16.3 million (22.5%) for the year ended
December 31, 2009 compared to 2008 as a result of an increase in lead
generation services volume. The gross profit for lead
generation services increased due to the Company’s focus on eliminating
lower margin sales and creating cost
efficiencies.
|
(b)
|
Publishing
and editing services revenue decreased $4.2 million (27.8%) for the year
ended December 31, 2009 compared to 2008 due to competition related to
online delivery of similar products, as well as a general downturn in
economic conditions. The gross profit for publishing and
editing services increased as a result of a shift in the mix of products
sold.
|
(c)
|
Content
management and recruitment services revenue decreased $5.1 million (20.7%)
for the year ended December 31, 2009 compared to 2008. This
decrease was the result of a decrease of $3.8 million associated with the
Company’s pay per click marketing management, email marketing, and
admissions consulting services and a decrease of $1.9 million associated
with the Company’s list marketing services. These decreases were offset by
an increase in revenue related to online
courses.
|
Impairment
expense. Impairment expense includes a $32.7 million charge related to
the impairment of goodwill and intangible assets related to the Company’s direct
marketing and list management business. This business has been
negatively affected by the economic recession and deterioration of the
direct-to-consumer student loan market.
Operating
expenses. Excluding
restructure and impairment charges and the cost to provide enrollment services,
operating expenses decreased $3.7 million (8.7%) for the year ended December 31,
2009 compared to 2008 as a result of continued focus on cost
efficiencies.
Before
tax operating margin. Excluding
restructure and impairment expenses, before tax operating margins were 5.4% and
4.7% for the years ended December 31, 2009 and 2008, respectively.
61
Year
ended December 31, 2008 compared to year ended December 31, 2007
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
$
Change
|
||||||||||
Net
interest income
|
$ | 17 | 340 | (323 | ) | |||||||
Enrollment
services revenue
|
112,405 | 103,905 | 8,500 | |||||||||
Software
services revenue
|
37 | — | 37 | |||||||||
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
|
||||||||||||
contract
termination costs
|
282 | 929 | (647 | ) | ||||||||
Impairment
expense
|
— | 11,401 | (11,401 | ) | ||||||||
Cost
to provide enrollment services
|
64,965 | 45,408 | 19,557 | |||||||||
Other
expenses
|
11,224 | 15,037 | (3,813 | ) | ||||||||
Intersegment
expenses
|
6,641 | 335 | 6,306 | |||||||||
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 | %) |
Enrollment
services revenue, cost to provide enrollment services, and gross
profit.
Year
ended December 31, 2008
|
||||||||||||||||||||
Publishing
|
Content
|
|||||||||||||||||||
and
|
management
|
|||||||||||||||||||
Lead
|
editing
|
and
recruitment
|
||||||||||||||||||
generation
(a)
|
services
(b)
|
Subtotal
|
services
(c)
|
Total
|
||||||||||||||||
Enrollment
services revenue
|
$ | 72,513 | 15,114 | 87,627 | 24,778 | 112,405 | ||||||||||||||
Cost
to provide enrollment services
|
58,668 | 6,297 | 64,965 | |||||||||||||||||
Gross
profit
|
$ | 13,845 | 8,817 | 22,662 | ||||||||||||||||
Gross
profit %
|
19.1 | % | 58.3 | % | 25.9 | % | ||||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||||||
Publishing
|
Content
|
|||||||||||||||||||
and
|
management
|
|||||||||||||||||||
Lead
|
editing
|
and
recruitment
|
||||||||||||||||||
generation
(a)
|
services
(b)
|
Subtotal
|
services
(c)
|
Total
|
||||||||||||||||
Enrollment
services revenue
|
$ | 50,195 | 17,835 | 68,030 | 35,875 | 103,905 | ||||||||||||||
Cost
to provide enrollment services
|
38,585 | 6,823 | 45,408 | |||||||||||||||||
Gross
profit
|
$ | 11,610 | 11,012 | 22,622 | ||||||||||||||||
Gross
profit %
|
23.1 | % | 61.7 | % | 33.3 | % |
(a)
|
Lead
generation revenue increased $22.3 million (44.5%) for the year ended
December 31, 2008 compared to 2007 as a result of an increase in lead
generation services volume. The gross profit for lead
generation services decreased due to the Company’s focus on increasing
customer base and volume.
|
(b)
|
Publishing
and editing services revenue decreased $2.7 million (15.3%) for the year
ended December 31, 2008 compared to 2007 due to competition related to
online delivery of similar products, as well as a general downturn in
economic conditions. The gross profit for publishing and
editing services decreased as a result of a shift in the mix of products
sold.
|
(c)
|
Content
management and recruitment services revenue decreased $11.1 million
(30.9%) for the year ended December 31, 2008 compared to
2007. This decrease was the result of a decrease of $1.5
million associated with the Company’s pay per click marketing management,
email marketing, and admissions consulting services and a decrease of $9.1
million associated with the Company’s list marketing
services.
|
62
Operating
expenses. Excluding
restructure and impairment charges and the cost to provide enrollment services,
operating expenses decreased $6.6 million (13.5%) for the year ended December
31, 2008 compared to 2007 as a result of continued focus on cost
efficiencies.
Before
tax operating margin. Excluding restructure
and impairment expenses and 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, the before tax
operating margins were 7.7% and 10.3% for the years ended December 31, 2008 and
2007, respectively.
SOFTWARE
AND TECHNICAL SERVICES OPERATING SEGMENT – RESULTS OF OPERATIONS
The
Company’s 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, legacy modernization,
technical consulting services, and Enterprise Content Management
solutions.
Many of
the Company’s 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 segment’s future revenue and
profit margins.
Year
ended December 31, 2009 compared to year ended December 31, 2008
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
$
Change
|
||||||||||
Net
interest income
|
$ | — | 24 | (24 | ) | |||||||
Software
services revenue
|
17,463 | 19,707 | (2,244 | ) | ||||||||
Intersegment
revenue
|
14,586 | 6,831 | 7,755 | |||||||||
Total
other income
|
32,049 | 26,538 | 5,511 | |||||||||
Salaries
and benefits
|
21,978 | 18,081 | 3,897 | |||||||||
Restructure
expense - severance and contract
|
||||||||||||
termination
costs
|
936 | 487 | 449 | |||||||||
Other
expenses
|
3,330 | 2,489 | 841 | |||||||||
Intersegment
expenses
|
2,867 | 2,323 | 544 | |||||||||
Total
operating expenses
|
29,111 | 23,380 | 5,731 | |||||||||
"Base
net income" before income taxes
|
2,938 | 3,182 | (244 | ) | ||||||||
Income
tax expense
|
(1,118 | ) | (1,021 | ) | (97 | ) | ||||||
"Base
net income"
|
$ | 1,820 | 2,161 | (341 | ) | |||||||
Before
Tax Operating Margin
|
9.2 | % | 12.0 | % |
Software
services revenue. Software services revenue
decreased in 2009 compared to 2008 as the result of a reduction in the number of
projects for existing external customers and the loss of external customers due
to the legislative developments in the student loan industry throughout 2008 and
2009.
Intersegment
revenue. Intersegment
revenue increased in 2009 compared to 2008 as a result of an increase in the
number of projects for internal customers.
Operating
expenses. Operating
expenses increased in 2009 compared to 2008 as a result of costs associated with
salaries and benefits to support the increase in intersegment
revenue.
Before
tax operating margin. Excluding restructure expenses, operating margins
were 12.1% and 13.8% for the years ended December 31, 2009 and 2008,
respectively.
63
Year
ended December 31, 2008 compared to year ended December 31, 2007
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
$
Change
|
||||||||||
Net
interest income after the provision
|
$ | 24 | 18 | 6 | ||||||||
Software
services revenue
|
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
|
2,323 | 775 | 1,548 | |||||||||
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 | % |
Software
services revenue. Software services revenue
decreased in 2008 compared to 2007 as the result of a reduction in the number of
projects for existing external customers and the loss of external customers due
to the legislative developments in the student loan industry throughout
2008.
Intersegment
revenue. Intersegment
revenue decreased in 2008 compared to 2007 as a result of an decrease in the
number of projects for internal customers.
Operating
expenses. Operating
expenses decreased in 2008 compared to 2007 as a result of 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.
Before
tax operating margin. Excluding restructure
expense and 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, the before tax operating margins were 22.4 %
and 26.6% for the years ended December 31, 2008 and 2007,
respectively.
64
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 Company’s student loan assets,
which has historically been the Company’s largest product and service offering.
The Company generates a substantial portion of its earnings from the spread,
referred to as the Company’s student loan spread, between the yield it receives
on its student loan portfolio and the 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.
Student
Loan Portfolio
The
tables below outline the components of the Company’s student loan
portfolio:
As
of December 31, 2009
|
||||||||||||||||||||
Originated | Originated | 2009-2010 | ||||||||||||||||||
prior
to
|
on
or after
|
Academic
Year
|
||||||||||||||||||
Total
|
10/1/07
|
10/1/07
|
Loans
(b)
|
|||||||||||||||||
Federally
insured:
|
||||||||||||||||||||
Stafford
|
$ | 7,145,966 | 29.9 | % | $ | 6,237,445 | 494,611 | 413,910 | ||||||||||||
PLUS/SLS
|
474,826 | 2.0 | % | 372,434 | 52,122 | 50,270 | ||||||||||||||
Consolidation
|
15,851,761 | 66.3 | % | 15,665,937 | 185,824 | — | ||||||||||||||
Total
federally insured
|
23,472,553 | 98.2 | % | $ | 22,275,816 | 732,557 | 464,180 | |||||||||||||
100.0 | % | 94.9 | % | 3.1 | % | 2.0 | % | |||||||||||||
Non-federally
insured
|
163,321 | 0.6 | % | |||||||||||||||||
Total
student loans receivable (gross)
|
23,635,874 | 98.8 | % | |||||||||||||||||
Unamortized
premiums and deferred
|
||||||||||||||||||||
origination
costs
|
341,970 | 1.4 | % | |||||||||||||||||
Allowance
for loan losses:
|
||||||||||||||||||||
Federally
insured
|
(30,102 | ) | (0.1 | %) | ||||||||||||||||
Non-federally
insured
|
(20,785 | ) | (0.1 | %) | ||||||||||||||||
Total
student loans receivable (net)
|
$ | 23,926,957 | 100.0 | % |
As
of December 31, 2008
|
||||||||||||||||||||
Originated
|
Originated | 2008-2009 | ||||||||||||||||||
prior
to
|
on
or after
|
Academic
Year
|
||||||||||||||||||
Total
|
10/1/07
|
10/1/07
|
Loans
(b)
|
|||||||||||||||||
Federally
insured:
|
||||||||||||||||||||
Stafford
|
$ | 7,602,568 | 29.9 | % | $ | 6,641,817 | 390,658 | 570,093 | ||||||||||||
PLUS/SLS
|
527,670 | 2.1 | % | 412,142 | 48,346 | 67,182 | ||||||||||||||
Consolidation
|
16,657,703 | 65.5 | % | 16,614,950 | 42,753 | — | ||||||||||||||
Total
federally insured
|
24,787,941 | 97.5 | % | $ | 23,668,909 | 481,757 | 637,275 | |||||||||||||
100.0 | % | 95.5 | % | 1.9 | % | 2.6 | % | |||||||||||||
Non-federally
insured
|
273,108 | 1.1 | % | |||||||||||||||||
Total
student loans receivable (gross)
|
25,061,049 | 98.6 | % | |||||||||||||||||
Unamortized
premiums and deferred
|
||||||||||||||||||||
origination
costs
|
402,881 | 1.6 | % | |||||||||||||||||
Allowance
for loan losses:
|
||||||||||||||||||||
Federally
insured
|
(25,577 | ) | (0.1 | %) | ||||||||||||||||
Non-federally
insured
|
(25,345 | ) | (0.1 | %) | ||||||||||||||||
Total
student loans receivable (net)
|
$ | 25,413,008 | 100.0 | % |
65
As
of December 31, 2007
|
||||||||||||||||
Originated
|
Originated | |||||||||||||||
prior
to
|
on
or after
|
|||||||||||||||
Total
|
10/1/07
|
10/1/07
(a)
|
||||||||||||||
Federally
insured:
|
||||||||||||||||
Stafford
|
$ | 6,725,910 | 25.2 | % | $ | 6,624,009 | 101,901 | |||||||||
PLUS/SLS
|
429,941 | 1.6 | % | 414,708 | 15,233 | |||||||||||
Consolidation
|
18,898,547 | 70.7 | % | 18,646,993 | 251,554 | |||||||||||
Total
federally insured
|
26,054,398 | 97.5 | % | $ | 25,685,710 | 368,688 | ||||||||||
100.0 | % | 98.6 | % | 1.4 | % | |||||||||||
Non-federally
insured
|
274,815 | 1.0 | % | |||||||||||||
Total
student loans receivable (gross)
|
26,329,213 | 98.5 | % | |||||||||||||
Unamortized
premiums and deferred
|
||||||||||||||||
origination
costs
|
452,501 | 1.7 | % | |||||||||||||
Allowance
for loan losses:
|
||||||||||||||||
Federally
insured
|
(24,534 | ) | (0.1 | %) | ||||||||||||
Non-federally
insured
|
(21,058 | ) | (0.1 | %) | ||||||||||||
Total
student loans receivable (net)
|
$ | 26,736,122 | 100.0 | % |
(a)
|
Federally
insured student loans originated on or after October 1, 2007 earn a
reduced annual yield as a result of the enactment of the College Cost
Reduction Act in September 2007.
|
(b)
|
2008-2009
and 2009-2010 Academic Year loans are eligible to be participated and sold
to the Department under the Department’s Participation and Purchase
Programs.
|
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.
66
The
following table sets forth the activity of loans originated or acquired through
each of the Company’s channels:
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Beginning
balance
|
$ | 25,061,049 | 26,329,213 | 23,414,468 | ||||||||
Direct
channel:
|
||||||||||||
Consolidation
loan originations
|
— | 69,078 | 3,096,754 | |||||||||
Less
consolidation of existing portfolio
|
— | (28,474 | ) | (1,602,835 | ) | |||||||
Net
consolidation loan originations
|
— | 40,604 | 1,493,919 | |||||||||
Stafford/PLUS
loan originations
|
1,669,582 | 1,258,961 | 1,086,398 | |||||||||
Branding
partner channel
|
860,171 | 936,044 | 662,629 | |||||||||
Forward
flow channel
|
202,520 | 517,551 | 1,105,145 | |||||||||
Other
channels
|
47,600 | 55,922 | 804,019 | |||||||||
Total
channel acquisitions
|
2,779,873 | 2,809,082 | 5,152,110 | |||||||||
Repayments,
claims, capitalized interest, participations, and other
|
(1,443,191 | ) | (1,877,885 | ) | (1,321,055 | ) | ||||||
Consolidation
loans lost to external parties
|
(430,475 | ) | (369,145 | ) | (800,978 | ) | ||||||
Loans
sold
|
(2,331,382 | ) | (1,830,216 | ) | (115,332 | ) | ||||||
Ending
balance
|
$ | 23,635,874 | 25,061,049 | 26,329,213 |
The
Company has significant financing needs that it meets through the capital
markets. Beginning in August 2007, the capital markets experienced unprecedented
disruptions. 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 2009, the Company acquired certain loans based on
certain lending relationships and to fulfill certain obligations with its brand
and forward flow partners.
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 August 2008, the Company began funding
FFELP Stafford and PLUS student loan originations for the 2008-2009 academic
year pursuant to the Department’s Participation Program. On October 7, 2008,
legislation was enacted to extend the Department’s authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the
extension of the Participation Program from September 30, 2009 to September 30,
2010. The Company plans to continue to use the Participation Program and a
participation agreement with Union Bank to fund loans for the 2009-2010 academic
year. These facilities are allowing the Company to continue originating new
federal student loans to all students regardless of the school they
attend.
67
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 Company’s allowance for loan
losses is presented in the following table:
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Balance
at beginning of period
|
$ | 50,922 | 45,592 | 26,003 | ||||||||
Provision
for loan losses:
|
||||||||||||
Federally
insured loans
|
20,000 | 17,000 | 23,158 | |||||||||
Non-federally
insured loans
|
9,000 | 8,000 | 5,020 | |||||||||
Total
provision for loan losses
|
29,000 | 25,000 | 28,178 | |||||||||
Charge-offs,
net of recoveries:
|
||||||||||||
Federally
insured loans
|
(14,954 | ) | (15,207 | ) | (6,225 | ) | ||||||
Non-federally
insured loans
|
(3,761 | ) | (3,713 | ) | (1,193 | ) | ||||||
Net
charge-offs
|
(18,715 | ) | (18,920 | ) | (7,418 | ) | ||||||
Sale
of federally insured loans
|
(520 | ) | (750 | ) | — | |||||||
Sale
of non-federally insured loans
|
(9,800 | ) | — | (1,171 | ) | |||||||
Balance
at end of period
|
$ | 50,887 | 50,922 | 45,592 | ||||||||
Allocation
of the allowance for loan losses:
|
||||||||||||
Federally
insured loans
|
$ | 30,102 | 25,577 | 24,534 | ||||||||
Non-federally
insured loans
|
20,785 | 25,345 | 21,058 | |||||||||
Total
allowance for loan losses
|
$ | 50,887 | 50,922 | 45,592 | ||||||||
Allowance
for federally insured loans as a percentage such loans
|
0.13 | % | 0.10 | % | 0.09 | % | ||||||
Allowance
for non-federally insured loans as a percentage such loans
|
12.73 | % | 9.28 | % | 7.66 | % |
In
September 2007, the Company recorded an expense of $15.7 million to increase the
Company’s allowance for loan losses related to an increase in risk share as a
result of the elimination of the Exceptional Performer program.
During
2009, the Company participated $95.5 million of non-federally insured loans to
third parties. Loans participated under these agreements have been
accounted for by the Company as loan sales. Accordingly, the participation
interests sold are not included on the Company’s consolidated balance
sheet.
Per the
terms of the servicing agreements, the Company’s servicing operations are
obligated to repurchase loans subject to the participation interests in the
event such loans become 60 or 90 days delinquent. The activity in the
accrual account during 2009 related to this repurchase obligation, which is
included in “other liabilities” in the Company’s consolidated balance sheet, is
detailed below.
Beginning
balance
|
$ | — | ||
Transfer
from allowance for loan losses
|
9,800 | |||
Reserve
for repurchase of delinquent loans (a)
|
800 | |||
Ending
balance
|
$ | 10,600 | ||
(a) The reserve for repurchase of loans is included in "other" under other operating expenses in the Company's consolidated statements of income. |
Delinquencies
have the potential to adversely impact the Company’s earnings through increased
servicing and collection costs and account charge-offs. The table
below shows the Company’s student loan delinquency amounts.
68
As
of December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
Federally
Insured Loans:
|
||||||||||||||||
Loans
in-school/grace/deferment (a)
|
$ | 5,783,648 | $ | 7,374,602 | ||||||||||||
Loans
in forebearance (b)
|
2,495,672 | 2,484,478 | ||||||||||||||
Loans
in repayment status:
|
||||||||||||||||
Loans
current
|
13,038,428 | 85.8 | % | 13,169,101 | 88.2 | % | ||||||||||
Loans
delinquent 31-60 days (c)
|
691,232 | 4.5 | 536,112 | 3.6 | ||||||||||||
Loans
delinquent 61-90 days (c)
|
314,265 | 2.1 | 240,549 | 1.6 | ||||||||||||
Loans
delinquent 91 days or greater (d)
|
1,149,308 | 7.6 | 983,099 | 6.6 | ||||||||||||
Total
loans in repaymentt
|
15,193,233 | 100.0 | % | 14,928,861 | 100.0 | % | ||||||||||
Total
federally insured loans
|
$ | 23,472,553 | $ | 24,787,941 | ||||||||||||
Non-Federally
Insured Loans:
|
||||||||||||||||
Loans
in-school/grace/deferment (a)
|
$ | 34,815 | $ | 84,237 | ||||||||||||
Loans
in forebearance (b)
|
1,919 | 9,540 | ||||||||||||||
Loans
in repayment status:
|
||||||||||||||||
Loans
current
|
118,761 | 93.8 | % | 169,865 | 94.7 | % | ||||||||||
Loans
delinquent 31-60 days (c)
|
3,023 | 2.4 | 3,315 | 1.8 | ||||||||||||
Loans
delinquent 61-90 days (c)
|
1,559 | 1.2 | 1,743 | 1.0 | ||||||||||||
Loans
delinquent 91 days or greater (d)
|
3,244 | 2.6 | 4,408 | 2.5 | ||||||||||||
Total
loans in repayment
|
126,587 | 100.0 | % | 179,331 | 100.0 | % | ||||||||||
Total
non-federally insured loans
|
$ | 163,321 | $ | 273,108 |
(a)
|
Loans
for borrowers who still may be attending school or engaging in other
permitted educational activities and are not yet required to make payments
on the loans, e.g., residency periods
for medical students or a grace period for bar exam preparation for law
students.
|
(b)
|
Loans
for borrowers who have temporarily ceased making full payments due to
hardship or other factors, according to a schedule approved by the
servicer consistent with the established loan program servicing procedures
and policies.
|
(c)
|
The
period of delinquency is based on the number of days scheduled payments
are contractually past due and relate to repayment loans, that is,
receivables not charged off, and not in school, grace, deferment, or
forbearance.
|
(d)
|
Loans
delinquent 91 days or greater include loans in claim status, which are
loans that 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 Company’s 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,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Variable
student loan yield
|
2.87 | % | 5.42 | % | 7.74 | % | ||||||
Consolidation
rebate fees
|
(0.70 | ) | (0.73 | ) | (0.77 | ) | ||||||
Premium
and deferred origination costs amortization
|
(0.30 | ) | (0.35 | ) | (0.36 | ) | ||||||
Variable
student loan net yield
|
1.87 | 4.34 | 6.61 | |||||||||
Student
loan cost of funds - interest expense
|
(1.40 | ) | (3.66 | ) | (5.51 | ) | ||||||
Student
loan cost of funds - derivative settlements
|
0.16 | 0.23 | — | |||||||||
Variable
student loan spread
|
0.63 | 0.91 | 1.10 | |||||||||
Variable
rate floor income,
|
||||||||||||
net
of settlements on derivatives (a)
|
(0.03 | ) | (0.06 | ) | (0.01 | ) | ||||||
Fixed
rate floor income,
|
||||||||||||
net
of settlements on derivatives
|
0.58 | 0.14 | 0.04 | |||||||||
Core
student loan spread
|
1.18 | % | 0.99 | % | 1.13 | % | ||||||
Average
balance of student loans
|
$ | 24,794,311 | 26,044,507 | 25,143,059 | ||||||||
Average
balance of debt outstanding
|
25,286,533 | 26,869,364 | 26,599,361 |
(a)
|
Prior
to October 1, 2008, 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 Company’s 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. For the student loan spread analysis shown above,
variable-rate floor income for prior periods was changed to reflect the
economic benefit to conform to the current period
presentation.
|
69
The
Company’s variable student loan spread has decreased due primarily to the
following items:
·
|
Legislation
reduced the yield on FFELP loans originated after October 1,
2007.
|
·
|
Historically,
the movement of the various interest rate indices received on the
Company’s student loan assets, primarily three-month commercial paper, and
paid on the debt to fund such loans, primarily LIBOR, was highly
correlated. The short term movement of these indices was
dislocated beginning in August 2007 which has negatively impacted the
Company’s net interest income.
|
The
decrease in variable student loan spread has been offset by an increase in fixed
rate floor income. 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. Due to
the decrease in the short-term interest rates during 2008 and 2009, the Company
received additional fixed rate floor income on a portion of its
portfolio.
Year
ended December 31, 2009 compared to year ended December 31, 2008
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
$
Change
|
||||||||||
Net
interest income after provision
|
||||||||||||
for
loan losses
|
$ | 222,213 | 152,773 | 69,440 | ||||||||
Loan
and guaranty servicing revenue
|
— | 26 | (26 | ) | ||||||||
Other
income
|
45,697 | 17,401 | 28,296 | |||||||||
Gain
(loss) on sale of loans, net
|
35,148 | (53,035 | ) | 88,183 | ||||||||
Derivative
market value, foreign currency,
|
||||||||||||
and
put option adjustments
|
— | 466 | (466 | ) | ||||||||
Derivative
settlements, net
|
39,286 | 65,622 | (26,336 | ) | ||||||||
Total
other income
|
120,131 | 30,480 | 89,651 | |||||||||
Salaries
and benefits
|
6,767 | 8,316 | (1,549 | ) | ||||||||
Restructure
expense - severance and contract
|
||||||||||||
termination
costs
|
— | 1,845 | (1,845 | ) | ||||||||
Impairment
expense
|
— | 9,351 | (9,351 | ) | ||||||||
Other
expenses
|
19,566 | 35,679 | (16,113 | ) | ||||||||
Intersegment
expenses
|
81,335 | 77,105 | 4,230 | |||||||||
Total
operating expenses
|
107,668 | 132,296 | (24,628 | ) | ||||||||
"Base
net income" before income taxes
|
234,676 | 50,957 | 183,719 | |||||||||
Income
tax expense
|
(89,178 | ) | (18,356 | ) | (70,822 | ) | ||||||
"Base
net income"
|
$ | 145,498 | 32,601 | 112,897 | ||||||||
Before
Tax Operating Margin
|
68.5 | % | 27.8 | % |
Net interest income after
the provision for loan losses.
Year
ended December 31,
|
Change
|
|||||||||||||||
2009
|
2008
|
Dollars
|
Percent
|
|||||||||||||
Loan
interest
|
$ | 850,023 | 1,415,281 | (565,258 | ) | (39.9 | )% | |||||||||
Consolidation
rebate fees
|
(174,075 | ) | (190,604 | ) | 16,529 | 8.7 | ||||||||||
Amortization
of loan premiums and deferred
origination costs
|
(73,530 | ) | (90,619 | ) | 17,089 | 18.9 | ||||||||||
Total
loan interest
|
602,418 | 1,134,058 | (531,640 | ) | (46.9 | ) | ||||||||||
Investment
interest
|
6,725 | 30,271 | (23,546 | ) | (77.8 | ) | ||||||||||
Total
interest income
|
609,143 | 1,164,329 | (555,186 | ) | (47.7 | ) | ||||||||||
Interest
on bonds and notes payable
|
357,930 | 986,556 | (628,626 | ) | (63.7 | ) | ||||||||||
Provision
for loan losses
|
29,000 | 25,000 | 4,000 | 16.0 | ||||||||||||
Net
interest income after provision for loan losses
|
$ | 222,213 | 152,773 | 69,440 | 45.5 | % |
70
·
|
Loan
interest income decreased $565.3 million as a result of a decrease in the
average student loan portfolio of $1.3 billion (4.8%) and a decrease in
the yield earned on student loans due to a decrease in interest rates for
the year ended December 31, 2009 compared to 2008. In addition,
the passage of the College Cost Reduction Act reduced the yield on all
FFELP loans originated after October 1, 2007. As of December
31, 2009, 5.1% of the Company’s federally insured student loan portfolio
was originated after October 1, 2007 as compared to 4.5% as of December
31, 2008. These decreases were offset by an increase of $104.6 million due
to an increase in fixed rate floor
income.
|
·
|
Consolidation
rebate fees decreased due to the $1.8 billion (10.1%) decrease in the
average consolidation
portfolio.
|
·
|
The
amortization of loan premiums and deferred origination costs decreased as
a result of reduced costs to acquire or originate
loans.
|
·
|
Investment
income decreased as a result of lower interest rates and a decrease in
average cash held for the year ended December 31, 2009 compared to
2008.
|
·
|
Interest
expense decreased as a result of a decrease in interest rates on the
Company’s variable rate debt which lowered the Company’s cost of funds
(excluding net derivative settlements) to 1.40% for the year ended
December 31, 2009 compared to 3.66% for the same period a year
ago. In addition, average debt decreased by $1.6 billion (5.9%)
for the year ended December 31, 2009 compared to
2008.
|
·
|
The
provision for loan losses increased for the year ended December 31, 2009
compared to 2008 primarily due to increases in
delinquencies.
|
Other
income. The increase in other income is due to the Company
repurchasing certain asset-backed securities resulting in the recognition of a
gain of $28.5 million during the year ended December 31, 2009.
