New Hampshire Higher Education Loan Corporation

Transcription

1 BAKER! NEWMAN New Hampshire Higher Education Loan Corporation Audited Consolidated Financial Statements Years Ended With Independent Auditors' Report INTEGRITY S E R VICE S 0 L UTI 0 N S

2 CONSOLIDATED FINANCIAL STATEMENTS Years Ended TABLE OF CONTENTS Independent Auditors' Report Audited Consolidated Financial Statements: Consolidated Statements of Financial Position Consolidated Statements of Activities and Changes in Net Assets Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements

3 BAKER NEWMAN NOYES INDEPENDENT AUDITORS' REPORT The Board of Trustees New Hampshire Higher Education Loan Corporation We have audited the accompanying consolidated statements of financial position ofnew Hampshire Higher Education Loan Corporation and Subsidiary (the Company) as of, and the related consolidated statements of activities and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 New Hampshire Higher Education Loan Corporation and Subsidiary as of, and the changes in its net assets and its cash flows for the years then ended in confonnity with accounting principles generally accepted in the United States of America. Manchester, New Hampshire January 6, 2012 Limited Liability Company Baker Newman & Noyes, LLC

4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS Cash and cash equivalents (note 3) Restricted cash (notes 3 and 6) Amounts due from loan servicer (note 7) Interest receivable Amounts due from U.S. Governmentsubsidized interest and other Investment securities (note 4) Student loans, less allowance for loan losses of $24,500,000 and $23,000,000 in 2011 and 2010, respectively (notes 5 and 6) Debt issuance costs, net Total assets $ 1,819,747 $ 60,625,344 24,085,441 11,476, ,476 2,609,705 17,335,010 27,326,263 1,277,578 6,380,507 32,435,114 23,716,354 1,077,040,621 1,350,795, ,055,523 $ 1,160,116,531 $ 1 J-87,286,423 LIABILITIES AND NET ASSETS Liabilities: Accounts payable and accrued expenses Accrued interest payable Special allowance and fees payable to the U.S. Government Due to related entities (note 7) Deferred revenue Arbitrage earnings rebatable (note 8) Bonds and notes payable, net (note 6) $ 346,239 $ 440, ,305 1,209,843 4,185,604 12,387, ,399 1,505,174 1,590,772 2,528, , , ,876,090 1,362,658, ,256,444 1,381,664,059 Commitments and contingencies (notes 8, 9 and 1 0) Net assets: Unrestricted Total liabilities and net assets 192,860, ,322,434 $ 1.160,116,531 $ 1,487,986,493 See accompanying notes. 2

5 CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS Years Ended September 30,2011 and Change in unrestricted net assets: Revenues and gains: Interest on student loans $ 47,593,698 $ 57,049,228 Net interest benefits and special allowance on student loans (note 5) (1 0,428,480) (13,539,042) Net investment (loss) gain (note 4) (491,582) 1,937,716 Settlement income (note 11) 20,000,000 Loan sale income (note 6) 2,256,375 3,017,100 Gain on extinguishment of debt (note 6) 87,827,662 68,817,235 Other income 1,833,739 2,152,115 Total unrestricted revenues and gains 128,591, ,434,352 Expenses: Interest expense 11,242,353 14,946,706 Contracted services (note 7) 12,364,932 15,622,187 Arbitrage earnings rebatable (note 8) (236,042) (248,653) Consolidation loan fees 5,316,998 5,755,369 Bond administration expenses 1,091, ,302 Borrower rebates 861, ,445 Amortization of debt issuance costs 426, ,828 Administrative and other expenses 1,202,736 1,569,565 Provision for losses on student loans (note 5) 9,783,702 13,898,162 Total expenses 42,053,759 53,861,911 Increase in unrestricted net assets 86,537,653 85,572,441 Unrestricted net assets at beginning of year 106,322,434 20,749,993 Unrestricted net assets at end of year $ $ I 06,322,434 See accompanying notes. 3

