FMD: Cology Acquisition and Fourth Quarter
By Ann Heffron, CFA
On October 3, 2012, FMD
announced the cash acquisition of certain assets and liabilities
of Cology, Inc., a provider of processing, disbursement, and
life-of-loan servicing to over 250 credit unions and lending
institutions nationally. First Marblehead Education Loan Services
LLC, a wholly owned subsidiary of FMD, expects to complete the
acquisition during the second quarter of fiscal 2013, and the
transaction is expected to be accretive in fiscal 2014.
Details are slim, but here's what we do know.
- For the 12 months ended June 30, 2012, Cology processed
over 65,000 applications and disbursed more than $451 million
in private student loans, generating three-year compound annual
growth rates of 114% and 106%, respectively. This compares to
$57.7 million of disbursed loans in fiscal 2012 for FMD through
its partnered lending programs ($23.4 million, or about 41% of
the total) and Union Federal Savings Bank ($34.3 million, or
59% of the total). So this acquisition adds significantly to
FMD's business volume.
- FMD has not yet disclosed the amount of cash paid for the
deal, though we gather that it is substantially less than the
$47 million paid for the TMS acquisition. In addition, FMD has
agreed to assume certain liabilities of Cology as part of the
transaction. We may learn more details about this in the fiscal
first quarter (ending September 30) conference call, though
this transaction won't be reflected in FMD's financial
statements until the second fiscal quarter (ending December
- Cology's fee-for-service business model consists of two
lines: (1) full service loan processing, in which Cology
underwrites private student loans and performs various other
services for its clients, including loan disbursement and
customer service and (2) technology hosting, in which Cology
only performs loan processing for is clients.
- Revenues per loan are generally lower than that which FMD
generates as FMD earns interest income on its first-loss
participation accounts, while Cology does not provide such a
product to its customer base.
- Unlike FMD which assumes a first-loss position on loans it
underwrites, Cology assumes no credit risk for loans it
underwrites, as this remains with its credit union clients, or
with third-party guarantors selected by the credit unions.
We view this acquisition positively and note that FMD benefits
from this acquisition in two ways. First, FMD can cross-sell
Monogram services to Cology's clients, particularly with regard
to credit scoring and portfolio management, thereby potentially
increasing revenues per client. Secondly, in the future, FMD may
be able to provide securitization services for private student
loans on Cology's client books, which could generate fees for
In other news, FMD reported its fiscal 2012 fourth
quarter results for the period ended June 30, 2012, during which
FMD changed its accounting for the securitizations trusts segment
to a discontinued operation following complete disposal of all
operations related to this segment in the third quarter
(prior-period results were restated). For the quarter, FMD
recorded a net loss from continuing operations of $14.0 million,
or a loss per share of $0.14, including a $0.3 million gain from
the TERI settlement. Excluding the TERI gain, the net loss from
continuing operations was $14.3 million or an operating loss per
share of $0.14.
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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