Gain
(loss) on sale of loans, net. A summary of gain (loss) from the sale of
student loans follows:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Department's
Purchase Program (a)
|
$ | 36,596 | — | |||||
Private
loan participations (b)
|
(695 | ) | — | |||||
FFELP
loan sales to a related party (c)
|
(753 | ) | (5,480 | ) | ||||
FFELP
loan sales to a third party (d)
|
— | (47,555 | ) | |||||
Gain
(loss) on sale of loans, net
|
$ | 35,148 | (53,035 | ) |
(a)
|
During
2009, the Company sold $2.1 billion of student loans to the Department
under the Purchase Program.
|
(b)
|
During
2009, the Company participated $95.5 million of
non-federally insured loans to third parties, which resulted in the
recognition of a loss on the sale of these
loans.
|
(c)
|
During
the years ended December 31, 2009 and 2008, the Company sold $76.4 million
(par value) and $535.4 million (par value), respectively, of federally
insured student loans to Union Bank, an entity under common
control.
|
(d)
|
The
Company sold $1.3 billion (par value) of student loans to third parties in
2008 in order to reduce the amount of student loans remaining under the
Company’s FFELP warehouse facility, which reduced the Company’s exposure
related to certain equity support provisions included in this
facility.
|
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 Company’s
derivative transactions with the intent that each is economically effective;
however, the Company’s derivative instruments do not qualify for hedge
accounting. Derivative settlements for each applicable period should be
evaluated with the Company’s net interest income as shown in this Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Asset Generation and Management Operating Segment – Results of
Operations – Student Loan Spread Analysis.”
Other
expenses. The
Company incurred expenses of $13.5 million in 2008 from fees paid related to
liquidity contingency planning.
71
Intersegment
expenses. Intersegment
expenses increased in 2009 compared to the same periods in 2008 due to
additional fees paid to the Student Loan and Guaranty Servicing operating
segment. These additional fees relate to an increase in origination
fees due to an increase in disbursement volume, an increase in fees related to
the number of loans transferred between various financings as the Company was
executing financing strategies, and incurring conversion fees as a result of the
Company selling student loans to the Department under the Purchase
Program.
Before
tax operating margin. Excluding
restructure and impairment expenses and fixed rate floor income, before tax
operating margins were 45.4% and 16.9% for the years ended December 31, 2009 and
2008, respectively.
Year
ended December 31, 2008 compared to year ended December 31, 2007
Year
ended December 31,
|
||||||||||||
2008
|
2007
|
$
Change
|
||||||||||
Net
interest income after the provision
|
||||||||||||
for
loan losses
|
$ | 152,773 | 236,821 | (84,048 | ) | |||||||
Loan
and guaranty servicing revenue
|
26 | 294 | (268 | ) | ||||||||
Other
income
|
17,401 | 17,820 | (419 | ) | ||||||||
Gain
(loss) on sale of loans, net
|
(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
|
77,105 | 74,714 | 2,391 | |||||||||
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 | % |
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.
|
72
·
|
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
Company’s variable rate debt which lowered the Company’s cost of funds
(excluding net derivative settlements) to 3.66% 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 Company’s 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
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
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. Income in 2007 from this agreement was $2.6
million. Other income also decreased due to losses on certain
investments.
Gain
(loss) on sale of loans, net. As part of the Company’s 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 reduce the amount of student loans remaining under the
Company’s FFELP warehouse facility, which reduced the Company’s exposure related
to certain equity support provisions included in this
facility.
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 Company’s
derivative transactions with the intent that each is economically effective;
however, the Company’s derivative instruments do not qualify for hedge
accounting. Derivative settlements for each applicable period should be
evaluated with the Company’s net interest income as shown in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Asset Generation and Management Operating Segment – Results of
Operations – Student Loan Spread Analysis.”
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
Company’s September 2007 and January 2008 restructuring plans.
Before
tax operating margin. Excluding
restructure and impairment expenses, fixed rate floor income, and 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, before tax operating margins were 18.7% and 50.2% for the years ended
December 31, 2008 and 2007, respectively.
73
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s fee generating businesses are non-capital intensive and all produce
positive operating cash flows. As such, a minimal amount of debt and equity
capital is allocated to the fee-based segments and any liquidity or capital
needs are satisfied using cash flow from operations. Therefore, the Liquidity
and Capital Resources discussion is concentrated on the Company’s liquidity and
capital needs to meet existing debt obligations, primarily unsecured corporate
debt and debt facilities in the Asset Generation and Management operating
segment, and fund new FFELP student loan originations.
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 secured and unsecured 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 Company’s liquidity requirements, contractual
restrictions, compliance with securities laws, and other factors. The amounts
involved in any such transactions may be material.
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 has used 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.
The
following table summarizes the Company’s debt obligations.
As
of December 31, 2009
|
||||||||
Carrying
|
Interest
rate
|
Final | ||||||
amount
|
range
|
maturity
|
||||||
Asset
Generation and Management:
|
||||||||
Bonds
and notes issued in asset-backed securitizations
|
$ | 21,923,256 | 0.21% - 6.90% |
05/01/11
- 04/25/42
|
||||
Department
of Education Participation
|
463,912 | 0.79% |
09/30/10
|
|||||
FFELP
warehouse facility
|
305,710 | 0.21% - 0.32% |
08/03/12
|
|||||
Department
of Education Conduit
|
1,125,929 | 0.27% |
05/08/14
|
|||||
Other
borrowings
|
30,016 | 0.24% - 5.10% |
01/01/10
and 11/01/15
|
|||||
23,848,823 | ||||||||
Unsecured
Corporate Debt:
|
||||||||
Senior
Notes due 2010
|
66,716 | 5.125% |
06/01/10
|
|||||
Unsecured
line of credit
|
691,500 | 0.73% |
05/18/12
|
|||||
Junior
Subordinated Hybrid securities
|
198,250 | 7.40% |
09/15/61
|
|||||
956,466 | ||||||||
$ | 24,805,289 |
Liquidity
Needs
The
Company has three primary liquidity needs:
·
|
Satisfy
unsecured debt obligations, specifically its unsecured senior notes and
unsecured line of credit
|
·
|
Satisfy
debt obligations secured by student loan assets and related
collateral
|
·
|
Fund
new FFELP Stafford and PLUS loan originations for the 2009-2010 academic
year
|
74
Liquidity
Needs and Sources of Liquidity Available to Satisfy Unsecured Debt
Obligations
Excluding
the Junior Subordinated Hybrid securities (which have a maturity in 2061), the
Company had the following unsecured debt obligations outstanding:
As
of
March
1, 2010
|
||||
Unsecured
Corporate Debt:
|
||||
Senior
Notes - due June 2010
|
$ | 66,716 | ||
Unsecured
line of credit - due May 2012
|
691,500 | |||
$ | 758,216 |
Sources
of liquidity currently available
The
following table details the Company’s sources of liquidity currently
available:
As
of
March
1, 2010
|
||||
Sources
of primary liquidity:
|
||||
Cash
and cash equivalents
|
$ | 425,000 | ||
Unencumbered
FFELP student loan assets
|
6,000 | |||
Unencumbered
private student loan assets
|
112,000 | |||
Asset-backed
security investments - Class B subordinated notes (a)
|
77,000 | |||
Asset-backed
security investments (b)
|
120,000 | |||
Total
sources of primary liquidity
|
$ | 740,000 |
(a)
|
As
part of the Company’s 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 Company’s 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. The amount included in the table above is the par value of
these subordinated notes as of March 1, 2010 and may not represent market
value upon sale of the notes.
|
(b)
|
During
2009, the Company purchased $120 million of its own asset-backed securities
(bonds and notes payable). For accounting purposes, these notes
were effectively retired and are not included on the Company’s
consolidated balance sheet. However, these securities are
legally outstanding at the trust level and the Company could sell 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. The amount included in the table
above is the par value of these notes as of March 1, 2010 and may not
represent market value upon sale of the
notes.
|
Cash
generated from operations
In
addition to current sources of liquidity, the Company plans to use cash
generated from operations to satisfy its unsecured debt
obligations. The Company has historically generated positive cash
flow from operations. For the years ended December 31, 2009, 2008,
and 2007, the Company had net cash flow from operating activities of $325
million, $321 million, and $273 million, respectively.
Liquidity
Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by
Student Loan Assets and Related Collateral
The
Company had the following debt obligations outstanding that are secured by
student loan assets and related collateral.
As
of December 31, 2009
|
|||||
Carrying
|
Final | ||||
amount
|
maturity
|
||||
Asset
Generation and Management:
|
|||||
Bonds
and notes issued in asset-backed securitizations
|
$ | 21,923,256 |
05/01/11
- 04/25/42
|
||
Department
of Education Participation
|
463,912 |
09/30/10
|
|||
FFELP
warehouse facility
|
305,710 |
08/03/12
|
|||
Department
of Education Conduit
|
1,125,929 |
05/08/14
|
|||
Other
borrowings
|
30,016 |
01/01/10
and 11/01/15
|
|||
$ | 23,848,823 |
75
Bonds
and notes issued in asset-backed securitizations
The
majority of the Company’s portfolio of student loans is funded in asset backed
securitizations that are structured to substantially match the maturity of the
funded assets and there are minimal liquidity issues related to these
facilities. In addition, due to the difference between the yield the Company
receives on the loans and cost of financing within these transactions, the
Company has created a portfolio that will generate earnings and significant cash
flow over the life of these transactions.
Based on
cash flow models developed to reflect management’s current estimate of, among
other factors, prepayments, defaults, deferment, forbearance, and interest
rates, the Company currently expects future undiscounted cash flows from its
portfolio to be approximately $1.43 billion as detailed below. This amount does
not include cash flows that the Company expects to receive related to loans
funded through the Department of Education’s Conduit and Loan Participation
Programs and other warehouse facilities. The Company expects the
future cash flows shown below would correspond to earnings when excluding the
amortization of loan premiums and deferred origination costs, potential
derivative activity used by the Company to hedge the portfolio, and other
portfolio management and administrative costs. Because the Company does not use
gain-on-sale accounting when issuing asset-backed securitizations, the future
earnings of these transactions are not yet reflected in the Company’s
consolidated financial statements.
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet13.jpg)
Department
of Education Participation / FFELP Warehouse Facility
The
Department of Education Participation and FFELP warehouse facility are further
discussed below under “Sources of Liquidity Available to Fund New FFELP Stafford
and PLUS Loan Originations for the 2009-2010 Academic Year.”
Department
of Education Conduit
In
January 2009, the Department published summary terms for its program 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 had to be first
disbursed on or after October 1, 2003, but not later than June 30, 2009, and
fully disbursed before September 30, 2009, and meet certain other requirements.
The Conduit Program was launched on May 11, 2009. Funding for the Conduit
Program is provided by the capital markets at a cost based on market rates, with
the Company being advanced 97 percent of the student loan face amount. Excess
amounts needed to fund the remaining 3 percent of the student loan balances are
contributed by the Company. The Conduit Program has a term of five years and
expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”)
issued by the Conduit Program are supported by a combination of (i)
notes backed by FFELP loans, (ii) a liquidity agreement with the Federal
Financing Bank, and (iii) a put agreement provided by the
Department. If the conduit does not have sufficient funds to pay all
Student Loan Notes, then those Student Loan Notes will be repaid with funds from
the Federal Financing Bank. The Federal Financing Bank will hold the
notes for a short period of time and, if at the end of that time, the Student
Loan Notes still cannot be paid off, the underlying FFELP loans that serve as
collateral to the Conduit Program will be sold to the Department through the Put
Agreement at a price of 97 percent of the face amount of the
loans.
Sources
of Liquidity Available to Fund New FFELP Stafford and PLUS Loan Originations for
the 2009-2010 Academic Year
The
Company has reliable sources of liquidity available for new FFELP Stafford and
PLUS loan originations for the 2009-2010 academic year under the Department’s
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, and in August 2009, the Company entered into a FFELP
warehouse facility that has a maximum financing amount of $500.0 million with a
revolving financing structure.
76
The
Company plans to fund all 2009-2010 academic year loans using the Participation
Program, the agreement with Union Bank, and the new FFELP warehouse
facility. These facilities are described in further detail
below.
Department
of Education’s Loan Participation and Purchase Commitment Programs
In August
2008, the Department implemented the Purchase and Participation Programs
pursuant to ECASLA. Under the Department’s 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 were required to be either refinanced by
the lender or sold to the Department pursuant to the Purchase Program prior to
its expiration on October 15, 2009. To be eligible for purchase or participation
under the Department’s 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 Department’s 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 funded under the Department's Participation
Program were required to be refinanced or sold to the Department prior to
October 15, 2009. On November 8, 2008, the Department announced the replication
of the terms of the Participation and Purchase Programs, in accordance with the
October 7, 2008 legislation, which will include FFELP student loans made for the
2009-2010 academic year.
During
2009, the Company sold $2.1 billion of 2008-2009 academic year loans to the
Department under the Purchase Program and recognized a gain of $36.6 million. As
of December 31, 2009, the Company had $464.2 million of 2009-2010 academic year
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, 2009, $613.3 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 Bank’s grantor trusts with access to investments
in interests in student loans, while providing liquidity to the Company on a
short term basis. The Company can participate loans to Union Bank to the extent
of availability under the grantor trusts, up to $750 million or an amount in
excess of $750 million if mutually agreed to by both parties. Loans
participated under this agreement have been accounted for by the Company as loan
sales. Accordingly, the participation interests sold are not included
on the Company’s consolidated balance sheet.
FFELP
Warehouse Facility
On August
3, 2009, the Company entered into the 2009 FFELP Warehouse Facility. The 2009
FFELP Warehouse Facility has a maximum financing amount of $500.0 million, with
a revolving financing structure supported by 364-day liquidity provisions, which
expire on August 2, 2010. The final maturity date of the facility is August 3,
2012. In the event the Company is unable to renew the liquidity provisions by
August 2, 2010, the facility would become a term facility at a stepped-up cost,
with no additional student loans being eligible for financing, and the Company
would be required to refinance the existing loans in the facility by August 3,
2012.
The 2009
FFELP Warehouse Facility provides for formula based advance rates depending on
FFELP loan type up to a maximum of 92 percent to 98 percent of the principal and
interest financed. The advance rates for collateral may increase or decrease
based on market conditions. The facility contains financial covenants relating
to levels of the Company’s consolidated net worth, ratio of adjusted EBITDA to
corporate debt interest, and unencumbered cash. Any violation of these covenants
could result in a requirement for the immediate repayment of any outstanding
borrowings under the facility. Unlike the Company’s prior FFELP warehouse
facility, the new facility does not require the Company to refinance or remove a
percentage of the pledged student loan collateral on an annual
basis. As of December 31, 2009 and March 1, 2010, $305.7 million and
$30.5 million, respectively, was outstanding under this facility and $194.3
million and $469.5 million, respectively, was available for future use. Upon
termination or expiration of the facility, the Company would expect to access
the securitization market, use operating cash, rely on sale of assets, or
transfer collateral to satisfy any remaining obligations.
77
Asset-backed
securities transactions
Depending
on market conditions, the Company anticipates continuing to access the
asset-backed securities market. Asset-backed securities transactions
would be used to refinance student loans included in the FFELP warehouse facility,
the Department of Education Conduit facility, and/or existing asset-backed
security transactions. The FFELP warehouse facility and DOE Conduit
facility have advance rates that are less than par. As of December
31, 2009 and March 1, 2010, the Company had approximately $14.2 million and
$8.8 million, respectively, advanced in operating cash for the
FFELP warehouse facility and $66.8 million and $75.9
million, respectively, advanced in operating cash for the DOE Conduit
facility. Depending on the terms of asset-backed security
transactions, refinancing loans included in these facilities could produce
positive cash flow to the Company and are contemplated by management when making
student loan financing decisions.
During
2009, the Company completed asset-backed securities transactions totaling $1.0
billion. In addition, on February 17, 2010, the Company completed as
asset-backed securities transaction of $523.3 million. The Company used the
proceeds from the sale of these notes to purchase student loans previously
financed in other asset-backed securitizations and the FFELP warehouse
facility.
Description
of Other Debt Facilities
Unsecured
Line of Credit
The
Company has a $750.0 million unsecured line of credit that terminates in May
2012. As of December 31, 2009 and March 1, 2010, there was $691.5 million
outstanding on this line. The weighted average interest rate on this line of
credit was 0.725% as of December 31, 2009. Upon termination in 2012, there can
be no assurance that the Company will be able to maintain this line of credit,
find alternative funding, or increase the amount outstanding under the line, if
necessary. The lending commitment under the Company’s unsecured line
of credit is provided by a total of thirteen banks, with no individual bank
representing more than 11% of the total lending commitment. The bank lending
group includes Lehman Brothers Bank, 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. The Company does not expect Lehman to fund future borrowing requests. As
of December 31, 2009 and March 1, 2010, excluding Lehman’s 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:
·
|
A
minimum consolidated net worth
|
·
|
A
minimum adjusted EBITDA to corporate debt interest (over the last four
rolling quarters)
|
·
|
A
limitation on subsidiary
indebtedness
|
·
|
A
limitation on the percentage of non-guaranteed loans in the Company’s
portfolio
|
As of
December 31, 2009, the Company was in compliance with all of these requirements.
Many of these covenants are duplicated in the Company’s other lending
facilities, including its FFELP warehouse facilities.
A default
on the 2009 FFELP Warehouse Facility would result in an event of default on the
Company’s unsecured line of credit that would result in the outstanding balance
on the line of credit becoming immediately due and payable.
The
Company’s operating line of credit does not have any covenants related to
unsecured debt ratings. However, changes in the Company’s ratings (as well as
the amounts the Company borrows) have modest implications on the pricing level
at which the Company obtains funding.
Junior
Subordinated Hybrid Securities
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 Company’s 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.
78
Debt
Repurchases
Due to
the Company’s improved cash position, the Company repurchased debt during 2009
as summarized below. Gains recorded by the Company from the purchase
of debt are included in “other income” on the Company’s consolidated statements
of income.
Year
ended December 31, 2009
|
Remaining
balance as
of
|
|||||||||||||||
Notional
amount
|
Purchase
price
|
Gain
|
December
31,
2009
|
|||||||||||||
5.125%
Senior Notes due 2010
|
$ | 208,284 | 196,529 | 11,755 | $ | 66,716 | ||||||||||
Junior
Subordinated Hybrid Securities
|
1,750 | 350 | 1,400 | $ | 198,250 | |||||||||||
Asset-backed
securities (a)
|
348,155 | 319,627 | 28,528 | |||||||||||||
$ | 558,189 | 516,506 | 41,683 |
(a)
|
In
accordance with the various indentures, the Company expects to continue to
use funds available in the trust to purchase certain asset-backed
securities for cash in open market transactions, privately negotiated
transactions, or otherwise to redeem such securities. Under the
terms of the indentures, the purchase price paid in any such transaction
must be less than the par amount of securities acquired. Any
redemptions in the normal course must be made at par. Any such
transaction will depend on prevailing market conditions, liquidity
requirements, contractual restrictions, compliance with securities laws,
and other factors.
|
The
Company's Senior Notes due 2010 (“Senior Notes”) were previously covered
debt under a Replacement Capital Covenant dated September 27, 2006 (the
"RCC"). Under the RCC, if $100 million or more of the Senior Notes remained
outstanding, the Company was restricted in its ability to repurchase or redeem
its Junior Subordinated Hybrid Securities. On September 17, 2009, the
Company announced that less than $100 million of the Senior Notes remained
outstanding, and therefore the RCC no longer provided any benefit to the holders
of the Senior Notes. The Company has no other eligible senior debt or
eligible subordinated debt under the terms of the RCC, therefore the RCC
and the restrictions on repurchase or redemption of the Junior Subordinated
Hybrid Securities are of no further force and effect.
Contractual
Obligations
The Company is committed under
noncancelable operating leases for certain office and warehouse space and
equipment. The Company’s contractual obligations were as
follows:
As
of December 31, 2009
|
||||||||||||||||||||
Total
|
Less
than
1
year
|
1
to 3
years
|
3
to 5
years
|
More
than
5
years
|
||||||||||||||||
Bonds
and notes payable
|
$ | 24,805,289 | 861,471 | 740,700 | 1,471,087 | 21,732,031 | ||||||||||||||
Operating
lease obligations (a)
|
26,332 | 7,995 | 11,405 | 6,633 | 299 | |||||||||||||||
Other
|
26,647 | 26,647 | — | — | — | |||||||||||||||
Total
|
$ | 24,858,268 | 896,113 | 752,105 | 1,477,720 | 21,732,330 |
(a)
|
Operating
lease obligations are presented net of approximately $2.1 million in
sublease arrangements.
|
As of
December 31, 2009, the Company had a reserve of $6.3 million for uncertain
income tax positions (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 $26.6 million of private loans from an
unrelated financial institution in quarterly installments of approximately $5.0
million through the third quarter of 2010 with any remaining amount to be
purchased at that time. This obligation is included in “other” in the
above table.
During
the year ended December 31, 2009, the Company participated $95.5 million of
non-federally insured loans to third parties. The Company has accounted for
these participations as loan sales. Accordingly, the participation interests
sold are not included on the Company’s consolidated balance
sheet. Per the terms of the servicing agreements, the Company’s
servicing operations are obligated to repurchase loans subject to the
participation interests when such loans become 60 or 90 days
delinquent. As of December 31, 2009, the Company has $10.6 million
accrued related to this obligation which is included in “other liabilities” in
the Company’s consolidated balance sheet. This obligation is not
included in the above table.
79
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. Commitments to purchase loans under these arrangements are
not included in the table above.
In 2004,
the Company purchased 50% of the stock of infiNET Integrated Solutions, Inc.
(“infiNET”) and, in 2006, purchased the remaining 50% of infiNET’s stock.
Consideration for the purchase of the remaining 50% of the stock of infiNET
included 95,380 restricted shares of the Company’s Class A common stock. 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 $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 Company’s Class A common stock as of December 31, 2009
of $17.23 per share, the Company’s 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. 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. The obligation to pay this guaranteed stock price is
due February 28, 2011 and is not included in the table above.
Dividends
In the
first quarter of 2007, the Company began paying dividends of $0.07 per share on
the Company's 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. On November 5,
2009, the Company's Board of Directors voted to reinstate the quarterly dividend
program. Accordingly, a dividend of $0.07 per share on the Company's Class
A and Class B Common Stock was paid on December 15, 2009 to all holders of
record as of December 1, 2009. The Company currently plans to continue
making quarterly dividend payments, subject to future earnings, capital
requirements, financial condition, and other factors. In addition,
the payment of dividends is subject to the terms of the Company’s outstanding
junior subordinated hybrid securities, which generally provide that if the
Company defers interest payments on those securities it cannot pay dividends on
its capital stock.
CRITICAL
ACCOUNTING POLICIES
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company’s 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 Company’s
financial condition and results of operations and they require management’s 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, impairment assessments related to goodwill and
intangible assets, income taxes, and accounting for derivatives.
Allowance
for Loan Losses
The
allowance for loan losses represents management’s 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 Company’s 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 Company’s 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, 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 Company’s future
provision for loan losses. The Company places a non-federally insured loan on
nonaccrual status when the collection of principal and interest is 30 days past
due and charges off the loan when the collection of principal and interest is
120 days past due.
80
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. 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.
Loan and guaranty servicing revenue
– 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.
Tuition payment processing and
campus commerce revenue - Fees for payment management services are
recognized over the period in which services are provided to
customers.
Enrollment services revenue –
Enrollment services revenue primarily consists of the following
items:
·
|
Lead generation –
Revenue from lead generation is derived primarily from fees which are
earned through the delivery of qualified leads or clicks. The Company
recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured. Delivery is deemed to have occurred
at the time a qualified lead or click is delivered to the customer
provided that no significant obligations remain. From time to time, the
Company may agree to credit certain leads or clicks if they fail to meet
the contractual or other guidelines of a particular client. The Company
has established a sales reserve based on historical experience. To date,
such credits have been immaterial and within management’s
expectations.
For
a portion of its lead revenue, the Company has agreements with providers
of online media or traffic (“Publishers”) used in the generation of leads
or clicks. The Company receives a fee from its customers and pays a fee to
Publishers either on a cost per lead, cost per click, or cost per number
of impressions basis. The Company is the primary obligor in the
transaction. As a result, the fees paid by the Company’s customers are
recognized as revenue and the fees paid to its Publishers are included in
“cost to provide enrollment services” in the Company’s consolidated
statements of income.
|
·
|
Publishing and editing
services - Revenue from the sale of print products and editing
services is generally earned and recognized, net of estimated returns,
upon shipment or delivery.
|
·
|
Content management and
recruitment services – Content management and recruitment services
includes the sale of subscription and performance based products and
services, as well as list sales. Revenues from sales of
subscription and performance based products and services are recognized
ratably over the term of the contract. Subscription and performance based
revenues received or receivable in advance of the delivery of services is
included in deferred revenue. Revenue from the sale of lists is
generally earned and recognized, net of estimated returns, upon
delivery.
|
81
Fees
associated with the majority of the services described above 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 Company’s 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.
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 Company’s services, revenue is
recognized upon the receipt of cash.
Goodwill
and Intangible Assets – Impairment Assessments
The
Company reviews goodwill for impairment annually (as of November 30) and
whenever triggering events or changes in circumstances indicate its carrying
value may not be recoverable. The Company performs a two-step impairment test 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 unit’s goodwill. If the carrying value of a reporting unit’s
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. 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 Company’s
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 Company’s
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.
Derivative
Accounting
The
Company records derivative instruments 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 Company’s derivative transactions with the
intent that each is economically effective. However, the Company’s derivative
instruments do not qualify for hedge accounting. 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.
82
RECENT
ACCOUNTING PRONOUNCEMENTS
Noncontrolling
Interests
In
December 2007, the FASB updated ASC 810, Consolidation. This
update 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 parent’s 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. The update also requires changes to certain
presentation and disclosure requirements. For the Company, the guidance was
effective January 1, 2009 and did not have a material impact on the
preparation of the Company’s consolidated financial statements. The
update is to be applied to all NCIs prospectively, except for the presentation
and disclosure requirements, which are to be applied retrospectively to all
periods presented.
Derivative
Instruments and Hedging Activities
In March
2008, the FASB updated ASC 815, Derivatives and Hedging. This
update was 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 entity’s financial position, financial performance, and cash flows. The
update also improved transparency about the location and amounts of derivative
instruments in an entity’s financial statements, how derivative instruments and
related hedged items are accounted for, and how derivative instruments and
related hedged items affect its financial position, financial performance, and
cash flows. The update was effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company adopted the update as of January
1, 2009, the effective date for the Company (see note 9 in the notes to the
consolidated financial statements included in this Report).
Fair
Value Measurements
In
February 2008, the FASB delayed issuing guidance to expand disclosure
requirements about fair value measurements on nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years (January 1, 2009 for the
Company). Effective January 1, 2009, the Company expanded disclosures
about fair value measurements on certain nonfinancial assets and nonfinancial
liabilities, which are recorded at fair value only upon impairment.
In
April 2009, the FASB updated ASC 820, Fair Value Measurements and
Disclosures. This update includes guidance on determining fair
value when volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are not orderly. The
update requires disclosure in interim and annual periods of the inputs and
valuation techniques used to measure fair value and a discussion of changes in
valuation techniques. The update became effective for the Company for the
interim period ended June 30, 2009 and was applied prospectively. The
update did not have an impact on the preparation of and disclosures in the
Company’s consolidated financial statements.
