Nelnet, Inc. (NNI) 2005 Q4 法說會逐字稿

. Good day everyone, and welcome to the Nelnet fourth quarter 2005 conference call. Today's call is being recorded and broadcast live over the Internet. At this time, Ms. Cheryl Watson, chief communications officer, will begin with opening remarks. Please go ahead.

Thank you, operator. And thank you everyone for joining us today. Nelnet's fourth quarter and year-end earnings release and financial supplement hade been posted to the investor relations web site at www.nelnet.net. On today's call, Steve Butterfield, co-chief executive officer and vice chairman, will provide an overview of our financial and operational results. Mike Dunlap, co-chief executive officer and chairman, will provide additional detail on our organizational changes. Jeff Noordhoek, president, will discuss our acquisition integration activities, and Terry Heimes, chief financial officer, will report on our year-end financial results.

Before they begin their formal remarks, I would like to read the Safe Harbor statement. We would like to remind you that there will be forward-looking statements made during today's call. The forward-looking statements may differ materially from actual results and are subject to certain risks and uncertainties detailed in the earnings release and in our filings with the SEC. The company does not intend to update any forward-looking statements made during the call. During the course of this call, we will refer to a non-GAAP financial measure which the company defines as base net income. Please refer to our earnings release or to our web site for the reconciliation of GAAP net income to base net income. After Steve, Mike, Jeff and Terry have concluded their formal remarks, we will open up the call for questions. I would now like to turn the call over to Steve Butterfield. Steve?

Thanks, Cheryl. Today I will discuss our key year end results, provide an update on legislative activity, and share some thoughts for 2006. When we began the year, we discussed our objectives to grow our business in a high teens to low 20s on a long-term basis. I am pleased to report that we have exceeded that objective, closing the year with a 51% increase in student loan asset growth to more than $20 billion. Excluding business and portfolio acquisitions, we experienced organic portfolio growth of 27% for the year.

From a diversification of revenue perspective in 2005, 37% of our revenue stream was derived from our fee-based businesses, up from 22% derived from fee-based businesses at the close of 2004. The largest portion of our fee income is generated through loan and guarantee servicing which experienced an increase of $52.4 million in 2005 compared with 2004. We attribute a significant portion of this increase to the expanded relationship we have with College Access Network and the acquisition of EDULINX in the fourth quarter of 2004. With regard to EDULINX, we have received a 16-month extension of the student loan servicing contract with the Canadian government. The RFP to renew that contract has been delayed and a new date has not been set for its release. EDULINX remains poised to respond as a strong contender to win the business once the RFP is issued.

On the legislative front here in the States, the House of Representatives expected to vote on the budget reconciliation bill tomorrow which, if approved and signed into law, will effectively reauthorize the Title 4 provisions of the Higher Education Act through 2012. Although the reconciliation bill delivers some cuts to lenders, we believe it provides benefits for students while balancing taxpayer interests. Among the benefits are an increase in loan limits, the authoritization of graduate and professional students to be eligible for Plus loans. We view both of these changes as an exciting opportunity to capture new volume, and we intend to focus our energies on maximizing the value of these program changes for our school customers, students, and families, which we believe will also help to ensure the long-term viability of the Pell program. Going forward, we believe Plus loans will be a valuable alternative to private consumer credit and expect they will absorb some of the private loan demand. In anticipation of the bill signing, we have mobilized our resources to capture this new program volume.

Looking ahead in 2006, we intend to continue focusing other efforts on organic growth, the future diversification of our revenue streams beyond interest income, developing greater efficiencies through our scale and taking advantage of acquisition opportunities as they present themselves. We believe our long-term focus on sustainable growth will translate to a greater services to our schools and a continued opportunity for students and families to realize their educational dreams. And now I'll turn the call over to Mike to discuss some operational news.

Thanks, Steve. I'd like to discuss two recent announcements we've made. One being the formation of Nelnet's education services division and the other being appointment of Jeff Noordhoek as president of Nelnet. As we look at Nelnet's key business drivers, our core objective is to fulfill the dreams of families who want to educate their children. That is exactly why Steve and I decided to form a division within Nelnet focused only on this division. We believe it enhances our focus and ensures that we remain nimble as we continue to grow this segment of our business. Today we believe we are differentiated through our ability to quickly respond to market opportunities and needs. We want that same differentiation to be true tomorrow and well into the future.

