Nelnet, Inc. (NNI) 2006 Q1 法說會逐字稿

Good day everyone, welcome to the Nelnet first quarter 2006 conference call. Today's call is being recorded and broadcast live over the Internet. At this time Ms. Cheryl Watson, Nelnet's Chief Communications Officer will begin with opening remarks, please go ahead.

Thank you operator and thank you everyone for joining us today. Nelnet's first quarter earnings release and financial supplement have been posted to the investor relations website 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 competitive position and market share. Jeff Noordhoek, President, will discuss our acquisition integration activities. And Terry Heimes, Chief Financial Officer will export on our 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 make during today's call. They forward-looking statements may differ materially from actual results and are subject to certain risks and uncertainties that are 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 two non-GAAP financial measures which the Company defines as base net income and adjusted base net income. Please refer to our earnings release or to our website for the reconciliation of GAAP net income to base and adjusted 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.

Thank you, Cheryl. I'm very pleased to report our first quarter results as they relate to Nelnet's continued focus on long term growth through asset generation, revenue diversification, and economies of scale. For the quarter ending March 31, 2006 student loan assets reached 21.3 billion, an increase of 1.1 billion or 5% compared with the first -- fourth quarter 2005. We are introducing the term adjusted base net income this year to simplify what we have previously described as base net income exclusive of the impact of certain special allowance yield adjustments and related derivatives. This is the figure that we as management focus on with respect to our growth goals of the high teens to low 20%. Again, this is not a measure for us, it's simply shortening terminology for an existing performance measure.

While excluding the provision for loan loss reserves recognized in the first quarter of 2006 related to the 1% increase in risk sharing as a result of the Deficit Reduction Act our adjusted base net income increased 5.5 million to $0.44 per share versus $0.35 per share for the first quarter of last year. An increase of 26% per share. As we begin the year I want to spend more time on what we have accomplished in terms of diversification. Our total fee base revenues including loan servicing, guarantee servicing, tuition payment plans, direct marketing, list management, and software solutions totaled 68.6 million during the first quarter compared with 42.7 million a year ago. An increase of nearly 26 million in reserves or 61%.

Loan and guarantee servicing fee income increased 9.9 million for the first quarter as compared with the same period a year ago. Thanks in large part to the acquisition of First Mark Services and the addition of guarantee servicing operations to our existing relationship with College Access Network. Our other fee based revenues included our list management, direct marketing, and tuition payment plan businesses. Revenue from these areas increased from 3.4 million during the first quarter of 2005 to 18.2 million during the first quarter of 2006. These revenues and net income contributions were much higher than anticipated and have certainly been a bright spot over the past 12 months and for the first quarter. While we're pleased with the overall growth and market position of these businesses it's also important to note that a portion of the first quarter performance was driven by market, the timing of market demand, and seasonality.

We anticipate these factors will normalize throughout the remainder of 2006 and specifically during the second quarter. Another contributor to fee revenues is our Canadian servicing company Edulinks. Edulinks is currently reviewing the recently released RFP for the renewal of the Canadian government loan servicing contract. Edulinks will be submitting its response shortly and we continue to believe the Company is well positioned to win that contract which is expected to be awarded around August or September of this year. From a legislative perspective we continue to implement the changes made to the Title IV programs through the Deficit Reduction Act. Including the expansion of plus loan program to graduate and professional students, increase loan limits and the increase in lender risk sharing by 1% for the exceptional performer designees.

Finally we would like to thank those who attended our March 14, investor day either in person or via the webcast. We appreciate the opportunity to provide a more in depth discussion of our competitive strategy, merger and acquisition integration, and financial foundation. For anyone who was unable to join you may locate a transcript of the event on our website under conference calls and webcasts. Now I would like to turn the call over to Mike Dunlap to discuss our competitive position and market objectives in greater detail.

Thanks Steve. I would like to continue our discussion from investor day related to our competitive position and market share. Consistent with our long-term vision we continue to focus on sustainable growth models for both student loan assets and our fee based income which we intend to increase to represent a substantial percentage of our total revenues. We believe this dual approach in strategy differentiates Nelnet in two significant ways. First, in addition to our FFELP fee income we are also focused on increasing our fee revenues in non-FFELP areas to lessen the impact of future legislative risk. Second we are focused on creating recurring revenue channels that are sustainable for the long term.

