Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FMD > SEC Filings for FMD > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for FIRST MARBLEHEAD CORP

Form 10-Q for FIRST MARBLEHEAD CORP


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and accompanying notes included in Part I of this quarterly report and in conjunction with our audited consolidated financial statements included in our annual report on Form 10-K for fiscal 2012 filed with the Securities and Exchange Commission, or SEC, on September 12, 2012, which we refer to as our Annual Report.

Unless otherwise indicated, or unless the context of the discussion requires otherwise, we use the terms "we," "us," "our" and similar references to refer to The First Marblehead Corporation and its subsidiaries, on a consolidated basis. We use the terms "First Marblehead" or "FMD" to refer to The First Marblehead Corporation on a stand-alone basis. We use the term "education loans" to refer to private education loans, which are not guaranteed by the federal government. Our fiscal year ends on June 30, and we identify our fiscal years by the calendar years in which they end. For example, we refer to the fiscal year ending June 30, 2013 as "fiscal 2013."

Factors That May Affect Future Results

In addition to historical information, this quarterly report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein regarding our strategy, future operations and products, financial performance and liquidity, future funding transactions, projected costs, projected loan portfolio performance, future market position, prospects, plans and outlook of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "observe," "plans," "projects," "will," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guaranty that we actually will achieve the results, plans, intentions or expectations expressed or implied in our forward-looking statements, which involve risks, assumptions and uncertainties. There are a number of important factors that could cause actual results, timing of events, levels of activity or performance to differ materially from those expressed or implied in the forward-looking statements we make. These important factors include our "critical accounting estimates" set forth below under "-Critical Accounting Policies and Estimates" and factors including, but not limited to, those set forth under the caption "Risk Factors" in Item 1A of Part II of this quarterly report. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to November 8, 2012.

Executive Summary

Overview

We are a specialty finance company focused on the education financing marketplace. We provide loan programs for K-12, undergraduate and graduate students, as well as tuition planning, tuition billing, refund management and payment technology services in the United States. We offer a fully integrated suite of services through our Monogramฎ loan product service platform, which we refer to as the Monogram platform, as well as certain services on a stand-alone, fee-for-service basis. We partner with lenders to design and administer education loan programs through our Monogram platform, which are school-certified and designed to be marketed through educational institutions or to prospective student borrowers and their families directly and designed to generate portfolios intended to be held by the originating lender or financed in the capital markets. We also offer a number of ancillary services in support of our clients, including loan origination, retail banking, portfolio management and securitization services.

These offerings are part of a change in our revenue model that we have been implementing since fiscal 2009 to focus on fee-based revenues. Our long-term success depends on the continued development of our four principal revenue lines:

• Partnered lending-We provide customized Monogram-based education loan programs for lenders who wish to hold originated portfolios to maturity. We are paid for our origination and marketing services at the time approved education loans are disbursed and receive monthly payments for portfolio management services, credit enhancement and administrative services throughout the life of the loan. We may provide credit enhancements by funding participation interest accounts, which we refer to as participation accounts, or, in the case of our subsidiary Union Federal Savings Bank, which we refer to as Union Federalฎ, deposit accounts, to serve as a first loss reserve for defaulted program loans. In consideration for funding participation accounts, we are entitled to receive a share of the interest generated on the loans.

• Banking services-Union Federal offers traditional retail banking products on a stand-alone basis. In addition, Union Federal generates additional revenues by originating Monogram-based education loan portfolios, subject to regulatory conditions, with the intent of holding them to maturity.

• Capital markets-Our capital markets experience coupled with our loan performance database and risk analytics expertise provide specialized insight into funding options available to our clients. We have a right of first refusal should one of our partner lenders wish to sell some or all of its education loan portfolio prior to maturity. In addition to traditional asset-backed securitizations, funding options may also include whole loan sales or other financing alternatives. We can also earn fees for analytical and structuring work, on-going fees for portfolio management services and net interest income by retaining a portion of the equity in any of these transactions.

• Fee-for-service-Loan origination, portfolio management, tuition billing and payment processing, and refund management services are each available on a stand-alone, fee-for-service basis. We offer outsourced tuition planning, tuition billing and payment technology services for universities, colleges and secondary schools through our subsidiary Tuition Management Systems LLC, which we refer to as TMS.