To the leadership of David Bottegal, as chief executive officer of the education services division, and Matt Hall as chief operating officer of the division, we've moved our decision making closer to the customer, so we can 1, continue to provide the total solutions that really impact schools, students, and their families. Number 2, act more strategicly toward new market opportunities. Number 3, expand our fee-based income streams. and number 4, leverage our vertically integrated platform into more customer touch points.

We believe this customer-focused approach will help us enhance our value to the education market, maximize our opportunity for organic growth, strengthen our economy as a skill, and further diversify our revenue base. Equally important, it will allow Steve and I to keep focusing on the future of the company. on ways we can continue to bring value to our schools, students, families, and associates through the expansion of Nelnet's business strategy and success. We also believe our multichannel approach will be strengthened under our new education services division. We look to this new division to provide Nelnet with an important competitive advantage from a financial perspective as we are able to both capitalize on or offset changes within our channels. Specifically, as margins continue to compressand our customer base remains very dynamic.. As an example of our customer dynamics, though not material, we were disappointed to lose our forward flow contract with Fifth Third Bank in the fourth quarter. This was a case where economies of the transaction did not fit within our current strategy. It's important to note that our objective is to not grow our volume for volume's sake. Our transactions must make strong economic sense and provide sustainable value. This is an important demonstration of the value of Nelnet's multiple asset channels, as we do have other brand visibility in the market and will continue to develop that presence.

On a positive note, we are pleased to announce the renewal of our forward flow relationship with M&T Bank, a strong northeastern brand. We're confident that David, Matt, and their teams will continue to capitalize on these type of renewals, as well as new market opportunities and strengthen our existing customer relationships to remain economically sound. Turning to Nelnet, I want to reinforce Steve and my long-term commitment to growing this business. Our passion for helping students and families make their educational dreams possible is even stronger today as we see the ever increasing financial need.

It is because of this commitment that we have appointed Jeff Noordhoek as president of Nelnet, Inc. Jeff was one of the original associates as we started and grew this business. In his previous position as executive director of our capital markets division, he has an extensive understanding of our company and industry, which he has used to create our diverse funding streamings as well as to help Steve and I with our long-term strategy. As president, Jeff will expand his decision-making role in the future growth and strategic objectives of the company, provide the day to day leadership for Nelnet, Inc. and oversee our mergers and acquisitions, capital markets, and communication divisions. Utilizing Jeff's experience and knowledge base, especially when it comes to supporting our M and A team, will allow Steve and I as co-CEOs to really look at where we want to take the company in the next five, ten, and fifteen years. We understand well that we must balance the demands of our current surroundings, the demand for continued future planning, and that is exactly what Jeff will help us do in his new role. While we believe these structural changes better position us for future market growth and opportunity, our message and long-term focus remain the same: customer focus, quality, service, and products, associates doing what they do best every day, and diversification of revenue streams and fee income, focused on the educational marketplace. Now I'd like to turn the call over to Jeff Noordhoek to discuss our recent acquisitions and integration progress. .

Thanks, Mike. It is important to note that Nelnet continues to focus on organic growth but we do use our strong capital position for acquisition opportunities that we believe will provide additional value to our product and service scope. In November, we acquired the remaining 50% ownership of 5280 Solutions and Firstmark Services. These acquisitions allow Nelnet the ability to leverage their technology in private loan servicing expertise throughout our education value chain as well as further diversify our fee-based revenues.

In November, we also announced the expansion of our strategic relationship with College Access Network, the Colorado state-designated guarantor of student loans. Under our new agreement, Nelnet provides the student loans servicing and guarantee operations of College Access Network, which expands our guarantee servicing line of business within our vertically integrated model. The transaction provides additional fee-based revenue diversification for Nelnet and helps to further integrate our student loan origination services with our guarantee servicing products.

As we move into 2006, we continue to focus heavily on integration of these organizations and our previous acquisitions of the year. Our acquisition strategy is to make the value of one plus one greater than two. As with all of our acquisitions, value creation is what we're working toward with the integration of these organizations with the goal to have the majority of the process completed by the 2006 year end. To date, we have integrated the LoanSTAR College Access Network and Chela sales teams into our education services division, and we have provided them access to Nelnet's product and service line to enhance our cross-selling opportunities. We are also expanding our cross-selling opportunity within the K through 12 and college market through the creation of a joint marketing strategy with FACTS management. Our objective here is to build the Nelnet brand recognition earlier in the students' college-planning cycle and leverage the actively managed tuition-payment opportunities available from FACTS into our college communities.