During 2005 we completed a significant number of transactions to support these goals. But as I've said numerous times in the past we will not grow for growth sake. Whether it be an acquisition, a school partnership or a lender branding relationship we are committed to our internal value creation, long-term vision and return thresholds based on future cash flow generation. Related to our fee income I want to underscore that while diversification is important for a long-term presence in this industry the student loan asset also remains critical, the value of which we are focused on growing. As I mentioned during investor day in recent years competition has had an impact on the net present value of the student loan due to demand for increased marketing expenses The buy down of loan origination fees and no in some instances guaranteed fees, additionally regulatory decreases in student loan spreads, costs associated to support the school's lender model, costs related to the loan consolidation, and enhanced borrowed benefits have also impacted value. The impact on value is even greater when more than one of these forces touches the same loan.

On the other hand when we look at the opportunity to organically grow our FFELP volume we still believe there is a significant window available to recapture loan value by using our fee based products to generate expanded customer relationships throughout the university campus, thus driving asset value growth on top of fee growth. From a private loan perspective we remain committed to providing this needed product to assist students and families.. Portfolio on those loans originated at schools with low default and high student placement rates. This is yet another differentiator of Nelnet. While others in the industry may focus more heavily on expanding their FFELP and private loan volume to reach their growth targets we have chosen to grow assets and create long term value and continue to diverse in both FFELP and non-FFELP fee income product lines.

When we introduced our education services division earlier this year we explained that this was a move to remain nimble and focused on delivering customer value in a timely efficient manner. Our objective of creating customer value by providing fee based services is central to helping schools, students and families be successful. This in turn translates to great repeat business for Nelnet thus expanding value campus by campus. During investor day, David Bottegal, CEO of our Education Division discussed the optimal school relationship as one in which Nelnet has our full suite of loan products and our suite of value added services at the school. Schools at this level of penetration have proven to deliver greater volume and value than those with loan products only. David also shared that we have a favorable market of schools who are not yet fully immersed in our fee products. Thus providing potential for both fee and asset value as we continue to provide them with our solution.

An additional loan volume generation line is our direct consumer loan consolidation business. Our net new consolidation were 321 million for the first quarter of 2006 compared with 284 million in the same period a year ago, an increase of 13%. Our quarterly results which fluctuate due to the seasonality of revenues and expenses that follow the academic year.

During the second quarter we anticipate increasing marketing expenses to maximize our consolidation loan volume prior to the July 1, interest rate reset and the roll out of our grad plus program. Despite this seasonality we remain committed to our strategy of generating long-term sustainable value. As I mentioned earlier we are focused on transactions that meet our internal rates of return, and this includes both school and lender partners. One of these relationship, which will expire in 2007 involved with Nova Southeastern University. We are currently in discussions with this school to renew our relationship. Our volume from Nova is not material to our overall asset or income base. However we wanted to share this as an example of a contract renewal that we are approaching with a focus on our internal return thresholds. We're also pleased to introduce newer expanded school relationships with Stanford University, University of Toledo Medical School, University of Maryland College Park, Florida Coastal School of Law, North Georgia College and the University of Virginia Medical School.

In closing, let me again reiterate that we continue to focus on sustainable growth models for both student loan assets and fee based revenue value creation. We believe this dual approach differentiates Nelnet by creating FFELP and non FFELP recurring fee revenue channels. We continue to leverage our education services division to drive customer value. We continue to consider additional partnerships consistent with our long-term vision and return thresholds based on future cash flow generation. Now I'll turn the call over to Jeff.

Thanks Mike. I would like to provide an update regarding the integration of our recent acquisitions and the value creation we are experiencing from a sales and marketing perspective. I'll then conclude with a discussion on our first quarter asset backed securitization and some unique considerations regarding the transaction's impact on the quarter's financials. During the first quarter we acquired the remaining shares of Fact Management and Infinet Integrated Solutions. And announced the formation Nelnet's business solutions unit. This was an important step for Nelnet in that combined these organizations can provide our school customers a more seamless and effective approach to tuition payment and e-commerce. While providing our campus solutions team expanded value propositions to cross selling opportunities.