Table of Contents

Business Trends, Uncertainties and Outlook

The following discussion of business trends, uncertainties and outlook focuses on certain developments affecting our business since the beginning of fiscal 2013.

Loan Origination

We began originating education loans based on our Monogram platform in the beginning of fiscal 2011 and providing services for two lender clients related to school-certified education loan programs funded by these lender clients based on our Monogram platform. During fiscal 2012, we began performing services for Union Federal related to school-certified education loan programs based on our Monogram platform, including a K-12 loan program. In June 2012, we launched a Monogram-based loan program with a new lender client and in August 2012, we launched a Monogram-based loan consolidation program with an existing client. Our Monogram platform continues to provide us with an opportunity to originate, administer, manage and finance education loans, and our lender clients' Monogram-based loan programs are a significant step in our return to the education financing marketplace.

The following table presents our loan origination metrics with respect to our Monogram-based programs for the three months ended September 30, 2012 and 2011. We refer to loans that we have approved following receipt of all applicant data, including the signed credit agreement, required certifications from the school or applicant and any required income or employment verification as booked loans. We refer to loans for which we have disbursed loan funds on behalf of the lender as disbursed loans.

                                         For three months ended September 30, 2012                           For three months ended September 30, 2011
                                Partnered Lending         Union Federal             Total           Partnered Lending         Union Federal             Total
                                                                                     (dollars in thousands)
Booked Loans                   $            63,089       $         21,378       $      84,467      $            14,798       $         16,481       $      31,279
Disbursed Loans                             33,077                 12,925              46,002                    7,256                  7,479              14,735

Historically, we have processed the greatest loan application volume during the summer and early fall months, as students and their families seek to borrow money in order to pay tuition costs for the fall semester or the entire academic year. Since we began originating the education loans at Union Federal in fiscal 2012, we have disbursed loans with weighted average FICO scores in the range of 750-760 and 84%-87% of these loans had co-signers. These credit qualities demonstrate that our strong loan growth has been accomplished while also focusing on providing loans to high credit quality borrowers.

Portfolio Performance

Credit performance of consumer-related loans generally has been adversely affected by general economic conditions in the United States over the past four years. These conditions have included higher unemployment rates and deteriorating credit performance, including higher levels of education loan defaults and lower recoveries on such defaulted loans. Although these conditions have lessened to a certain extent recently, they may have a material adverse effect on consumer loan portfolio performance in the future. Our Monogram-based education loan portfolios have yet to experience significant adverse portfolio performance as a majority of these portfolios has yet to experience more than 12-months of seasoning. Consequently, in evaluating loan portfolio performance, we review projected gross default rates and projected post-default recovery rates. Further, we evaluate the loan portfolio performance of the securitization trusts that we previously facilitated and, accordingly, the estimated fair value of our service revenue receivables from those trusts. The service revenue receivables that remain on our consolidated balance sheet at September 30, 2012 and June 30, 2012 have not been significantly impacted by defaults or recoveries since the trusts possess guarantees that help partially negate the overall impact of any default activity. These securitization trusts are also cash flowing, seasoned portfolios that, for the most part, have relatively short weighted-average lives.

Capital Markets

We believe that conditions in the capital markets generally improved in fiscal 2012 compared to recent years. In particular, investors in asset-backed securities, or ABS, demonstrated increased interest in ABS backed by private education loans that exhibited a strong credit profile. Additionally, in fiscal 2012 investors demonstrated increasing interest in longer duration ABS in the sector. We believe that, as a result of the recent market trends, there has been a tightening in credit spreads for the private education loan securitization marketplace during fiscal 2012 and the first quarter of fiscal 2013. The structure and economics of any financing transaction may be materially different from prior transactions that we have sponsored. Such differences may include lower revenues as a result of wider credit spreads and higher initial cash requirements on our part.


Table of Contents

Uncertainties

Our near-term financial performance and future growth depends in large part on our ability to successfully and efficiently market our Monogram platform and TMS services and originate education loans through Union Federal so that we may grow and diversify our client base and revenues. Facilitated loan volume is a key element of our financial results and business strategy, and we believe that the results from the current peak origination season through the first quarter of fiscal 2013 demonstrate market demand for Monogram-based education loans.

