FMD: Second Quarter - Enhanced Clarity - Analyst Blog

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FMD: Second Quarter - Enhanced Clarity

Ann Heffron, CFA

On January 31, 2012, the The First Marblehead Company ( FMD ) reported its fiscal 2012 second quarter results for the period ending December 31, 2011. For the quarter, FMD recorded a net loss from education financing of $3.5 million, or a diluted loss per share of $0.03, including a $0.3 million gain on proceeds from the TERI settlement and a $12.5 million one-time tax benefit related to FMD's settlement with the Massachusetts Appellate Tax Board. Excluding the TERI gain and tax benefit, the net loss was $16.3 million or a diluted operating per share loss of $0.15.

Total net earnings, including the securitization trusts net income of $1.2 billion, was $1.2 billion, or $10.82 per diluted share, including a $1.2 billion gain from the deconsolidation of the NCSLT Trusts when FMD sold its variable interests in these trusts on November 14, 2011. Sale of these interests simplifies financial statement presentation, leaving only education financing and the GATE Trusts, in which FMD owns 100% of the residual interests, on the balance sheet and income statement. This clarification will go a long way toward improving understanding of the Company, in our opinion.   

Our second quarter loss estimate for the education financing segment was $18.1 million, or a loss of $0.18 per diluted share. Both revenues and expenses came in lower than we had anticipated, with the benefit from reduced costs outweighing the shortfall in revenues.

Net income from the GATE Trusts, in which FMD owns 100% of the residual interests, was $1.3 million, or $0.01 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 72,000 private student loan applications representing $718 million in loans, of which it has approved $159 million, or almost one-quarter of the $718 million total. Of the total $159 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 22% of all loans submitted. This is further borne out by the credit quality statistics of the loans that have been approved: a weighted-average credit score of 759; 87% are cosigned, 62% are in immediate repayment; 94% have repayment terms of 15 years or less; weighted average interests rates of 6.10% for variable-rate loans and of 8.60% for fixed-rate loans; and 80% of loans are fixed rate, generating a higher margin for FMD. To date, there has been only one loan default in the Monogram program.

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 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.

To view a free copy of our most recent research report on FMD, visit Ann Heffron's coverage page at http://scr.zacks.com/ .
 


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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