In
April 2009, the FASB updated ASC 320, Investments – Debt and Equity
Securities, which expanded guidance on the recognition and presentation
of other-than-temporary impairment. The update amends the requirements for the
recognition and measurement of other-than-temporary impairments for debt
securities by modifying the pre-existing "intent and ability" indicator. Under
the new update, an other-than-temporary impairment is triggered when there is an
intent to sell the security, it is more likely than not that the security will
be required to be sold before recovery, or the security is not expected to
recover the entire amortized cost basis of the security. Additionally, the
update changed the presentation of an other-than-temporary impairment in the
income statement for those impairments involving credit losses. The credit loss
component is recognized in earnings and the remainder of the impairment is
recorded in other comprehensive income. The update was effective for the Company
for the interim period ended June 30, 2009. The update did not have an impact on
the preparation of and disclosures in the Company’s consolidated financial
statements.
In
April 2009, the FASB updated ASC 825, Financial Instruments, which
expanded guidance on interim disclosure about fair value of financial
instruments. The update requires interim disclosures regarding the fair values
of financial instruments. Additionally, the update
requires disclosure of the methods and significant assumptions used to estimate
the fair value of financial instruments on an interim basis as well as changes
of the methods and significant assumptions from prior periods. The
update does not change the accounting treatment for these financial instruments
and was effective for the Company for the interim period ended June 30, 2009
(see note 17 in the notes to the consolidated financial statements included in
this Report).
In August
2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value,
an update to ASU 820, Fair Value Measurements and
Disclosures, which provides guidance allowing companies to determine the
fair value of a liability by using the perspective of an investor that holds the
related obligation as an asset. The update was effective for interim and annual
periods beginning after August 27, 2009 and applies to all fair-value
measurements of liabilities required by GAAP. The update did not have a material
impact on the preparation of and disclosures in the Company’s consolidated
financial statements.
In
January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements, an update to ASC 820, Fair Value Measurements and
Disclosures. The update provides additional disclosures for
transfers in and out of Levels I and II and for activity in Level
III. This update also clarifies certain other existing disclosure
requirements including level of desegregation and disclosures around inputs and
valuation techniques. The update will be effective for annual or
interim periods beginning after December 15, 2009, except for purchases, sales,
issuances, and settlements on a gross basis, which will be effective for fiscal
and interim periods beginning after December 15, 2010. Early adoption
is permitted. The Company is currently evaluating the impacts and
disclosures related to this update.
Subsequent
Events
During
2009, the FASB updated ASC 855, Subsequent Events, which
establishes general standards of accounting for and disclosing events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. The update was effective for interim and
annual periods ending after June 15, 2009. The Company adopted the
update on June 30, 2009 (see note 3 in the notes to the consolidated financial
statements included in this Report).
83
FASB
Accounting Standards Codification
In June
2009, the FASB issued ASU 2009-01, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, an update to ASC 105, Generally Accepted Accounting
Principles. The update establishes the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by
FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. The Company adopted the update on
September 30, 2009, the effective date for the Company.
Transfers
of Financial Assets and the Variable Interest Entity Consolidation
Model
In June
2009, the FASB issued ASU 2009-16, Accounting for Transfers of
Financial Assets, an update to ASC 860, Transfers and Servicing,
which provides guidance on improving the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. The update removes the concept of a qualifying
special-purpose entity. Additionally, the update defines the term
participating interest
to establish specific conditions for reporting a transfer of a portion of a
financial asset as a sale, and also requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s
beneficial interest) and liabilities incurred as a result of a transfer of
financial assets accounted for as a sale. The update is effective for
fiscal and interim periods beginning after November 15, 2009 (January 1, 2010
for the Company). The Company is currently evaluating the impacts and
disclosures related to this update.
In June
2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities, an update to ASC
810, Consolidations,
which provides guidance for determining whether an entity is a variable interest
entity in addition to subjecting enterprises to a number of other requirements
including, among other things: (i) requiring an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity and
specifies the characteristics the primary beneficiary of a variable interest
entity must have to be designated as such; (ii) requiring an enterprise to
assess whether it has an implicit financial responsibility to ensure that a
variable interest entity operates as designed when determining whether it has
the power to direct the activities of the variable interest entity that most
significantly impact the entity’s economic performance; (iii) requiring the
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity; (iv) the elimination of the quantitative approach
previously required for determining the primary beneficiary of a variable
interest entity, and (v) adding an additional reconsideration event for
determining whether an entity is a variable interest entity when any changes in
facts and circumstances occur such that investors of the equity investment at
risk, as a group, lose the power from voting or similar rights of the investment
to direct the activities of the entity that have the most significant impact on
the entity’s economic performance. The update is effective for fiscal
and interim periods beginning after November 15, 2009 (January 1, 2010 for the
Company). The Company is currently evaluating the impacts and
disclosures related to this update.
Revenue
Recognition
In
October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue
Arrangements, an update to ASC 605, Revenue Recognition. Under
the new update, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition
guidance. The update will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010 (January 1, 2011 for the Company), with early adoption
permitted. The Company is currently evaluating the impacts and
disclosures related to this update.
In
October 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements that
Include Software Elements, an update to ASC 985, Software, which provides
guidance on revenue arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the update, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The update includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition. The update is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 (January 1, 2011 for the
Company), with early adoption permitted. The Company is currently
evaluating the impacts and disclosures related to this update.
84
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
The
Company’s primary market risk exposure arises from fluctuations in its borrowing
and lending rates, the spread between which could impact the Company due to
shifts in market interest rates. Because the Company generates a significant
portion of its earnings from its student loan spread, the interest sensitivity
of the balance sheet is a key profitability driver.
The
following table sets forth the Company’s loan assets and debt instruments by
rate characteristics:
As
of December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
Fixed-rate
loan assets
|
$ | 10,305,622 | 43.6 | % | $ | 2,532,609 | 10.1 | % | ||||||||
Variable-rate
loan assets
|
13,330,252 | 56.4 | 22,528,440 | 89.9 | ||||||||||||
Total
|
$ | 23,635,874 | 100.0 | % | $ | 25,061,049 | 100.0 | % | ||||||||
Fixed-rate
debt instruments
|
$ | 273,906 | 1.1 | % | $ | 677,096 | 2.5 | % | ||||||||
Variable-rate
debt instruments
|
24,531,383 | 98.9 | 26,110,863 | 97.5 | ||||||||||||
Total
|
$ | 24,805,289 | 100.0 | % | $ | 26,787,959 | 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 loan’s repayment status, and funding
sources for the loan. The Company generally finances its student loan portfolio
with variable rate debt. In low and/or declining interest rate environments,
when the fixed borrower rate is higher than the rate produced by the SAP
formula, the Company’s student loans earn at a fixed rate while the interest on
the variable rate debt typically continues to decline. In these interest rate
environments, the Company may earn additional spread income that it refers to as
floor income.
Depending
on the type of loan and when it was originated, the borrower rate is either
fixed to term or is reset to an annual rate each July 1. As a result, for loans
where the borrower rate is fixed to term, the Company may earn floor income for
an extended period of time, which the Company refers to as fixed rate floor
income, and for those loans where the borrower rate is reset annually on July 1,
the Company may earn floor income to the next reset date, which the Company
refers to as variable rate floor income. In accordance with legislation enacted
in 2006, lenders are required to rebate fixed rate floor income and variable
rate floor income to the Department for all new FFELP loans first originated on
or after April 1, 2006.
For the
years ended December 31, 2009, 2008, and 2007, loan interest income includes
approximately $145.1 million, $37.5 million, and $10.3 million of fixed rate
floor income, respectively. The amount of fixed rate floor income has
increased over the last few years due to a decrease in interest
rates. If interest rates remain low, the Company anticipates
continuing to earn significant fixed rate floor income in future
periods.
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. The economic benefit received by the Company related to
variable rate floor income was $7.5 million and $25.7 million for the years
ended December 31, 2009 and 2008, respectively. Variable rate floor
income calculated on a statutory maximum basis was $24.2 million and $44.5
million for the years ended December 31, 2009 and 2008,
respectively. The variance between variable rate floor income
calculated on a statutory maximum basis and the calculation of variable rate
floor income to better reflect the economic benefit received by the Company was
inconsequential for the year ended December 31, 2007.
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.
85
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%:
![](https://www.sec.gov/Archives/edgar/data/0001258602/000143774910000526/nelnet14.jpg)
The
following table shows the Company’s student loan assets that are earning fixed
rate floor income:
As
of December 31, 2009
|
||||||||||
Borrower/
|
Estimated
|
Balance of | ||||||||
Fixed
|
lender
|
variable
|
assets
earning
|
|||||||
interest
|
weighted
|
conversion
|
fixed-rate
|
|||||||
rate
range
|
average
yield
|
rate
(a)
|
floor
income
|
|||||||
Less
than 3.0%
|
2.88% | 0.23 % | $ | 1,647,374 | ||||||
3.0 - 3.49% | 3.21% | 0.57% | 1,849,245 | |||||||
3.5 - 3.99% | 3.65% | 1.01% | 1,891,773 | |||||||
4.0 - 4.49% | 4.20% | 1.56% | 1,485,648 | |||||||
4.5 - 4.99% | 4.72% | 2.08% | 815,780 | |||||||
5.0 - 5.49% | 5.25% | 2.61% | 535,793 | |||||||
5.5 - 5.99% | 5.67% | 3.03% | 324,082 | |||||||
6.0 - 6.49% | 6.19% | 3.55% | 382,610 | |||||||
6.5 - 6.99% | 6.70% | 4.06% | 338,974 | |||||||
7.0 - 7.49% | 7.17% | 4.53% | 117,326 | |||||||
7.5 - 7.99% | 7.71% | 5.07% | 199,493 | |||||||
8.0 - 8.99% | 8.16% | 5.52% | 451,963 | |||||||
>
9.0%
|
9.04% | 6.40% | 265,561 | |||||||
$ | 10,305,622 |
(a)
|
The
estimated variable conversion rate is the estimated short-term interest
rate at which loans would convert to variable rate. As of
December 31, 2009, the short-term interest rate was 21 basis
points.
|
86
The
following table summarizes the outstanding derivatives instruments used by the
Company to hedge fixed-rate student loan assets.
As
of December 31, 2009
|
||||||||
Weighted
|
||||||||
average
fixed
|
||||||||
Notional
|
rate
paid by
|
|||||||
Maturity
|
Amount
|
the
Company (a)
|
||||||
2010
|
$ | 4,750,000 | 0.54 | % | ||||
2011
|
150,000 | 1.03 | ||||||
$ | 4,900,000 | 0.55 | % |
(a)
|
For
all interest rate derivatives for which the Company pays a fixed rate, the
Company receives discrete three-month
LIBOR.
|
As of
December 31, 2009, the Company had $3.3 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 Company’s 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 Company’s 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 Company's outlook as to current and future market
conditions. Based on those factors, the Company uses derivative instruments as
part of its overall risk management strategy. Derivative instruments used as
part of the Company's interest rate risk management strategy currently include
interest rate swaps, basis swaps, and cross-currency swaps.
The
following table presents the Company’s FFELP student loan assets and related
funding arranged by underlying indices:
As
of December 31, 2009
|
||||||||||
Index
(g)
|
Frequency
of
Variable
Resets
|
Assets
|
Debt
outstanding
that
funded
student
loan
assets
(a)
|
|||||||
3
month H15 financial commercial paper (b)
|
Daily
|
$ | 22,435,918 | 463,912 | ||||||
3
month Treasury bill (c)
|
Varies
|
1,036,635 | — | |||||||
3
month LIBOR (d)
|
Quarterly
|
— | 20,187,356 | |||||||
Auction-rate
or remarketing
|
Varies
|
— | 1,726,960 | |||||||
Asset-backed
commercial paper (e)
|
Varies
|
— | 1,431,639 | |||||||
Fixed
rate
|
— | 8,940 | ||||||||
Other
(f)
|
376,270 | 30,016 | ||||||||
$ | 23,848,823 | 23,848,823 |
(a)
|
The
Company has certain basis swaps outstanding in which the Company receives
three-month LIBOR and pays one-month LIBOR plus or minus a spread as
defined in the agreements (the “1/3 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:
|
87
As
of December 31, 2009
|
||||
Maturity
|
Notional
Amount
|
|||
2010
|
$ | 1,000,000 | ||
2013
|
500,000 | |||
2014
|
500,000 | |||
2018
|
1,300,000 | |||
2019
|
500,000 | |||
2021
|
250,000 | |||
2023
|
1,250,000 | |||
2024
|
250,000 | |||
2028
|
100,000 | |||
2039
|
150,000 | |||
$ | 5,800,000 |
(b)
|
The
Company’s FFELP student loans earn interest based on the daily average H15
financial commercial paper index calculated on a fiscal quarter. The
Company’s funding includes FFELP student loans under the Department’s
Participation Program. The interest rate on the principal
amount of participation interests outstanding under the Department’s
Participation Program is based on a rate of commercial paper plus 50 basis
points, which is set a quarter in arrears, while the earnings on the
student loans is based primarily on the daily average H15 financial
commercial paper index calculated on the current fiscal
quarter.
|
(c)
|
The
Company has used derivative instruments to hedge both the basis and
repricing risk on certain student loans in which the Company earns
interest based on a treasury bill rate that resets daily and are funded
with debt indexed to primarily three-month LIBOR. To hedge these loans,
the Company has entered into basis swaps in which the Company receives
three-month LIBOR set discretely in advance and pays a weekly treasury
bill rate plus a spread as defined in the agreement (“T-BILL/LIBOR Basis
Swaps”). The following table summarizes these
derivatives:
|
As
of December 31, 2009
|
||||
Maturity
|
Notional
Amount
|
|||
2011
(a)
|
$ | 225,000 |
(a)
|
These
derivatives have forward effective start dates of October 2010 ($75
million), November 2010 ($75 million), and December 2010 ($75
million).
|
(d)
|
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 three-month LIBOR. As a
result, these notes are reflected in the three-month LIBOR category in the
above table. See “Foreign Currency Exchange
Risk.”
|
(e)
|
Asset-backed
commercial paper consists of $305.7 million funded in the Company’s FFELP
warehouse facility and $1.1 billion funded through the Department’s
Conduit Program. Funding for the Conduit Program is provided by
the capital markets at a cost based on market
rates.
|
(f)
|
Assets
include restricted cash and investments and other assets. Debt outstanding
includes other debt obligations secured by student loan assets and related
collateral.
|
(g)
|
Historically,
the movement of the various interest rate indices received on the
Company’s student loan assets and paid on the debt to fund such loans was
highly correlated. The short term movement of the indices was dislocated
beginning in August 2007. This dislocation has had a negative impact on
the Company’s student loan net interest income as compared to historical
periods.
|
Financial
Statement Impact of Derivative Instruments
The
Company recognizes changes in the fair value of derivative instruments currently
in earnings unless specific hedge accounting criteria are met. Management has
structured all of the Company’s derivative transactions with the intent that
each is economically effective. However, the Company’s derivative instruments do
not qualify for hedge accounting; consequently, the change in fair value of
these derivative instruments is included in the Company’s operating results.
Changes or shifts in the forward yield curve and fluctuations in currency rates
can significantly impact the valuation of the Company’s derivatives.
Accordingly, changes or shifts to the forward yield curve and fluctuations in
currency rates will impact the financial position and results of operations of
the Company. The change in fair value of the Company’s derivatives are included
in “derivative market value, foreign currency, and put option adjustments and
derivative settlements, net” in the Company’s consolidated statements of income
and resulted in income of $6.9 million for the year ended December 31, 2009,
expense of $38.6 million for the year ended December 31, 2008, and income of
$139.1 million for the year ended December 31, 2007.
88
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,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Settlements,
income (expense):
|
||||||||||||
Interest
rate swaps
|
$ | (2,020 | ) | (15,036 | ) | 16,803 | ||||||
Average/discrete
basis swaps
|
11,483 | 44,947 | 7,319 | |||||||||
1/3
basis swaps
|
21,192 | 1,805 | 1,215 | |||||||||
Cross-currency
interest rate swaps
|
8,631 | 23,941 | (6,660 | ) | ||||||||
Total
settlements
|
$ | 39,286 | 55,657 | 18,677 |
Sensitivity
Analysis
The
following tables summarize the effect on the Company’s earnings, based upon a
sensitivity analysis performed by the Company assuming hypothetical increases in
interest rates of 100 basis points and 300 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 and 30 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 Company’s variable rate assets and liabilities. The
analysis includes the effects of the Company’s interest rate and basis swaps in
existence during these periods.
Year
ended December 31, 2009
|
||||||||||||||||||||||||||||||||
Interest
Rates
|
Asset
and funding
index
mismatches
|
|||||||||||||||||||||||||||||||
Change
from increase
of
100 basis points
|
Change
from increase
of
300 basis points
|
|||||||||||||||||||||||||||||||
Increase
of 10 basis points
|
Increase
of 30 basis points
|
|||||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
|||||||||||||||||||||||||
Effect
on earnings:
|
||||||||||||||||||||||||||||||||
Increase
(decrease) in pre-tax net income before impact of derivative
settlements
|
$ | (96,704 | ) | (44.8 | )% | (129,399 | ) | (60.0 | )% | (25,290 | ) | (11.7 | )% | (75,870 | ) | (35.1 | )% | |||||||||||||||
Impact
of derivative settlements
|
5,525 | 2.6 | 16,533 | 7.7 | — | — | — | — | ||||||||||||||||||||||||
Increase
(decrease) in net income before taxes
|
$ | (91,179 | ) | (42.2 | )% | (112,866 | ) | (52.3 | )% | (25,290 | ) | (11.7 | )% | (75,870 | ) | (35.1 | )% | |||||||||||||||
Increase
(decrease) in basic and diluted earnings per share
|
$ | (1.19 | ) | (1.47 | ) | (0.33 | ) | (0.99 | ) | |||||||||||||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||||||||||||||
Interest
Rates
|
Asset
and funding
index
mismatches
|
|||||||||||||||||||||||||||||||
Change
from increase
of
100 basis points
|
Change
from increase
of
300 basis points
|
|||||||||||||||||||||||||||||||
Increase
of 10 basis points
|
Increase
of 30 basis points
|
|||||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
|||||||||||||||||||||||||
Effect
on earnings:
|
||||||||||||||||||||||||||||||||
Increase
(decrease) in pre-tax net income before impact of derivative
settlements
|
$ | (26,009 | ) | (58.1 | )% | (52,485 | ) | (117.3 | )% | (26,819 | ) | (59.9 | )% | (80,457 | ) | (179.7 | )% | |||||||||||||||
Impact
of derivative settlements
|
23,855 | 53.3 | 50,811 | 113.6 | — | — | — | — | ||||||||||||||||||||||||
Increase
(decrease) in net income before taxes
|
$ | (2,154 | ) | (4.8 | )% | (1,674 | ) | (3.7 | )% | (26,819 | ) | (59.9 | )% | (80,457 | ) | (179.7 | )% | |||||||||||||||
Increase
(decrease) in basic and diluted earnings per share
|
$ | (0.03 | ) | (0.02 | ) | (0.33 | ) | (0.99 | ) | |||||||||||||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||||||||||||||||||
Change
from increase
of
100 basis points
|
Change
from increase
of
300 basis points
|
Asset
and funding
index
mismatches
|
||||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Increase
of 10 basis points
|
Increase
of 30 basis points
|
|||||||||||||||||||||||||||
Effect
on earnings:
|
||||||||||||||||||||||||||||||||
Increase
(decrease) in pre-tax net income before impact of derivative
settlements
|
$ | 6,828 | 11.9 | % | 27,009 | 47.3 | % | (26,599 | ) | (46.5 | )% | (79,797 | ) | (139.5 | )% | |||||||||||||||||
Impact
of derivative settlements
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Increase
(decrease) in net income before taxes
|
$ | 6,828 | 11.9 | % | 27,009 | 47.3 | % | (26,599 | ) | (46.5 | )% | (79,797 | ) | (139.5 | )% | |||||||||||||||||
Increase
(decrease) in basic and diluted earning per share
|
$ | 0.09 | 0.34 | (0.33 | ) | (0.99 | ) |
89
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 Company’s balance sheet in U.S. dollars based on the foreign
currency exchange rate on that date. Changes in the principal and accrued
interest amounts as a result of foreign currency exchange rate fluctuations are
included in the “derivative market value, foreign currency, and put option
adjustments and derivative settlements, net” in the Company’s consolidated
statements of income.
The
Company entered into cross-currency interest rate swaps in connection with the
issuance of the Euro Notes. Under the terms of these derivative instrument
agreements, the Company receives from a counterparty a spread to the EURIBOR
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 accounting authoritative guidance;
consequently, the change in fair value is included in the Company’s operating
results.
The
following table summarizes the financial statement impact as a result of the
remeasurement of the Euro Notes and change in the fair value of the related
derivative instruments. These amounts are included in “derivative market value,
foreign currency, and put option adjustments and derivative settlements, net” on
the Company’s consolidated statements of income.
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Re-measurement
of Euro Notes
|
$ | (37,654 | ) | 52,886 | (108,712 | ) | ||||||
Change
in fair value of
|
||||||||||||
cross-currency
derivatives
|
2,497 | (24,436 | ) | 125,532 | ||||||||
Total
impact to statements of
|
||||||||||||
income
- (expense) income
|
$ | (35,157 | ) | 28,450 | 16,820 |
The
re-measurement of the Euro-denominated bonds generally correlates with the
change in fair value of the cross-currency interest rate swaps. However, the
Company will experience unrealized gains or losses related to the cross-currency
interest rate swaps if the two underlying indices (and related forward curve) do
not move in parallel. Management intends to hold the cross-currency interest
rate swaps through the maturity of the Euro-denominated bonds.
The
following table summarizes all of the components of “Derivative market value,
foreign currency, and put option adjustments and derivative settlements, net”
included in the consolidated statements of income.
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Change
in fair value of derivatives
|
$ | 6,852 | (38,576 | ) | 139,146 | |||||||
Foreign
currency transaction adjustment
|
(37,654 | ) | 52,886 | (108,712 | ) | |||||||
Change
in fair value of put options issued in business
acquisitions
|
— | (3,483 | ) | (3,628 | ) | |||||||
Derivative
settlements, net
|
39,286 | 55,657 | 18,677 | |||||||||
Derivative
market value, foreign currency, and put option adjustments and
derivative settlements, net
|
$ | 8,484 | 66,484 | 45,483 |
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.
90
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 Company’s
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 Company’s 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.
Changes
in Internal Control over Financial Reporting
There was
no change in the Company’s internal control over financial reporting during the
Company’s last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
Management’s
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 Company’s internal control system was designed to provide
reasonable assurance to the Company’s 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 management’s 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 Company’s internal control over financial
reporting as of December 31, 2009 based on the criteria for effective
internal control described in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2009, the Company’s internal control over financial reporting
is effective.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been audited by KPMG LLP, the Company’s independent
registered public accounting firm, as stated in their report included herein,
which expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31,
2009.
Inherent
Limitations on Effectiveness of Internal Controls
The
Company’s management, including the chief executive and chief financial
officers, understands that the disclosure controls and procedures and internal
controls over financial reporting are 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. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of a control system must be considered relative to
their costs. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections
of any evaluation of controls effectiveness to future periods are subject to
risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures.
As a
result, there can be no assurance that the Company’s disclosure controls and
procedures or internal controls over financial reporting will prevent all errors
or fraud or ensure that all material information will be made known to
management in a timely fashion. By their nature, the Company’s or any system of
disclosure controls and procedures or internal controls over financial
reporting, no matter how well designed and operated, can provide only reasonable
assurance regarding management’s control objectives.
91
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, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Nelnet, Inc.’s (the Company) 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 Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s 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
company’s 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 company’s 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 company’s 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, 2009, 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, 2009 and 2008, 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, 2009, and our report dated March 3, 2010 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Lincoln,
Nebraska
March 3,
2010
ITEM
9B. OTHER INFORMATION
During
the fourth quarter of 2009, no information was required to be disclosed in a
report on Form 8-K, but not reported.
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 1—ELECTION OF DIRECTORS—Nominees,” “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 Company’s fiscal
year, relating to the Company’s Annual Meeting of Shareholders scheduled to be
held on May 27, 2010 (the “Proxy Statement”) is incorporated into this Report by
reference.
92
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 SHAREHOLDERS—Stock 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 information about compensation plans under which
equity securities are authorized for issuance.
Equity
Compensation Plan Information
As
of December 31, 2009
|
||||||
Number
of shares to be issued
upon
exercise
of outstanding
options,
warrants,
and rights
|
Weighted-average
exercise
price
of
outstanding
options,
warrants,
and rights
|
Number
of shares remaining
available
for future issuance under
equity
compensation plans
(excluding
securities reflected in
column
(a))
|
||||
Plan
category
|
(a)
|
(b)
|
(c)
|
|||
Equity
compensation plans approved by shareholders
|
0
|
$0
|
4,741,851
|
|||
Equity
compensation plans not approved by shareholders
|
0
|
$0
|
0
|
|||
Total
|
0
|
$0
|
4,741,851
(1)
|
(1)
Includes
2,971,331, 231,914, 677,702, 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 2—APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM—Independent Accountant Fees and Services” in
the Proxy Statement is incorporated into this Report by reference.
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:
93
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Income for the years ended December 31, 2009, 2008, and
2007
|
F-4
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the years
ended December 31, 2009, 2008, and 2007
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008, and
2007
|
F-6 |
Notes
to Consolidated Financial Statements
|
F-7
|
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, furnished, or
incorporated by reference as part of this Report.
