FMD: Third Quarter – Cleaning Up Legacy Issues and Progress with Expense Cuts

By Ann Heffron, CFA

On May 2, 2012, The First Marblehead Corporation (FMD) reported its fiscal 2012 third quarter results for the period ending March 31, 2012. For the quarter, FMD recorded net income from education financing of $1.7 million, or diluted earnings per share of $0.02, including $1.2 million of severance costs and a $12.6 million gain on sale of First Marblehead Data Services, Inc. (FMDS) for $13.7 million in cash on March 2, 2012. Excluding the FMDS gain and severance costs, the net loss from education financing was $9.6 million or a diluted operating loss per share of $0.09.

Total net earnings, including the securitization trusts net income of $2.3 million, was $9.9 million, or $0.09 per diluted share after eliminations, and included a $10.9 million noncash gain on deconsolidation of the GATE Trusts. The GATE trusts were deconsolidated effective March 31, 2012, following the FMDS sale and other related transactions. This removed $258.4 million of assets, $260.1 million of liabilities, and net stockholders’ interests of a $1.7 million loss from FMD’s balance sheet at the end of the third quarter. That said, the third quarter income statement includes these operations until their disposals.

This means that all securitization trusts assets, liabilities, and accumulated deficit have now been deconsolidated from FMD’s balance sheet (the NCSLT Trusts were deconsolidated in the second quarter when FMD sold its variable interests in these trusts on November 14, 2011).

On a prospective basis, FMD’s financial statements will reflect only the operations of the education financing segment. This simplification will go a long way toward improving understanding of the Company.

FMD has already begun on a significant cost-cutting program, primarily related to legacy operations of the now-sold NCSLT and GATE Trusts. This includes reduced headcount, though no cutbacks are expected in the marketing staff for the Mongram program or at TMS. 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).

UFSB generated Monogram disbursed loan volume of $32.6 million through the first ten months of the current fiscal year. More importantly, UFSB’s education loan portfolio continued of high quality, having a weighted-average credit score of 747, 86% were cosigned, and 46% were in immediate repayment. At March 31, 2012, 1.6% of these loans were delinquent and there were no defaults. Nonaccrual loans plus past due loans greater than 90 days and still accruing interest were $69,000, or 0.21% of outstanding education loans.

During the third quarter, FMD expanded its Monogram lending program to 704 approved lender list positions, a 79% increase from 393 lender list positions at the end of the previous quarter in December (the timing is propitious as this expansion occurred prior to the peak lending season, which begins this summer).

This reflects consolidation of all Sun Trust student loan products onto the Monogram platform, the diligent effort of FMD’s sales force, and the superiority of the Monogram loan product, which represents a new generation of student loan product. Monogram offers its customers enhanced flexibility in structuring student loans, improved disclosure about terms and costs of the loan for easier comparison with other loan programs, and better pricing. In fact, for the most creditworthy customers, students can borrow money at a cheaper rate than through the major federal student loan programs.

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.