6 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended September 3 0, 2011 and Cash flows from operating activities: Increase in unrestricted net assets $ 86,537,653 $ 85,572,441 Adjustments to reconcile increase in unrestricted net assets to net cash provided by operating activities: Amortization of deferred loan origination costs 1,657,507 2,124,516 Amortization of debt issuance costs 426, ,828 Amortization of original issue bond discount 194,715 Provision for losses on student loans 9,783,702 13,898,162 Gain on extinguishment of debt (87,827,662) (68,817,235) Net realized and unrealized loss (gain) on investments 1,186,286 (1,258, 120) Changes in operating assets and liabilities: Amounts due from U.S. Government 5,102,929 (1,125,892) Interest receivable 9,991,253 9,148,488 Amounts due from loan servicer 1,976,229 (357,286) Other assets 2,275,310 Accrued interest payable (568,538) (1,440,223) Due to related entities (641,775) (363,792) Special allowance and fees payable to the U.S. Government (8,202,045) 3,553,618 Accounts payable and accrued expenses (94,201) 87,189 Arbitrage earnings rebatable (181,217) (248,654) Deferred revenue (937,846) (1,136,829) Net cash provided by operating activities 18,403,101 42,252,521 Cash flows from investing activities: Student loans disbursed (23,809,952) (122,230,406) Student loan principal payments received 286,123, ,060,958 Loan origination costs received for student loans 418,292 Increase in restricted cash ( 12,608,444) (10,557,438) Purchase of investments (23,742,211) (12,330,806) Proceeds from the sale of investments 13,837, Net cash provided by investing activities 239,800, ,565,549 Cash flows from financing activities: Payment of debt issuance costs (5,006,220) (839,237) Proceeds from bond issuance 639,866,220 Payments on bonds payable (751,026,250) (553,951,375) Proceeds from notes payable 527,472,548 Payments on notes payable (200,842,928) (194,956,387) Proceeds from line of credit 133,285,446 Payments on line of credit (134,690,934) Net cash used by financing activities (317,009,178) (223,679,939) Net (decrease) increase in cash and cash equivalents (58,805,597) 24,138,131 Cash and cash equivalents at beginning of year 60,625,344 36,487,213 Cash and cash equivalents at end of year $ 1, $, Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 11,616,176 $ 16,386,929 See accompanying notes. 4

7 September 3 0, 2011 and Organization New Hampshire Higher Education Loan Corporation (the Company) is a private, non-profit, taxexempt corporation founded in 1983 and organized for the charitable and educational purpose of providing financial assistance primarily to eligible New Hampshire students and to take and carry out all actions and functions reasonably necessary for the accomplishment of these purposes. During September 1993, the Company became an eligible lender under the Federal Family Education Loan (FFEL) Program. The Company also provides private non-guaranteed student loans which are aimed at borrowers who have difficulty obtaining financial assistance through Federal loan programs. The Company is not an agency, instrumentality, or department of, or otherwise affiliated in any manner with the State of New Hampshire. During the Company's fiscal year 2010, the Federal government passed the Student Aid and Fiscal Responsibility Act (SAFRA) legislation which ended new originations under the FFEL Program effective July 1, The discontinuation of the FFEL will reduce the Company's loan portfolio and related revenue over time. 2. Summary of Significant Accounting Policies The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America. The following describes the more significant accounting policies: Consolidation The consolidated financial statements contain the accounts of the Company and its subsidiary, NHHEAF Network Educational Foundation (NNEF) which is an inactive, not for profit, tax-exempt entity. All significant balances and transactions have been eliminated. Basis o{accounting The Company is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. Any support or contributions received are recorded as unrestricted, temporarily restricted or permanently restricted depending on the existence and/or nature of any donor restrictions. The Company does not have any temporarily or permanently restricted net assets. The financial statements are prepared on the accrual method of accounting and accordingly recognize revenues as earned and expenses as incurred. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates used in the preparation of the financial statements are the allowance for losses on student loans and arbitrage earnings rebatable. 5