4. Appendix
Appendix
A – Description of the Federal Family Education Loan Program
94
(b)
Exhibits
|
|||
EXHIBIT
INDEX
|
|||
Exhibit
|
|||
No.
|
Description
|
||
2.1
|
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.
|
||
2.2
|
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 registrant’s Current Report on Form 8-K filed on June 6, 2007
and incorporated herein by reference.
|
||
3.1
|
Second
Amended and Restated Articles of Incorporation of Nelnet, Inc., as
amended, filed as Exhibit 3.1 to the registrant’s Quarterly Report for the
period ended September 30, 2006, filed on Form 10-Q and incorporated by
reference herein.
|
||
3.2
|
Articles
of Amendment to Second Amended and Restated Articles of Incorporation of
Nelnet, Inc. Incorporated by reference to Exhibit 3.1 to the registrant’s
quarterly report for the period ended June 30, 2007, filed on Form
10-Q.
|
||
3.3
|
Fifth
Amended and Restated Bylaws of Nelnet, Inc., as amended as of February 3,
2010, filed as Exhibit 3.1 to the registrant's current report of Form 8-K
filed on February 9, 2010 and incorporated herein by
reference.
|
||
4.1
|
Form
of Class A Common Stock Certificate of Nelnet, Inc. Incorporated by
reference to Exhibit 4.1 to the registrant’s Form S-1 Registration
Statement.
|
||
4.2
|
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.
|
||
4.3
|
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
registrant’s Form S-1 Registration Statement.
|
||
10.1
|
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 registrant's Form
S-1 Registration Statement.
|
||
10.2
|
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 registrant's Form S-1 Registration
Statement.
|
||
10.3
|
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 registrant's Form S-1 Registration
Statement.
|
||
10.4
|
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 registrant's Form S-1 Registration
Statement.
|
||
10.5
|
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 registrant's Form S-1
Registration Statement.
|
||
10.6
|
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
registrant's Form S-1 Registration
Statement.
|
95
|
|||
10.7
|
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 registrant's Form S-1 Registration
Statement.
|
||
10.8
|
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 registrant's Form S-1
Registration Statement.
|
||
10.9
|
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 registrant's Form S-1 Registration Statement.
|
||
10.10
|
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 registrant's Form S-1 Registration
Statement.
|
||
10.11
|
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 registrant's Form S-1
Registration Statement.
|
||
10.12
|
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
registrant's Form S-1 Registration Statement.
|
||
10.13
|
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 registrant's Form S-1
Registration Statement.
|
||
10.14
|
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 registrant's Form S-1 Registration
Statement.
|
||
10.15
|
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 registrant’s annual report for the year ended December 31, 2003, filed
on Form 10-K.
|
||
10.16
|
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 registrant’s annual report for the
year ended December 31, 2003, filed on Form 10-K.
|
||
10.17
|
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 registrant’s annual report for the year ended
December 31, 2003, filed on Form 10-K.
|
||
10.18
|
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 registrant’s annual report for the year ended
December 31, 2003, filed on Form 10-K.
|
||
10.19
|
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 registrant’s quarterly report for the period ended
March 31, 2004, filed on Form 10-Q.
|
96
10.20
|
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
registrant’s quarterly report for the period ended March 31, 2004, filed
on Form 10-Q.
|
||
10.21
|
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
registrant’s current report on Form 8-K filed on February 10,
2005.
|
||
10.22
|
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. Incorporated by
reference to Exhibit 10.32 to the registrant's annual report for the year
ended December 31, 2008, filed on Form 10-K.
|
||
10.23
|
Amended
and Restated Aircraft Joint Ownership Agreement, dated as of September 30,
2009, by and between National Education Loan Network, Inc. and Union
Financial Services, Inc. Incorporated by reference to Exhibit 10.33 to the
registrant's annual report for the year ended December 31, 2008, filed on
Form 10-K.
|
||
10.24
|
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 registrant’s Current Report on Form 8-K filed on February 10,
2005 and incorporated herein by reference.
|
||
10.25+
|
Nelnet,
Inc. Employee Share Purchase Plan, as amended. Incorporated by
reference to Exhibit 10.1 to the registrant’s quarterly report for the
period ended September 30, 2005, filed on Form 10-Q.
|
||
10.26+
|
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.
|
||
10.27+
|
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.
|
||
10.28+
|
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.
|
||
10.29
|
Office
Building Lease dated June 21, 1996 between Miller & Paine and Union
Bank and Trust Company, filed as Exhibit 10.3 to the registrant's Current
Report on Form 8-K filed on October 16, 2006 and incorporated by reference
herein.
|
||
10.30
|
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
registrant's Current Report on Form 8-K filed on October 16, 2006 and
incorporated by reference herein.
|
||
10.31
|
Lease
Amendment Number Two dated February 8, 2001 between Miller & Paine and
Union Bank and Trust Company, filed as Exhibit 10.5 to the registrant's
Current Report on Form 8-K filed on October 16, 2006 and incorporated by
reference herein.
|
||
10.32
|
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
registrant's Current Report on Form 8-K filed on October 16, 2006 and
incorporated by reference herein.
|
||
10.33
|
Lease
Agreement dated May 20, 2005 between Miller & Paine, LLC and Union
Bank and Trust Company, filed as Exhibit 10.7 to the registrant's Current
Report on Form 8-K filed on October 16, 2006 and incorporated by reference
herein.
|
||
10.34
|
Office
Sublease dated April 30, 2001 between Union Bank and Trust Company and
Nelnet, Inc., filed as Exhibit 10.8 to the registrant's Current Report on
Form 8-K filed on October 16, 2006 and incorporated by reference
herein.
|
||
10.35+
|
Executive
Officers Bonus Plan as amended, filed as Exhibit 10.1 to the registrant’s
Current Report on Form 8-K filed on November 20, 2006 and incorporated
herein by reference.
|
||
10.36+
|
Nelnet,
Inc. Share Retention Policy, as amended. Incorporated by reference to
Exhibit 10.72 to the registrant’s annual report for the year ended
December 31, 2006, filed on Form 10-K.
|
||
10.37+
|
Nelnet,
Inc. Restricted Stock Plan, As amended through March 22, 2007.
Incorporated by reference to Exhibit 10.2 to the registrant’s quarterly
report for the period ended March 31, 2007, filed on Form
10-Q.
|
||
10.38
|
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 registrant’s Current Report on Form 8-K filed on May 10, 2007
and incorporated herein by reference.
|
97
10.39+
|
Nelnet,
Inc. Restricted Stock Plan, as amended through May 24, 2007, filed as
Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on May
31, 2007 and incorporated herein by reference.
|
||
10.40
|
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 registrant’s Current Report on Form 8-K filed on November 2,
2007 and incorporated herein by reference.
|
||
10.41+
|
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 registrant's quarterly report for the period ended March 31, 2008,
filed on Form 10-Q.
|
||
10.42+
|
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 registrant's quarterly report for the period ended March 31, 2008,
filed on Form 10-Q.
|
||
10.43+
|
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 registrant's quarterly report for the period ended
March 31, 2008, filed on Form 10-Q.
|
||
10.44+
|
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.
|
||
10.45
|
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 registrant's quarterly report for the period ended June 30, 2008,
filed on Form 10-Q.
|
||
10.46
|
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 registrant's quarterly report for the period ended September 30, 2008,
filed on Form 10-Q.
|
||
10.47
|
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 registrant's quarterly report for the period ended September 30, 2008,
filed on Form 10-Q.
|
||
10.48
|
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 registrant's quarterly report for the period ended September 30, 2008,
filed on Form 10-Q.
|
||
10.49
|
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
registrant's quarterly report for the period ended September 30, 2008,
filed on Form 10-Q.
|
||
10.50
|
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
registrant's quarterly report for the period ended September 30, 2008,
filed on Form 10-Q.
|
||
10.51+
|
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
registrant's quarterly report for the period ended September 30, 2008,
filed on Form 10-Q.
|
||
10.52
|
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.). Incorporated by reference to Exhibit 10.69 to the
registrant's annual report for the year ended December 31, 2008, filed on
Form 10-K.
|
||
10.53+
|
Separation
Agreement, dated as of August 4, 2008, by and between Raymond J. Ciarvella
and Nelnet, Inc. Incorporated by reference to Exhibit 10.70 to the
registrant's annual report for the year ended December 31, 2008, filed on
Form 10-K.
|
98
10.54
|
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. Incorporated by
reference to Exhibit 10.71 to the registrant's annual report for the year
ended December 31, 2008, filed on Form 10-K.
|
||
10.55
|
Loan
Servicing Agreement, dated as of November 25, 2008, by and between Nelnet,
Inc. and Union Bank and Trust Company. Incorporated by reference to
Exhibit 10.72 to the registrant's annual report for the year ended
December 31, 2008, filed on Form 10-K.
|
||
10.56
|
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. Incorporated by reference to
Exhibit 10.73 to the registrant's annual report for the year ended
December 31, 2008, filed on Form 10-K.
|
||
10.57+
|
Nelnet,
Inc. Second Amended Executive Officers Bonus Plan. Incorporated
by reference to Exhibit 10.1 to the registrant's quarterly report for the
period ended March 31, 2009, filed on Form 10-Q.
|
||
10.58+
|
Nelnet,
Inc. Restricted Stock Plan, as amended through May 20, 2009, filed as
Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on May
27, 2009 and incorporated herein by reference.
|
||
10.59
|
Funding
Note Purchase Agreement, dated as of May 13, 2009, among Straight-A
Funding, LLC, a Delaware limited liability company, as Conduit Lender,
Nelnet Super Conduit Funding, LLC, a Delaware limited liability company,
as Funding Note Issuer, First National Bank, a national banking
association, as Eligible Lender Trustee, The Bank of New York Mellon, a
New York banking corporation, as Conduit Administrator for the Conduit
Lender, as Securities Intermediary and as Conduit Lender Eligible Lender
Trustee, National Education Loan Network, Inc., a Nevada corporation, as
the SPV Administrator for the Funding Note Issuer, Nelnet, Inc., a
Nebraska corporation, as Sponsor, BMO Capital Markets Corp., a Delaware
company, as Manager for the Conduit Lender, and National Education Loan
Network, Inc., a Nevada corporation, as Master
Servicer. Incorporated by reference to Exhibit 10.2 to the
registrant's quarterly report for the period ended June 30, 2009, filed on
Form 10-Q.
|
||
10.60
|
Eligible
Lender Trust Agreement, dated as of May 13, 2009 between Nelnet Super
Conduit Funding, LLC, a Delaware limited liability company, and Zions
First National Bank, a national banking association, not in its individual
capacity but solely as eligible lender trustee on behalf and for the
benefit of the Funding Note Issuer. Incorporated by reference
to Exhibit 10.3 to the registrant's quarterly report for the period ended
June 30, 2009, filed on Form 10-Q.
|
||
10.61
|
Student
Loan Purchase Agreement, dated as of May 13, 2009, among National
Education Loan Network, Inc., a Nevada corporation, Union Bank and Trust
Company, a Nebraska banking corporation, not in its individual capacity
but solely as eligible lender trustee for the benefit of the Seller and
its assigns, Nelnet Super Conduit Funding, LLC, a Delaware limited
liability company, and Zions First National Bank, a national banking
association, not in its individual capacity but solely as eligible lender
trustee for the benefit of the Purchaser and its assigns. Incorporated by
reference to Exhibit 10.4 to the registrant's quarterly report for the
period ended June 30, 2009, filed on Form 10-Q.
|
||
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.
|
99
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 3, 2010
NELNET,
INC.
|
|||
|
By:
|
/s/ MICHAEL S. DUNLAP | |
Michael
S. Dunlap
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
|
Chairman
and
|
March
3, 2010
|
||
Michael
S. Dunlap
|
Chief
Executive Officer
|
|||
(Principal
Executive Officer)
|
||||
/s/
TERRY J. HEIMES
|
Chief
Financial Officer
|
March
3, 2010
|
||
Terry
J. Heimes
|
(Principal
Financial Officer and
|
|||
Principal
Accounting Officer)
|
||||
/s/
STEPHEN F. BUTTERFIELD
|
Vice
Chairman
|
March
3, 2010
|
||
Stephen
F. Butterfield
|
||||
/s/
JAMES P. ABEL
|
Director
|
March
3, 2010
|
||
James
P. Abel
|
||||
/s/
KATHLEEN A. FARRELL
|
Director
|
March
3, 2010
|
||
Kathleen
A. Farrell
|
||||
/s/
THOMAS E. HENNING
|
Director
|
March
3, 2010
|
||
Thomas
E. Henning
|
||||
/s/
BRIAN J. O’CONNOR
|
Director
|
March
3, 2010
|
||
Brian
J. O’Connor
|
||||
/s/
KIMBERLY K. RATH
|
Director
|
March
3, 2010
|
||
Kimberly
K. Rath
|
||||
/s/
MICHAEL D. REARDON
|
Director
|
March
3, 2010
|
||
Michael
D. Reardon
|
||||
100
NELNET,
INC. AND SUBSIDIARIES
Index
to Consolidated Financial Statements
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Income for the years ended December 31, 2009, 2008, and
2007
|
F-4
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the years
ended December 31, 2009, 2008, and 2007
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008,
and 2007
|
F-6
|
Notes
to Consolidated Financial Statements
|
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, 2009 and 2008, 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, 2009. These consolidated financial statements are the
responsibility of the Company’s 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, 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, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 3, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
Lincoln,
Nebraska
March 3,
2010
F-2
NELNET,
INC. AND SUBSIDIARIES
|
Consolidated
Balance Sheets
|
December
31, 2009 and 2008
|
2009
|
2008
|
|||||||
(Dollars
in thousands, except share data)
|
||||||||
Assets:
|
||||||||
Student
loans receivable (net of allowance for loan losses of $50,887 in 2009 and
$50,922 in 2008)
|
$ | 23,926,957 | 25,413,008 | |||||
Cash
and cash equivalents:
|
||||||||
Cash
and cash equivalents – not held at a related party
|
12,301 | 13,129 | ||||||
Cash
and cash equivalents – held at a related party
|
325,880 | 176,718 | ||||||
Total
cash and cash equivalents
|
338,181 | 189,847 | ||||||
Restricted
cash and investments
|
625,492 | 997,272 | ||||||
Restricted
cash – due to customers
|
91,741 | 160,985 | ||||||
Accrued
interest receivable
|
329,313 | 471,878 | ||||||
Accounts
receivable (net of allowance for doubtful accounts of $1,198 in 2009 and
$1,005 in 2008)
|
42,043 | 42,088 | ||||||
Goodwill
|
143,717 | 175,178 | ||||||
Intangible
assets, net
|
53,538 | 77,054 | ||||||
Property
and equipment, net
|
26,606 | 38,747 | ||||||
Other
assets
|
104,940 | 113,666 | ||||||
Fair
value of derivative instruments
|
193,899 | 175,174 | ||||||
Total
assets
|
$ | 25,876,427 | 27,854,897 | |||||
Liabilities:
|
||||||||
Bonds
and notes payable
|
$ | 24,805,289 | 26,787,959 | |||||
Accrued
interest payable
|
19,831 | 81,576 | ||||||
Other
liabilities
|
172,514 | 179,336 | ||||||
Due
to customers
|
91,741 | 160,985 | ||||||
Fair
value of derivative instruments
|
2,489 | 1,815 | ||||||
Total
liabilities
|
25,091,864 | 27,211,671 | ||||||
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
|
||||||||
38,396,791
shares in 2009 and 37,794,067 shares in 2008
|
384 | 378 | ||||||
Class
B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and
outstanding
|
||||||||
11,495,377
shares in 2009 and 2008
|
115 | 115 | ||||||
Additional
paid-in capital
|
109,359 | 103,762 | ||||||
Retained
earnings
|
676,154 | 540,521 | ||||||
Employee
notes receivable
|
(1,449 | ) | (1,550 | ) | ||||
Total
shareholders’ equity
|
784,563 | 643,226 | ||||||
Commitments
and contingencies
|
||||||||
Total
liabilities and shareholders’ equity
|
$ | 25,876,427 | 27,854,897 |
See
accompanying notes to consolidated financial statements.
F-3
NELNET,
INC. AND SUBSIDIARIES
|
|||||||||||||||
Consolidated
Statements of Income
|
|||||||||||||||
Years
ended December 31, 2009, 2008, and 2007
|
2009
|
2008
|
2007
|
||||||||||
(Dollars in thousands, except share data) | ||||||||||||
Interest
income:
|
||||||||||||
Loan
interest
|
$ | 609,920 | 1,176,383 | 1,667,057 | ||||||||
Investment
interest
|
10,287 | 37,998 | 80,219 | |||||||||
Total
interest income
|
620,207 | 1,214,381 | 1,747,276 | |||||||||
Interest
expense:
|
||||||||||||
Interest
on bonds and notes payable
|
384,862 | 1,026,489 | 1,502,662 | |||||||||
Net
interest income
|
235,345 | 187,892 | 244,614 | |||||||||
Less
provision for loan losses
|
29,000 | 25,000 | 28,178 | |||||||||
Net
interest income after provision for loan losses
|
206,345 | 162,892 | 216,436 | |||||||||
Other
income (expense):
|
||||||||||||
Loan
and guaranty servicing revenue
|
108,747 | 99,942 | 122,380 | |||||||||
Tuition
payment processing and campus commerce revenue
|
53,894 | 48,155 | 42,766 | |||||||||
Enrollment
services revenue
|
119,397 | 112,405 | 103,905 | |||||||||
Software
services revenue
|
21,164 | 24,115 | 27,764 | |||||||||
Other
income
|
68,152 | 22,775 | 30,423 | |||||||||
Gain
(loss) on sale of loans, net
|
35,148 | (51,414 | ) | 3,597 | ||||||||
Derivative
market value, foreign currency, and put option adjustments
|
||||||||||||
and
derivative settlements, net
|
8,484 | 66,484 | 45,483 | |||||||||
Total
other income
|
414,986 | 322,462 | 376,318 | |||||||||
Operating
expenses:
|
||||||||||||
Salaries
and benefits
|
155,532 | 183,393 | 236,631 | |||||||||
Other
operating expenses:
|
||||||||||||
Cost
to provide enrollment services
|
74,926 | 64,965 | 45,408 | |||||||||
Depreciation
and amortization
|
35,636 | 43,669 | 47,451 | |||||||||
Impairment
expense
|
32,728 | 18,834 | 49,504 | |||||||||
Professional
and other services
|
27,265 | 32,482 | 37,034 | |||||||||
Occupancy
and communications
|
19,306 | 19,215 | 25,395 | |||||||||
Postage
and distribution
|
9,377 | 11,163 | 17,016 | |||||||||
Trustee
and other debt related fees
|
9,167 | 10,408 | 11,450 | |||||||||
Advertising
and marketing
|
8,046 | 7,924 | 17,393 | |||||||||
Other
|
33,650 | 48,561 | 48,327 | |||||||||
Total
other operating expenses
|
250,101 | 257,221 | 298,978 | |||||||||
Total
operating expenses
|
405,633 | 440,614 | 535,609 | |||||||||
Income
before income taxes
|
215,698 | 44,740 | 57,145 | |||||||||
Income
tax expense
|
(76,573 | ) | (17,896 | ) | (21,716 | ) | ||||||
Income
from continuing operations
|
139,125 | 26,844 | 35,429 | |||||||||
Income
(loss) from discontinued operations, net of tax
|
— | 1,818 | (2,575 | ) | ||||||||
Net
income
|
$ | 139,125 | 28,662 | 32,854 | ||||||||
Earnings
per common share:
|
||||||||||||
Basic:
|
||||||||||||
Continuing
operations
|
$ | 2.79 | 0.54 | 0.71 | ||||||||
Discontinued
operations
|
— | 0.04 | (0.05 | ) | ||||||||
Net
earnings
|
$ | 2.79 | 0.58 | 0.66 | ||||||||
Diluted:
|
||||||||||||
Continuing
operations
|
$ | 2.78 | 0.54 | 0.71 | ||||||||
Discontinued
operations
|
— | 0.04 | (0.05 | ) | ||||||||
Net
earnings
|
$ | 2.78 | 0.58 | 0.66 | ||||||||
Dividends
paid per common share
|
$ | 0.07 | 0.07 | 0.28 | ||||||||
Weighted
average common shares outstanding:
|
||||||||||||
Basic
|
49,484,816 | 49,099,967 | 49,618,107 | |||||||||
Diluted
|
49,685,143 | 49,324,278 | 49,732,973 |
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, 2009, 2008, and 2007
|
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, 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 authoritative
|
||||||||||||||||||||||||||||||||||||||||||||
guidance
on uncertain tax positions
|
— | — | — | — | — | — | — | (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 | ) | |||||||||||||||||||||||||||||
Reduction
of employee notes receivable
|
— | — | — | — | — | — | — | — | 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
as of December 31, 2008
|
— | 37,794,067 | 11,495,377 | — | 378 | 115 | 103,762 | 540,521 | (1,550 | ) | — | 643,226 | ||||||||||||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||||||||||
Net
income
|
— | — | — | — | — | — | — | 139,125 | — | — | 139,125 | |||||||||||||||||||||||||||||||||
Cash
dividend on Class A and Class B
|
||||||||||||||||||||||||||||||||||||||||||||
common
stock - $0.07 per share
|
— | — | — | — | — | — | — | (3,492 | ) | — | — | (3,492 | ) | |||||||||||||||||||||||||||||||
Issuance
of common stock, net of forfeitures
|
— | 641,153 | — | — | 7 | — | 4,365 | — | — | — | 4,372 | |||||||||||||||||||||||||||||||||
Compensation
expense for stock based awards
|
— | — | — | — | — | — | 1,661 | — | — | — | 1,661 | |||||||||||||||||||||||||||||||||
Repurchase
of common stock
|
— | (38,429 | ) | — | — | (1 | ) | — | (429 | ) | — | — | — | (430 | ) | |||||||||||||||||||||||||||||
Reduction
of employee notes receivable
|
— | — | — | — | — | — | — | — | 101 | — | 101 | |||||||||||||||||||||||||||||||||
Balance
as of December 31, 2009
|
— | 38,396,791 | 11,495,377 | $ | — | 384 | 115 | 109,359 | 676,154 | (1,449 | ) | — | 784,563 |
See
accompanying notes to consolidated financial statements.
F-5
NELNET,
INC. AND SUBSIDIARIES
|
Consolidated
Statements of Cash Flows
|
Years
ended December 31, 2009, 2008, and 2007
|
2009
|
2008
|
2007
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Net
income
|
$ | 139,125 | 28,662 | 32,854 | ||||||||
Income
(loss) from discontinued operations
|
— | 1,818 | (2,575 | ) | ||||||||
Income
from continuing operations
|
139,125 | 26,844 | 35,429 | |||||||||
Adjustments
to reconcile income from continuing operations to net cash
provided
|
||||||||||||
by
operating activities:
|
||||||||||||
Depreciation
and amortization, including loan premiums and deferred origination
costs
|
116,038 | 141,605 | 261,385 | |||||||||
Provision
for loan losses
|
29,000 | 25,000 | 28,178 | |||||||||
Impairment
expense
|
32,728 | 18,834 | 49,504 | |||||||||
Derivative
market value adjustment
|
(6,852 | ) | 38,576 | (139,146 | ) | |||||||
Foreign
currency transaction adjustment
|
37,654 | (52,886 | ) | 108,712 | ||||||||
Change
in value of put options issued in business acquisitions
|
— | 3,483 | 3,628 | |||||||||
Proceeds
to terminate and/or amend derivative instruments
|
3,870 | 20,368 | 50,843 | |||||||||
Payments
to terminate and/or amend derivative instruments
|
(15,069 | ) | (16,367 | ) | (8,100 | ) | ||||||
Gain
from repurchase of bonds and notes payable
|
(41,683 | ) | — | — | ||||||||
Originations
and purchases of student loans - held for sale
|
(13,345 | ) | — | — | ||||||||
Loss
on sale of business
|
— | — | 8,291 | |||||||||
Gain
on sale of equity method investment
|
— | — | (3,942 | ) | ||||||||
(Gain)
loss on sale of student loans, net
|
(35,148 | ) | 51,414 | (3,087 | ) | |||||||
Deferred
income tax benefit
|
(19,057 | ) | (9,468 | ) | (24,979 | ) | ||||||
Non-cash
compensation expense
|
2,644 | 7,320 | 6,686 | |||||||||
Other
non-cash items
|
1,976 | 1,788 | (2,643 | ) | ||||||||
Decrease
(increase) in accrued interest receivable
|
142,565 | 121,444 | (89,924 | ) | ||||||||
Decrease
(increase) in accounts receivable
|
45 | 6,996 | (6,659 | ) | ||||||||
Decrease
(increase) in other assets
|
9,283 | 1,603 | (5,324 | ) | ||||||||
(Decrease)
increase in accrued interest payable
|
(61,745 | ) | (47,870 | ) | 9,235 | |||||||
Increase
(decrease) in other liabilities
|
2,677 | (17,581 | ) | (1,310 | ) | |||||||
Net
cash flows from operating activities - continuing
operations
|
324,706 | 321,103 | 276,777 | |||||||||
Net
cash flows from operating activities - discontinued
operations
|
— | — | (3,717 | ) | ||||||||
Net
cash provided by operating activities
|
324,706 | 321,103 | 273,060 | |||||||||
Cash
flows from investing activities, net of business
acquisitions:
|
||||||||||||
Originations,
purchases, and consolidations of student loans, including loan
premiums
|
||||||||||||
and
deferred origination costs
|
(2,776,557 | ) | (2,685,876 | ) | (5,042,378 | ) | ||||||
Purchases
of student loans, including loan premiums, from a related
party
|
(47,621 | ) | (212,888 | ) | (260,985 | ) | ||||||
Net
proceeds from student loan repayments, claims, capitalized interest,
participations, and other
|
1,873,666 | 2,247,031 | 2,122,033 | |||||||||
Proceeds
from sale of student loans
|
2,317,093 | 1,807,813 | 118,649 | |||||||||
Proceeds
from sale of student loans to a related party
|
76,448 | — | — | |||||||||
Purchases
of property and equipment, net
|
(1,204 | ) | (5,141 | ) | (20,061 | ) | ||||||
Decrease
(increase) in restricted cash and investments, net
|
371,780 | (70,025 | ) | 590,604 | ||||||||
Purchases
of equity method investments
|
— | (2,988 | ) | — | ||||||||
Distributions
from equity method investments
|
— | — | 747 | |||||||||
Sale
of business, net of cash sold
|
— | — | 14,497 | |||||||||
Business
acquisitions - contingent consideration and purchase price adjustments,
net
|
— | (18,000 | ) | (1,773 | ) | |||||||
Proceeds
from sale of equity method investment
|
— | — | 10,000 | |||||||||
Net
cash flows from investing activities - continuing
operations
|
1,813,605 | 1,059,926 | (2,468,667 | ) | ||||||||
Net
cash flows from investing activities - discontinued
operations
|
— | — | (294 | ) | ||||||||
Net
cash provided by (used in) investing activities
|
1,813,605 | 1,059,926 | (2,468,961 | ) | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Payments
on bonds and notes payable
|
(6,644,250 | ) | (6,879,826 | ) | (5,750,423 | ) | ||||||
Proceeds
from issuance of bonds and notes payable
|
4,688,404 | 5,640,865 | 8,121,833 | |||||||||
Payments
from issuance of notes payable due to a related party, net
|
(21,520 | ) | (35,772 | ) | (50,796 | ) | ||||||
Payments
of debt issuance costs
|
(9,239 | ) | (14,886 | ) | (15,160 | ) | ||||||
Dividends
paid
|
(3,492 | ) | (3,458 | ) | (13,817 | ) | ||||||
Payment
on settlement of put option
|
— | (9,600 | ) | (15,875 | ) | |||||||
Proceeds
from issuance of common stock
|
449 | 710 | 1,467 | |||||||||
Repurchases
of common stock
|
(430 | ) | (1,536 | ) | (76,648 | ) | ||||||
Payments
received on employee stock notes receivable
|
101 | 575 | 432 | |||||||||
Net
cash flows from financing activities - continuing
operations
|
(1,989,977 | ) | (1,302,928 | ) | 2,201,013 | |||||||
Net
cash flows from financing activities - discontinued
operations
|
— | — | — | |||||||||
Net
cash provided by (used in) financing activities
|
(1,989,977 | ) | (1,302,928 | ) | 2,201,013 | |||||||
Effect
of exchange rate fluctuations on cash
|
— | — | 548 | |||||||||
Net
increase in cash and cash equivalents
|
148,334 | 78,101 | 5,660 | |||||||||
Cash
and cash equivalents, beginning of year
|
189,847 | 111,746 | 106,086 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 338,181 | 189,847 | 111,746 | ||||||||
Supplemental
disclosures of cash flow information:
|
||||||||||||
Interest
paid
|
$ | 434,834 | 1,056,640 | 1,369,287 | ||||||||
Income
taxes paid, net of refunds
|
$ | 101,491 | 24,058 | 36,999 | ||||||||
Supplemental
disclosures of noncash financing activities:
|
||||||||||||
Notes
payable assumed in connection with an acquisition of an entity under
common control
|
$ | — | — | 14,110 | ||||||||
Common
stock issued in consideration for notes receivable
|
$ | — | — | 725 |
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 a transaction
processing and finance company focused primarily on providing quality education
related products and services to students, families, schools, and financial
institutions nationwide. The Company earns its revenues from
fee-based processing businesses, including its loan servicing, payment
processing, and lead generation businesses, and the net interest income on its
student loan portfolio.
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 Company’s products and services are
designed to simplify the education planning and financing process and provide
value to customers throughout the education life cycle.
The
Company has five operating segments, as follows:
· Student
Loan and Guaranty Servicing
· Tuition
Payment Processing and Campus Commerce
· Enrollment
Services
· Software
and Technical Services
· Asset
Generation and Management
See note
22 for additional information on the Company’s segment reporting.
Fee-Based
Operating Segments
Student Loan and Guaranty
Servicing
The
Company’s Student Loan and Guaranty Servicing operating segment provides for the
servicing of it’s student loan portfolio and the portfolios of third parties and
servicing provided to guaranty agencies. The loan servicing activities include
loan origination activities, loan conversion activities, application processing,
borrower updates, payment processing, due diligence procedures, and claim
processing. These activities are performed internally for the Company’s
portfolio in addition to generating fee revenue when performed for third-party
clients. The guaranty servicing 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.
Tuition
Payment Processing and Campus Commerce
The
Company’s 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.