We have invested in our distribution capabilities over the course of the past two years, including our school channel sales force and TMS, but we face challenges in increasing loan volumes after our prolonged absence from the marketplace. For example, competitors with larger customer bases, greater name or brand recognition, or more established customer relationships than those of our clients, have an advantage in attracting loan applicants at a lower acquisition cost than us and making education loans on a recurring, or "serialized," basis. These disadvantages for us are particularly acute in the current peak origination season because we have only been operating Monogram-based loan programs since fiscal 2011.

Outlook

Our long-term success depends on our ability to attract additional lender clients, or otherwise obtain additional sources of interim or permanent financing. This is particularly true because of the regulatory conditions and approvals relating to the Union Federal Private Student Loan Program. To date, we have entered into education loan program agreements based on our Monogram platform with four lender clients, including our subsidiary Union Federal. We are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current economic environment where lenders continue to evaluate their education lending business models. We believe, however, that the credit quality characteristics of the loan portfolios originated in the 2011-2012 and the 2012-2013 academic years will be attractive to additional potential lender clients, as well as capital markets participants. We also believe that the ability to permanently finance private education loan portfolios through the capital markets would make our products and services more attractive to lenders and would accelerate improvement in our long-term financial results.

On October 19, 2012, FMD's subsidiary First Marblehead Education Loan Services LLC currently d/b/a Cology LLC, which we refer to as Cology, completed its acquisition of a substantial portion of the assets of Cology, Inc. and certain of its affiliates, which we refer to as Cology, Inc., for $4.7 million in cash and the assumption of certain liabilities. Cology, Inc. provided processing, disbursement and life-of-loan servicing to over 250 credit unions and lending institutions in the United States and processed over $450 million in private education loans during the twelve month period ended June 30, 2012. We expect to loan processing services to the former customers of Cology, Inc. similar to the services provided to them by Cology, Inc. prior to the asset acquisition. In addition, we expect to provide various Monogram products and services to these customers to assist them in education loan product design, pricing, marketing, reporting and analysis, as well as education loan portfolio management services.

We are uncertain of the volume of education loans to be generated by the Monogram-based loan programs of our four lender clients, one of which is our subsidiary Union Federal, or any additional lender clients, including clients acquired through our asset acquisition of Cology, Inc., during fiscal 2013. It is our view that returning to profitability will be dependent on a number of factors, including our loan capacity and related volumes, expense management and growth at TMS and Union Federal, and the availability of financing alternatives, including our ability to successfully re-enter the securitization market. In particular, we need to generate loan volumes substantially greater than those that we have generated to date, as well as to develop funding capacity for Monogram-based loan programs at loan volume levels greater than those of our four lender clients with lower credit enhancement levels and higher capital markets advance rates than those available today. We must also continue to achieve efficiencies in attracting applicants, through loan serialization or otherwise, in order to reduce our overall cost of acquisition.

Changes in any of the following factors could materially affect our financial results:

• Demand for education financing, which may be affected by changes in limitations established by the federal government on the amount of federal loans that a student can receive, the terms and eligibility criteria for loans and grants under federal or state government programs and legislation recently passed or currently under consideration;

• The extent to which our services and products, including our Monogram platform, Cology offerings and TMS offerings, gain market share and remain competitive at pricing favorable to us;

• The amount of education loan volume disbursed under our lender clients' Monogram-based loan programs;

• Our ability to sell Monogram products and services to customers acquired in our asset acquisition of Cology, Inc.;

• An adverse outcome relating to the federal income tax treatment of our sale of the trust certificate of NC Residuals Owners Trust, which we refer to as the Trust Certificate, in fiscal 2009 or our asset services agreement with the purchaser of the Trust Certificate, including any challenge related to federal tax refunds previously received in the amount of $176.6 million as a result of the audit currently being conducted by the Internal Revenue Service, or IRS;

• Regulatory requirements applicable to Union Federal, TMS and us, including conditions and approvals relating to the Union Federal Private Student Loan Program, which limit Union Federal's ability to fund education loans;


Table of Contents
• Conditions in the education loan financing market, including the costs or availability of financing, rating agency assumptions or actions, and market receptivity to private education loan asset-backed securitizations;