8 2. Summary of Significant Accounting Policies (Continued) Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less when purchased, other than restricted cash, to be cash equivalents. Investment Securities Investment securities are comprised of common stocks, corporate and foreign sovereign bonds, mutual funds and U.S. Government and agency obligations. Investments are carried at fair value as determined by obtaining readily available current market values for securities. Net investment income in the consolidated statements of activities and changes in net assets includes both unrealized and realized investment gains and losses as well as interest income. The Company invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the value of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. Student Loans Student loans consist of guaranteed student loans and private loans which are made to post-secondary students attending eligible educational institutions and guaranteed parental loans made to parents of dependent undergraduate students, graduate and professional students and independent undergraduate students attending eligible educational institutions. Student loans also include consolidation loans which are loans to eligible students that combine two or more existing student loans and extend the repayment period. Student loans are stated at their unpaid principal balance plus the unamortized amount of loan origination costs paid to disburse the loans. Loan origination costs are deferred and recognized as a reduction of interest income on student loans over the estimated life of student loans on a method which approximates the level yield. Interest on student loans is recognized as revenue in the period earned. New Hampshire Higher Education Assistance Foundation (the Foundation) assessed a default fee to borrowers on loans guaranteed and disbursed after June 30, For student loans guaranteed prior to April 15, 2008, the Company paid these fees on behalf of its borrowers. The Company amortizes these fees over the estimated average life of loans of seven years on a method which approximates the level yield. The U.S. Department of Education (ED) makes quarterly interest subsidy payments on guaranteed loans on behalf of certain qualified students until the student is required to begin repayment. Repayment on Stafford Student Loans normally begins within six months after students complete their course of study, leave school or cease to carry at least one-half the normal full-time academic load as determined by the educational institution. Repayment of PLUS, SLS and Consolidation loans normally begins within sixty days from the date of loan disbursement unless a deferment of payments has been granted. In these cases, full repayment of principal and interest would resume at the expiration of the deferment. Interest accrues during this deferment period. 6

9 2. Summary of Significant Accounting Policies (Continued) ED provides a special allowance to lenders participating in the Stafford, PLUS, SLS, and Consolidation student loan programs. Special allowance is paid based on a rate that is established quarterly. For loans first disbursed before January 1, 2000, the rate is based on the average rate established in the auction of the thirteen-week U.S. Treasury bill, plus a pre-determined factor, less the interest rate on the loan. For loans first disbursed on or after January 1, 2000, financed with obligations issued after October 1, 1993, the rate is based on the average rate established in the auction of three-month Financial Commercial Paper, plus a pre-determined factor, less the interest rate on the loan. Interest and special allowance on student loans are recognized as revenue in the period earned. Allowance for Loan Losses Student loans are primarily guaranteed by the Foundation and substantially all such loans are reinsured by ED. However, there is still the risk that loans may lose their guarantee and become uncollectible under certain circumstances and certain student loans are not guaranteed. Student loans originated under the FFELP subsequent to July 1, 2006, are only reinsured for 97% of the principal amount. Student loans under the FFELP originated on or after October 1, 1993 and before July 1, 2006, are reinsured for 98% of the principal amount. Student loans under the FFELP originated prior to October 1, 1993, are 100% reinsured. At, the majority of the Company's student loans under the FFELP are subject to the 98% guarantee. Therefore, management of the Company has established an allowance for loan losses to provide for probable losses. The amount of the allowance, which is established through a provision for losses on student loans charged to expense, is based on management's estimation of the probable losses within the portfolio. In estimating the adequacy of the allowance for loan losses, management considers such factors as the nature and volume of the portfolio, default rates, the percentage of loans guaranteed and their guaranteed percentage and current economic conditions that may affect the borrowers' ability to repay. Actual results could differ from those estimates. Loans are charged-offwhen deemed uncollectible. Deferred Revenue Fees charged to private loan borrowers as a guarantee fee are reflected in income when received to the extent of estimated loan guarantee costs. The remaining balance is deferred and subsequently recognized as income on a straight-line basis over the estimated average life of the student loans, which is seven years. The amount of revenue recognized is included in other income on the statements of activities and changes in net assets. Debt Issuance Costs I Original Issue Discount Expenses incurred in obtaining financing arrangements are being amortized on the effective yield method or a straight-line basis over the estimated term of the related financing arrangements, which approximates the effective yield method. The original issue discount is presented as a reduction of the face amount of the bonds payable and is being amortized using the effective interest rate method. 7