Enrollment
Services
The
Company’s Enrollment Services operating segment offers products and services
that are focused on helping colleges recruit and retain students (lead
generation and recruitment services) and helping students plan and prepare for
life after high school (content management and publishing and editing services).
Lead generation products and services include vendor lead management services
and admissions lead generation. Recruitment services include pay per click
marketing management, email marketing, list marketing services, and admissions
consulting. Content management products and services include online courses and
related services. Publishing and editing services include test preparation study
guides and essay and resume editing services.
F-7
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
Company’s 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, legacy modernization, technical
consulting services, and Enterprise Content Management solutions.
Asset
Generation and Management Operating Segment
The
Company’s Asset Generation and Management operating segment includes the
origination, acquisition, management, and ownership of the Company’s student
loan assets. The Company generates a substantial portion of its earnings from
the spread, referred to as the Company’s student loan spread, between the yield
it receives on its student loan portfolio and the costs associated with
originating, acquiring, and financing its portfolio. The Company generates
student loan assets through direct origination or through
acquisitions. Student loan assets include loans originated under the
Federal Family Education Loan Program (“FFELP” or “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”).
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 for
the years ended December 31, 2009, 2008, and 2007.
2009
|
2008
|
2007
|
||||||||||
Operating
income of discontinued operations
|
$ | — | — | 9,278 | ||||||||
Income
tax on operations
|
— | — | (3,562 | ) | ||||||||
Gain
(loss) on disposal
|
— | 1,966 | (8,316 | ) | ||||||||
Income
tax (expense) benefit on disposal
|
— | (148 | ) | 25 | ||||||||
Income
(loss) from discontinued operations, net of tax
|
$ | — | 1,818 | (2,575 | ) |
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
Company’s interest expense is included within continuing
operations.
2007
|
||||
Net
interest income
|
$ | 124 | ||
Other
income
|
31,511 | |||
Operating
expenses
|
(22,357 | ) | ||
Income
before income taxes
|
9,278 | |||
Income
tax expense
|
3,562 | |||
Operating
income of discontinued
|
||||
operations,
net of tax
|
$ | 5,716 |
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.
The
Company’s 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 Company’s 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. For accounting purposes, the transfers of student loans to
the eligible lender trusts do not qualify as sales, 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 Company’s consolidated financial
statements.
Reclassifications
Certain
amounts previously reported have been reclassified to conform to the current
period presentation. The reclassifications were made to change the income
statement presentation to provide the users of the financial statements
additional information related to the operating results of the Company’s
fee-based businesses, which are becoming more significant to the Company’s
operations. These reclassifications include reclassifying “tuition payment
processing and campus commerce revenue” and “enrollment services revenue,” which
were previously included in “other fee-based income.” In addition, the “cost to
provide enrollment services” was reclassified from various operating expense
accounts, primarily “advertising and marketing.”
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. Management has made significant estimates in several areas,
including allowance for loan losses, the amortization of loan premiums, deferred
origination costs, and borrower benefits, impairment assessment related to
goodwill and intangible assets, income taxes, and the valuation of
derivatives. Actual results could differ from those
estimates.
Student
Loans Receivable
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 carried at amortized cost. Amortized cost includes the
unamortized premiums and capitalized origination costs and fees, all of which
are amortized to interest income. Loans which are held-for-investment also have
an allowance for loan loss as needed. Any loans the Company has the ability and
intent to sell are classified as held for sale and are carried at the lower of
cost or fair value. Loans which are held-for-sale do not have the associated
premium and origination costs and fees amortized into interest income and there
is also no related allowance for loan losses. As of December 31, 2009 and 2008,
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 of 1965, as amended (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 U.S. Department of Education (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. 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.
F-9
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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.
Allowance
for Loan Losses
The
allowance for loan losses represents management’s 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 Company’s 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
Company’s loss exposure on the outstanding balance of the Company’s federally
insured portfolio. 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
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.
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 eliminated all provisions relating to Exceptional Performer
status, and the monetary benefit associated with it, effective October 1,
2007.
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, 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 when
the collection of principal and interest is 30 days past due 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 Company’s 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
Company’s 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, 2009 and 2008. All
restricted cash and investments held by the trustees are included on the
consolidated balance sheets.
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 and 2007 was $2.7 million and $8.7 million,
respectively. Due to low interest rates, the Company earned minimal
interest income, net of servicing charges, during 2009.
F-10
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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.
Goodwill
The
Company reviews goodwill for impairment annually (as of November 30) and
whenever triggering events or changes in circumstances indicate its carrying
value may not be recoverable. 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 performs a two-step impairment
test 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 unit’s goodwill. If the carrying value of a reporting unit’s
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.
Intangible
Assets
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 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.
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.
F-11
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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. The Company uses estimates to determine the fair value
of long-lived 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 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.
Assumptions
and estimates about future values and remaining useful lives of the Company’s
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 Company’s
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.
Other
Assets
Other
assets are recorded at cost or amortized cost and consist primarily of debt
issuance costs, student list costs, and other miscellaneous assets. Debt
issuance costs are amortized using the effective interest method.
Fair
Value Measurements
Fair
value 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 uses fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures.
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
Company’s market assumptions. Transaction costs are not included in
the determination of fair value. When possible, the Company seeks to
validate the model’s 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.
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.
|
Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company’s various financial
instruments. In cases where quoted market prices are not available for identical
or similar instruments, 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.
F-12
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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 holder’s 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
borrower’s 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, which includes an estimate of
prepayment speeds. The Company
periodically evaluates the assumptions used to estimate the life of the loans
and prepayment speeds.
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 revenue
– 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.
Tuition payment processing and
campus commerce revenue - Fees for payment management services are
recognized over the period in which services are provided to
customers.
Enrollment services revenue –
Enrollment services revenue primarily consists of the following
items:
|
·
|
Lead generation –
Revenue from lead generation is derived primarily from fees which are
earned through the delivery of qualified leads or clicks. The Company
recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectability
is reasonably assured. Delivery is deemed to have occurred at the time a
qualified lead or click is delivered to the customer provided that no
significant obligations remain. From time to time, the Company may agree
to credit certain leads or clicks if they fail to meet the contractual or
other guidelines of a particular client. The Company has established a
sales reserve based on historical experience. To date, such credits have
been immaterial and within management’s
expectations.
|
For a
portion of its lead generation revenue, the Company has agreements with
providers of online media or traffic (“Publishers”) used in the generation of
leads or clicks. The Company receives a fee from its customers and pays a fee to
Publishers either on a cost per lead, cost per click, or cost per number of
impressions basis. The Company is the primary obligor in the transaction. As a
result, the fees paid by the Company’s customers are recognized as revenue and
the fees paid to its Publishers are included in “cost to provide enrollment
services” in the Company’s 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)
|
·
|
Publishing and editing
services - Revenue from the sale of print products and editing
services is generally earned and recognized, net of estimated returns,
upon shipment or delivery.
|
|
·
|
Content management and
recruitment services – Content management and recruitment services
includes the sale of subscription and performance based products and
services, as well as list sales. Revenues from sales of
subscription and performance based products and services are recognized
ratably over the term of the contract. Subscription and performance based
revenues received or receivable in advance of the delivery of services is
included in deferred revenue. Revenue from the sale of lists is
generally earned and recognized, net of estimated returns, upon
delivery.
|
Other income – Other income
includes borrower late fee income, which is earned by the education lending
subsidiaries and is recognized when payments are collected from the
borrower.
Software services revenue –
Software services revenue is determined from individual agreements with
customers and includes license and maintenance fees associated with student loan
software products. 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. Payments made on maintenance and enhancement
agreements for services to be performed in subsequent periods are deferred and
recognized in revenue 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 records derivative instruments at fair value on the consolidated 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 Company’s derivative transactions with the
intent that each is economically effective. However, the Company’s derivative
instruments do not qualify for hedge accounting. 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.
Foreign
Currency
The
Company’s 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, which are included in “bonds
and notes payable” on the consolidated balance sheets. 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.
F-14
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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).
Subsequent
Events
Management
has evaluated subsequent events, and the impact on the reported results and
disclosures through March 3, 2010, which is the date these financial statements
were filed with the Securities and Exchange Commission (“SEC”).
4.
|
Recent
Developments - Legislation
|
On
February 26, 2009, the President introduced a fiscal year 2010 Federal budget
proposal calling for the elimination of the FFEL Program and a recommendation
that all new student loan originations be funded through the Federal Direct Loan
Program. On September 17, 2009, the House of Representatives passed
H.R. 3221, the Student Aid and Fiscal Responsibility Act (“SAFRA”), which would
eliminate the FFEL Program and require that, after July 1, 2010, all new federal
student loans be made through the Federal Direct Loan Program. The Senate is
expected to begin its consideration of similar student loan reform legislation
sometime in 2010. In addition to the House-passed legislation, there are several
other proposals for changes to the education financing framework that may be
considered that would maintain a role for private lenders in the origination of
federal student loans. These include a possible extension of ECASLA, which
expires on July 1, 2010, and the Student Loan Community Proposal, a proposal
endorsed by a cross-section of FFELP service providers (including the Company)
as an alternative to the 100% federal direct lending proposal included in
SAFRA.
Elimination
of the FFEL Program would impact the Company’s operations and profitability by,
among other things, reducing the Company’s interest revenues as a result of the
inability to add new FFELP loans to the Company’s portfolio and reducing
guarantee and third-party FFELP servicing fees as a result of reduced FFELP loan
servicing and origination volume. Additionally, the elimination of the FFEL
Program could reduce education loan software licensing opportunities and related
consulting fees received from lenders using the Company’s software products and
services. The fair value and/or ability to recover the Company’s goodwill,
intangible assets, and other long-lived assets related to these activities could
be adversely affected if the FFEL Program is eliminated.
In June
2009, the Department of Education named the Company as one of four private
sector companies awarded a servicing contract to service student loans. No later
than August 2010, the Company expects to also begin servicing new loans
originated under the Direct Loan Program. If legislation is passed mandating
that all new student loan originations be funded through the Direct Loan
Program, revenue from servicing loans under this contract will partially offset
the loss of revenue if the FFEL Program is eliminated.
5.
|
Restructuring
Charges
|
Legislative
Impact – 2007 Restructuring
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 the 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 Company’s
student loan business model, including lowering the cost of student loan
acquisition, creating efficiencies in the Company’s 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 Company’s 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 and an expense of $0.7
million in 2009 to recognize adjustments from initial estimates.
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
|
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 | |||||||||||||||
Adjustment
from initial estimate of charges
|
— | 692 |
(b)
|
— | 692 | ||||||||||||||
Cash
payments
|
— | (650 | ) | — | (650 | ) | |||||||||||||
Restructuring
accrual as of December 31, 2009
|
$ | — | 2,933 | — | 2,933 |
|
(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.
|
F-16
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 by operating segment and
Corporate Activity and Overhead follows:
Operating
segment
|
||||||||||||||||||||||||||||
Student
Loan and Guaranty Servicing
|
Tuition
Payment Processing and Campus Commerce
|
Enrollment
Services
|
Software
and Technical Services
|
Asset
Generation and Management
|
Corporate
Activity and Overhead
|
Total
|
||||||||||||||||||||||
Restructuring
costs recognized in 2007
|
$ | 1,840 | — | 929 | 58 | 2,654 | 14,810 | 20,291 | ||||||||||||||||||||
Write-down
of assets to net realizable value
|
— | — | — | — | (248 | ) | (9,812 | ) | (10,060 | ) | ||||||||||||||||||
Adjustment
from initial estimate of charges
|
(95 | ) | — | — | — | (25 | ) | (30 | ) | (150 | ) | |||||||||||||||||
Cash
payments
|
(1,276 | ) | — | (848 | ) | (58 | ) | (2,003 | ) | (1,021 | ) | (5,206 | ) | |||||||||||||||
Restructuring
accrual as of December 31, 2007
|
469 | — | 81 | — | 378 | 3,947 | 4,875 | |||||||||||||||||||||
Adjustment
from initial estimate of charges
|
(72 | ) | — | (15 | ) | — | (40 | ) | (64 | ) | (191 | ) | ||||||||||||||||
Cash
payments
|
(397 | ) | — | (34 | ) | — | (330 | ) | (1,032 | ) | (1,793 | ) | ||||||||||||||||
Restructuring
accrual as of December 31, 2008
|
— | — | 32 | — | 8 | 2,851 | 2,891 | |||||||||||||||||||||
Reclassification
of initial estimate of charges
|
(692 | ) | — | (32 | ) | — | (8 | ) | 732 | — | ||||||||||||||||||
Adjustment
from initial estimate of charges
|
692 | — | — | — | — | — | 692 | |||||||||||||||||||||
Cash
payments
|
— | — | — | — | — | (650 | ) | (650 | ) | |||||||||||||||||||
Restructuring
accrual as of December 31, 2009
|
$ | — | — | — | — | — | 2,933 | 2,933 |
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 and an
additional expense of approximately $12,000 in 2009 to recognize adjustments
from initial estimates.
F-17
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 | |||||||||||||||
Adjustment
from initial estimate of charges
|
— | 12 |
(b)
|
— | 12 | ||||||||||||||
Cash
payments
|
— | (250 | ) | — | (250 | ) | |||||||||||||
Restructuring
accrual as of December 31, 2009
|
$ | — | 351 | — | 351 |
|
(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:
Operating
segment
|
||||||||||||||||||||||||||||
Student
Loan and Guaranty Servicing
|
Tuition
Payment Processing and Campus Commerce
|
Enrollment
Services
|
Software
and Technical Services
|
Asset
Generation and Management
|
Corporate
Activity and Overhead
|
Total
|
||||||||||||||||||||||
Restructuring
costs recognized in 2008
|
$ | 5,906 | — | 297 | 510 | 11,235 | 8,149 | 26,097 | ||||||||||||||||||||
Write-down
of assets to net realizable value
|
(5,074 | ) | — | — | — | (9,351 | ) | (4,409 | ) | (18,834 | ) | |||||||||||||||||
Cash
payments
|
(786 | ) | — | (310 | ) | (511 | ) | (1,878 | ) | (3,189 | ) | (6,674 | ) | |||||||||||||||
Restructuring
accrual as of December 31, 2008
|
46 | — | (13 | ) | (1 | ) | 6 | 551 | 589 | |||||||||||||||||||
Reclassification
of initial estimate of charges
|
84 | — | 13 | 1 | (6 | ) | (92 | ) | — | |||||||||||||||||||
Adjustment
from initial estimate of charges
|
(130 | ) | — | — | — | — | 142 | 12 | ||||||||||||||||||||
Cash
payments
|
— | — | — | — | — | (250 | ) | (250 | ) | |||||||||||||||||||
Restructuring
accrual as of December 31, 2009
|
$ | — | — | — | — | — | 351 | 351 |
F-18
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
Legislative
Impact – 2009 Restructuring
On May 8,
2009, as a result of the continued challenges in the economy and the student
loan industry, the Company adopted a plan to further streamline its operations
by continuing to reduce its geographic footprint and consolidate servicing
operations and related support services.
Management
developed a restructuring plan that will result in lower costs and provide
enhanced synergies through cross training, career development, and simplified
communications. The Company will simplify its operating structure to
leverage its larger facilities and technology by closing certain offices and
downsizing its presence in certain geographic
locations. Approximately 300 associates will be impacted by this
restructuring plan. However, the majority of these functions will be
relocated to the Company’s Lincoln headquarters and Denver
offices. Implementation of the plan began immediately and is expected
to be substantially complete during the second quarter of 2010.
The
Company estimates that the charge to earnings associated with this restructuring
plan will total approximately $12.8 million, consisting of approximately $6.2
million in severance costs and approximately $6.6 million in contract
terminations, of which $7.3 million was recognized in 2009, and $5.5 million is
expected to be recognized in 2010. Selected information relating to the
restructuring charge and accrual follows:
Employee
|
||||||||||||
termination
|
Lease
|
|||||||||||
benefits
|
terminations
|
Total
|
||||||||||
Restructuring
costs recognized in 2009
|
$ | 4,247 |
(a)
|
3,031 |
(b)
|
7,278 | ||||||
Cash
payments
|
(898 | ) | (605 | ) | (1,503 | ) | ||||||
Restructuring
accrual as of December 31, 2009
|
$ | 3,349 | 2,426 | 5,775 |
(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.
|
Selected
information relating to the restructuring charge by operating segment and
Corporate Activity and Overhead follows:
Operating
segment
|
||||||||||||||||||||||||||||
Student
Loan and Guaranty Servicing
|
Tuition
Payment Processing and Campus Commerce
|
Enrollment
Services
|
Software
and Technical Services
|
Asset
Generation and Management
|
Corporate
Activity and Overhead
|
Total
|
||||||||||||||||||||||
Restructuring
costs recognized in 2009
|
$ | 5,402 | — | — | 936 | — | 940 | 7,278 | ||||||||||||||||||||
Cash
payments
|
(871 | ) | — | — | (411 | ) | — | (221 | ) | (1,503 | ) | |||||||||||||||||
Restructuring
accrual as of December 31, 2009
|
$ | 4,531 | — | — | 525 | — | 719 | 5,775 |
Operating
segment
|
||||||||||||||||||||||||||||
Student
Loan and Guaranty Servicing
|
Tuition
Payment Processing and Campus Commerce
|
Enrollment
Services
|
Software
and Technical Services
|
Asset
Generation and Management
|
Corporate
Activity and Overhead
|
Total
|
||||||||||||||||||||||
Estimated
total restructuring costs
|
$ | 9,810 | — | — | 1,224 | — | 1,741 | 12,775 | ||||||||||||||||||||
Restructuring
costs recognized in 2009
|
(5,402 | ) | — | — | (936 | ) | — | (940 | ) | (7,278 | ) | |||||||||||||||||
Remaining
restructuring costs expected
|
||||||||||||||||||||||||||||
to
be recognized
|
$ | 4,408 | — | — | 288 | — | 801 | 5,497 |
F-19
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
6.
|
Intangible
Assets and Goodwill
|
Intangible
assets consist of the following as of December 31, 2009 and
2008:
Weighted
|
||||||||||||
average
|
||||||||||||
remaining
|
||||||||||||
useful
life as of
|
||||||||||||
December
31,
|
||||||||||||
2009
(months)
|
2009
|
2008
|
||||||||||
Amortizable
intangible assets:
|
||||||||||||
Customer
relationships (net of accumulated amortization of $38,785
|
||||||||||||
and
$29,737, respectively)
|
97 | $ | 40,991 | 50,623 | ||||||||
Trade
names (net of accumulated amortization of $9,101
|
||||||||||||
and
$5,478, respectively)
|
34 | 7,452 | 11,581 | |||||||||
Covenants
not to compete (net of accumulated amortization of $20,372
|
||||||||||||
and
$14,887, respectively)
|
8 | 3,229 | 8,735 | |||||||||
Database
and content (net of accumulated amortization of $7,701
|
||||||||||||
and
$5,447, repectively)
|
12 | 1,779 | 4,033 | |||||||||
Computer
software (net of accumulated amortization of $8,915
|
||||||||||||
and
$7,441, respectively)
|
13 | 87 | 1,561 | |||||||||
Other
|
— | — | 521 | |||||||||
Total
- amortizable intangible assets
|
80 | $ | 53,538 | 77,054 |
The
Company recorded amortization expense on its intangible assets of $22.2 million,
$26.2 million, and $30.4 million, during the years ended
December 31, 2009, 2008, and 2007, respectively. The Company will continue
to amortize intangible assets over their remaining useful lives. As of December
31, 2009, the Company estimates it will record amortization expense as
follows:
2010
|
$ | 15,219 | ||
2011
|
9,746 | |||
2012
|
8,961 | |||
2013
|
6,143 | |||
2014
|
5,689 | |||
2015
and thereafter
|
7,780 | |||
$ | 53,538 |
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, 2007
|
$ | — | 58,086 | 55,463 | 8,596 | 42,550 | 164,695 | |||||||||||||||||
Additional
contingent consideration paid
|
— | — | 11,150 | — | — | 11,150 | ||||||||||||||||||
Impairment
charge
|
— | — | — | — | (667 | ) | (667 | ) | ||||||||||||||||
Balance
as of December 31, 2008
|
— | 58,086 | 66,613 | 8,596 | 41,883 | 175,178 | ||||||||||||||||||
Impairment
charge
|
— | — | (31,461 | ) | — | — | (31,461 | ) | ||||||||||||||||
Balance
as of December 31, 2009
|
$ | — | 58,086 | 35,152 | 8,596 | 41,883 | 143,717 |
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 5), the Company recorded an impairment charge of
$49.5 million during 2007. This charge is included in “impairment expense” in
the Company’s consolidated statements of income. Information related to the
impairment charge follows:
F-20
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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 | ||||
Property
and equipment
|
Asset
Generation and Management
|
248 | ||||
Property
and equipment
|
Corporate
Activity
|
9,812 | ||||
Total
impairment charge
|
$ | 49,504 |
As
disclosed in note 5, 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 Company’s 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 |
F-21
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
Company reviews goodwill for impairment annually. This annual review is
completed by the Company as of November 30 of each year and whenever triggering
events or changes in circumstances indicate its carrying value may not be
recoverable. As a result of the 2009 annual test, the Company recorded an
impairment charge of $31.5 million related to its list marketing business. The
Company’s list marketing business has been negatively affected by the economic
recession and deterioration of the direct-to-consumer student loan
market. In addition, during the fourth quarter of 2009, the Company
recognized an impairment charge of $1.2 million on certain intangible assets
related to its list marketing business. These charges are included in
“impairment expense” in the Company’s consolidated statements of income.
Information related to the impairment charge follows:
Operating
|
Impairment
|
|||||
Asset
|
segment
|
charge
|
||||
Amortizable
intangible assets:
|
||||||
Customer
relationships
|
Enrollment
Services
|
$ | 584 | |||
Trade
names
|
Enrollment
Services
|
506 | ||||
Covenants
not to compete
|
Enrollment
Services
|
21 | ||||
Other
|
Enrollment
Services
|
156 | ||||
Goodwill
|
Enrollment
Services
|
31,461 | ||||
Total
impairment charge
|
$ | 32,728 |
With the
exception of the Company’s list marketing business as discussed previously, as
of November 30, 2009, the fair value of each of the Company’s reporting units
exceeded the carrying value of the net assets assigned to that unit and the
Company was not required to perform further testing for impairment.
7.
|
Student
Loans Receivable
|
Student
loans receivable consisted of the following as of December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Federally
insured loans
|
$ | 23,472,553 | 24,787,941 | |||||
Non-federally
insured loans
|
163,321 | 273,108 | ||||||
23,635,874 | 25,061,049 | |||||||
Unamortized
loan premiums and deferred origination costs
|
341,970 | 402,881 | ||||||
Allowance
for loan losses – federally insured loans
|
(30,102 | ) | (25,577 | ) | ||||
Allowance
for loan losses – non-federally insured loans
|
(20,785 | ) | (25,345 | ) | ||||
$ | 23,926,957 | 25,413,008 | ||||||
Allowance
for federally insured loans as a percentage of such loans
|
0.13 | % | 0.10 | % | ||||
Allowance
for non-federally insured allowance as a percentage of such
loans
|
12.73 | % | 9.28 | % |
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 1.9% to 12.0% (the weighted average rate was 4.8% and 5.1%
as of December 31, 2009 and 2008, respectively).
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, 2009, 2008, and 2007 is shown below:
2009
|
2008
|
2007
|
||||||||||
Beginning
balance
|
$ | 50,922 | 45,592 | 26,003 | ||||||||
Provision
for loan losses
|
29,000 | 25,000 | 28,178 | |||||||||
Loans
charged off, net of recoveries
|
(18,715 | ) | (18,920 | ) | (7,418 | ) | ||||||
Sale
of loans
|
(10,320 | ) | (750 | ) | (1,171 | ) | ||||||
Ending
balance
|
$ | 50,887 | 50,922 | 45,592 |
F-22
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
In
September 2007, the Company recorded an expense of $15.7 million to increase the
Company’s allowance for loan losses related to an increase in risk share as a
result of the elimination of the Exceptional Performer program.
Loan
Sales
The
activity included in “gain (loss) on sale of loans, net” in the accompanying
consolidated statements of income for the years ended December 31, 2009, 2008,
and 2007 is detailed below.
2009
|
2008
|
2007
|
||||||||||
Department's
Purchase Program (a)
|
$ | 36,596 | — | — | ||||||||
Private
loan participations (b)
|
(695 | ) | — | — | ||||||||
FFELP
loan sales to related party (c)
|
(753 | ) | (3,860 | ) | — | |||||||
FFELP
loan sales to third parties (d)
|
— | (47,554 | ) | 3,597 | ||||||||
Gain
(loss) on sale of loans, net
|
$ | 35,148 | (51,414 | ) | 3,597 |
|
(a)
|
The
Company sold $2.1 billion (par value) of student loans to the Department
under the Department’s Loan Purchase Commitment Program. See note 8 for a
description of this program.
|
|
(b)
|
The
Company participated $95.5 million of non-federally insured loans to third
parties. Loans participated under these agreements have been
accounted for by the Company as loan sales. Accordingly, the participation
interests sold are not included on the Company’s consolidated balance
sheet. Per the terms of the servicing agreements, the Company’s
servicing operations are obligated to repurchase loans subject to the
participation interests in the event such loans become 60 or 90
days delinquent. The activity in the accrual account during
2009 related to this repurchase obligation, which is included in “other
liabilities” in the accompanying consolidated balance sheet, is detailed
below.
|
Beginning
balance
|
$ | — | ||
Transfer
from allowance for loan losses
|
9,800 | |||
Reserve
for repurchase of delinquent loans (a)
|
800 | |||
Ending
balance
|
$ | 10,600 |
(a)
|
The
reserve for repurchase of loans is included in "other" under other
operating expenses in the accompanying consolidated statements of
income.
|
|
(c)
|
As
a result of the disruptions in the debt and secondary markets, the Company
sold $76.4 million (par value) and $535.4 million (par value) of federally
insured student loans to Union Bank & Trust Company (“Union Bank”), an
entity under common control with the Company, during the years ended
December 31, 2009 and 2008, respectively, in order to reduce the Company’s
exposure related to certain equity support provisions included in the
Company’s warehouse facility for FFELP
loans.
|
|
(d)
|
As
a result of the disruptions in the debt and secondary markets, the Company
sold $1.3 billion (par value) of federally insured student loans in order
to reduce the amount of student loans remaining under the Company’s
warehouse facility for FFELP loans, which reduced the Company’s exposure
related to certain equity support provisions included in this
facility.
|
F-23
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
8.
|
Bonds
and Notes Payable
|
The
following tables summarize the Company’s outstanding bonds and notes payable by
type of instrument as of December 31, 2009 and 2008:
2009
|
|||||||||
Carrying
|
Interest
rate
|
||||||||
amount
|
range
|
Final
maturity
|
|||||||
Variable-rate
bonds and notes (a):
|
|||||||||
Bonds
and notes based on indices
|
$ | 20,187,356 | 0.26% - 6.90% |
05/26/14
- 04/25/42
|
|||||
Bonds
and notes based on auction or remarketing
|
1,726,960 | 0.21% - 3.73% |
05/01/11
- 07/01/43
|
||||||
Total
variable-rate bonds and notes
|
21,914,316 | ||||||||
Commercial
paper - FFELP facility (b)
|
305,710 | 0.21% - 0.32% |
08/03/12
|
||||||
Fixed-rate
bonds and notes (a)
|
8,940 | 6.15% - 6.34% |
07/02/20
- 05/01/29
|
||||||
Unsecured
fixed rate debt
|
264,966 |
5.125%
and 7.40%
|
06/01/10
and 09/15/61
|
||||||
Unsecured
line of credit
|
691,500 | 0.73% |
05/08/12
|
||||||
Department
of Education Participation
|
463,912 | 0.79% |
09/30/10
|
||||||
Department
of Education Conduit
|
1,125,929 | 0.27% |
05/08/14
|
||||||
Other
borrowings
|
30,016 | 0.24% - 5.10% |
01/01/10
- 11/01/15
|
||||||
$ | 24,805,289 |
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 (c)
|
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 (b)
|
1,445,327 | 1.32% - 2.94% |
05/09/10
|
||||||
Commercial
paper - private loan facility (b)
|
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 |
5.125%
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)
|
Loan
warehouse facilities
|
|
(c)
|
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.
|
F-24
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
Secured
Financing Transactions
The
Company has historically relied upon secured financing vehicles as its most
significant source of funding for student loans. The net cash flow the Company
receives from the securitized student loans generally represents the excess
amounts, if any, generated by the underlying student loans over the amounts
required to be paid to the bondholders, after deducting servicing fees and any
other expenses relating to the securitizations. The Company’s rights to cash
flow from securitized student loans are subordinate to bondholder interests and
may fail to generate any cash flow beyond what is due to bondholders. The
Company’s secured financing vehicles are loan warehouse facilities, asset-backed
securitizations, and the government’s Participation and Conduit Programs (as
described below).