Finally, we have also begun the loan servicing system integration for the LoanSTAR and Chela portfolios in order to develop greater efficiencies in their administration and are using our existing warehouse lines to provide a lower cost of funds to greater economies of scale for these two portfolios. As it relates to our warehouse lines and funding strategy for future organic or acquisition opportunities, we intend to derive further benefit from the scale and efficiency we achieved in 2005 as the second largest issuer of student loan ABS in the nation. In 2005, we also received a Baa2 corporate debt rating from Moody's Investor Service to compliment our triple B+ S&P rating and subsequently conducted our debut unsecured debt offering. In 2006, our corporate debt rating will continue to be a focus, and we intend to become a more frequent and programmatic issuer of unsecured corporate debt as a means of further diversifying our source of funds. Now I'll turn the call over to Terry Heimes to discuss our fourth quarter and year-end financial results.

Thanks, Jeff. I'd like to begin by noting the creation of Nelnet's education services division will not change our segment reporting, and we anticipate our public disclosure to remain consistent with our past practices. Turning to the numbers, for the 12 months ended December 31st, 2005, our base net income, excluding the impact of certain special allowance yield adjustments and related derivatives or that income related to our core operations was $1.46 a share compared with $1.02 per share last year, an increase of $23.8 million. Excluding the impact of certain incentive compensation related expenses related to the special allowance yield adjustment in 2004, our adjusted base net income increased more than 20%.

For the 12 months ended December 31st, 2005, base net income or net income excluding the impact of derivative mark to market adjustments, amortization of intangibles, and variable rate floor income was $127.6 million or $2.37 per share. GAAP net income for the 12 months ended December 31st, 2005 was $181.1 million or $3.37 per share compared with $149.2 million or $2.78 per share for the same period a year ago. For the fourth quarter, our base net income, excluding the impact of certain special allowance yield adjustments and related derivatives, was $21 million or $0.39 per share compared with $18.3 million or $0.33 per share a year ago.

Base net income was $32.3 million or $0.60 per share compared with $31.7 million or $0.59 per share for the same period last year, noting specifically the decrease in excess special allowance yield adjustments of $2 million. Fourth quarter GAAP net income was $42.7 million or $0.79 per share compared with $47.2 million or $0.88 per share a year ago. As we've discussed in the past, our derivatives are not structured to qualify for hedge accounting under FASB133. As such, the change in the fair market value of our derivative instruments is recorded in our statement of operation.

During 2005, the change in the forward yield curve resulted in a mark to market gain of $95.9 million, which is reflected in our GAAP net income. However, consistent with how we treated this in the past, and how we look at and manage our business, this gain is removed from our calculation of base net income. As we said in the past, asset growth, specifically asset growth achieved under sound economic analysis, is one of our primary objectives necessary to meet our goal of long-term sustainable growth. Our net student loan assets have increased nearly $6.8 billion, driven by net organic channel acquisitions of $3.6 billion. This represents 27% growth in our student loan assets and is supplemented by portfolio or company acquisitions of $3.2 billion. We are very pleased with the performance of all of our various channels but specifically the growth of our internal brands within our school channel and our direct consumer channel. Combined, these two channels are up over 40% over last year.

The primary focus of our direct consumer channel during 2005 was asset retention and portfolio growth through our consolidation product. We believe we've achieved a tremendous amount of success during a time of increased competition and market pressure. At year end, consolidation loans made up more than 64% of our total portfolio. We generated more than $4 billion in gross new consolidation loans, with $2.1 billion being gained as new loans, meaning those loans acquired from other holders. At the same time, we experienced only $855 million consolidated out of our portfolio to other parties.

Including our consolidation portfolio, more than 99% of our portfolio is government guaranteed and serviced by parties who have been designated exceptional performers, qualifying for 100% reimbursement of defaulted claims. Steve mentioned the proposed budget reconciliation legislation and this does include an increased risk- for holders of FELP loans to 1% for those serviced by exceptional performer designees. We anticipate increasing our allowance for loan loss by an estimated $5 million to $7 million related to the increased risk sharing upon enactment of the legislation.

