November 24, 2008

Daniel F. Kaplan, Esq.

Perry, Guthery, Haase 

 & Gessford, P.C., L.L.O.

233 13th Street, Suite 1400

Lincoln, Nebraska 68508

Dear Mr. Kaplan:

This is in response to the request by Union Bank and Trust Company 

(“Union Bank”) for an exemption from section 23A of the Federal Reserve Act and the 

Board’s Regulation W to allow Union Bank to purchase $[ ] in federally guaranteed 

student loans from its affiliate, Nelnet, Inc. (“Nelnet”), both of Lincoln, Nebraska.

Nelnet is one of the largest originators, holders, and servicers of student 

loans in the United States.1

Section 23A and Regulation W limit the amount of “covered transactions” 

between a bank and any single affiliate to 10 percent of the bank’s capital stock and 

surplus and limit the amount of covered transactions between a bank and all its affiliates 

to 20 percent of the bank’s capital stock and surplus.

 Almost all the student loans originated by Nelnet are at least 

97 percent guaranteed by the U.S. Department of Education under the Federal Family 

Education Loan Program (“FFELP”).

Nelnet historically has financed its student loans almost entirely in the 

securitization markets. Nelnet, like other student lenders, has encountered severe 

difficulties in securitizing its student loans profitably after the beginning of the credit 

market turmoil in August 2007. Since then, it has been financing a large share of its 

student loans through a short-term bank warehouse facility. Nelnet’s warehouse lenders 

have been making repeated and increasing margin calls on the facility. To provide 

liquidity to Nelnet, Union Bank now proposes to purchase from Nelnet, at par, up to 

$[ ] of FFELP student loans (the “Portfolio”).

2

 1

 Union Bank is a commercial bank and also engages in originating and holding student

loans. 

2

 12 U.S.C. § 371c(a)(1); 12 CFR 223.11 and 223.12.

 Under section 23A and 

Regulation W, “covered transactions” include the purchase of assets by a bank from an 

affiliate, the extension of credit by a bank to an affiliate, the issuance of a guarantee by a 
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bank on behalf of an affiliate, and certain other transactions.3 The statute and regulation 

also require a bank to secure its extensions of credit to, and guarantees on behalf of, 

affiliates with prescribed amounts of collateral.4

Nelnet and Union Bank are affiliates for purposes of section 23A and 

Regulation W because the [ ] controls more than 25 percent of the voting shares of 

Nelnet and of Farmers and Merchants Investment, Inc., Lincoln (“Holding Company”), 

the parent holding company of Union Bank.

 In addition, section 23A and 

Regulation W prohibit a bank from purchasing low-quality assets from an affiliate and 

require that all covered transactions between a bank and an affiliate be on terms that are 

consistent with safe and sound banking practices. 

5

 Consequently, Union Bank’s purchase of 

the Portfolio from Nelnet would be a covered transaction subject to the quantitative limits 

and qualitative requirements of section 23A and Regulation W. Under Regulation W, the 

value of the covered transaction would be approximately $[ ] – the purchase price to 

be paid by Union Bank for the Portfolio.6

Accordingly, Union Bank has requested an exemption from section 23A 

and Regulation W to permit it to acquire the Portfolio from Nelnet. Section 23A and 

Regulation W specifically authorize the Board to exempt, in its discretion, transactions or 

relationships from the requirements of the statute and rule if the Board finds the 

exemption to be in the public interest and consistent with the purposes of section 23A.

 Because the capital stock and surplus of Union 

Bank is approximately $[ ], the bank’s quantitative limit per affiliate is 

approximately $[ ]. The proposed covered transaction would therefore exceed the 

bank’s quantitative limits under section 23A and Regulation W.

7

The Board has routinely approved exemptions under section 23A for 

one-time asset transfers that are part of a corporate reorganization and that are structured 

to ensure the quality of the transferred assets.

 

8

 Although this request differs from 

previous corporate-reorganization exemption requests in several material ways, there are 

a number of factors that weigh in favor of granting the exemption, and the parties have 

made a number of commitments to reduce the risks to the bank.9

 3

 12 U.S.C. § 371c(b)(7); 12 CFR 223.3(h).

4

 12 U.S.C. § 371c(c); 12 CFR 223.14.

5

 [ ]. 

6

 See 12 CFR 223.22(a).

7

 12 U.S.C. § 371c(f)(2); 12 CFR 223.43(a).

8

 See, e.g., Board letters dated March 25, 2008, to Karen Grandstrand, Esq. 

(Minnwest Corporation); December 21, 2007, to Andres L. Navarette, Esq. (Capital One 

Financial Corporation); and June 30, 2006, to Carl Howard, Esq. (Citigroup Inc.).

 

9

 The commitments made by Union Bank and its affiliates are set forth in the appendix.
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First, credit risk to the bank in this case is very low because the Portfolio is 

substantially guaranteed by an agency of the U.S. government. Second, Nelnet, Holding 

Company, and [ ] have agreed to place and maintain in escrow at Union Bank an 

amount of cash equal to the entire amount of the Portfolio that is not government

guaranteed. In addition, Nelnet, Holding Company, and [ ] have committed to 

guarantee the bank against any losses on the Portfolio and to make quarterly payments as 

necessary to reimburse Union Bank for any Portfolio losses. To address the possibility 

that the cost of funding the Portfolio might to exceed the return on the Portfolio, Nelnet, 

Holding Company, and [ ] have agreed to take a series of actions to ensure that 

Union Bank will earn a positive spread on the Portfolio. Finally, Holding Company and 

Union Bank have committed to maintain regulatory capital ratios at levels in excess of 

the well-capitalized thresholds, including maintaining a total risk-based capital ratio of at 

least 11 percent.