The
majority of the bonds and notes payable are primarily secured by the student
loans receivable, related accrued interest, and by the amounts on deposit in the
accounts established under the respective bond resolutions or financing
agreements. Certain variable rate bonds and notes and fixed rate bonds 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.
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 and 2009-2010 academic years
pursuant to the Department’s Participation Program and a participation agreement
with Union Bank.
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. To support its funding needs on a short-term basis, the
Company historically relied upon a multi-year committed facility for FFELP loans
and a $250.0 million private loan warehouse for non-federally insured student
loans.
FFELP Warehouse
Facility
On August
3, 2009, the Company entered into a FFELP warehouse facility (the “2009 FFELP
Warehouse Facility”). The 2009 FFELP Warehouse Facility has a maximum financing
amount of $500.0 million, with a revolving financing structure supported by
364-day liquidity provisions, which expire on August 2, 2010. The final maturity
date of the facility is August 3, 2012. In the event the Company is unable to
renew the liquidity provisions by August 2, 2010, the facility would become a
term facility at a stepped-up cost, with no additional student loans being
eligible for financing, and the Company would be required to refinance the
existing loans in the facility by August 3, 2012.
The 2009
FFELP Warehouse Facility provides for formula based advance rates depending on
FFELP loan type, up to a maximum of 92 percent to 98 percent of the principal
and interest of loans financed. The advance rates for collateral may increase or
decrease based on market conditions. The facility contains financial covenants
relating to levels of the Company’s consolidated net worth, ratio of adjusted
EBITDA to corporate debt interest, and unencumbered cash. Any violation of these
covenants could result in a requirement for the immediate repayment of any
outstanding borrowings under the facility. As of December 31, 2009, the Company
was in compliance with all of these requirements. Unlike the Company’s prior
FFELP warehouse facility, the new facility does not require the Company to
refinance or remove a percentage of the pledged student loan collateral on an
annual basis. As of December 31, 2009, $305.7 million was outstanding under this
facility and $194.3 million was available for future use.
The
Company’s prior FFELP warehouse facility was supported by 364-day liquidity
which was up 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. The terms and
conditions of the prior FFELP warehouse facility provided for formula-based
advance rates based on market conditions. As of December 31, 2008, the Company
had $1.6 billion of student loans in the facility, $1.4 billion borrowed under
the facility, and $280.6 million in cash posted as equity funding support for
this facility. During 2009, the Company refinanced the student loans in this
facility which allowed the Company to withdraw all remaining equity funding
support from the facility. The Company refinanced these loans using the
following facilities:
F-25
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
|
·
|
In
March 2009, the Company completed a privately placed asset-backed
securitization of $294.6 million.
|
|
·
|
In
June 2009, the Company accessed the Department’s Conduit Program (as
further discussed below).
|
|
·
|
In
August 2009, the Company refinanced all remaining loans using the 2009
FFELP Warehouse Facility and terminated the prior FFELP
facility.
|
Private Loan Warehouse
Facility
On
February 25, 2009, the Company paid $91.5 million on the outstanding debt of its
private loan warehouse facility with operating cash and terminated the
facility. Beginning in January 2008, the Company suspended private
student loan originations.
Asset-backed
securitizations
During
2009 and 2008, the Company completed asset-backed securities transactions
totaling $1.0 billion and $4.5 billion, respectively. Notes issued in the 2009
and 2008 asset-backed securities transactions carry interest rates based on a
spread to LIBOR. As part of the Company’s issuance of asset-backed securities 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 Company’s 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 Company’s 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, 2009 and 2008, the Euro Notes were recorded on the
Company’s 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 an increase of $37.7 million for the year ended December 31, 2009, a
decrease of $52.9 million for the year ended December 31, 2008, and an increase
of $108.7 million for the year ended December 31, 2007. These changes
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.
The
interest rates on certain of the Company's 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 $1.4 billion of Auction Rate
Securities and $0.3 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 Company’s 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, 2009, 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.
F-26
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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 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.
Department
of Education’s Loan Participation and Purchase Commitment Programs
In August
2008, the Department implemented the Purchase Program and the Participation
Program pursuant to the Ensuring Continued Access to Student Loans Act of 2008
(“ECASLA”). Under the Department’s 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 had to be either refinanced by the
lender or sold to the Department pursuant to the Purchase Program prior to
October 15, 2009. To be eligible for purchase or participation under the
Department’s 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 Department’s 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 October
15, 2009 to September 30, 2010. The Department indicated that loans for the
2008-2009 academic year which were funded under the
Department's Participation Program would need to be refinanced or sold to
the Department prior to October 15, 2009. On November 8, 2008, the Department
announced the replication of the terms of the Participation and Purchase
Programs, in accordance with the October 7, 2008 legislation, which includes
FFELP student loans made for the 2009-2010 academic year.
As of
December 31, 2009 and 2008, the Company had $463.9 million and $622.2 million,
respectively, borrowed under the Participation Program. The Company
plans to continue to use the Participation Program to fund certain loans through
the 2009-2010 academic year. These programs are allowing the Company to continue
originating new federal student loans to all students regardless of the school
they attend.
Department
of Education’s Conduit Program
In
January 2009, the Department published summary terms for its program 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 had to be first
disbursed on or after October 1, 2003, but not later than June 30, 2009, and
fully disbursed before September 30, 2009, and meet certain other requirements.
The Conduit Program was launched on May 11, 2009. Funding for the Conduit
Program is provided by the capital markets at a cost based on market rates, with
the Company being advanced 97 percent of the student loan face amount. Excess
amounts needed to fund the remaining 3 percent of the student loan balances are
contributed by the Company. The Conduit Program has a term of five years and
expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”)
issued by the Conduit Program are supported by a combination of (i)
notes backed by FFELP loans, (ii) a liquidity agreement with the Federal
Financing Bank, and (iii) a put agreement provided by the
Department. If the conduit does not have sufficient funds to pay all
Student Loan Notes, then those Student Loan Notes will be repaid with funds from
the Federal Financing Bank. The Federal Financing Bank will hold the
notes for a short period of time and, if at the end of that time, the Student
Loan Notes still cannot be paid off, the underlying FFELP loans that serve as
collateral to the Conduit Program will be sold to the Department through the Put
Agreement at a price of 97 percent of the face amount of the
loans. As of December 31, 2009, the Company had $1.1 billion borrowed
under the facility and $66.8 million advanced as equity support in the
facility.
F-27
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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, 2009 and 2008, $613.3 million and
$548.4 million, respectively, of loans were subject to outstanding participation
interests held by Union Bank, as trustee, under this agreement. The agreement
automatically renews annually and is terminable by either party upon five
business days notice. This agreement provides beneficiaries of Union Bank’s
grantor trusts with access to investments in interests in student loans, while
providing liquidity to the Company on a short term basis. The Company can
participate loans to Union Bank to the extent of availability under the grantor
trusts, up to $750 million or an amount in excess of $750 million if mutually
agreed to by both parties. Loans participated under this agreement have been
accounted for by the Company as loan sales. Accordingly, the
participation interests sold are not included on the Company’s consolidated
balance sheet.
Unsecured
Line of Credit
The
Company has a $750.0 million unsecured line of credit that terminates in May
2012. As of December 31, 2009 and 2008, there was $691.5 million
outstanding on this line. The weighted average interest rate on this
line of credit was 0.73% as of December 31, 2009. Upon termination in
2012, there can be no assurance that the Company will be able to maintain this
line of credit, find alternative funding, or increase the amount outstanding
under the line, if necessary. The lending commitment under the
Company’s unsecured line of credit is provided by a total of thirteen banks,
with no individual bank representing more than 11% of the total lending
commitment. The bank lending group includes Lehman Brothers Bank (“Lehman”), a
subsidiary of Lehman Brothers Holdings Inc., which represents approximately 7%
of the lending commitment under the line of credit. On September 15, 2008,
Lehman Brothers Holdings Inc. filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. The Company does not expect
that Lehman will fund future borrowing requests. As of December 31, 2009,
excluding Lehman’s 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:
|
·
|
A
minimum consolidated net worth
|
|
·
|
A
minimum adjusted EBITDA to corporate debt interest (over the last four
rolling quarters)
|
|
·
|
A
limitation on subsidiary
indebtedness
|
|
·
|
A
limitation on the percentage of non-guaranteed loans in the Company’s
portfolio
|
As of
December 31, 2009, the Company was in compliance with all of these requirements.
Many of these covenants are duplicated in the Company’s other lending
facilities, including its FFELP warehouse facilities.
The
Company’s operating line of credit does not have any covenants related to
unsecured debt ratings. However, changes in the Company’s ratings (as
well as the amounts the Company borrows) have modest implications on the pricing
level at which the Company obtains funding.
A default
on the 2009 FFELP Warehouse Facility would result in an event of default on the
Company’s unsecured line of credit that would result in the outstanding balance
on the line of credit becoming immediately due and payable.
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 Company’s 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.
F-28
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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 Company’s 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).
During
2009, the Company repurchased certain amounts of its unsecured fixed rate debt
as summarized below.
Other
Borrowings
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, 2009
and 2008, the outstanding balance on the note was $4.9 million and $5.0 million,
respectively.
As of
December 31, 2009 and 2008, bonds and notes payable included $10.0 million and
$8.0 million, respectively, of notes due to a third-party. The
Company used the proceeds from these notes to invest in non-federally insured
student loan assets via a participation agreement.
As of
December 31, 2009, bonds and notes payable included a line of credit with a
balance of $15.1 million. The Company used the proceeds from the line
of credit to purchase federally insured student loans.
As of
December 31, 2008, bonds and notes payable included $21.5 million of notes due
to Union Bank. The Company 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 loans
participated under this agreement do not qualify as loan sales.
Debt
Repurchases
During
2009, the Company repurchased outstanding debt as summarized below. There were
no debt repurchases in 2008 and 2007. Gains recorded by the Company from the
repurchase of debt are included in “other income” on the Company’s consolidated
statements of income for the year ended December 31, 2009.
Notional
amount
|
Purchase
price
|
Gain
|
Remaining
balance
|
|||||||||||||
5.125%
Senior Notes due 2010
|
$ | 208,284 | 196,529 | 11,755 | $ | 66,716 | ||||||||||
Junior
Subordinated Hybrid Securities
|
1,750 | 350 | 1,400 | $ | 198,250 | |||||||||||
Asset-backed
securities
|
348,155 | 319,627 | 28,528 | |||||||||||||
$ | 558,189 | 516,506 | 41,683 |
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, 2009 are due in varying amounts as
shown below.
2010
|
$ | 861,471 | ||
2011
|
49,200 | |||
2012
|
691,500 | |||
2013
|
— | |||
2014
|
1,471,087 | |||
2015
and thereafter
|
21,732,031 | |||
$ | 24,805,289 |
Generally,
the Company’s 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 Company’s 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, 2009 and 2008, $34.3 million and $31.9 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, 2009.
9.
|
Derivative
Financial Instruments
|
The
Company is exposed to certain risks relating to its ongoing business
operations. The primary risks managed by using derivative instruments
are interest rate risk and foreign currency exchange risk.
Interest
Rate Risk
The
Company’s primary market risk exposure arises from fluctuations in its borrowing
and lending rates, the spread between which could impact the Company due to
shifts in market interest rates. Because the Company generates a significant
portion of its earnings from its student loan spread, the interest rate
sensitivity of the balance sheet is a key profitability driver. The
Company has adopted a policy of periodically reviewing the mismatch related to
the interest rate characteristics of its assets and liabilities together with
the Company's 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.
Basis
Swaps
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
three-month LIBOR, set by auction, or through a remarketing process. The income
generated by the Company’s student loan assets is generally driven by short term
indices (treasury bills, commercial paper, and certain fixed rates) that are
different from those which affect the Company’s liabilities, 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 Company’s student loan spread to compress, while in a rising rate
environment, it may cause the spread to increase. As of December 31,
2009, the Company had $22.4 billion and $1.0 billion of FFELP loans indexed to
the three-month financial commercial paper rate and the three-month treasury
bill rate, respectively, both of which reset daily, and $20.2 billion of debt
indexed to three-month LIBOR, which resets quarterly.
Because
of the different index types and different index reset frequencies, the Company
is exposed to interest rate risk in the form of basis risk and repricing risk,
which, as noted above, is the risk that the different indices may reset at
different frequencies, or will not move in the same direction or with the same
magnitude. While these indices are short term with rate movements that are
highly correlated over a longer period of time, capital market dislocations or
other factors not within the Company’s control can impact the level of
correlation on these indices.
F-30
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
Company has used derivative instruments to hedge both the basis and repricing
risk on certain student loans in which the Company earns interest based on a
treasury bill rate that resets daily and are funded with debt indexed to
primarily three-month LIBOR. To hedge these loans, the Company has
entered into basis swaps in which the Company receives three-month LIBOR set
discretely in advance and pays a weekly treasury bill rate plus a spread as
defined in the agreement (“T-Bill/LIBOR Basis Swaps”).
However,
the Company does not generally hedge the basis risk on those assets indexed to
the commercial paper rate that are funded with liabilities in which the Company
pays primarily on the LIBOR index, since the derivatives needed to hedge this
risk are generally illiquid or non-existent and the relationship between these
indices has been highly correlated over a long period of time.
The
Company has also used derivative instruments to hedge the repricing risk due to
the timing of the interest rate resets on its assets and
liabilities. The Company has entered into basis swaps in which the
Company:
|
·
|
receives
three-month LIBOR set discretely in advance and pays a daily weighted
average three-month LIBOR less a spread as defined in the agreements (the
“Average/Discrete Basis Swaps”)
|
|
·
|
receives
three-month LIBOR and pays one-month LIBOR plus or minus a spread as
defined in the agreements (the “1/3 Basis
Swaps”)
|
The
following table summarizes the Company’s basis swaps outstanding as of December
31, 2009 and 2008:
2009
|
||||||||||||
Notional
amount
|
||||||||||||
Maturity
|
Average/Discrete
Basis
Swaps
|
1/3
Basis Swaps
|
T-Bill/LIBOR
Basis
Swaps
|
|||||||||
2010
|
$ | — | 1,000,000 | — | ||||||||
2011
(a)
|
— | — | 225,000 | |||||||||
2013
|
— | 500,000 | — | |||||||||
2014
|
— | 500,000 | — | |||||||||
2018
|
— | 1,300,000 | — | |||||||||
2019
|
— | 500,000 | — | |||||||||
2021
|
— | 250,000 | — | |||||||||
2023
|
— | 1,250,000 | — | |||||||||
2024
|
— | 250,000 | — | |||||||||
2028
|
— | 100,000 | — | |||||||||
2039
|
— | 150,000 | — | |||||||||
$ | — | 5,800,000 | 225,000 |
(a)
|
These
derivatives have forward effective start dates of October 2010 ($75
million), November 2010 ($75 million), and December 2010 ($75
million).
|
F-31
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
2008
|
||||||||||||
Notional
amount
|
||||||||||||
Average/Discrete
Basis
Swaps
|
1/3
Basis Swaps
|
T-Bill/LIBOR
Basis
Swaps
|
||||||||||
Maturity
|
||||||||||||
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 | — |
During
the years ended December 31, 2009 and 2008, the Company terminated and/or
amended certain basis swap agreements for net receipts of $3.9 million and $14.3
million, respectively, and net payments of $15.1 million and $3.3 million,
respectively. No basis swaps were terminated and/or amended in
2007.
Interest
rate swaps
FFELP
loans originated prior to April 1, 2006 generally earn interest at the higher of
a floating rate based on the Special Allowance Payment (or SAP) formula set by
the Department and the borrower rate, which is fixed over a period of time. The
SAP formula is based on an applicable index plus a fixed spread that is
dependent upon when the loan was originated, the loan’s repayment status, and
funding sources for the loan. The Company generally finances its student loan
portfolio with variable rate debt. In low and/or declining interest rate
environments, when the fixed borrower rate is higher than the rate produced by
the SAP formula, the Company’s student loans earn at a fixed rate while the
interest on the variable rate debt typically continues to decline. In these
interest rate environments, the Company may earn additional spread income that
it refers to as floor income.
Depending
on the type of loan and when it was originated, the borrower rate is either
fixed to term or is reset to an annual rate each July 1. As a result, for loans
where the borrower rate is fixed to term, the Company may earn floor income for
an extended period of time, which the Company refers to as fixed rate floor
income, and for those loans where the borrower rate is reset annually on July 1,
the Company may earn floor income to the next reset date, which the Company
refers to as variable rate floor income. In accordance with legislation enacted
in 2006, lenders are required to rebate fixed rate floor income and variable
rate floor income to the Department for all FFELP loans first originated on or
after April 1, 2006.
Absent
the use of derivative instruments, a rise in interest rates may reduce the
amount of floor income received and this may have an impact on earnings due to
interest margin compression caused by increasing financing costs, until such
time as the federally insured loans earn interest at a variable rate in
accordance with their special allowance payment formulas. In higher interest
rate environments, where the interest rate rises above the borrower rate and
fixed rate loans effectively become variable rate loans, the impact of the rate
fluctuations is reduced.
As
previously disclosed, the Company reached a settlement agreement with the
Department to resolve an audit related to the Company’s 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
Company’s 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:
F-32
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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.
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.
As of
December 31, 2009, the Company held the following interest rate derivatives to
hedge fixed-rate student loan assets earning fixed rate floor
income.
Weighted
|
||||||||
average
fixed
|
||||||||
Notional
|
rate
paid by
|
|||||||
Maturity
|
Amount
|
the
Company (a)
|
||||||
2010
|
$ | 4,750,000 | 0.54 | % | ||||
2011
|
150,000 | 1.03 | ||||||
$ | 4,900,000 | 0.55 | % |
(a)
For all interest rate derivatives, the Company receives
|
||
discrete
three-month LIBOR.
|
F-33
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
Foreign
Currency Exchange Risk
During
2006, the Company completed separate debt offerings of student loan asset-backed
securities that included 420.5 million and 352.7 million Euro Notes with
interest rates based on a spread to the EURIBOR index. As a result of 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 Company’s balance sheet in U.S. dollars based on the foreign
currency exchange rate on that date. Changes in the principal and accrued
interest amounts as a result of foreign currency exchange rate fluctuations are
included in the “derivative market value, foreign currency, and put option
adjustments and derivative settlements, net” in the Company’s consolidated
statements of income.
The
Company entered into cross-currency interest rate swaps in connection with the
issuance of the Euro Notes. Under the terms of these derivative instrument
agreements, the Company receives from a counterparty a spread to the EURIBOR
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
following table shows the income statement impact as a result of the
re-measurement of the Euro Notes and the change in the fair value of the related
derivative instruments for the periods ended December 31, 2009, 2008, and
2007. These items are included in “Derivative market value, foreign
currency, and put option adjustments and derivative settlements, net” on the
accompanying consolidated statements of income.
2009
|
2008
|
2007
|
||||||||||
Re-measurement
of Euro Notes
|
$ | (37,654 | ) | 52,886 | (108,712 | ) | ||||||
Change
in fair value of cross currency interest rate swaps
|
2,497 | (24,436 | ) | 125,532 | ||||||||
Total
impact to statements of income - (expense) income
|
$ | (35,157 | ) | 28,450 | 16,820 |
The
re-measurement of the Euro-denominated bonds generally correlates with the
change in fair value of the cross-currency interest rate swaps. However, the
Company will experience unrealized gains or losses related to the cross-currency
interest rate swaps if the two underlying indices (and related forward curve) do
not move in parallel. Management intends to hold the cross-currency interest
rate swaps through the maturity of the Euro-denominated bonds.
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.
Accounting
for Derivative Financial Instruments
The
Company records derivative instruments on the consolidated balance sheet as
either an asset or liability measured at its fair value. Management has
structured all of the Company’s derivative transactions with the intent that
each is economically effective; however, the Company’s derivative instruments do
not qualify for hedge accounting. As a result, the change in fair
value of the Company’s derivatives at each reporting date are included in
“derivative market value, foreign currency, and put option adjustments and
derivative settlements, net” in the Company’s consolidated statements of income.
Changes or shifts in the forward yield curve and fluctuations in currency rates
can significantly impact the valuation of the Company’s derivatives.
Accordingly, changes or shifts to the forward yield curve and fluctuations in
currency rates will impact the financial position and results of operations of
the Company.
Any
proceeds received or payments made by the Company to terminate a derivative in
advance of its expiration date, or to amend the terms of an existing derivative,
are included in “derivative market value, foreign currency, and put option
adjustments and derivative settlements, net” on the consolidated statements of
income and are accounted for as a change in fair value on such
derivative.
F-34
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 fair value of the Company’s derivatives not
designated as hedging instruments as of December 31, 2009 and 2008:
Fair
value of asset derivatives
|
Fair
value of liability derivatives
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
rate swaps
|
$ | 4,497 | — | 2,230 | — | |||||||||||
Average/discrete
basis swaps
|
— | 2,817 | — | 1,800 | ||||||||||||
1/3
basis swaps
|
17,768 | 5,037 | — | 15 | ||||||||||||
T-Bill/LIBOR
basis swaps
|
— | — | 259 | — | ||||||||||||
Cross-currency
interest rate swaps
|
169,817 | 167,320 | — | — | ||||||||||||
Other
|
1,817 | — | — | — | ||||||||||||
Total
|
$ | 193,899 | 175,174 | 2,489 | 1,815 |
The
following table summarizes the effect of derivative instruments in the
consolidated statements of income for the years ended December 31, 2009, 2008,
and 2007. All gains and losses recognized in income related to the
Company’s derivative activity are included in “Derivative market value, foreign
currency, and put option adjustments and derivative settlements, net”, on the
consolidated statements of income.
Amount
of gain (or loss) recognized
|
||||||||||||
Derivatives
not designated as hedging
|
in
income on derivatives
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Settlements:
|
||||||||||||
Interest
rate swaps
|
$ | (2,020 | ) | (15,036 | ) | 16,803 | ||||||
Average/discrete
basis swaps
|
11,483 | 44,947 | 7,319 | |||||||||
1/3
basis swaps
|
21,192 | 1,805 | 1,215 | |||||||||
T-Bill/LIBOR
basis swaps
|
— | — | — | |||||||||
Cross-currency
interest rate swaps
|
8,631 | 23,941 | (6,660 | ) | ||||||||
Other
|
— | — | — | |||||||||
Total
settlements
|
39,286 | 55,657 | 18,677 | |||||||||
Change
in fair value:
|
||||||||||||
Interest
rate swaps
|
4,084 | (4,346 | ) | (13,319 | ) | |||||||
Average/discrete
basis swaps
|
(13,647 | ) | (19,190 | ) | 26,638 | |||||||
1/3
basis swaps
|
12,587 | 8,220 | 295 | |||||||||
T-Bill/LIBOR
basis swaps
|
(101 | ) | — | — | ||||||||
Cross-currency
interest rate swaps
|
2,497 | (24,436 | ) | 125,532 | ||||||||
Other
|
1,432 | 1,176 | — | |||||||||
Total
change in fair value
|
6,852 | (38,576 | ) | 139,146 | ||||||||
Total
impact to statements of income - (expense) income
|
$ | 46,138 | 17,081 | 157,823 |
Derivative
Instruments - Credit and Market Risk
By using
derivative instruments, the Company is exposed to credit and market
risk.
When the
fair value of a derivative instrument is negative, the Company would owe the
counterparty if the derivative was settled and, therefore, has no immediate
credit risk. Additionally, if the negative fair value of derivatives
with a counterparty exceeds a specified threshold, the Company may have to make
a collateral deposit with the counterparty. The threshold at which the Company
posts collateral may depend on the Company’s 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 Company’s liquidity and
capital resources.
When the
fair value of a derivative contract is positive, this generally indicates that
the counterparty would owe the Company if the derivative was settled. If the
counterparty fails to perform, credit risk with such counterparty is equal to
the extent of the fair value gain in the derivative less any collateral held by
the Company. As of December 31, 2009, the Company held $329 million
of collateral from the counterparty on the cross-currency interest rate
swaps.
F-35
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
Company attempts to manage market and credit risks associated with interest and
foreign currency exchange rates by establishing and monitoring limits as to the
types and degree of risk that may be undertaken, and by entering into
transactions with high-quality counterparties that are reviewed periodically by
the Company’s risk committee. The Company also has a policy of requiring that
all derivative contracts be governed by an International Swaps and Derivatives
Association, Inc. Master Agreement.
10.
|
Derivative
Market Value, Foreign Currency, and Put Option Adjustments and Derivative
Settlements, net
|
The
following table summarizes the components of “Derivative market value, foreign
currency, and put option adjustments and derivative settlements, net” included
in the consolidated statements of income for the years ended December 31, 2009,
2008, and 2007.
2009
|
2008
|
2007
|
||||||||||
Change
in fair value of derivatives
|
$ | 6,852 | (38,576 | ) | 139,146 | |||||||
Foreign
currency transaction adjustment
|
(37,654 | ) | 52,886 | (108,712 | ) | |||||||
Change
in fair value of put options
|
||||||||||||
issued
in business acquisitions
|
— | (3,483 | ) | (3,628 | ) | |||||||
Derivative
settlements, net
|
39,286 | 55,657 | 18,677 | |||||||||
Derivative
market value, foreign currency,
|
||||||||||||
and
put option adjustments and
|
||||||||||||
derivative
settlements, net
|
$ | 8,484 | 66,484 | 45,483 |
11.
|
Shareholders’
Equity
|
Classes
of Common Stock
The
Company’s 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 holder’s 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.
Dividends
In the
first quarter of 2007, the Company began paying dividends of $0.07 per share on
the Company's 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. On November 5,
2009, the Company's Board of Directors voted to reinstate the quarterly dividend
program. Accordingly, a dividend of $0.07 per share on the Company's Class
A and Class B Common Stock was paid on December 15, 2009 to all holders of
record as of December 1, 2009.
Conversion
of Class B Common Stock
During
2007, principal shareholders gifted 10,435 shares of Class B common stock to
certain charitable organizations. Per the articles of incorporation, these
shares were voluntarily converted to Class A shares upon transfer. Also, in
2007, in anticipation of selling shares to the Company under the Company’s 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.
F-36
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
Put
Option Settlements
On July
19, 2007, the Company paid $15.9 million to redeem 238,237 shares of the
Company's 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 Management Co. The 238,237 shares of Class A common stock
purchased by the Company were retired resulting in a $5.4 million decrease to
the Company’s consolidated shareholders’ equity.
In
addition, on November 10, 2008, the Company paid $9.6 million to redeem 258,760
shares of the Company’s 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 Company’s Class A
common stock on the open market, through private transactions, or otherwise.
During the years ended December 31, 2009, 2008, and 2007, the Company
repurchased and retired 38,429 shares, 388,204 shares, and 3,372,122 shares of
Class A common stock, respectively, for $0.4 million (average price of $11.17
per share), $11.1 million (average price of $28.69 per share), and $82.1 million
(average price of $24.33 per share), respectively. 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. As of
December 31, 2009, 4,833,907 shares may yet be purchased under the Company’s
stock repurchase program.