10 September 3 0, and Summary of Significant Accounting Policies (Continued) Income Taxes The Company has received a determination letter from the Internal Revenue Service stating that it qualifies for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes has been included in the financial statements. Tax-exempt organizations could be required to record an obligation for income taxes as the result of a tax position they have historically taken on various tax exposure items including unrelated business income or tax status. Under guidance issued by the Financial Accounting Standards Board (F ASB), assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the "more-likely-than-not" threshold, based upon the technical merits of the position. Estimated interest and penalties, if applicable, related to uncertain tax positions are included as a component of income tax expense. The Company has evaluated the positions taken on its filed tax returns. The Company has concluded no uncertain income tax positions exist at September 30, 2011 or The Company's tax years from 2007 through 2010 are open and subject to examination. Fair Value o{financial Instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents, restricted cash, interest and other receivables, investment securities, bonds payable, accounts payable and accrued expenses, accrued interest payable and commitments to extend credit approximate fair value. In determining the fair value of student loans, management has considered the student loan interest rates and third-party market transactions and has determined that the carrying amount approximates fair value. Subsequent Events Events occurring after the statement of financial position date are evaluated by management to determine whether such events should be recognized or disclosed in the financial statements. Management has evaluated subsequent events through January 6, 2012 which is the date the financial statements were available to be issued. Reclassifications Certain items in the 2010 financial statements have been reclassed to conform to the presentation in the 2011 financial statements. 8

11 3. Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash consist ofthe following at : Cash $ 1,199,103 $ 534,887 Money market accounts 620,644 60,090,457 $ $ Restricted cash $24,085,441 $ At cash was comprised of accounts at one and two banks, respectively. The bank balances at were $1,331,982 and $534,896, respectively. The difference between the net bank balances and the cash recorded on the financial statements is outstanding checks and deposits in transit. At, $250,000 of the bank balances were covered by Federal depository insurance. At September 30, 2011, the money market accounts are primarily invested in the Wells Fargo Advantage Funds 100% Treasury. The Fund seeks current income exempt from most state and local individual income taxes, while preserving capital and liquidity. The Wells Fargo Advantage Funds 100% Treasury invests exclusively in high-quality, short-term money market instruments that consist of U.S. Treasury obligations. At September 30, 2010, the money market accounts are primarily invested in the Deutsche Bank's Cash Management Fund Institutional. The Fund seeks a high level of current income consistent with liquidity and the preservation of capital. The Deutsche Bank Cash Management Fund Institutional invests primarily in a portfolio of high quality money market instruments, maintaining a dollarweighted average maturity of 90 days or less. At September 30, 2010, approximately $21,226,000 of cash and cash equivalents was restricted for the repayment of bonds payable and to satisfy certain reserve requirements specified by the various indentures. At, the Company has cash held by third parties pursuant to the "Master Participation Agreement" and the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) Asset-Backed Commercial Paper (ABCP) Program. The differences between the invested balances and cash recorded in the financial statements are deposits in transit. Restricted cash is invested as follows at September 30,2011 and 2010: Dreyfus Cash Management Fund Federated Treasury Obligation Fund $9,064,621 $10,471,

12 3. Cash, Cash Equivalents and Restricted Cash (Continued) As of September 30, 2011, the Company has $14,961,576 in Wells Fargo Bank Advantage Funds 100% Treasury under restrictions set forth in the floating rate note and variable rate demand bonds for the payment of bond principal, interest, and certain fees. The difference between the invested balance and cash recorded in the 2011 financial statements are deposits in transit. 4. Investment Securities Investments, at fair value, are as follows at : U.S. Government and agency obligations Fixed income securities Common stocks Mutual funds $ 6,178,042 5,280,569 14,192,599 6,783,904 $ 4,069,827 5,073,156 13,341,903 1,231,468 $ $ The cost and fair values of investments in debt secuntles at September 30, 2011, by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Due after one year through five years Due after five years through ten years Net investment gain (loss) consists of the following: Interest and dividend income Net realized and unrealized gain (loss) on investments Net investment gain (loss) Cost $ 7,561,503 3,540,164 $ $ 694,704 (1,186,286) $ (491,582) Fair Value $ 7,680,628 3,777,983 $_1 1._ $ 679,596 1,258,120 $1,937,716 The F ASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level3 measurements). The three levels of the fair value hierarchy under F ASB ASC 820 are described as follows: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access 10

13 4. Investment Securities (Continued) Level2: Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets or liabilities in inactive markets. Inputs other than quoted prices that are observable for the asset or liability. Inputs which are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at September 30,2011 and Common stock, mutual funds, certain corporate bonds and U.S. Government and certain Agency securities: Valued at the closing price reported in the active market on which the security is traded. Foreign Sovereign bonds, certain corporate bonds and certain U.S. Agency securities: Valued using observable inputs including quoted prices for similar assets or quoted prices in less active markets. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes during the year in the Company's fair value methodologies. 11