Assuming continued growth and new volume and cohort default rates in the 4% to 5% range, the change in legislation would also have an estimated $3-million to $5 million-dollar annual impact through our provision for loan losses. Turning to some of the operations detail, net interest income, excluding the special allowance yield adjustment of $94.7 for the 12 months ended December 31st, 2005, and $203.5 million for the same period last year, increased $39.8 million or just over 20%. For the fourth quarter, net interest income excluding the impact of special allowance yield adjustments increased $9.5 million or 17.4% compared to the same period last year. The growth in that interest income is driven by the increase in our outstanding portfolio but is also offset by contracting margins.

Our core student loan spread was 1.51% for the 12 months ended December 31st, 2005, and 1.44% for the fourth quarter, holding relatively stable compared to the third quarter which was 1.46%. We would expect to see some continued margin pressure with the shift of portfolio mix toward consolidation loans as well as the increased competition and pricing pressures related to origination fee discounts and acquisition costs. Although zero fee lending won't hit the income statement directly in 2006, it has and will continue to increase the cost of acquisition of new loans, specifically school channel loans which will ultimately be recognized as amortization and result in contracting margins.

The margin compression we continue to see in our loan assets and our focus on providing a complete set of financial products and services to our customers emphasizes the importance of our core principle of revenue diversification. Loan and guarantee service fee income increased more than $52 million for the 12 months ended December 31st, 2005 as compared to the same period a year ago and $16.5 million in the fourth quarter as compared to 2004. Our acquisition of EDULINX in the fourth quarter of 2004, and the expansion of our guarantee servicing operations with College Access Network have driven the increase in revenues here. Because of the fee-for-service nature of these operations, we have also seen a significant increase in operating expenses as we expand and diversify our fee-for-service business. We believe that as we continue to expand our product and service offerings to our school and lender clients, these services will present additional leverage and integration opportunities in 2006 and beyond.

Other fee based revenues increased from approximately $7 million in 2004 to $36 million in 2005. For the fourth quarter, these revenues increased more than $11 million compared to the fourth quarter of 2004. Total operating expenses increased $79.6 million for the 12 months ended December 31st, 2005 and $36.3 million for the fourth quarter as compared to 2004, driven by our M&A activity, expansion of our fee-for-service operation, and continued efforts to focus on asset generation. We continue to focus on efficiently meeting the needs of our customers. In fact, when excluding the impact of acquisitions and the College Access Network contract, our core operating expenses for the quarter increased less than 3% compared to the third quarter, and were relatively flat compared to the 4th quarter of 2004. We believe our Chela and LoanSTAR acquisitions bring tremendous opportunity for leverage in terms of operations as well as portfolio growth. These acquisitions and the related portfolios are currently serviced on multiple platforms with corresponding support cost, infrastructure, and back office operations. We will focus on retaining the intellectual capital of these organizations and will also be looking to provide the level of service that our newly acquired customers have come to expect and demand.

As we continue to integrate the portfolio acquisitions, we will recognize the benefits of improved efficiencies in terms of servicing and financing but also in terms of market penetration and origination growth. The integration of servicing and back office operations will continue throughout 2006. We believe the true benefit and impact of these acquisitions will be realized in 2006 and beyond, as we work to integrate the acquired operations in the most efficient manner with our focus on enhancing our customers' experience. This will be achieved by developing efficiencies through combined servicing platforms, integration of back office operations, and leverage of assumed marketing operations that will translate into future asset growth. We continue to highlight these results as we believe they are significant when considering the costs incurred as we continue to diversify our product offerings and demonstrate our ability to grow our asset base. Our shareholder equity neared $650 million at year end.

During the fourth quarter, we issued approximately 260,000 shares in conjunction with the acquisition of 5280 Solutions and Firstmark. During 2005, we also issued approximately 75,000 shares under various employee and director share plans, bringing the total outstanding shares to near 54 million shares at year end. Our long-term objectives remain the same. Diversify sustainable growth. We do anticipate our asset growth rate will slow during 2006 to double digit to high teens due to the large acquisitions at the end of 2005 and the industry-wide contraction of consolidation market. However, as we continue to diversify our revenues toward fee-for-service activities, we continue to look for growth in our adjusted base income in the high teens to low 20% range. With that, I'll turn it over to Steve for closing comments.