12.
|
Earnings
per Common Share
|
Presented
below is a summary of the components used to calculate basic and diluted
earnings per share. On January 1, 2009, the Company began applying the two-class
method of computing earnings per share. The two-class method requires the
calculation of separate earnings per share amounts for unvested share-based
awards and for common stock. Unvested share-based awards that contain
nonforfeitable rights to dividends are considered securities which participate
in undistributed earnings with common stock. Earnings per share attributable to
common stock is shown in the table below. Prior period earnings per share data
has been retroactively adjusted to conform to the current
presentation.
A
reconciliation of weighted average shares outstanding for the years ended
December 31, 2009, 2008, and 2007 follows:
2009
|
2008
|
2007
|
||||||||||
Net
income attributable to Nelnet, Inc.
|
$ | 139,125 | 28,662 | 32,854 | ||||||||
Less
earnings allocated to unvested restricted stockholders
|
889 | 210 | 144 | |||||||||
Net
income available to common stockholders
|
$ | 138,236 | 28,452 | 32,710 | ||||||||
Weighted
average common shares outstanding - basic
|
49,484,816 | 49,099,967 | 49,618,107 | |||||||||
Dilutive
effect of the assumed vesting of restricted stock awards
|
200,327 | 224,311 | 114,866 | |||||||||
Weighted
average common shares outstanding - diluted
|
49,685,143 | 49,324,278 | 49,732,973 | |||||||||
Basic
earnings per common share
|
$ | 2.79 | 0.58 | 0.66 | ||||||||
Diluted
earnings per common share
|
$ | 2.78 | 0.58 | 0.66 |
Included
in the Company’s weighted average shares outstanding during the years ended
December 31, 2009, 2008, and 2007 is 96,622 shares, 54,573 shares, and 24,412
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 Company’s
nonemployee directors’ compensation plan (see note 19).
F-37
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
13.
|
Other
Income
|
The
following table summarizes the components of “other income” included in the
consolidated statements of income for the years ended December 31, 2009, 2008,
and 2007.
2009
|
2008
|
2007
|
|||||||
Gains
on debt repurchases, net
|
$ |
41,683
|
—
|
—
|
|||||
Borrower
late fee income
|
11,305
|
11,515
|
8,207
|
||||||
Gain
on sale of equity method investment (a)
|
3,500
|
—
|
3,942
|
||||||
Other
|
11,664
|
11,260
|
18,274
|
||||||
Other
income
|
$ |
$68,152
|
22,775
|
30,423
|
|||||
(a)
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 not an affiliated entity of the
Company. The Company recognized an initial gain on the sale of
Premiere of $3.9 million. 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.
|
14.
|
Restricted
Investments
|
The
Company’s restricted investments, included in “restricted cash and investments”
in the attached consolidated balance sheets, by contractual maturity, as of
December 31, 2009 and 2008, are shown below. See note 3 for the
Company’s accounting policy related to restricted investments.
2009
|
2008
|
|||||||
Over
1 year through 5 years
|
$ | 48,090 | 31,111 | |||||
After
5 years through 10 years
|
7,620 | 238,561 | ||||||
After
10 years
|
251,252 | 340,196 | ||||||
$ | 306,962 | 609,868 |
15.
|
Property
and Equipment
|
Property
and equipment consisted of the following as of December 31, 2009 and
2008:
Useful
life
|
2009
|
2008
|
||||||||||
Computer
equipment and software
|
1-5
years
|
$ | 80,501 | 83,200 | ||||||||
Office
furniture and equipment
|
3-7
years
|
13,049 | 13,206 | |||||||||
Leasehold
improvements
|
1-15
years
|
11,792 | 11,949 | |||||||||
Transportation
equipment
|
3-10
years
|
3,771 | 3,771 | |||||||||
Buildings
|
5-39
years
|
8,320 | 8,534 | |||||||||
Land
|
— | 700 | 700 | |||||||||
118,133 | 121,360 | |||||||||||
Accumulated
depreciation
|
91,527 | 82,613 | ||||||||||
$ | 26,606 | 38,747 |
Depreciation
expense for the years ended December 31, 2009, 2008, and 2007 related to
property and equipment was $13.4 million, $17.4 million, and
$17.0 million, respectively.
F-38
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
16.
|
Income
Taxes
|
The
Company is subject to income taxes in the United States and
Canada. Significant judgment is required in evaluating the Company’s
tax positions and determining the provision for income taxes. During
the ordinary course of business, there are many transactions and calculations
for which the ultimate tax determination is uncertain.
On
January 1, 2007, the Company adopted the provisions of Accounting Standards
Codification Subtopic 740, which clarified the accounting for uncertainty in
income tax positions. This standard 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, 2009, the total amount of gross unrecognized tax benefits
(excluding the federal benefit received from state positions) was $8.6 million.
Of this total, $6.3 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 $2.0 million prior to
December 31, 2010 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 $1.3 million, if recognized, would affect the Company’s effective
tax rate. A reconciliation of the beginning and ending amount of gross
unrecognized tax benefits for the years ended December 31, 2009 and 2008
follows:
2009
|
2008
|
|||||||
Gross
balance - beginning of year
|
$ | 8,275 | 8,359 | |||||
Additions
based on tax positions of prior years
|
1,082 | 938 | ||||||
Additions
based on tax positions related to the current year
|
3,159 | 999 | ||||||
Settlements
with taxing authorities
|
— | (62 | ) | |||||
Reductions
for tax positions of prior years
|
(3,779 | ) | (858 | ) | ||||
Reductions
based on tax positions related to the current year
|
— | — | ||||||
Reductions
due to lapse of applicable statute of limitations
|
(108 | ) | (1,101 | ) | ||||
Gross
balance - end of year
|
$ | 8,629 | 8,275 |
Substantially
all of the reductions due to the lapse of statute of limitations and for prior
year tax positions shown above impacted the effective tax rate.
The
Company's 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, 2009 and 2008, approximately $1.2 million and $1.6 million in
accrued interest and penalties, respectively, was included in other liabilities.
The Company recognized interest income related to uncertain tax positions of
approximately $575,000 for the year ended December 31, 2009 and interest expense
of approximately $72,000 and approximately $80,000 for the years ended December
31, 2008 and 2007, respectively. Penalties were accrued in 2009 totaling
$235,000. 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.
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. As the Company effectively
settled with the Internal Revenue Service for tax years 2005 and 2006, it is no
longer subject to U.S. federal income tax examinations for years prior to 2007.
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, 2009, the
tax years subject to examination by a significant jurisdiction are as
follows:
California 2004
through 2006
New
York 2004
through 2006
F-39
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
provision for income taxes from continuing operations for the years ended
December 31, 2009, 2008, and 2007 consists of the following
components:
2009
|
2008
|
2007
|
||||||||||
Current:
|
||||||||||||
Federal
|
$ | 88,413 | 25,073 | 45,016 | ||||||||
State
|
7,194 | 2,270 | 1,674 | |||||||||
Foreign
|
23 | 21 | 5 | |||||||||
Total
current provision
|
95,630 | 27,364 | 46,695 | |||||||||
Deferred:
|
||||||||||||
Federal
|
(15,947 | ) | (7,256 | ) | (24,105 | ) | ||||||
State
|
(3,111 | ) | (2,217 | ) | (874 | ) | ||||||
Foreign
|
1 | 5 | — | |||||||||
Total
deferred provision (benefit)
|
(19,057 | ) | (9,468 | ) | (24,979 | ) | ||||||
Provision
for income taxes
|
$ | 76,573 | 17,896 | 21,716 |
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, 2009, 2008, and
2007 are shown below:
2009
|
2008
|
2007
|
||||||||||
Tax
expense at federal rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase
(decrease) resulting from:
|
||||||||||||
State
tax, net of federal income tax benefit
|
1.9 | 0.9 | 2.2 | |||||||||
Resolution
of uncertain federal and state tax matters
|
— | (0.9 | ) | (0.4 | ) | |||||||
Tax
credits
|
(0.4 | ) | (1.9 | ) | (3.6 | ) | ||||||
Put
option on common stock
|
— | 4.2 | 3.4 | |||||||||
Valuation
allowance
|
(0.6 | ) | 0.8 | — | ||||||||
Other,
net
|
(0.4 | ) | 1.9 | 1.4 | ||||||||
Effective
tax rate
|
35.5 | % | 40.0 | % | 38.0 | % |
F-40
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
Company’s 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, 2009 and 2008:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Student
loans
|
$ | 23,940 | 20,229 | |||||
Accrued
expenses
|
5,677 | 5,283 | ||||||
Depreciation
|
1,073 | 969 | ||||||
Deferred
revenue
|
441 | 536 | ||||||
Stock
compensation
|
863 | 875 | ||||||
Foreign
tax credit
|
1,041 | 1,339 | ||||||
Intangible
assets
|
8,771 | — | ||||||
Bond
issuance costs
|
740 | 1,994 | ||||||
Net
operating loss carryforwards
|
849 | 1,165 | ||||||
Other
|
— | 141 | ||||||
Total
gross deferred tax assets
|
43,395 | 32,531 | ||||||
Less,
valuation allowance
|
(763 | ) | (1,988 | ) | ||||
Deferred
tax assets
|
42,632 | 30,543 | ||||||
Deferred
tax liabilities:
|
||||||||
Loan
origination services
|
47,816 | 55,793 | ||||||
Basis
in certain derivative contracts
|
8,313 | 17,152 | ||||||
Debt
repurchases
|
15,225 | — | ||||||
Intangible
assets
|
— | 5,179 | ||||||
Prepaid
expenses
|
204 | 477 | ||||||
Other
|
158 | — | ||||||
Deferred
tax liabilities
|
71,716 | 78,601 | ||||||
Net
deferred income tax liability
|
$ | (29,084 | ) | (48,058 | ) |
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 Company’s 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 Company’s state net operating loss and foreign tax credit carry
forwards, it is management’s 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. The amount of deferred tax assets considered realizable; however,
could be reduced in the near terms if estimates of future taxable income during
the carry forward period are reduced. As of December 31, 2009, various
subsidiaries have state net operating loss carry forwards of $17.4 million
expiring at various times through 2028 and foreign tax credit carry forwards of
$1.0 million expiring in 2018. A valuation allowance has been established at
December 31, 2009 and 2008 to reduce deferred income tax assets to amounts
expected to be realized.
The
valuation allowance for deferred tax assets as of December 31, 2009 and 2008 was
$0.8 million and $2.0 million, respectively. The net change in the
valuation allowance for the year ended December 31, 2009 was a decrease of $1.2
million, which affected the Company’s effective tax rate. Certain
events occurred during the year which, in the judgment of management, changed
the level of the Company’s state net operating loss and foreign tax credit carry
forwards expected to be realized.
F-41
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
As of
December 31, 2009 and 2008, current income taxes receivable of $0.6 million
and payable of $5.3 million are included in “other assets” and “other
liabilities”, respectively, on the consolidated balance sheets.
17.
|
Fair
Value
|
The
following table presents the Company’s financial assets and liabilities that are
measured at fair value on a recurring basis as of December 31, 2009 and
2008. All financial assets and liabilities that are measured at fair
value are categorized as Level 1 or Level 2 based on the hierarchy as discussed
in note 3, summary of significant accounting policies and
procedures.
2009
|
||||||||||||
Level
1
|
Level
2
|
Total
|
||||||||||
Assets:
|
||||||||||||
Other
assets (a)
|
$ | 4,278 | — | 4,278 | ||||||||
Fair
value of derivative instruments (b)
|
— | 193,899 | 193,899 | |||||||||
Total
assets
|
$ | 4,278 | 193,899 | 198,177 | ||||||||
Liabilities:
|
||||||||||||
Fair
value of derivative instruments (b)
|
$ | — | 2,489 | 2,489 | ||||||||
Total
liabilities
|
$ | — | 2,489 | 2,489 |
2008
|
||||||||||||
Level
1
|
Level
2
|
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 on a recurring
basis. 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
Company’s policy to compare its derivative fair values to those received
by its counterparties in order to validate the model’s
outputs. Fair value of derivative instruments is comprised of
market value less accrued interest and excludes
collateral.
|
The Company measures certain assets at
fair value on a nonrecurring basis in accordance with GAAP. For the years ended
December 31, 2009 and 2008, these adjustments to fair value resulted from the
write-down to fair value of goodwill and intangible assets. For assets measured
at fair value on a nonrecurring basis during the years ended December 31,
2009 and 2008, that were still held in the balance sheet at each respective
period end, the following table provides the fair value hierarchy and the
carrying value of the related individual assets at year end.
Level
3
|
||||||||
2009
|
2008
|
|||||||
Goodwill
(a)
|
$ | 143,717 | 175,178 | |||||
Intangible
assets (b)
|
53,538 | 77,054 | ||||||
Property
and equipment, net (b)
|
26,606 | 38,747 | ||||||
$ | 223,861 | 290,979 |
F-42
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
|
(a)
|
Goodwill
is reviewed annually for impairment and whenever triggering events or
changes in circumstances indicate its carrying value may not be
recoverable.
|
|
(b)
|
Long-lived
assets, such as property and equipment and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
|
The
following table presents the fair value adjustments included in the consolidated
statements of income related to the decrease in value of the above
assets. The fair value adjustments were recorded by the Company as
impairment charges and are included in “impairment expense” in the consolidated
statements of income.
2009
|
2008
|
|||||||
Goodwill
|
$ | (31,461 | ) | (667 | ) | |||
Intangible
assets
|
(1,267 | ) | (13,373 | ) | ||||
Property
and equipment, net
|
— | (4,794 | ) | |||||
$ | (32,728 | ) | (18,834 | ) |
The
following table summarizes the fair values of all of the Company’s financial
instruments on the consolidated balance sheet as of December 31, 2009 and
2008:
2009
|
2008
|
|||||||||||||||
Fair
value
|
Carrying
value
|
Fair
value
|
Carrying
value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Student
loans receivable
|
$ | 24,387,267 | 23,926,957 | 25,743,732 | 25,413,008 | |||||||||||
Cash
and cash equivalents
|
338,181 | 338,181 | 189,847 | 189,847 | ||||||||||||
Restricted
cash
|
318,530 | 318,530 | 387,404 | 387,404 | ||||||||||||
Restricted
cash – due to customers
|
91,741 | 91,741 | 160,985 | 160,985 | ||||||||||||
Restricted
investments
|
306,926 | 306,962 | 609,868 | 609,868 | ||||||||||||
Accrued
interest receivable
|
329,313 | 329,313 | 471,878 | 471,878 | ||||||||||||
Other
assets
|
4,278 | 4,278 | 8,817 | 8,817 | ||||||||||||
Derivative
instruments
|
193,899 | 193,899 | 175,174 | 175,174 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Bonds
and notes payable
|
24,741,306 | 24,805,289 | 26,512,082 | 26,787,959 | ||||||||||||
Accrued
interest payable
|
19,831 | 19,831 | 81,576 | 81,576 | ||||||||||||
Due
to customers
|
91,741 | 91,741 | 160,985 | 160,985 | ||||||||||||
Derivative
instruments
|
2,489 | 2,489 | 1,815 | 1,815 |
F-43
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
methodologies for estimating the fair value of financial assets and liabilities
that are measured at fair value on a recurring basis are discussed
above. The remaining financial assets and liabilities were estimated
using the following methods and assumptions:
Student
Loans Receivable
The fair
value of student loans receivable is estimated at amounts recently paid and/or
received or amounts anticipated to be received by the Company to acquire and/or
sell similar loans in the market and/or the characteristics of the portfolio and
are considered to be fair value exit prices.
Cash
and Cash Equivalents, Restricted Cash, Restricted Cash – Due to Customers,
Restricted Investments, Accrued Interest Receivable/Payable and Due to
Customers
The
carrying amount approximates fair value due to the variable rate of interest
and/or the short maturities of these instruments.
Bonds
and Notes Payable
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.
18.
|
Commitments
and Contingencies
|
Leases
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, 2009, 2008, and 2007 was $10.4 million, $11.9
million, and $13.4 million, respectively. Minimum future rentals as of
December 31, 2009, under noncancelable operating leases are shown
below:
2010
|
$ | 7,995 | ||
2011
|
6,030 | |||
2012
|
5,375 | |||
2013
|
4,701 | |||
2014
|
1,932 | |||
2015
and thereafter
|
299 | |||
$ | 26,332 |
Future
rental commitments for leases have been reduced by minimum non-cancelable
sublease rentals aggregating approximately $2.1 million as of December 31,
2009.
Contingent
Considerations
infiNET
Integrated Solutions, Inc. (“infiNET”)
In 2004,
the Company purchased 50% of the stock of infiNET and, in 2006, purchased the
remaining 50% of infiNET’s stock. infiNET provides software for customer-focused
electronic transactions, information sharing, and electronic account and bill
presentment for colleges and universities. Consideration for the purchase of the
remaining 50% of the stock of infiNET included 95,380 restricted shares of the
Company’s Class A common stock. 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 $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
Company’s Class A common stock as of December 31, 2009 of $17.23 per share, the
Company’s 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. 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.
F-44
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”)
In 2005,
the Company purchased 100% of the capital stock of SMG and 100% of the
membership interests of NHR. 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. 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
Company’s obligations related to the contingencies per the terms of the
agreement. Additional consideration paid by the Company in 2007 and 2008, less
any amounts accrued, was recorded as an increase to goodwill.
CUnet,
LLC (“CUnet”)
In 2006,
the Company purchased 100% of the membership interests of CUnet. 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. In
addition to the initial purchase price, additional payments were paid by the
Company based on the operating results of CUnet. 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 Company’s 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 Company’s 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.
The Company recognized $0.2 million, $1.9 million, and $1.9 million in
compensation expense for the years ended December 31, 2009, 2008, and 2007,
respectively, related to these contingency payments.
Peterson’s
In 2006,
the Company purchased certain assets and assumed certain liabilities from
Thomson Learning Inc (“Peterson’s”). During 2007, the purchase price for
Peterson’s was finalized per the terms of the purchase agreement and the Company
received a $2.2 million working capital settlement. This settlement was recorded
by the Company as a decrease to goodwill.
19.
|
Employee
Benefit Plans
|
Defined
Contribution Plan
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
$3.2 million, $3.5 million, and $4.5 million during the years
ended December 31, 2009, 2008, and 2007, respectively. Union Bank &
Trust Company, an entity under common control with the Company, serves as the
trustee for the plan.
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
Company’s ability to attract and retain employees and to better enable such
persons to participate in the Company’s 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 Company’s 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, 2009, 2008, and 2007, the Company
recognized compensation expense of approximately $216,000, $186,000, and
$279,000, respectively, in connection with issuing 52,311 shares,
71,172 shares, and 86,909 shares, respectively, under this
plan.
F-45
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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 4,000,000 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, 2009, 2008, and 2007, the Company
issued 552,321 shares, 79,162 shares, and 563,022 shares,
respectively, of its Class A common stock under the restricted stock plan.
Included in the 2009 shares issued are 454,957 shares issued to employees at or
above management level for bonuses awarded under the performance based incentive
plan. In addition, 58,489 shares, 169,961 shares, and
55,230 shares were owned and tendered by employees to satisfy tax
withholding obligations or forfeited in 2009, 2008, and 2007, respectively.
Tendered and forfeited shares are available for future issuance under the plan.
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, 2009, 2008, and 2007, the Company recognized compensation
expense of $1.6 million, $2.4 million, and $2.6 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
Company’s Employee Stock Purchase Loan Plan (the “Loan Plan”). 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, 2009 and 2008, the balance
of the loans granted under the Loan Plan was $1.4 million and $1.6 million,
respectively, and is reflected as a reduction to stockholders’ equity on the
consolidated balance sheets.
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, 2009, 2008, and 2007, the Company issued 7,143
shares, 17,837 shares, and 13,691 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, 2009, 2008, and 2007,
the Company allocated 36,078 shares, 35,806 shares, and 7,974 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 Company’s weighted average shares outstanding calculation. For the years
ended December 31, 2009, 2008, and 2007, the Company recognized
approximately $575,000, $494,000, and $459,000, respectively, of expense related
to this plan.
F-46
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
20.
|
Legal
Proceedings
|
General
The
Company is subject to various claims, lawsuits, and proceedings that arise in
the normal course of business. These matters principally consist of claims by
student loan borrowers disputing the manner in which their student loans have
been processed and disputes with other business entities. In addition, from time
to time the Company receives information and document requests from state or
federal regulators concerning its business practices. The Company cooperates
with these inquiries and responds to the requests. While the Company cannot
predict the ultimate outcome of any inquiry or investigation, the Company
believes its activities have materially complied with applicable law, including
the Higher Education Act, the rules and regulations adopted by the Department of
Education thereunder, and the Department’s guidance regarding those rules and
regulations. On the basis of present information, anticipated insurance
coverage, and advice received from counsel, it is the opinion of the Company’s
management that the disposition or ultimate determination of these claims,
lawsuits, and proceedings will not have a material adverse effect on the
Company’s business, financial position, or results of operations.
Regulatory
Reviews
The
Department of Education periodically reviews participants in the FFELP for
compliance with program provisions. On June 28, 2007, the Department
notified the Company that it would be conducting a review of the Company’s
practices in connection with the prohibited inducement provisions of the Higher
Education Act and the associated regulations that allow borrowers to have a
choice of lenders. The Company understands that the Department
selected several schools and lenders for review. The Company
responded to the Department’s requests for information and documentation and
cooperated with their review. On May 1, 2009, the Company received
the Department’s preliminary program review report, which covered the
Department’s review of the period from October 1, 2002 to September 30,
2007. The preliminary program review report contained certain initial
findings of noncompliance with the Higher Education Act’s prohibited inducement
provisions and required that the Company provide an explanation for the basis of
the arrangements noted in the preliminary program review report. The
Company has responded and provided an explanation of the arrangements noted in
the Department of Education’s initial findings and follow-up
requests. The Department of Education is expected to issue a final
program review determination letter and advise the Company whether it intends to
take any additional action. To the extent any findings are contained
in a final letter, the additional action may include the assessment of fines or
penalties, or the limitation, suspension, and termination of the Company’s
participation in the FFELP.
In
connection with the Company’s settlement agreement with the Department of
Education in January 2007 to resolve an audit report by the Office of
Inspector General of the Department of Education (the “OIG”) with respect to the
Company’s student loan portfolio receiving special allowance payments at a
minimum 9.5% interest rate (the “Settlement Agreement”), 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 Department of Justice in connection with the
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 Department’s guidance regarding those rules and
regulations.
United
States ex rel Oberg v. Nelnet, Inc. et al
On
September 28, 2009, the Company was served with a Summons and First Amended
Complaint naming the Company as one of ten defendants in a “qui tam” action
brought by Jon H. Oberg on behalf of the United States of America. Qui tam
actions assert claims by an individual on behalf of the federal government, and
are filed under seal until the government decides, if at all, to intervene in
the case.
An
original complaint in the action was filed under seal in the U.S. District Court
for the Eastern District of Virginia on September 21, 2007, and was unsealed on
August 26, 2009 upon the government’s filing of a Notice of Election to Decline
Intervention in the matter. The First Amended Complaint (the “Oberg
Complaint”) was filed on August 24, 2009 and alleges the defendant student loan
lenders submitted false claims for payment to the Department of Education in
order to obtain special allowance payments on certain student loans at a
rate of 9.5%, which the Oberg Complaint alleges is in excess of amounts
permitted by law. The Oberg Complaint seeks the imposition of civil
penalties and treble the amount of damages sustained by the government in
connection with the alleged overbilling by the defendants for special allowance
payments. The Oberg Complaint alleges that approximately $407
million in unlawful 9.5% special allowance payment claims
were submitted by the Company to the Department of
Education.
F-47
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The 9.5%
special allowance payments received by the Company were disclosed by the Company
on multiple occasions beginning in 2003. In January, 2007, the
Company entered into the Settlement Agreement. The Settlement Agreement
resolved the issues now raised by the Oberg Complaint, and contains an
acknowledgment by the Department of Education that the Company acted in good
faith in connection with its billings for 9.5% special allowance
payments.
The
Company believes the allegations in the above qui tam action to be frivolous and
without merit and intends to vigorously defend the claim. However, the
Company cannot currently predict the ultimate outcome of these matters
or any liability which may result, which could have a material adverse effect on
the Company's results of operations and financial condition.
United
States ex rel Vigil v. Nelnet, Inc. et al
On
November 4, 2009, the Company was served with a Summons and Third Amended
Complaint naming the Company as one of three defendants in an unrelated qui tam
action brought by Rudy Vigil (the “Vigil Complaint”). This matter was
filed under seal in the U.S. District Court for the District of Nebraska on July
11, 2007 and was unsealed on October 15, 2009 following the government’s notice
that it declined to intervene in the matter. The Vigil Complaint,
filed by a former employee of the Company, appears to allege that the Company
engaged in false advertising and offered prohibited inducements to student loan
borrowers in order to increase the Company’s loan holdings, and subsequently
submitted false claims to the Department of Education in order to obtain special
allowance payments and default claim payments on such loans.
The
Company believes the allegations in the above qui tam action to be frivolous and
without merit and intends to vigorously defend the claim. However, the
Company cannot currently predict the ultimate outcome of these matters
or any liability which may result, which could have a material adverse effect on
the Company's results of operations and financial
condition.
21.
|
Related
Parties
|
During
2008, the Company sold approximately $535 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 $3.9 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 Company’s 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. As of December 31, 2009 and
2008, the Company held $13.9 million and $14.3 million, respectively, in escrow
related to this agreement. As part of this agreement, the Company is
obligated to buy back 30 days delinquent loans; in 2009, the Company bought back
from Union Bank $36.9 million in loans related to this obligation.
During
2009, the Company sold $76.4 million of loans to Union Bank under this $750
million exemption. The Company recognized a loss on this loan sale of
$0.8 million, which represented unamortized costs on this
portfolio.
On
February 4, 2005, the Company entered into an agreement to amend certain
existing contracts with Union Bank. Under the agreement, Union Bank committed to
transfer to the Company substantially all of the remaining balance of Union
Bank’s 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.
F-48
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
Company serviced loans for Union Bank of $539.8 million and
$533.1 million as of December 31, 2009 and 2008, respectively. Income
earned by the Company from servicing loans for Union Bank was $1.9 million for
the year ended December 31, 2009, and $0.3 million for each of the years
ended 2008 and 2007. As of December 31, 2009 and 2008, accounts receivable
includes $0.2 million 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 years ended December 31,
2009 and 2008 noted above.
During
the years ended December 31, 2009, 2008, and 2007, the Company purchased
student loans of $47.6 million (which includes loans purchased under the
Commitment Agreement as discussed previously), $208.0 million, and
$252.5 million, respectively, from Union Bank. For the years ended December
31, 2008 and 2007, premiums paid on these loans totaled $4.9 million and
$8.5 million, respectively. No premiums were paid for loans purchased
during 2009. 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 in FFELP
loans with balances of $613.3 million and $548.4 million as of
December 31, 2009 and 2008, 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, 2009
and 2008, the Company had $387.8 million and $200.8 million,
respectively, invested in the STFIT or deposited at Union Bank in operating
accounts, of which $61.9 million and $24.1 million as of December 31, 2009
and 2008, respectively, represented cash collected for customers. The Company’s
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, 2009, 2008, and 2007 was $2.9 million, $3.9 million,
and $7.0 million, respectively.
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 $70,000, $141,000, and $173,000 for
commercial rent and storage income during 2009, 2008, and 2007, 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.
The
Company paid Union Bank $0.7 million, $0.2 million, and $0.2 million during the
years ended December 31, 2009, 2008, and 2007, respectively, for payroll costs,
reimbursement of FDIC insurance fees (beginning in 2009), certain cash
management services, and miscellaneous fees and commissions.
During
the years ended December 31, 2009, 2008, and 2007, Union Bank paid the Company
$0.1 million, $0.2 million, and $0.2 million, respectively, for consulting
services. In addition, Union Bank reimbursed the Company $3.4
million, $4.6 million, and $3.1 million during the years ended December 31,
2009, 2008, and 2007, respectively, for marketing services and fees related to
the Illinois and Nebraska College Savings Plans.
