FMD: Second Quarter Update

Zacks Small Cap Research

By Ann Heffron, CFA

The First Marblehead Corporation (FMD) reported its fiscal 2013 second quarter results for the period ended December 31, 2012, posting a net loss from continuing operations of $12.6 million, or a loss per share of $0.12, excluding a nonoperating gain of $0.3 million. This compares to a net loss from continuing operations of $16.9 million in the prior-year period, or a loss per share of $0.17, excluding a $12.6 one-time tax benefit ($0.12 per share) and $0.6 million nonoperating gains ($0.01 per share).

To download a free copy of the most recent FMD research report, please click here: FMD 3-15-13

During the second quarter, FMD expanded its Monogram lending program to 959 approved lender list positions, a 6% increase from 904 lender list positions at the end of the previous quarter in September and a 128% surge from the 421 list positions year-ago quarter.

Relative to the second quarter a year ago, net revenue increased $4.5 million, or 68%, to $11.2 million as net interest income doubled to $1.0 million on a higher net interest margin (1.25% versus 0.51%) and a greater level of loans and securities outstanding. In addition, TMS fees rose $0.2 million, or 3%, year over year to $7.4 million (up 9% after adjusting 2012 revenues for fees related to the sale of certain K-12 contracts), while administrative and other fees gained $0.3 million, or 13%, to $2.4 million as a $1.1 million decline in special servicing revenues was more than offset by $0.6 million of Cology revenues and a $0.8 million increase in Monogram-based revenues on a 42% jump in Monogram-based loan volumes. There was also a $3.6 million positive swing in the fair value change to service revenues receivable, to a $0.4 million gain in fiscal 2013’s second quarter from a $3.2 million loss in the prior-year quarter.

Operating expenses slid 1% year over year to $23.4 million, as a $0.2 million, or 2%, increase in compensation costs to $10.4 million were more than offset by a $0.5 million, or 4%, decrease in general and administrative expenses to $13.0 million, principally the result of lower costs related to marketing (down $1.0 million) and special servicing costs (a drop of $1.0 million), partially offset by costs related to the acquisition of Cology.

FMD should continue to benefit from its cost-cutting program, primarily related to reduced headcount at the legacy operations of the now-sold NCSLT and GATE Trusts. FMD expects annual compensation expense to be reduced by about $7 million and annual general and administrative expenses to be reduced $6.6 million, stemming from outsourcing operations and TMS’s call center, to begin in fiscal 2013’s second quarter. In total, annual cash operating usage is expected to be reduced by $13.6 million, or 26%, when all cuts have been implemented by the end of fiscal 2013 (ending June 30, 2013).

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 300 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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