14 4. Investment Securities (Continued) The following table sets forth by level, within the fair value hierarchy, the Company's assets recorded at fair value as of : Levell Level2 Level3 Total 2011 U.S. Government and agency securities: U.S. Treasury securities $ 4,256,693 $ $ - $ 4,256,693 U.S. Agency bonds 1,917, ,921,349 6,174,069 3,973 6,178,042 Fixed income securities: Corporate bonds 4,364, ,867 4,681,729 Foreign Sovereign bonds 598, ,364, ,707 5,280,569 Common stocks: Consumer 3,057,125 3,057,125 Utilities and energy 2,137,422 2,137,422 Financial institutions 2,034,588 2,034,588 Health care 2,026,592 2,026,592 Manufacturing and industrial 4,448,673 4,448,673 Other ,192,599 14,192,599 Mutual funds: Fixed income 312, ,202 Blended 382, ,527 Growth 1,081,061 1,081,061 International 3,945,952 3,945,952 Commodity 1,062, ,062,162 6,783,904 6,783,904 Total assets recorded at fair value $31,5_~ $~ 919~8Jl $_- $32,435,114 12

15 4. Investment Securities (Continued) Level 1 Level2 Level3 Total 2010 U.S. Government and agency securities: U.S. Treasury securities $ 2,864,184 $ $ - $ 2,864,184 U.S. Agency bonds 1,205,643 1,205,643 2,864,184 1,205,643 4,069,827 Corporate bonds 5,073,156 5,073,156 Common stocks: Consumer 2,606,782 2,606,782 Utilities and energy 2,010,858 2,010,858 Financial institutions 1,992,570 1,992,570 Health care 1,668,349 1,668,349 Manufacturing and industrial 4,550,159 4,550,159 Other 513, ,185 13,341,903 13,341,903 Mutual funds: Fixed income 650, ,156 Blended 157, ,001 International 285, ,491 Other 138, ,820 1,231,468 1,231,468 Total assets recorded at fair value $ $ $ - $ In 2011, certain corporate bonds and U.S. Agency bonds are reflected in Level 1, rather than Level2 as in 20 I 0, due to market activity at the respective year end. 5. Student Loans Student loans bear annual fixed or variable interest rates ranging from 1.22% to 9.00%. Most of the Company's borrowers are located in the New England states, primarily in the State ofnew Hampshire. ED restricts student loan interest revenue for loans first disbursed on or after April1, The Company is required to return borrower loan interest in excess of the special allowance formulae rates for certain Stafford, PLUS and Consolidation loans. The return of interest totaled $16,180,960 and $23,943,231 in 2011 and 2010, respectively, and is reflected as a reduction ofnet interest benefits and special allowance on student loans in the Consolidated Statements of Activities and Changes in Net Assets. Student loans are classified as being in "interim" status during the period from the date the loan is made until a student is out of school either for six or nine months. Subsequent to this period, student loans are classified as being in "repayment" status. "Deferral" status is a period during the life of the loan when repayment is suspended for authorized purposes. 13

16 5. Student Loans (Continued) The Company has adopted Accounting Standards Update (ASU ), Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In accordance with ASU , the Company has expanded its disclosures about the credit quality of its student loans and the associated allowance for loan losses. Management has determined that the Federal Family Education Loan Program (FFEL) student loans and private loans are portfolio segments as defined by ASU The Company does not disaggregate its portfolio segments into classes of receivables. Loans within each segment are evaluated collectively. Student loans at are summarized as follows: Status: Interim status Deferral status Repayment status: Current days past due days past due > 90 days past due Claims filed Deferred loan origination costs, net of amortization Less: Allowance for loan losses FFEL Loans $ 41,602, ,336, ,989,046 25,740,060 16,137,197 40,923,791 3,268,821 1,867,554 (985,228) 2011 Private Loans $ 14,518,545 32,718, ,478,920 6,063,705 2,569,764 7,325,563 (23,514,772) $ FFEL Loans 191,774, ,112, ,730,560 27,219,333 15,640,927 41,822,007 7,657,359 3,525, Private Loans $ 3 2,186,893 35,949, ,333,640 6,262,107 2,984,565 8,597,270 (834,406) (22, 165,594) Total student loans $ $ $ $ Guarantee type: U.S. Department of Education Other- non guaranteed Deferred loan origination costs, net of amortization Less: Allowance for loan losses $ 2011 Held for Investment 868,998, ,674,910 1,867,554 (24,500,000) Held for Investment 2010 Held for Sale $ 981,493,461 $ 137,463, ,313,585 3,525,061 (23,000,000) Total student loans $=1, $ 1,213,332,107 $ 132~63,693 The student loans are pledged to the repayment of bonds and other loans outstanding. 14