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 Company’s 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 Company’s 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 Life’s 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 Packer’s historical carrying values. This transaction
resulted in a $12.5 million decrease to the Company’s consolidated shareholders’
equity and a decrease of 474,426 shares of the Company’s Class A common stock
outstanding.
F-49
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
22.
|
Segment
Reporting
|
The
Company has five operating segments 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 Company’s operating segments are defined by the
products and services they offer or the types of customers they serve, and they
reflect the manner in which financial information is currently evaluated by
management. The accounting policies of the Company’s operating
segments are the same as those described in 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 Company’s operating
segments based on the management structure of the Company as well as the
methodology used by management to evaluate performance and allocate
resources. Management, including the Company’s chief operating
decision maker, evaluates the performance of the Company’s operating segments
based on their profitability. As discussed further below, management
measures the profitability of the Company’s operating segments based on “base
net income.” Accordingly, information regarding the Company’s
operating segments is provided based on “base net income.” The
Company’s “base net income” is not a defined term within generally accepted
accounting principles (“GAAP”) and may not be comparable to similarly titled
measures reported by other companies. Unlike financial accounting,
there is no comprehensive, authoritative guidance for management
reporting.
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 EDULINX’s detailed operating results that
have been segregated from continuing operations and reported as discontinued
operations.
Historically,
the Company generated the majority of its revenue from net interest income
earned in its Asset Generation and Management operating segment. The
Company made several acquisitions that have expanded the Company’s products and
services and have 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 Company’s 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, thereby reducing legislative and political
risk.
F-50
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
Fee-Based
Operating Segments
Student Loan and Guaranty
Servicing
The
Student Loan and Guaranty Servicing operating segment provides for the servicing
of the Company’s student loan portfolios and the portfolios of third parties and
servicing provided to guaranty agencies. The loan servicing activities include
loan origination activities, application processing, borrower updates, payment
processing, due diligence procedures, and claim processing. These activities are
performed internally for the Company’s portfolio in addition to generating fee
revenue when performed for third-party clients. The guaranty servicing
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
|
|
·
|
Origination
and servicing of non-federally insured student
loans
|
|
·
|
Servicing
and support outsourcing for guaranty
agencies
|
In June
2009, the Department of Education named the Company as one of four private
sector companies awarded a servicing contract to service all federally-owned
student loans, including FFELP loans purchased by the Department pursuant to
ECASLA. No later than August 2010, the Company expects to also begin
servicing new loans originated under the Direct Loan Program. The contract spans
five years with one, five-year renewal option. Servicing loans under this
contract will increase revenue earned by this segment. However,
operating margins under this contract are expected to be lower than historical
levels achieved.
Tuition Payment Processing
and Campus Commerce
The
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.
Enrollment
Services
The
Enrollment Services operating segment offers products and services that are
focused on helping colleges recruit and retain students (lead generation and
recruitment services) and helping students plan and prepare for life after high
school (content management and publishing and editing services). Lead generation
products and services include vendor lead management services and admissions
lead generation. Recruitment services include pay per click marketing
management, email marketing, list marketing services, and admissions consulting.
Content management products and services include online courses and related
services. Publishing and editing services include test preparation study guides
and essay and resume editing services.
Software and Technical
Services
The
Company’s 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, legacy modernization, technical
consulting services, and Enterprise Content Management solutions.
Asset
Generation and Management Operating Segment
The Asset
Generation and Management operating segment includes the acquisition,
management, and ownership of the Company’s student loan assets. Revenues are
primarily generated from the Company’s earnings from the spread, referred to as
the Company’s 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.
F-51
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
Segment
Operating Results – “Base Net Income”
The
tables below include the operating results of each of the Company’s operating
segments for the years ended December 31, 2009, 2008, and 2007. Management,
including the chief operating decision maker, evaluates the Company on certain
non-GAAP performance measures that the Company refers to as “base net income”
for each operating segment. While “base net income” is not a substitute for
reported results under GAAP, the Company relies on “base net income” to manage
each operating segment because it believes this measure provides additional
information regarding the operational and performance indicators that are most
closely assessed by management.
“Base net
income” is the primary financial performance measure used by management to
develop the Company’s financial plans, track results, and establish corporate
performance targets and incentive compensation. Management believes this
information provides additional insight into the financial performance of the
core business activities of the Company’s operating segments. Accordingly, the
tables presented below reflect “base net income,” which is the operating measure
reviewed and utilized by management to manage the business. Reconciliation of
the segment totals to the Company’s operating results in accordance with GAAP
are also included in the tables below.
Certain
amounts previously reported have been reclassified to conform to the current
period presentation. The reclassifications were made to change the income
statement presentation to provide the users of the financial statements
additional information related to the operating results of the Company’s
fee-based businesses, which are becoming more significant to the Company’s
operations. These reclassifications include reclassifying “tuition payment
processing and campus commerce revenue” and “enrollment services revenue,” which
were previously included in “other fee-based income.” In addition, the “cost to
provide enrollment services” was reclassified from various operating expense
accounts, primarily “advertising and marketing.”
F-52
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
2009
|
||||||||||||||||||||||||||||||||||||||||
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
|
$ | 112 | 62 | — | — | 174 | 609,143 | 5,391 | (2,003 | ) | 7,502 | 620,207 | ||||||||||||||||||||||||||||
Interest
expense
|
— | — | — | — | — | 357,930 | 28,935 | (2,003 | ) | — | 384,862 | |||||||||||||||||||||||||||||
Net
interest income (loss)
|
112 | 62 | — | — | 174 | 251,213 | (23,544 | ) | — | 7,502 | 235,345 | |||||||||||||||||||||||||||||
Less
provision for loan losses
|
— | — | — | — | — | 29,000 | — | — | — | 29,000 | ||||||||||||||||||||||||||||||
Net
interest income (loss) after provision
|
||||||||||||||||||||||||||||||||||||||||
for
loan losses
|
112 | 62 | — | — | 174 | 222,213 | (23,544 | ) | — | 7,502 | 206,345 | |||||||||||||||||||||||||||||
Other
income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan
and guaranty servicing revenue
|
110,273 | — | — | — | 110,273 | — | (1,526 | ) | — | — | 108,747 | |||||||||||||||||||||||||||||
Tuition
payment processing and campus commerce revenue
|
— | 53,894 | — | — | 53,894 | — | — | — | — | 53,894 | ||||||||||||||||||||||||||||||
Enrollment
services revenue
|
— | — | 119,397 | — | 119,397 | — | — | — | — | 119,397 | ||||||||||||||||||||||||||||||
Software
services revenue
|
3,701 | — | — | 17,463 | 21,164 | — | — | — | — | 21,164 | ||||||||||||||||||||||||||||||
Other
income
|
644 | — | — | — | 644 | 45,697 | 21,811 | — | — | 68,152 | ||||||||||||||||||||||||||||||
Gain
(loss) on sale of loans, net
|
— | — | — | — | — | 35,148 | — | — | — | 35,148 | ||||||||||||||||||||||||||||||
Intersegment
revenue
|
85,104 | 237 | 555 | 14,586 | 100,482 | — | 33,469 | (133,951 | ) | — | — | |||||||||||||||||||||||||||||
Derivative
market value, foreign currency,
|
||||||||||||||||||||||||||||||||||||||||
and
put option adjustments
|
— | — | — | — | — | — | — | — | (30,802 | ) | (30,802 | ) | ||||||||||||||||||||||||||||
Derivative
settlements, net
|
— | — | — | — | — | 39,286 | — | — | — | 39,286 | ||||||||||||||||||||||||||||||
Total
other income (expense)
|
199,722 | 54,131 | 119,952 | 32,049 | 405,854 | 120,131 | 53,754 | (133,951 | ) | (30,802 | ) | 414,986 | ||||||||||||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries
and benefits
|
54,289 | 25,549 | 23,222 | 21,978 | 125,038 | 6,767 | 24,777 | (1,209 | ) | 159 | 155,532 | |||||||||||||||||||||||||||||
Restructure
expense- severance and contract
|
||||||||||||||||||||||||||||||||||||||||
termination
costs
|
5,964 | — | — | 936 | 6,900 | — | 1,082 | (7,982 | ) | — | — | |||||||||||||||||||||||||||||
Impairment
expense
|
— | — | 32,728 | — | 32,728 | — | — | — | — | 32,728 | ||||||||||||||||||||||||||||||
Cost
to provide enrollment services
|
— | — | 74,926 | — | 74,926 | — | — | — | — | 74,926 | ||||||||||||||||||||||||||||||
Other
expenses
|
35,391 | 9,642 | 13,226 | 3,330 | 61,589 | 19,566 | 35,307 | 3,736 | 22,249 | 142,447 | ||||||||||||||||||||||||||||||
Intersegment
expenses
|
37,039 | 2,800 | 2,121 | 2,867 | 44,827 | 81,335 | 2,334 | (128,496 | ) | — | — | |||||||||||||||||||||||||||||
Total
operating expenses
|
132,683 | 37,991 | 146,223 | 29,111 | 346,008 | 107,668 | 63,500 | (133,951 | ) | 22,408 | 405,633 | |||||||||||||||||||||||||||||
Income
(loss) before income taxes
|
67,151 | 16,202 | (26,271 | ) | 2,938 | 60,020 | 234,676 | (33,290 | ) | — | (45,708 | ) | 215,698 | |||||||||||||||||||||||||||
Income
tax (expense) benefit (a)
|
(25,518 | ) | (6,156 | ) | 9,984 | (1,118 | ) | (22,808 | ) | (89,178 | ) | 19,186 | — | 16,227 | (76,573 | ) | ||||||||||||||||||||||||
Net
income (loss) from continuing operations
|
41,633 | 10,046 | (16,287 | ) | 1,820 | 37,212 | 145,498 | (14,104 | ) | — | (29,481 | ) | 139,125 | |||||||||||||||||||||||||||
Income
from discontinued operations, net of tax
|
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net
income (loss)
|
$ | 41,633 | 10,046 | (16,287 | ) | 1,820 | 37,212 | 145,498 | (14,104 | ) | — | (29,481 | ) | 139,125 | ||||||||||||||||||||||||||
Total
assets
|
$ | 134,264 | 114,581 | 76,140 | 12,266 | 337,251 | 25,899,946 | 12,201 | (372,971 | ) | — | 25,876,427 |
(a)
Income taxes are applied based on 38% of income (loss) before taxes for the
individual operating segments.
F-53
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
2008
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
Tuition
|
||||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
"Base
net
|
||||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
Software
|
Asset
|
Corporate
|
income"
|
|||||||||||||||||||||||||||||||||||
and
|
and
|
and
|
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
||||||||||||||||||||||||||||||||
Guaranty
|
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 revenue
|
99,916 | — | — | — | 99,916 | 26 | — | — | — | 99,942 | ||||||||||||||||||||||||||||||
Tuition
payment processing and campus commerce revenue
|
— | 48,155 | — | — | 48,155 | — | — | — | — | 48,155 | ||||||||||||||||||||||||||||||
Enrollment
services revenue
|
— | — | 112,405 | — | 112,405 | — | — | — | — | 112,405 | ||||||||||||||||||||||||||||||
Software
services revenue
|
4,371 | — | 37 | 19,707 | 24,115 | — | — | — | — | 24,115 | ||||||||||||||||||||||||||||||
Other
income
|
51 | — | — | — | 51 | 17,401 | 5,323 | — | — | 22,775 | ||||||||||||||||||||||||||||||
Gain
(loss) on sale of loans
|
— | — | — | — | — | (53,035 | ) | 1,621 | — | — | (51,414 | ) | ||||||||||||||||||||||||||||
Intersegment
revenue
|
75,361 | 302 | 2 | 6,831 | 82,496 | — | 63,384 | (145,880 | ) | — | — | |||||||||||||||||||||||||||||
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 | 70,328 | (145,880 | ) | 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 | ||||||||||||||||||||||||||||||
Cost
to provide enrollment services
|
— | — | 64,965 | — | 64,965 | — | — | — | — | 64,965 | ||||||||||||||||||||||||||||||
Other
expenses
|
33,922 | 9,879 | 11,224 | 2,489 | 57,514 | 35,679 | 53,975 | 24 | 26,230 | 173,422 | ||||||||||||||||||||||||||||||
Intersegment
expenses
|
47,737 | 1,397 | 6,641 | 2,323 | 58,098 | 77,105 | 3,732 | (138,935 | ) | — | — | |||||||||||||||||||||||||||||
Total
operating expenses
|
138,800 | 34,566 | 107,491 | 23,380 | 304,237 | 132,296 | 120,732 | (145,880 | ) | 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)
Income taxes are applied to each operating segment based on the
consolidated effective tax rate for the period.
|
F-54
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
2007
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
Tuition
|
||||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
"Base
net
|
||||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
Software
|
Asset
|
Corporate
|
income"
|
|||||||||||||||||||||||||||||||||||
and
|
and
|
and
|
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
||||||||||||||||||||||||||||||||
Guaranty
|
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 revenue
|
122,086 | — | — | — | 122,086 | 294 | — | — | — | 122,380 | ||||||||||||||||||||||||||||||
Tuition
payment processing and campus commerce revenue
|
— | 42,766 | — | — | 42,766 | — | — | — | — | 42,766 | ||||||||||||||||||||||||||||||
Enrollment
services revenue
|
— | — | 103,905 | — | 103,905 | — | — | — | — | 103,905 | ||||||||||||||||||||||||||||||
Software
services revenue
|
5,689 | — | — | 22,075 | 27,764 | — | — | — | — | 27,764 | ||||||||||||||||||||||||||||||
Other
income
|
— | — | — | — | — | 17,820 | 12,603 | — | — | 30,423 | ||||||||||||||||||||||||||||||
Gain
(loss) 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 | ||||||||||||||||||||||||||||||
Cost
to provide enrollment services
|
— | — | 45,408 | — | 45,408 | — | — | — | — | 45,408 | ||||||||||||||||||||||||||||||
Other
expenses
|
36,618 | 8,901 | 15,037 | 2,995 | 63,551 | 29,205 | 77,915 | 2,969 | 30,426 | 204,066 | ||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||
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 38% of net income (loss) 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
|
|
·
|
Certain
corporate activities and unallocated overhead functions related to
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.
The
adjustments required to reconcile from the Company’s “base net income” measure
to its GAAP results of operations relate to differing treatments for
derivatives, foreign currency transaction adjustments, and certain other items
that management does not consider in evaluating the Company’s 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, 2009, 2008, and 2007:
F-55
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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
|
||||||||||||||||||||||
2009
|
||||||||||||||||||||||||||||
Derivative
market value, foreign currency, and
|
||||||||||||||||||||||||||||
put
option adjustments (1)
|
$ | — | — | — | — | 34,569 | (3,767 | ) | 30,802 | |||||||||||||||||||
Amortization
of intangible assets (2)
|
4,315 | 7,440 | 9,961 | 533 | — | — | 22,249 | |||||||||||||||||||||
Compensation
related to business combinations (3)
|
— | — | — | — | — | 159 | 159 | |||||||||||||||||||||
Variable-rate
floor income, net of settlements on derivatives (4)
|
— | — | — | — | (7,502 | ) | — | (7,502 | ) | |||||||||||||||||||
Income
from discontinued operations, net of tax (5)
|
— | — | — | — | — | — | — | |||||||||||||||||||||
Net
tax effect (6)
|
(1,640 | ) | (2,827 | ) | (3,787 | ) | (202 | ) | (10,285 | ) | 2,514 | (16,227 | ) | |||||||||||||||
Total
adjustments to GAAP
|
$ | 2,675 | 4,613 | 6,174 | 331 | 16,782 | (1,094 | ) | 29,481 | |||||||||||||||||||
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 | ) | |||||||||||||||||||
Income
from 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 | ) | ||||||||||||||||||
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 | ) | |||||||||||||||||||
Income
from 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 |
|
(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 used in the Company’s risk management strategy in which the
Company does not qualify for “hedge treatment” under
GAAP. Included in “base net income” are the economic effects of
the Company’s derivative instruments, which includes any cash paid or
received being recognized as an expense or revenue upon actual derivative
settlements. “Base net income” also excludes the foreign
currency transaction gains or losses caused by the re-measurement of the
Company’s Euro-denominated bonds to U.S. dollars 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 Company’s control which can affect the period-to-period comparability
of results of operations.
|
F-56
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
The
Company has used derivative instruments to hedge variable rate floor income
during certain periods. During the year ended December 31, 2008, the Company
made payments (settlements) of $10.0 million on such
derivatives. These settlements are netted with variable-rate floor
income and are excluded from “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)
|
For
2009 and 2007, income taxes are applied based on 38% of income (loss)
before income taxes for the individual operating segments. For
2008, income taxes for each individual operating segment are applied based
on the consolidated effective tax
rate.
|
23.
|
Quarterly
Financial Information (Unaudited)
|
2009
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
quarter
|
quarter
|
quarter
|
quarter
|
|||||||||||||
Net
interest income
|
$ | 28,508 | 57,107 | 69,182 | 80,548 | |||||||||||
Less
provision for loan losses
|
7,500 | 8,000 | 7,500 | 6,000 | ||||||||||||
Net
interest income after provision for loan losses
|
21,008 | 49,107 | 61,682 | 74,548 | ||||||||||||
Other
income
|
93,347 | 87,044 | 85,357 | 105,606 | ||||||||||||
Gain
(loss) on sale of loans
|
(206 | ) | (196 | ) | 8,788 | 26,762 | ||||||||||
Derivative
market value, foreign currency, and put option adjustments
|
||||||||||||||||
and
derivative settlements, net
|
19,478 | (24,478 | ) | 7,740 | 5,744 | |||||||||||
Operating
expenses
|
(92,571 | ) | (97,356 | ) | (92,662 | ) | (90,316 | ) | ||||||||
Impairment
expense
|
— | — | — | (32,728 | ) | |||||||||||
Income
tax (expense) benefit
|
(15,601 | ) | (5,918 | ) | (24,501 | ) | (30,553 | ) | ||||||||
Income
(loss) from continuing operations
|
25,455 | 8,203 | 46,404 | 59,063 | ||||||||||||
Income
(loss) from discontinued operations, net of tax
|
— | — | — | — | ||||||||||||
Net
income (loss)
|
$ | 25,455 | 8,203 | 46,404 | 59,063 | |||||||||||
Earnings
per common share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Continuing
operations
|
$ | 0.52 | 0.16 | 0.93 | 1.18 | |||||||||||
Discontinued
operations
|
— | — | — | — | ||||||||||||
Net
earnings
|
$ | 0.52 | 0.16 | 0.93 | 1.18 | |||||||||||
Diluted:
|
||||||||||||||||
Continuing
operations
|
$ | 0.52 | 0.16 | 0.93 | 1.18 | |||||||||||
Discontinued
operations
|
— | — | — | — | ||||||||||||
Net
earnings
|
$ | 0.52 | 0.16 | 0.93 | 1.18 |
F-57
NELNET,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements – (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
noted)
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
per common share:
|
||||||||||||||||
Basic:
|
||||||||||||||||
Continuing
operations
|
$ | (1.41 | ) | 0.86 | 0.48 | 0.61 | ||||||||||
Discontinued
operations
|
— | 0.02 | — | 0.02 | ||||||||||||
Net
earnings
|
$ | (1.41 | ) | 0.88 | 0.48 | 0.63 | ||||||||||
Diluted:
|
||||||||||||||||
Continuing
operations
|
$ | (1.41 | ) | 0.86 | 0.48 | 0.61 | ||||||||||
Discontinued
operations
|
— | 0.02 | — | 0.02 | ||||||||||||
Net
earnings
|
$ | (1.41 | ) | 0.88 | 0.48 | 0.63 |
24.
|
Condensed
Parent Company Financial Statements
|
The
following represents the condensed balance sheets as of December 31, 2009
and 2008 and condensed statements of income and cash flows for each of the years
in the three-year period ended December 31, 2009 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-58
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)
|
||||||||
December
31, 2009 and 2008
|
||||||||
2009
|
2008
|
|||||||
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 120,332 | 130,394 | |||||
Restricted
cash
|
— | 17,607 | ||||||
Restricted
cash - due to customers
|
64,952 | 132,336 | ||||||
Investment
in subsidiaries
|
1,254,758 | 657,020 | ||||||
Intangible
assets, net
|
— | 28,168 | ||||||
Accounts
receivable
|
34 | 13,447 | ||||||
Other
assets
|
381,975 | 980,070 | ||||||
Total
assets
|
$ | 1,822,051 | 1,959,042 | |||||
Liabilities:
|
||||||||
Notes
payable
|
$ | 937,586 | 1,166,500 | |||||
Accrued
interest payable
|
4,329 | 5,232 | ||||||
Other
liabilities
|
30,621 | 11,748 | ||||||
Due
to customers
|
64,952 | 132,336 | ||||||
Total
liabilities
|
1,037,488 | 1,315,816 | ||||||
Shareholders'
equity:
|
||||||||
Common
stock
|
499 | 493 | ||||||
Additional
paid-in capital
|
109,359 | 103,762 | ||||||
Retained
earnings
|
676,154 | 540,521 | ||||||
Employee
notes receivable
|
(1,449 | ) | (1,550 | ) | ||||
Total
shareholders' equity
|
784,563 | 643,226 | ||||||
Total
liabilities and shareholders' equity
|
$ | 1,822,051 | 1,959,042 |
Statements
of Income
|
||||||||||||
(Parent
Company Only)
|
||||||||||||
Years
ended December 31, 2009, 2008, and 2007
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
revenues
|
$ | 57,029 | 133,942 | 220,985 | ||||||||
Operating
expenses
|
4,428 | 104,803 | 143,329 | |||||||||
Net
operating income
|
52,601 | 29,139 | 77,656 | |||||||||
Net
interest income (expense)
|
4,680 | (8,030 | ) | (31,429 | ) | |||||||
Derivative
market value, foreign currency, and put option adjustments
|
||||||||||||
and
derivative settlements, net
|
34,901 | 14,406 | 35,581 | |||||||||
Equity
in earnings (loss) of subsidiaries
|
101,373 | 5,445 | (14,243 | ) | ||||||||
Income
tax expense
|
54,430 | 14,116 | 32,136 | |||||||||
Net
income from continuing operations
|
139,125 | 26,844 | 35,429 | |||||||||
Income
(loss) on discontinued operations, net of tax
|
— | 1,818 | (2,575 | ) | ||||||||
Net
income
|
$ | 139,125 | 28,662 | 32,854 |
F-59
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)
|
||||||||||||
Years
ended December 31, 2009, 2008, and 2007
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
income
|
$ | 139,125 | 28,662 | 32,854 | ||||||||
Income
(loss) from discontinued operations
|
— | 1,818 | (2,575 | ) | ||||||||
Income
from continuing operations
|
139,125 | 26,844 | 35,429 | |||||||||
Adjustments
to reconcile income from continuing operations to net cash
provided
|
||||||||||||
by
(used in) operating activities:
|
||||||||||||
Depreciation
and amortization
|
1,264 | 5,477 | 7,606 | |||||||||
Derivative
market value adjustment
|
(4,207 | ) | 13,868 | (13,818 | ) | |||||||
Proceeds
from termination of derivative instruments
|
3,870 | 20,368 | 50,843 | |||||||||
Payments
to terminate derivative instruments
|
(15,069 | ) | (16,367 | ) | (8,100 | ) | ||||||
Impairment
expense
|
— | 2,448 | 8,643 | |||||||||
Equity
in (earnings) loss of subsidiaries
|
(101,373 | ) | (5,445 | ) | 14,243 | |||||||
Gain
on sale of equity method investment
|
— | — | (3,942 | ) | ||||||||
Gain
on purchase of debt
|
(26,137 | ) | — | — | ||||||||
Non-cash
compensation expense
|
2,644 | 7,320 | 6,686 | |||||||||
Other
non-cash items
|
— | 4,133 | (320 | ) | ||||||||
Decrease
in accounts receivable
|
13,413 | 9,006 | 3,613 | |||||||||
Decrease
(increase) in other assets
|
116,886 | (542,104 | ) | 69,271 | ||||||||
(Decrease)
increase in accrued interest payable
|
(903 | ) | 79 | (1,893 | ) | |||||||
(Decrease)
increase in other liabilities
|
20,645 | (8,992 | ) | (5,099 | ) | |||||||
Net
cash provided by (used in) operating activities
|
150,158 | (483,365 | ) | 163,162 | ||||||||
Cash
flows from investing activities, net of business
acquisitions:
|
||||||||||||
Decrease
(increase) in restricted cash
|
17,607 | (17,607 | ) | — | ||||||||
Purchases
of property and equipment, net
|
— | 2,510 | (9 | ) | ||||||||
Distribution
from equity method investment
|
— | — | 747 | |||||||||
Capital
contributions to/from subsidiary, net
|
28,168 | 12,515 | 309,413 | |||||||||
Business
acquisitions - contingent consideration and purchase price adjustments,
net
|
— | (18,000 | ) | (4,950 | ) | |||||||
Proceeds
from sale of equity method investment
|
— | — | 10,000 | |||||||||
Net
cash provided by (used in) investing activities
|
45,775 | (20,582 | ) | 315,201 | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Payments
on notes payable
|
(204,532 | ) | (14,550 | ) | (597,297 | ) | ||||||
Proceeds
from issuance of notes payable
|
1,909 | 611,500 | 230,383 | |||||||||
Payments
of debt issuance costs
|
— | 23 | (114 | ) | ||||||||
Dividends
paid
|
(3,492 | ) | (3,458 | ) | (13,817 | ) | ||||||
Payment
on settlement of put option
|
— | (9,600 | ) | (15,875 | ) | |||||||
Proceeds
from issuance of common stock
|
449 | 710 | 1,467 | |||||||||
Repurchases
of common stock
|
(430 | ) | (1,536 | ) | (76,648 | ) | ||||||
Payments
received on employee stock notes receivable
|
101 | 575 | 432 | |||||||||
Net
cash provided by (used in) financing activities
|
(205,995 | ) | 583,664 | (471,469 | ) | |||||||
Net
(decrease) increase in cash and cash equivalents
|
(10,062 | ) | 79,717 | 6,894 | ||||||||
Cash
and cash equivalents, beginning of year
|
130,394 | 50,677 | 43,783 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 120,332 | 130,394 | 50,677 |
F-60
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
|
|
·
|
PLUS
Loans
|
|
·
|
Consolidation
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 borrower’s 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 borrower’s 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 loan’s 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:
|
·
|
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%.
|
|
·
|
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:
|
·
|
July
1, 2008 and before July 1, 2009, the applicable interest rate is fixed at
6.00%,
|
|
·
|
July
1, 2009 and before July 1, 2010, the applicable interest rate will be
fixed at 5.60%,
|
|
·
|
July
1, 2010 and before July 1, 2011, the applicable interest rate will be
fixed at 4.50%,
|
|
·
|
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.
For SLS
Loans first disbursed on or after October 1, 1992, but before July 1, 1994, the
applicable interest rate is as follows:
A-4
|
·
|
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%.
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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.
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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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9%,
or
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The
weighted average of the interest rates on the loans being consolidated,
rounded to the nearest whole
percent.
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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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A-5
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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.
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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.
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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 student’s 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 borrower’s 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 borrower’s
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 borrower’s adjusted gross income, minus 150% of the poverty
line for the borrower’s 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;
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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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A-7
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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.
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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 borrower’s 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 borrower’s educational
debt burden and his or her income.
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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 borrower’s service period and 180 days following the demobilization
date.
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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A-8
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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.
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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.
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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 borrower’s temporary financial
hardship, may postpone any payments. A borrower is entitled to
forbearance for a period not exceeding three years while the borrower’s debt
burden under Title IV of the Higher Education Act (which includes the Federal
Family Education Loan Program) equals or exceeds 20% of the borrower’s 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
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0.0%
with respect to loans for which the first disbursement is made on or after
July 1, 2010.
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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.
A-9
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).
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.
A-10
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%
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|
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.
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
|
|
·
|
four.
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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
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|
·
|
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.
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