We also continue to focus heavily on the integration of our acquisitions from the end of last year and achieved a number of important milestones in this process. Of specific note are the migration of the Chelet portfolio onto the Nelnet surfing system. And the planned migration of the LoneStar portfolio in the second quarter. In addition the rest of our integrated -- integration targets continue to be on schedule. Including the continued collaboration between the sales and marketing teams of these organizations to effectively expand Nelnet's loan and product suite across campus channels. As we continue to support these and future acquisitions with asset back financings we completed another successful $2 billion securitization in the first quarter and continued to expand our warehousing capacity. The securitization included our first year LIBOR transaction and related foreign currency swap. Although the currency swap was an economic edge we did not seek to qualify the transaction for hedge accounting treatment under FASB 133. As such the market value adjustment, the currency swap and the remeasurement of bonds to U.S. dollars are included in our derivative market value and foreign currency adjustment line on our financial statements. Accordingly they do not impact our base net income or adjusted base net income. Now I'll turn the call over to Terry Heimes to discuss our first quarter financial results.

Thanks Jeff. I'll cover the financial information and operating results for the first quarter of 2006, but before I discuss some of the detailed numbers I wanted to highlight some events and information that should be considered in conjunction with my commentary and when reviewing earnings supplement. First, we recorded a $6.9 million expense for loan loss reserve related to the 1% increase in risk sharing for exceptional performers enacted with the Deficit Reduction Act. Tax effect discounted for $0.08 per share and should be considered when reviewing our results for the quarter.

Second our private loans increased $66.7 million to $163.6 million since year end with the anticipated first quarter acquisition of loans originated through our pipeline channels. These have been reflected in our provision for loan loss and we will continue to adjust that provision to account for portfolio size, status, and performance.

Next we had a great first quarter, especially in terms of our other fee based income. Specifically, our list management and direct marketing revenues exceeded our internal expectations by more than $2 million. This contributed nearly $0.035 per share to the results for the quarter. Finally, the seasonality of revenues and asset generation expenses are expected to impact our second quarter results, but will not impact our commitment to long-term value creation.

Turning to some of the detailed numbers. For the quarter ended March 31, 2006 our adjusted base net income excluding the expense related to establishing the loan loss reserve I referred to earlier was $0.44 per share compared to $0.35 per share a year ago. Or an increase of 26%. For the first quarter of 2006 base net income was $30.9 million or $0.57 per share compared to $31.4 million or $0.59 per share a year ago. Excluding the one time provision for loan loss related to increased risk sharing our base net income per share increased 10% compared to the first quarter of last year GAAP net income for the three months ended March 31, 2006 was $52.1 million or $0.96 per share compared to $68.1 million or $1.27 per share for the same period a year ago. The decline in GAAP earnings was driven primarily by a reduction in mark to market gain on derivative instruments and lower access special allowance earnings in the first quarter compared with last year.

As we have discussed in the past our derivatives are not structured to qualify for hedge accounting under FASB 133. As such the change in fair value of our derivative instruments is recorded in our statement of operations. Activity in the first quarter of 2006 includes the impact of changes in the forward yield curve as well as the net impact of our debut issuance of your LIBOR notes and foreign currency derivative active activity which Jeff discussed earlier. Combined these resulted in a gain of $39.8 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.

We continue to firmly believe that asset quality growth combined with diversification of revenues will be key in meeting our goal of long-term sustainable growth. At the end of the first quarter our net student loan assets have increased nearly $6.8 billion since last year, but more importantly these assets have increased 1.1 billion or just over 5% since the beginning of the year. Combined our total channel acquisitions are up 18% over last year. We are pleased with the performance of all of our various channels but specifically our internal brands within our school channel and our direct to consumer channel.

At March 31, consolidation loans made up 65% of our total portfolio. During the first quarter we generated $1 billion in gross new consolidation loans with 591 million accounting for new loans or those loans acquired from other holders. At the same time we lost 270 million in loans consolidated from our portfolio to other parties. Thus we actually increased our portfolio as a result of consolidation activity by $321 million in the first quarter compared to 365 million in the fourth quarter of 2005 and 284 million during the same period last year. We did however experience the expected slow down in the consolidation market in the first quarter. The decrease in total loan originations and conversion of our existing portfolio was slightly greater than expected and this is reflected in our loan origination numbers. It is also impact on our net spread. Our core student loan spread increased to 1.54% for the three months ended March 31, 2005, compared to 1.44% for the fourth quarter of 2005, and 1.51% for the year ended December 31, 2005. A number of items contributed to this improvement.