17 5. Student Loans (Continued) Transactions in the allowance for loan losses for the years ended were as follows: FFEL Private FFEL Private Loans Loans Loans Loans Balance, October 1 $ 834,406 $22,165,594 $1,001,085 $ 17,431,787 Provision for losses on student loans 635,396 9,148, ,933 13,521,229 Loans charged off (484,574) (9,427,626) (543,612) ( 10,263,955) Recoveries 1,628,498 1,476,533 Balance, September 30 $ 985,228 $23,_514,172 $ 814,406 $ 22,165,594 Approximately $98,760,000 and $102,526,000 or 11.73% and 11.54% of student loans in repayment were delinquent by more than 30 days at, respectively. Approximately $82,801,000 and $84,682,000 of delinquent loans at, respectively, were re-insured by ED. 6. Bonds and Notes Payable On August 24, 2011, the Company issued Adjustable Rate Educational Loan Revenue Bonds (VRDB) and Taxable Student Loan Notes (FRN) which proceeds were used to purchase or redeem all outstanding Series 1997 through Series 2007 Auction Rate Certificates (ARCs) in August and September The Company has outstanding the following bonds and notes at : Taxable Student Loan Backed Notes issued August 24, Consists of $213,000,000 in A-1 Floating Rate Notes, $127,000,000 in A-2 Floating Rate Notes and $182,635,000 in A-3 Floating Rate Notes. Redeemable on a quarterly basis with the collections on student loans, after paying interest and reasonable fees and expenses. All principal payments are applied to A-1 notes until this tranche is paid in full, maturing October 20, 2021, then A-2 Notes until paid entirely; maturing October 20, 2025, then A-3 Notes; maturing October 20, $ 522,635,000 $ Adjustable Rate Educational Loan Revenue Bonds issued August 24, Redeemable on a quarterly basis with the collections on student loans, after paying interest and reasonable fees and expenses, maturing December I, 2032: 2011A taxable variable rate demand bonds 125,400,000 15

18 6. Bonds and Notes Payable (Continued) 2011B tax-exempt variable rate demand bonds Series 1997 Bonds through Series 2007 ARCs: Taxable Tax-exempt ED Loan Participation Program Facility Asset-backed Commercial Paper Conduit Program, available rate as calculated monthly by the Conduit Manager and Administrator (0.76% at September 30, 2011) maturing January Less unamortized original issue discount on floating rate notes $ 10,000,000 $ 433,150, ,850, ,463, ,815, ,194, ,850,155 1,362,658,083 (17,974,065) $ ,Q90 $ All bonds and notes payable are limited obligations of the Company and are secured, as provided in the underlying bond and note indentures, by an assignment and pledge to the Trustee of all the Company's rights, title and interest in certain student loans and revenues derived thereon and the guarantee thereof, including the insurance of certain student loans by ED. In addition, a significant portion of restricted cash is held in trust to secure the bonds. Proceeds from issuance of bonds and notes payable and all revenues thereon are held in trust and are restricted as follows: to retire bonds, to repurchase student loans on a restricted basis, pay interest on the bonds, maintain required reserves of the greater of $500,000 or 0.25% of principal amount of FRN bonds outstanding and the greater of $500,000 or 0.75% of principal amount of VRDB loans outstanding, and pay reasonable and necessary expenses. Series 1997 Through Series 2007 Bonds The Company retired the Series 1997 through Series 2007 ARCs in fiscal years ended September 30, 2011 and 2010 as follows: Carrying value Redemption amount Issuance costs $ 843,000,000 (751,026,250) (4,146,088) $ 626,050,000 (553,951,375) (3,281,390) Gain on extinguishment of debt $ $

