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FMD: Third Quarter Surprises on the Up Side

By Ann Heffron, CFA, CPA

The First Marblehead Corporation (FMD) posted a third quarter that surprised on the up side.

Click here to download a free copy of the FMD research report: FMD 5-30-13

First, the loss per share of $0.08 was $0.03 better than our $0.11 loss per share estimate, as third-party services expense slid $2.1 million year over year.

Second, FMD’s net operating cash usage improved dramatically, falling to $7.9 million from $12.3 million in the year-ago period, reflecting the impact of FMD’s expense reduction program initiated in last year’s fourth quarter, and was the lowest on record.

Finally, CEO Daniel Meyers noted that pipeline conversation regarding its partnered lending programs had been extraordinarily active lately, an encouraging sign.

Specifically, FMD reported that in its fiscal 2013 third quarter ended March 30, 2013, it posted a net loss from continuing operations of $9.2 million, or a loss per share of $0.08, excluding a nonoperating gain of $0.4 million. This compares to our third quarter loss estimate of $11.7 million, or a loss of $0.11 per diluted share. The primary reason for the better performance stems from a $2.1 million year-over-year decrease in third-party services expense as FMD quit special servicing for the NCSLT and GATE Trusts following their deconsolidations in fiscal 2012.

In last year’s third quarter, FMD reported a net loss from continuing operations of $5.0 million, or a loss per share of $0.05, excluding a $9.2 million gain on deconsolidation of the trusts and $1.2 million of severance costs. Last year’s third quarter also benefitted from a $5.2 million income tax benefit compared to a $0.4 million income tax expense this year.

On a pretax operating basis, the third quarter loss from operations improved by $1.4 million to a loss of $8.8 million from a loss of $10.2 million in the prior-year period as a $2.3 million drop in expenses was partly offset by a $0.9 million decrease in total revenues after the provision for loan losses.

During the third quarter, FMD expanded its Monogram lending program to 1,003 approved lender list positions, a 5% increase from 959 lender list positions at the end of the previous quarter in December and a 42% surge from the 704 list positions in the year-ago quarter.

We have raised our estimates, and expect higher lending volumes at UFSB, growing contributions from Cology and Monogram, and continued strong expense control to be the primary drivers behind this improvement.

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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