Before I close, I would like to extend a personal invitation to our investors and analysts to join us for our 2006 investor day which will be held on Tuesday, March 14th, at the New York Stock Exchange. We hope to see all of you there, but we will also be providing the event via webcast, as we can take some time to further discuss our business and our thoughts for the coming years. Like to reiterate the key highlights of the year and fourth quarter. We exceeded our student loan growth objective, closing the year with organic portfolio growth of 27%. From a diversification of revenue perspective in 2005, 37% of our revenue stream was derived from our fee-based businesses up from 22% in 2004. Our loan and guarantee servicing experienced an increase of nearly $52.4 million in 2005 compared with the same period in 2004. Although the reconciliation bill delivers some cuts to lenders, we believe it provides benefits for students and families while balancing taxpayer interest, and we intend to focus our energies on maximizing the value of these program change for our school and student customers. And we believe our long-term focus on sustainable growth will translate to greater services to our schools and the continued opportunity for students and families to realize their educational dreams. And with, that we'd like to turn it back to the operator and listen for your questions. Operator, please.

Yes, sir. Thank you. To ask a question, please press the star key followed by the digit 1 on your touch-tone telephone. If you're using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star 1 on your touch-tone telephone. And we'll pause for just a moment to give everyone an opportunity to signal for questions. We'll take our first question from Matt Snowling, FBR. Please go ahead.

Good afternoon. Just wondering if you could talk a little bit about the impact that the higher consolidation activity had on your amortization rate during the quarter.

Well, the amortization rate, if you look -- when you look at our amortization, I think it was about 52 basis points up from 51 basis points. The increase in the high consolidation activity did drive that up but also -- we had our acquisitions we began to amortize the premium related to Chela and LoanSTAR which are also included that number, so I think we had nearly $2 billion of our internal consolidations as well as -- which shifted the portfolio mix as well as we lost $855 million to external parties. We still experience significant growth of our internal assets through consolidation, but it did drive that up.

Can you isolate how much that --

No. We don't isolate that.

Just a couple of other quick questions then. In terms of Fifth Third, how much overflow [inaudible] did you get from Fifth Third.

It was roughly in the $100 million range.

$100 million? Okay. Terms of the timing of the higher provision for risk sharing, are you anticipating taking that provision upon passage or when it goes into effect?

That's what we've got to look at in terms of the enactment versus when it comes into effect. I believe it will be probably late first quarter.

Late first, okay. One quick one. You talked about the ability to go out and do acquisitions going forward, and it looks like your tangible equity as a percentage of the loan portfolio is down around 2%. Does that suggest you're kind of at your threshold or is there more dry powder there going forward?

This is Mike Dunlap. If there is a good opportunity to make an acquisition that's going to create value, we'll find the gunpowder to make it happen.

Fair enough.

And we'll take our next question from Moshe Orenbuch, CS First Boston. Please go ahead.

Thanks. Following up on the acquisition question, could you talk a little bit about the kinds of things that you're looking for now? I mean, we've seen some, I would say, some of the other state agency-type entities kind of getting ready to be sold. What would be appealing to you or maybe what wouldn't be appealing at this stage?

We'll definitely look at some of the core businesses that we're in and state agencies would be right down the line of our core business. I think the thing that probably concerns us a little bit in those situations are, is there going to be much value left if it turns into a bidding war to acquire those. If we can get those at the right price where it's going to create value for us long-term, we'd be very, very interested, but we aren't going to bid up an acquisition just to add volume for volume's sake. But we will -- we will definitely be in the mix looking at all those.

Just to follow up on the Fifth Third, what happened to that? They went with another provider that -- did you think they had a price that was too high?

We believe they went with another provider, yes.

Thanks.

We'll take our next question from Neil Abromavage, Deutsche Bank. Please go ahead.

Thank you very much, and just to, sort of, follow-up once again on the acquisition, you commented that the asset growth would be double digit to high teens. Is that with or without contemplating any acquisitions you do in '06? And then maybe you could comment on the pace of potential acquisitions in '06 relative to what you did in '05, and then maybe just sort of frame out how the landscape might change if we were to get HEA reauthorization here in the near term. Thank you very much.