One, the accelerated slowing consolidation activity actually contributed to the decline in premium amortization. The higher yielding loans acquired in recent portfolio business acquisitions have begun to have an impact on our spread. Narrowing credit spreads in the first quarter especially in our auction paper contributed to the spread improvement.

During the first quarter we began to see our margins stabilize, however long term we continue to expect margin pressure with a shift in portfolio mix toward consolidation loans, increased competition, pricing pressures related to origination fee discounts and the runoff of derivatives and higher rate loans. Driven by growth in assets and improved spread, net interest income excluding the special allowance yield adjustment of $13.9 million in the first quarter and $29.7 million for the same period last year increased $15.3 million or 27%. Our total operating expenses were $108.2 compared with $71.4 million a year ago and $98.1 in the fourth quarter of 2005. Adjusting the fourth quarter of 2005 to account for mid quarter acquisitions, operating costs increased 1.9% during the first quarter. The increase is partially due to the amortization of intangibles and year-end salary and compensation adjustments. I also wanted to note that our operating results include approximately $850,000 of noncash compensation and valuation adjustments of equity contracts related to recent merger and acquisition transactions.

Our shareholder equity topped $700 million at quarter end. Our weighted average shares outstanding increased from 53.7 million shares a year ago to 54.2 million shares during the first quarter as a result of shares issued under our various stock ownership plans and in connection with recent acquisitions.

Wrapping up, at our investor day we reaffirmed our objective of long-term sustainable value both in terms of assets and diversification of revenues. We also indicated that as we continue to diversify and increase our fee for service activity and take advantage of asset generation opportunities our quarterly results will be impacted by seasonality of revenues and expenses. Certain fee based revenues tied to the cycles of the academic school year and the increase in operating costs related to asset generation will impact the second quarter specifically, but we are excited by our prospects for continued growth and long-term value creation as we execute our business strategies. With that I'll turn it over to Steve for closing comments.

Thank you. Before we open the call to questions I would like to reiterate for the quarter ending March 31, 2006, student loan assets reached 21.3 billion, an increase of 1.1 billion or 5% as compared to the fourth quarter of 2005. Excluding the provision of loan loss reserves recognized in the first quarter of 2006 related to the 1% increase in risk sharing, our adjusted base net income increased 5.5 million to $0.44 per share as compared to $0.35 per share for the first quarter last year, an increase of 26% per share. Our fee based revenues totaled 68.6 million during the first quarter compared to 42.7 million a year ago, an increase of 26 million in revenues or 61%. Now operator I would like to turn the call back to you so we can begin the question and answer portion of the program.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Stephen Schulz with KBW.

Hi, thanks for taking my question. Would you be able to just provide a little bit more color around the provision line, understanding it was elevated this quarter related to the one time, bump up in reserves for the change in risk sharing. If you could give us some idea of what the impact of the change in risk sharing will be going forward or what kind of run rate we should think about for provisions going forward?

Yes, this is Terry. We reported about 6.9 million as we indicated to account for the change in risk share with the legislation. As we have indicated in the past we'd expect that on a go forward basis our provision, or the impact of the 1% per share with would be in the 3 to 5 million range annually.

So 3 to 5 million annually,so if you pick the mid point that would be 4 million annually so 1 million quarter. Would you say about 1 million of that 6.9 was kind of the higher run rate going forward?

Well, we accounted for the 6.9 based on our portfolio at quarter end.

Okay.

And so, we will continue to adjust that as we move forward throughout the remainder of the year and going forward based on new loans originated and the performance of our existing portfolio.

Okay. Just one follow-up, if I can. Just related to the expense revenue seasonality and the impact on net income on a quarterly basis through the rest of the year in the investor day you had given kind of table of what you expected to be sort of a back half weighted year from a net income perspective. I was just curious, I mean have you changed the percentages that you, rough percentages that you gave at the investor day in terms of first half versus second half contribution?

No, we really haven't.

Okay, great.

Obviously it's going to be impacted by the performance that we have had in the first quarter. But we really haven't changed those overall percentages.

Would you have a feeling that the first quarter, second quarter relationship this year, there will be a more pronounced seasonality than we saw for instance last year first quarter to second quarter?

