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Analyst Blog

Ann Heffron, CFA

FMD: Fine-Tuning Operations

(FMD) has made several announcements over the past week that indicate it continues to fine-tune its operations as the Company forges ahead in its turn-around bid. 

In the first of these on June 30, FMD announced the completion of the $6.9 million sale of a portfolio of contracts with 377 lower cost private, predominantly faith-based primary and secondary schools from its Tuition Management Systems (TMS) subsidiary to FACTS Management Company, a Nelnet subsidiary. While this portfolio accounted for 18% of TMS’s revenue in calendar-year 2010, it represented a much higher proportion of contracts at 33% of the total. This sale rids TMS of a less lucrative business and frees up resources that TMS can more profitably devote to higher margin opportunities. We note that TMS will continue to service these schools through the upcoming school year.

On July 5,  FMD announced that on July 1 its Union Federal Savings Bank  (UFSB) subsidiary began accepting applications for its Union Federal Private Student Loan and prepGATE® Education Loan programs, both based upon First Marblehead's Monogram® product platform, in line with developments announced in May. At that time, FMD made the decision to retain UFSB, which had previously been put up for sale, in an effort to speed growth of its new Monogram-based education lending programs.

In addition to its own UFSB program, FMD has partnered lending programs that began in 2010 with Sun Trust Bank, headquartered in Atlanta and serving the Southeast and mid-Atlantic regions, with more than $170 billion in assets; and Kinecta Federal Credit Union, a California-based federal credit union with over $3.5 billion in assets. Program size is $200 million for Sun Trust and $75 million for Kinecta, with both programs having initial two-year terms that are expected to run through late 2012.

While credit quality metrics of the Sun Trust and Kinecta lending programs appear to be strong based upon preliminary data, we sense that growth is less than FMD had hoped, recognizing that peak demand for education loans typically occurs in the summer months prior to the start of the academic school year. Moreover, adding more financial institutions to FMD’s partnered lending roster has been challenging.

Thus, the UFSB program provides FMD the opportunity to grow its asset base through its own national program as well as to make improvements to the Monogram platform based upon its own experience. We note that FMD recently added nine sales people to its national college and university coverage team. The expanded team will be responsible for the national sales and marketing of the both the UFSB private student loan program, as well as its partnered lending programs. In addition, the TMS sales staff is responsible for the national distribution of the prepGATE loan program.

Given UFSB’s capital base, it currently has the capacity to originate about $30 million of student loans. Growth in excess of this would require additional capital, possibly in the form of a capital contribution from its Parent, First Marblehead. Much depends upon consumer acceptance of the UFSB loan program and how quickly it can get up to speed.

We expect FMD to report 2011 fiscal fourth quarter and full-year (ending June 30, 2011) results around mid-August. We are maintaining our Neutral recommendation on FMD shares, as well as our loss per share estimates at $0.81 for the fiscal year just ended and at $0.52 for the fiscal 2012 year.

Founded in 1991, The First Marblehead Corporation (FMD), headquartered in Boston, Massachusetts, focused on creating private, nongovernment-sponsored, education loan programs. The company had its initial public offering on the NYSE in October 2003. First Marblehead currently has more than 200 employees. Through a fully integrated suite of services, the company offers outsourcing capabilities to national and regional financial institutions (banks-to-mutual institutions) and educational institutions (colleges and universities), with respect to the design and implementation of private education loan programs for undergraduates and graduates.
 

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