On your first question, we assume that we aren't going to have any acquisitions so that the double digit to high teens is without any acquisitions. If we have any acquisitions, it will be opportunistic, and we'll add to that number. As far as the pace of acquisitions go, when opportunities come up, you can't really plan those. I would say 2005, we were at a record pace as far as the number of acquisitions that we did. I would expect that to slow down significantly in 2006, although if a number of the state agencies come up for sale, and there's opportunities to make acquisitions there, we'll step up to the plate and take a swing at the ball. Your last question, with the passage of the reauthorization, I think probably the biggest opportunity that we see today is in the graduate Plus area where graduate students will be able to get Plus loans, and so we see that as a huge opportunity for us and for the industry to grow assets.

That's very helpful. Maybe just one follow up question on the operating expenses. I mean, should we be thinking about a run rate off the fourth quarter excluding some of the integration noise or maybe just a little color commentary there. Thank you very much.

Well, just to give you guys -- give everybody a flavor of what we did in the fourth quarter, we added almost over 500 associates when you look at the different acquisitions that we made, and it's going to take us some time to integrate and become more efficient with those acquisitions. So as far as the run rate from the fourth quarter, we see opportunities for efficiencies throughout 2006, but at the same point in time growing some of our other business channels. If you look at our pure growth and expenses when you take out the acquisitions, I think Terry mentioned they were less than 4% as far as the growth in our expenses. For next -- for next year, we aren't sure how much of that efficiency is going to drop in the bottom line, but it should be less. Should be a little bit less than what it was in the fourth quarter run rate. Terry, do you want to add to that?

Yeah, I think the time to look or the way to look at that, we had about -- we had really two months of our acquisitions included in the fourth quarter, and so the fourth quarter run rate is probably a close run rate given a slight increase in some expenses as well as some of the efficiencies that we will gain then throughout the year with integration costs. All of that needs to be balanced with our asset generation activities. We referenced a slowdown in consolidation activity. We are going to still be very active in the direct consumer market which focuses not only on consolidation loans but I believe Steve referenced the Plus loan activities. So all of that will come into play when we start looking at our expenses for 2006.

Another comment I would say in general, we are focused on being efficient and controlling our expenses, but we have more focus on the revenue side of the equation in that we create more revenues in our expenses over time, so as our expenses go up we are focused on growing our revenue at a faster pace, and that's where we really want our associates to be focused on. Grow the revenues faster than the expenses, and we expect that to happen in 2006.

Great. Thank you very much.

We'll take our next question from Dan Welden, Jefferies & Co. Please go ahead.

Thanks. Could you talk a little bit about how many branding and forward flow contractings are up for renewal in the next year, and then also a little more color on what you expect in terms of the market [inaudible] for consolidations, and your volume to that channel next year on a net basis?

Sure. Off the top of my head, I don't know how many forward flow contracts we have coming up in the next year. I would guess it's less than a half dozen. So I just don't have that -- don't have an answer for you on that one. With respect to consolidation loans, in general, we think the market has shrunk somewhere between 30 and 50%, and so from that perspective, when we look at our growth or our portfolio consolidation loans, we're going to have to grow market share to not shrink at that same dollar amount or same percentage amount. We think we will grow some market share. I do not know -- I can't tell you today whether we'll grow enough market share to have a net growth year-over-year in in a consolidation loan market area. I would guess that our year-over-year number will not be a growth number because the market has shrunk so much.

But we do anticipate growing our portfolio through our consolidation activities.

Correct.

Got you. Thank you.

We'll take our next question from Jordan Himowitz, Philadelphia Financial. Please go ahead.

Hey, guys. One follow-up to Dan's question and then several questions. The Fifth Third contract was about 10% of your forward flow contracts. What percent, if you don't know the number of contracts in dollars, do you think expire in '06?

I really don't have that off the top of my head, what other contracts expire in '06. I mean, just -- we do business with hundreds of banks, and so I just don't have that number off the top of my head.

What's the average contract length?

I mean, they run out in varying increments from two to five years.

So figure three and a half year average, so to speak?

I don't have that average. That's probably close.

Yes. I'd say around three years.

Okay. Also can you guys disclose how much floor income on the 7.5% and 8.5% and 9.5% loans went through the income statement? In other words that was not the 9.5% that's been recycled, but the floor income related to the nonrecycled 9.5% loans, the 7.5% and 8.5% loans that actually flow to the income statement?