Yes, I think -- yes, I would. Because especially as we indicated, we had a really solid first quarter from -- as it results to other fee based income and in our risk management direct marketing, so we had a really solid first quarter there which is going to drive some of the impact into the second quarter as well.

We also have some additional companies that we acquired in the last year. They're going to lead to additional seasonality this year that we didn't have last year.

Understood, thank you very much.

[OPERATOR INSTRUCTIONS] We will go next to Moshe Orenbuch with Credit Suisse.

Thanks. Your capital ratio actually improved during the quarter. And just wanted to kind of talk a little bit if you could talk a little bit about what kinds of opportunities you see out there and as you kind of look out for acquisition potential. I've got a follow-up after that.

I would say in general, Moshe, that when we look at the traditional, I'm going to say secondary markets/state ago portfolio sales, it's more of a bid situation, very competitive. And so as far as an opportunity to create a lot of value from a traditional sense we don't see a lot of opportunities there right now. That doesn't mean that we aren't going to take a look at those and bid, but as I mentioned on the call, we want to stick to our return thresholds. So we get into a very, very competitive bid situation. I don't know how successful we're going to be as some of these different portfolios come up for a wide group of people to bid on it.

With respect to fee income based businesses, we continue to look for opportunities in that market. I think I've said this in the past, it always seems like there's a half dozen or dozen different opportunities that we're looking at at any point in time and we continue to find new ones as we go forward. We have a very formal M&A department now that's been in existence for a little over a year and that's really added to the way that we approach this from a process standpoint and look for and find opportunities that fit in with our strategic direction and fit in with what we're trying to accomplish to create long-term value for the Company going forward with companies that have recurring revenue. As you add new customers year over year you can add that recurring revenue, you don't have to earn it back every year. Those are the type of companies that we're looking for.

As a follow-up, since a lot of those fee acquisitions have been kind of relatively small, do you think any differently about the ways to deploy your capital, ways other than M&A, whether dividend stock buyback or anything like that, how does that enter your thinking at this stage?

I think our thinking is similar to what it was a couple years ago, right after we went public. It's always good to raise money when you don't need it. Then when that opportunity presents itself you can take advantage of of it. At this point in time as a company we still see a lot of different opportunities that could come up on the horizon. So I think at this point in time we're not really considering a dividend.

With respect to stock buyback, that is something that we have considered as far as internally discussions about it. And it just kind of determines from our perspective whether we think it's a good investment, but that's a possibility. But at this point in time we have made no decision to do that. Also I think that for at least a couple years I think, Moshe, you kept asking us are we going to invest that excess capital, then some opportunities came up kind of all at once that we had been working on for a long time and right now we're kind of in the cash accumulation phase again. Maybe a little bit of debt pay down too.

We will go next to Jordan Heimowitz with Philadelphia Financial.

Hey guys. A bunch of questions I don't quite understand in detail. Your spread of 154, your margin. First of all does that include borrowed benefits and if so how much is that?

It does include borrow benefits, we don't break out the difference in borrow benefits as a separate component.

Like Sallie Mae, there was a big increase in the quarter for them, did you have a big increase as well.

No, we did not change really anything as it relates to our borrow benefit estimates or anything like that.

So there wasn't an unusually large catch up so to speak in one way?

No.

Second, this quarter includes the full benefit of an extra 400 million of 9.5% loans in that margin. How much did that extra 400 million of loans in there for the full quarter benefit the margin?

I don't have a specific break down as to the amount of contribution. But those portfolios that we did acquire in the fourth quarter did have a higher yield in terms of that helped contribute to that margin. But I don't have a break down as to whether that was 2 basis points or 3 basis points, et cetera.

Okay. Because the margin went up by 10 basis points quarter to quarter.

Correct.

I mean that's -- I mean one, your prepayments went down, so that benefited.

Right, that drove down our premium amortization. As you can see, our premium amortization was about 8 basis points lower in the current quarter compared to the fourth quarter.

That was a positive. There's a number of days that went down in the quarter that you pay interest expense on because the February effect, so that benefited it some. Then offsetting it is the 9.5% income and I guess that's it, because you don't have the borrower benefits in there.

Correct. They're in there, we just don't break them out separately.

Let me put it this way, would the 9.5% loans equal the approximately 10 to 11 basis point benefit you got from the extra amortization, see what I'm trying to get at? I'm trying to figure out in a more competitive market how your margin went up.

