FMD: First Quarter ??? Making Progress

FMD: First Quarter – Making Progress

Ann Heffron, CFA

On November 3, 2011, the The First Marblehead Corporation (FMD - Analyst Report or the Company) reported its fiscal 2012 first quarter results for the period ending September 30, 2011. For the quarter, FMD recorded a net loss from education financing of $18.1 million, or a diluted loss per share of $0.18, including a $1.1 million gain on proceeds from the TERI settlement. Excluding the TERI gain, the diluted operating per share loss was $0.19. The total net loss, including the securitization trusts net loss of $69.3 million, was $88.0 million, or a $0.87 loss per diluted share, including an $8.0 million gain on proceeds from the TERI settlement.

Our first quarter loss estimate for the education financing segment was $13.6 million, or a loss of $0.13 per diluted share. The primary reason for the shortfall from our estimate was $4.5 million in new marketing expenses, which boosted total noninterest expense to $31.0 million and compares to our $27.4 million estimate.

Net revenue at $12.5 million fell short of our $14.5 million estimate, though TMS performed satisfactorily. TMS posted administrative fee revenue of $7.3 million on a 4% advance in tuition payments processed to $1.3 billion and net interest income of $0.25 million (since the TMS acquisition occurred on Dember 31, 2010, TMS is not included in the year-ago quarter).

Net income from the GATE Trusts, in which FMD owns 100% of the residual interests, was $1.6 million, or $0.02 per share, the same as it was in the prior-year quarter.

FMD has had an auspicious launch to its first peak origination student loan season since the beginning of the credit crisis in 2007. Including the Monogram-based loan programs at Sun Trust and Kinecta that began in July and September 2010, respectively, as well as at Union Federal Savings Bank (UFSB), which began on July 1, 2011, the Company has processed over 53,000 private student loan applications representing $557 million in loans, of which it has approved $129.4 million, or almost one-quarter of the $550 million total. Of the total $129.4 million amount approved, $43.6 million has been booked to date.These metrics demonstrate that loan demand is quite strong and that FMD is accepting only the cream of the crop, the top 23% of all loans submitted.

FMD also has made several recent announcements regading its business. First, FMD sold its variable interests in its National Collegiate Student Loan Trusts (NCSLT Trusts) to VCG Special Opportunities Master Fund Limited (VCG) for $13 million in cash. Notably, this will allow FMD to deconsolidate the NCSLT Trusts from it financial statements, removing assets of $6.7 billion and liabilities of $7.9 billion from its balance sheet, while at the same time booking a $1.2 billion gain on the sale, thereby eliminating the deficit in shareholders’ equity related to the NCSLT Trusts.

Second, FMD amended its loan program agreement with SunTrust Bank, extending the maturity to January 31, 2015 from April 20, 2012 and greatly increasing lending volume through FMD’s Monogram platform.

Finally, FMD disclosed that the Massachusetts Appellate Tax Board (ATB) had issued an order (Order) in the cases relating to the Massachusetts tax treatment of GATE Holdings, Inc., a former subsidiary of FMD. In connection with the Order, FMD expects to recognize an income tax benefit during the fiscal second quarter ending December 31, 2011 of approximately $12.5 million. FMD also expects to make net tax payments for GATE’s taxable years ended June 30, 2004, 2005 and 2006 of approximately $5.0 million during its fiscal third quarter ending March 31, 2012.

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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