19 6. Bonds and Notes Payable (Continued) All of the bonds outstanding as of September 30, had been issued as Auction Rate Certificates. The proceeds from these bonds were used to originate and acquire student loans under the FFELP and the private student loan program. The bonds were secured by the following: (a) all revenues representing all payments, proceeds, charges and other cash income received by the Company relating to the loans financed by the issuance of the bonds, sale of the loans and all interest earned or gains realized on securities held by the trustee; (b) all funds and accounts held in trust pursuant to the related agreements; and (c) the student loans and related notes in the approximate amount of $852,000,000 at September 30, The taxable bonds bore interest at a maximum rate equal to the 12 month average ninety-one day U.S. Treasury Bill sold immediately prior to the sale of ARCs plus 1.20%. The taxexempt bonds bore interest at a maximum interest rate equal to a municipal bond index, times an applicable percentage. For bonds rated at least A-/A3, the applicable percentage was 175%; for bonds rated below A-/A3 but at least BBB-/Baa3, the applicable percentage was 200%; and for bonds rated below BBB/Baa3, the applicable percentage was 265%. Interest was payable based on the interest payment date that was determined at each auction. For failed ARC bond auctions through September 30, 2010, the maximum interest rate was calculated using the averaging of interest rate method provided in the bond documents. The bonds outstanding at September 30, 2010 had interest rates ranging from 0% to 1.756%. In 2010, the bonds were subject to early redemption at par, in whole or in part, from unused bond proceeds and investment income thereon, to the extent that the funds were not be used to acquire eligible loans. The bonds were subject to mandatory redemption under provisions outlined in the bond indentures. Adjustable Rate Educational Revenue Bonds The 2011A taxable and 2011B tax-exempt bonds were issued through the New Hampshire Health and Education Facilities Authority (the Authority). The Authority is a public body corporate and agency of the State of New Hampshire. The proceeds were loaned to the Company by the Authority pursuant to a loan agreement with respect to the series of bonds for the purpose of providing funds to the Company to aid in financing of student loans. Interest rates on the VRDB 2011A and 2011B bonds reset every week and shall not exceed 12% per annum. Interest on the 2011A bonds is paid monthly, while interest on the 2011B bonds is paid semi annually. As of September 30, 2011, VRDB bonds payable had interest ranging from 0.19% to 0.20%. The bonds payable are backed by letters of credit issued by Royal Bank of Canada which allows the Trustee to draw up to $138,686,473 for repayment of principal and interest. The maximum aggregate amount available under the letters of credit are calculated as the outstanding principal balance remaining on the VRDB plus accrued interest on the principal portion as defined by the bond indenture. The letters of credit expire on October 15, 2015, and may be extended by the parties. No amounts have been drawn on the letters of credit agreement at September 30, The VRDB bonds contain covenants which include a minimum asset ratio. The Company was in compliance with the covenants at September 30,

20 September 30, 2011 and Bonds and Notes Payable (Continued) Taxable Student Loan Backed Notes The interest on the FRN resets and is paid quarterly, with the A-1 interest rate at 3-month LIBOR plus 0.50%, and A-2 and A-3 at an interest rate of 3-month LIBOR plus 0.85%. As of September , FRN bonds payable had interest rates ranging from 0.76% to 1.11%. In October 2011, approximately $7,700,000 in floating rate notes were redeemed. The FRN bond contains covenants with which the Company was in compliance at September 30, Asset-Backed Commercial Paper Conduit Facility In May 2010, the Company entered into a "Funding Note Purchase Agreement" with Straight-A Funding LLC, the Conduit, under the ECASLA ABCP Conduit Put Program. Under the terms of the agreement, the Company may sell its loans to this conduit through funding notes collateralized by eligible student loans. This note has liquidity support from a Put Agreement between ED, the Conduit, and Bank of New Y ark-mellon, the Conduit Administrator. Amounts outstanding as of September 30, 2011 and 2010 totaled $318,815,155 and $382,194,390, respectively. ED Loan Participation Program Facility In 2009, the Company entered into a "Master Participation Agreement" with ED under the Ensuring Continued Access to Student Loans Act for the Company's fiscal year ending September 30, Under the terms of the agreement, the Company sold participation interests in eligible student loans to ED via a purchase request. The Company was charged a participation yield at the commercial paper rate set quarterly by ED plus 0.5% on the average daily principal balance of participation interests outstanding. Loans funded under the program were sold to ED pursuant to the program prior to October 15, As of September 30, 2010, the amount outstanding under this program was $137,463,693, related to participation interests sold for the school year. On October 9, 2009, the Company sold to ED at par value 40,228 loans with outstanding principal and interest of $181,026,476 previously financed under the participation program facility. Under the terms of the sale, the Company also received proceeds of $3,017,100 ($75 per loan) and was reimbursed lender fees of $1,771,705. The Company recognized the proceeds on the sale in the fiscal year ending September 30, On October 8, 2010, the Company sold to ED at par value 30,085 loans with outstanding principal and interest of $141,632,198 previously financed under the participation program facility. Under the terms of the sale, the Company also received proceeds of $2,256,375 ($75 per loan) and was reimbursed lender fees of $1,384,611. The Company recognized the proceeds on the sale in the fiscal year ending September 30, As of September 30, 2010, the Company recognized the lender fee proceeds as a reduction of student loans in the amount of $552,598, on the Consolidated Statement of Financial Position and a reduction oflnterest on Student Loans of $832,013, on the Consolidated Statement of Activities and Changes in Net Assets. 18