Well, the 9.5% is actually excluded from our core, the excess yield. So the primary driver behind the increase or the improvement in our core spread was the decline in premium amortization. He also did add higher yielding portfolios, the portfolios we acquired in the fourth quarter carried actually a higher yield because of some of the other fixed rate loans, et cetera, and we had narrowing credit spreads. So all of those contributed to that.

But the acquisition you got in the fourth quarter didn't they have some 9.5% loans that you included in core income because they were not transferred loans.

That is correct.

So I'm trying to figure out what the benefit from just those loans were in basis points?

Like I said I don't have that broken out, but it's probably in the 4 to 6 range.

4 to 6 basis points, okay. 4 to 6 from that and 8 basis points from the prepayments. Okay. That makes sense. The last question is do you have any update on the investigation by the Department of Education?

There's no new update. We're currently in the process of responding to the report in connection with the issues.

And I guess one more thing. The other fee based income, that went up a lot last quarter first to second, but the loan servicing and fee income went down. When you say a more pronounced effect of fee income, would that be in both line items or just one or the other?

It's primarily in the other fee based income is where we experienced the significant increase. The loan servicing and guarantee did benefit from again we had the full quarter of the expanded relationship that we have with college access network and we also acquired First Mark Services which is a servicing operation.

Okay. Thank you.

Thank you.

We will go next to the site of Matt Snowling with Friedman Billings Ramsey.

Hi, how you doing.

Good, how are you today.

Good. I guess my only question left here is looking at your loan acquisitions, particularly the Stafford plus, seemed to have doubled over the last year. Just wondering is that related to new schools or DGC effort or is that all the Union Bank volume.

In terms of when you say--?

Well, I think it was 170 million last year going to 306 million this year.

Yes, a large part of that is a combination of all of those. Its the acquisition of the Union Bank brand in the first quarter of last year, shifting over there, it's the increase in school volume, expansion of our school volume, it's really a combination of all those.

Let me ask it a different way, how much is the Union Bank volume of the 306 million?

On an annualized basis union bank is right around 30 # 0 million I think, somewhere in that range. Again, those loans will be originated based on the academic cycle of the school year. So a big chunk come in in the fall, then a big chunk at the end and beginning of the year.

Okay, great. One other follow-up question to I think, Jordan. Can you give us a time line of how you expect the OIG process to kind of unfold over the next couple months? Or is this something that you respond back to them, then they respond back to you and we all wait for a report?

Yes, we anticipate that we will respond back to them and then we will wait for them to respond back to us.

How long, I mean is this something that will play out over the next month or two or in the next year?

It's hard to say. Originally when they came in here and left in September they said they would be back in the next 90 to 120 days, it was six and a half months before they got back to us. I think realistically it's probably a 6 to 18 month process.

Oh, great. All right, thanks.

We will go next to the site of Sanjay Sakhrani with Calyon Securities.

Hi, thanks for taking my question. A couple of questions, one was I was wondering what the initiatives were, what kind of initiatives were underway to take advantage of the market opportunity for Graduate Plus One products. Sort of if you could quantify the impact demand to asset growth this year? Second is I believe your exceptional performer designation runs through May 31, of this year. When do you get notice if it's renewed or not.

We do it quarter by quarter audit to keep the exceptional performer. In terms of renewal I think it will be in the second quarter, early third quarter in terms of -- yes, it's in place until we hear it's not.

Okay.

With regard to Grad Plus.

On the Grad Plus side of the equation I can just give you kind of what we think the total market potential is. We think that if you look at the private loan market there's roughly, I'm going to say a $15 billion market there and we think roughly a third of that market is from graduate schools so the potential maximum market for grad plus loans could be as much as 5 billion if everybody that was getting private loans would go to Grad Plus. It's probably unlikely 100% of them would go there. So given the whole student loan market is just roughly 60 billion, you're seeing about a 10% increase as far as opportunity in the whole market so when we look at our loan volume that we do on an annualized basis we think there's a potential opportunity if we just stay even with the rest of our market to grow our total loan volume maybe 10% from what's going to happen in Grad Plus. There are a lot of things that have to be done with respect to interpreting the Deficit Reduction Act with respect to Grad Plus and we're not 100% sure that all the schools this year are going to be prepared to process Grad Plus loans. So the full impact of potentially increasing our volumes 10% because of that product probably won't be felt in 2006, it will be more 2007, 2008 impact from our perspective.