No. We don't break that out. But I believe you can look and you can see that we have about $1.4 billion of loans that are not earning at the 9.5% yield but that are earning at those fixed rates. If you look at our overall portfolio, that's earning at fixed rates, it's about $4.9 billion, and we've got that in excess of 80%. 80 plus -- between 80% and 85% hedged. So that would include those 7% and 8% loans, but we don't break out the separate floor income related to those.

So it's a $1.4 billion? Is the number in the quarter?

A $1.4 billion is the amount of loans at year end that were earning at rates above 7%, below 9.5%.

And does that include then $300,000 of nonrecycled loans?

I'm not sure I'm following.

You guys have $3.1 billion in 9.5% loans. $2.8 billion has been recycled and put in that other category, but $300,000 of which is --

Is earning at 9.5%. That would -- that would include, yes, that that's earning within the tax exempt bonds at the 9.5% rate.

Thank you.

And we'll take our next question from David Chamberlain, Pimco. Please go ahead.

Hi.Just can you give kind of the related revenue that you got in the quarter from the two months of integration acquisition?

Can you repeat the question again?

Yeah. If I looked at the acquisitions that you did in the quarter, you included in the period for revenue, what's the revenue number?

The revenue number for the quarter was somewhere between $10 and $11 million.

Okay. You said that's primarily two-thirds. One quarter is included?

Right.

Thanks.

We'll take our next question from Stephen Schultz, KBW. Please go ahead. .

Hi. Thanks, guys. Terry, I think you referenced potential efficiency improvement also on the funding side from the loans that you brought over from Chela and LoanSTAR to migrating those over into your own warehouse facilities. Can you give us any sense as to kind of what kind of spreads the Chela and LoanSTAR portfolios were funded at?

I don't necessarily have the breakdown in exact what the rates were or the spreads, but we know that we can pick up -- we're going to pick up some efficiency in terms of the value of our warehouse lines as well as when we start putting them in our long-term securitizations, being the second largest issuer, we've -- our cost of funds and our spreads have continually come down, and we're anticipating that we will get the efficiency from that as well.

Great. And if you could, what -- how mutch of the Chela and LoanSTAR loans were actually funded via warehouse versus were any of them funded through term securitization?

It's Jeff. It would have been both. So they would have been split equally approximately between warehouse and securitizing -- securitization after we acquired them.

Great. And just a follow-up. Can you just update us again the comments you made on the EDULINX contract renewal and kind of where that stands?

We're waiting for the Canadian government to issue another RFP on that. They've extended the contract with us for 16 more months that I think goes through July 1st of 2007.

Okay. Great. And then just lastly on the effective tax rate that bounced around a little bit recently, I'm just curious for an update on where you expect that to be going forward.

It should be consistent with the fourth quarter and 2007 going forward as we continue to look for ways that we can take advantage of various tax deductions as best we can.

Fantastic. Thank you very much, guys.

At this time, we have one question remaining in the queue. As a reminder, if you would like to ask a question or if you have a follow-up question, please press the star key followed by the digit one. That's star one and we'll take a follow-up question from Dan Welden, Jefferies and Company. Please go ahead.

Thanks for taking the follow up. Just wanted to talk about the the expense increase, one more time. Is there any component of that increase sequentially that you classify as nonrecurring or you're not breaking it out that way?

We're really not breaking it out that way. I mean, we're going to have some cost of integration that we would expect to go down over time throughout 2006 as we integrate and leverage the operations, but I would not classify -- we're not classifying any of them as one time expenses.

To the extent they were one time, they were insignificant.

Okay. And finally, on the servicing side, given the extension of the EDULINX contract and the increase in the quarter of your third party servicing contract, what it your outlook for the combined balance of the businesses? Is it a little bit of a decline or steady over the next year? So far for the past year, the third party servicing has been going down a little bit.

On the third party servicing in the U.S., we think that's going to continue to stay flat to slightly down into the future. As far as Canada goes, the amount of loans and kids going to school in Canada is increasing slightly, so we expect the Canadian portfolio and revenue from that to grow slightly going forward in the future.

Great. Thanks very much.

And at this time we have no further questions from the phone audience. I would like to turn the conference back over to the speakers for any additional or closing remarks.

Just like to thank everybody for taking the time to join us on the call today. Excited about our quarter and excited about the year 2006. Thank you.

Thank you.

And that does conclude today's presentation. We thank you for your participation, and you may disconnect at this time. This concludes the conference call.