21 September 3 0, 2011 and Related Entity Transactions The following transactions are disclosed as "related entity" transactions for financial reporting purposes. The fact that an entity is a "related entity" for the purposes of financial reporting does not mean that the entity is deemed to be "related" for any other purpose. The Company contracts certain administrative and accounting services to Granite State Management and Resources (Granite State) a related entity through common management. Fees for contracted services to Granite State were approximately $940,000 and $1,032,000 for the years ended, respectively, and are included in contracted services. Amounts due from Granite State for contracted services were approximately $20,000 at September 30, In addition, the Company has entered into contractual agreements with Granite State for other servicing and maintenance of student loans originated and purchased by the Company. In consideration for the services provided by Granite State under the agreements, the Company pays monthly fees based upon a fee schedule. Fees paid for such services were approximately $11,000,000 and $14,000,000 for the years ended, respectively, and are included in contracted services. Amounts due to Granite State were approximately $863,000 and $1,505,000 at September 30, 2011 and 2010, respectively. Also, at, Granite State held approximately $633,000 and $2,127,000, respectively, of principal and interest payments on student loans due the Company. At September 30, 2010, Granite State owed NHHELCO $462,000 for billed consolidation loan rebate fees on consolidated student loans. The Foundation, an entity which functions as guarantor of loans made under FFELP, assessed approximately $833,000 in 2010, in default fees on loans, net of cancellations, which the Company disbursed to borrowers. There were no amounts due to the Company at. 8. Arbitrage Earnings Rebatable The tax-exempt bonds issued by the Company are subject to Internal Revenue Service regulations which limit the amount of income which may be earned on certain cash equivalents, investments and student loans acquired with bond proceeds. Any excess earnings are to be refunded to the Federal government. Non-purpose arbitrage liability relates to bond proceeds which have not been used for their intended purpose which have been temporarily invested. Purpose arbitrage liability relates to excess earnings on bond proceeds utilized for intended purposes such as originating and acquiring student loans. The Company estimated that there were arbitrage liabilities at September 30, 2011 and 2010, of $753,035 and $934,252, respectively. Management estimates that any payments in the next fiscal year will be minimal. The following is a schedule of the activity in the purpose arbitrage earnings rebatable during 2011 and There was no non-purpose arbitrage at September 30, and Beginning balance Change in arbitrage earnings rebatable Refund $ 934,252 (236,042) 54,825 $1 '182,906 (248,654) Ending balance 19 $

22 September 30,2011 and Loan Commitments At, the Company had commitments to refinance existing credit for student loans of approximately $204,000 and $140,000, respectively. Commitments to refinance existing credit are agreements to lend to a borrower as long as there is no violation of any condition established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses. The Company uses the same credit policies in making commitments as it does for student loans. 10. Contingencies The Company participates in the FFELP. The program is subject to financial and compliance audits by ED and resolution of identified compliance issues. The amount, if any, of program revenues which may be disallowed by the ED cannot be determined at this time. 11. Limited Release Agreement In 2010, the Company received $20,000,000 under a settlement agreement with UBS and certain related entities related to the Company's auction rate securities. 20