As an additional safeguard, and in recognition that this transaction is not 

intended to be a transfer of an operating business to the bank, this exemption will be 

temporary, expiring on September 30, 2010. Because the exemption is temporary, 

Union Bank must sell the Portfolio to Nelnet or to another purchaser, or find an 

alternative means to bring the covered transaction into compliance with section 23A and 

Regulation W, on or before September 30, 2010. Finally, Union Bank may not purchase 

any low-quality assets (as defined in Regulation W) from Nelnet as part of the proposed 

transfer, and the proposal must be reviewed and approved by the board of directors of 

Union Bank, including a majority of directors who are independent from Nelnet.

The proposed asset purchase by Union Bank from Nelnet would be subject 

to the market-terms requirement of section 23B of the Federal Reserve Act.10

This determination is specifically conditioned on compliance by 

Union Bank, Nelnet, Holding Company, and [ ] with all the commitments and 

 In light of 

the substantial government guarantee supporting most of the Portfolio and all the 

commitments made by Nelnet, Holding Company, and [ ], the proposed transaction 

appears to pose little risk to Union Bank and to provide the potential for income to 

benefit the bank. It also is expected to provide the public benefit of maintaining liquidity 

in the student loan market. 

Accordingly, the exemption appears to be in the public interest and 

consistent with the purposes of section 23A. The Board, after consultation with staff of 

the Federal Deposit Insurance Corporation, hereby grants the requested exemption.

 10 See 12 U.S.C. §371c-1(a)(1). Section 23B requires that the proposed transaction be on 

terms that are substantially the same, or at least as favorable to Union Bank, as those 

prevailing at the time for comparable transactions with unaffiliated companies.
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representations made in connection with the exemption request. These commitments and 

representations are deemed to be conditions imposed in writing in connection with 

granting the exemption and, as such, may be enforced in proceedings under applicable 

law. This determination is based on the specific facts and circumstances surrounding the 

proposed transaction and may be revoked in the event of any material change in those 

facts or circumstances or any failure by Union Bank, Nelnet, Holding Company, or 

[ ] to observe any of their commitments or representations. Granting this exemption 

does not represent a determination concerning the permissibility of any other transactions 

engaged in by Union Bank, Nelnet, Holding Company, or [ ] that are subject to 

section 23A and Regulation W.

Sincerely,

Robert deV. Frierson

Deputy Secretary of the Board

Appendix

cc: Federal Reserve Bank of Kansas City

Federal Deposit Insurance Corporation
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Appendix

1. Nelnet, Holding Company, and [ ] commit to make either (i) quarterly 

cash payments to Union Bank equal to the book value at the end of each 

calendar quarter, plus write-downs during that quarter by Union Bank, of 

any transferred assets that became and remained low-quality assets (as 

defined in Regulation W) during that quarter; or (ii) quarterly purchases 

from Bank of any transferred assets that became and remained low-quality 

assets during that quarter at a price equal to the book value at the end of that 

quarter plus write-downs during that quarter by Union Bank of any such 

assets. Nelnet, Holding Company, or [ ] will make the cash payment or 

will purchase the assets within 30 days after the end of each calendar 

quarter. Union Bank will hold an amount of risk-based capital equal to the 

book value of any transferred assets that become low-quality assets so long 

as Union Bank (or any operating subsidiary) retains ownership or control of 

such assets. For example, under this dollar-for-dollar capital requirement, 

the risk-based capital charge for each transferred asset that becomes a lowquality asset would be 100 percent (equivalent to a 1250 percent risk 

weight), rather than the 8 percent requirement that would apply to a similar 

defaulted loan asset that is not a part of the transferred asset pool.

2. Nelnet, Holding Company, and [ ] commit to establish and maintain 

throughout the term of the exemption an escrow account at Union Bank in 

an amount equal to the aggregate outstanding principal amount of the 

transferred assets that is not guaranteed by the U.S. Department of Education 

under the FFELP. Union Bank will be entitled to draw money from the 

escrow account to the extent that the bank incurs losses as a result of a 

breach by Nelnet, Holding Company, or [ ] in complying with any of the 

commitments made in connection with this exemption request.

3. Nelnet, Holding Company, and [ ] commit to reimburse Union Bank 

promptly for any losses incurred by the bank on the sale of any transferred 

assets.

4. Nelnet commits to waive servicing fees charged to Union Bank in 

connection with the transferred assets to the extent that Union Bank’s spread 

on the transferred assets falls below 50 basis points. If a complete waiver of 

servicing fees by Nelnet leaves Union Bank with a negative spread on the 

transferred assets, Nelnet, Holding Company, and [ ] commit to make 

monthly cash contributions to Union Bank to enable it to earn a positive 

spread on the transferred assets.
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5. Holding Company commits to maintain regulatory capital ratios equal to or 

greater than the pro forma regulatory capital ratios set forth on Attachment B 

to the exemption request. Specifically, Holding Company commits to 

maintain a tier 1 leverage ratio of at least 8.23 percent, a tier 1 risk-based 

ratio of at least 10.81 percent, and a total risk-based ratio of at least 

11.22 percent.

6. Union Bank commits to maintain a tier 1 leverage ratio of at least 5 percent, 

a tier 1 risk-based ratio of at least 6 percent, and a total risk-based ratio of at 

least 11 percent.