Okay, great. Thanks.

We will go next to David Chamberlain with Pemco.

I apologize if you already discussed this. But the 18 million and the other fees you guys talked about it being from this list management direct marketing tuition plan businesses, I guess first of all how much of that could be seasonal in terms of it being the first quarter and the third quarter and then secondly, of those three businesses could we point to any of those three being the lion's share of the increase say year over year or the fourth quarter?

In terms of the year over year it's really a combination of all of them. So they have all contributed to the growth. We acquired the list management in the first quarter, early first quarter a couple years ago. We have got FACTS which is our tuition payment plan which we acquired in the late second quarter last year. So all of those have contributed to the increase. In terms of the seasonality, the biggest impact of the seasonality is for example in terms of tuition payment plan business, that is tied very closely to the academic school year. In the second quarter the -- because of the summer session is going to be out, so there won't be -- we will see a decline in revenues in that regard.

With regard to the list management that's more somewhat seasonal, somewhat sporadic, it's driven by market demand. We experienced, had a great first quarter in that regard. So we will have to see what happens to that in the second quarter. Probably one of the other components of seasonality is that the second quarter is where we are going to be devoting marketing expenses to our consolidation in Grad Plus activities as we consolidation loan, the interest rate reset is July 1. So we will be expending fund and resources to take advantage of that interest rate reset period.

Okay. So it sounds like at least the part of the business that's the tuition payment would come down in the second quarter just seasonally. The other businesses it's too tough to tell at this point.

I would say I think a lot of companies that buy List, they do it based on their budget or their plan until they spend that money in the first quarter. So we also expect that we had an unusually large first quarter in that business and that it will be, it will be less in the second quarter just because it was so large in the first quarter. I can't promise you it's going to be less, but that's our anticipation.

Got it. Thanks guys.

[OPERATOR INSTRUCTIONS] We will take a follow up from Moshe Orenbuch with Credit Suisse.

Just a quick one. Is there any way you can size your hiring plans for that second quarter? In terms of number of people if not dollars.

In general when you look at our, I'm going to say our phone system and the people that answer the telephone, I think we're going to probably increase our staff somewhere in the neighborhood of 80 people. And overall with how that impacts the rest of the organization it is probably going to be a little bit over a hundred.

Great, thanks.

We will go next to the site of Stephen Schulz with KBW.

Hi. Just a follow-up, a clarification actually, on the internal brand original nations, I think it was Matt's question. The UB&T volume that you got this year from internalizing, that comes through branding partner or through the direct channel Stafford and Plus.

That's a direct channel now because we own the brand.

Okay. Great, that was the only question, thanks.

And we have a follow up from Jordan Heimowitz with Philadelphia Financial.

Yes, in response to Dave Chamberlain's question, of the 18 million how much was List in the first quarter?

I don't have a break down of what that -- we don't break out specifically how much was List or how much was tuition payment plan.

I mean was it half, was it 75?

We don't break that out.

Okay. Can you give us a sense then how much, what percentage of whatever it was you expect it to be down, like down 10%, down 50%, down?

That business is really sporadic, so it's hard, it's really hard for us to say. If you look at the business, we think it's going to be down, but we don't know.

We don't break that out separately.

What is that business' seasonality of revenues? How much generally comes through in Q1 versus Q2 as a percent of the total, forgetting what the absolute numbers are?

It's sporadic. Some years they have a better second quarter than first quarter, some years the third quarter.

It depends upon the market demand.

It depends on the year. This year for some reason we had a huge first quarter and there is, if you go back and look at the trends it really isn't a trend that we can say it's this percentage.

Let me try one last thing then, because you guys have been been pretty good on this. What percent over the base was this year's first quarter?

As I indicated in my remarks, we exceeded internal expectations by about $2 million.

But we don't know what number that was so?

Right. And we don't break that out separately.

Okay, thank you.

And that is all the questions we have at this time. I'll turn it back over to Steve Butterfield for any additional or closing remarks.

Thank you all very much for taking the time to join us today. We're obviously pleased with the quarter and looking forward to rolling up our sleeves and getting back to work in the second quarter. Look forward to talking to you then. Thank you very much.

This does include today's conference call, you may disconnect at this time, thank you for participating.