• The underlying loan performance of the Monogram-based loan programs, including the net default rates, unemployment rates, and the timing and amounts of excess credit enhancements that may be material to us;

• The resolution of any appeal of the order of the Massachusetts Appellate Tax Board, or ATB, in the cases pertaining to our Massachusetts state income tax returns;

• Application of critical accounting policies and estimates, which impact the carrying value of assets and liabilities, as well as our determinations to consolidate or deconsolidate a VIE;

• Application of The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, enacted in July 2010, through the supervisory authority of the Consumer Financial Protection Bureau, or CFPB, which has the authority to regulate consumer financial products such as education loans, and to take enforcement actions against institutions marketing and selling consumer financial products under its supervision, such as Union Federal, and institutions that act as service providers to originators of education loans, such as our subsidiary First Marblehead Education Resources, or FMER;

• Applicable laws and regulations, which may affect the terms upon which lenders agree to make education loans, the terms of future portfolio funding transactions, including disclosure and risk retention requirements, recovery rates on defaulted education loans and the cost and complexity of our loan facilitation operations; and

• Departures or long-term unavailability of key personnel.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of our financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We base our estimates, assumptions and judgments on our historical experience, economic conditions and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.

Our significant accounting policies are described more fully in Note 2, "Summary of Significant Accounting Policies," in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report.

On an ongoing basis, we evaluate our estimates, assumptions and judgments, particularly as they relate to accounting policies that we believe are most important to the portrayal of our financial condition and results of operations. We regard an accounting estimate or assumption underlying our consolidated financial statements to be a "critical accounting estimate" where:

• The nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

• The impact of the estimates and assumptions on our financial condition or operating performance is material.

We have discussed our accounting policies with the Audit Committee of the FMD Board of Directors. We consider the following to be our critical accounting policies:

• Whether or not to consolidate the financial results of a variable interest entity, or VIE;

• The determination of goodwill and intangible asset impairment; and

• Income taxes relating to uncertain tax positions accrued for under Financial Accounting Standards Board Interpretation, or FASB, No. 48, Accounting for Uncertainty in Income Taxes (now incorporated into Accounting Standards Codification, or ASC, 740, Income Taxes).

During the three months ended September 30, 2012, there were no significant changes in our critical accounting policies from those disclosed in Item 7 of Part II of our Annual Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Application of Critical Accounting Policies and Estimates."

Results of Operations-Three Months Ended September 30, 2012 and 2011

Financial Results Summary

The financial results of operations include FMD and its subsidiaries for the fiscal years then ended. These results are reported through our continuing operations. Previously consolidated securitization trusts and the results of our subsidiary First Marblehead Data Services, Inc., or FMDS, are included in discontinued operations as discussed below for each of the fiscal years then ended.


Table of Contents

Discontinued Operations

Upon our adoption of Accounting Standards Update, or ASU, 2009-16, Transfers and Servicing (Topic 860)-Accounting for Transfers of Financial Assets, or ASU 2009-16, and ASU 2009-17, Consolidation (Topic 810)-Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities, or ASU 2009-17, effective July 1, 2010, we consolidated 14 securitization trusts that we facilitated during fiscal 2004 through fiscal 2008. The education loans purchased by certain of the securitization trusts, which we refer to as the Trusts, were initially subject to a default repayment guaranty by The Education Resources Institute, Inc., or TERI, while the education loans purchased by other securitization trusts, which we refer to as the NCT Trusts, were, with limited exceptions, not TERI-guaranteed. Of the 14 securitization trusts consolidated on July 1, 2010, 11 were Trusts and 3 were NCT Trusts. We refer to the consolidated Trusts as the NCSLT Trusts and the consolidated NCT Trusts as the GATE Trusts.

Consistent with our goal of refining our business model and focusing on our Monogram platform and tuition billing and payment processing services, we disposed of certain components of our business in fiscal 2012. In particular, we sold our variable interests in the Trusts, we sold our trust administrator, FMDS, and we resigned as the special servicer of the Trusts, including the NCSLT Trusts. In addition, the new third party owner of FMDS terminated the agreement, effective September 30, 2012, with our subsidiary FMER for the special servicing of the NCT Trusts, including the GATE Trusts. During the fourth quarter of fiscal 2012, we determined that we no longer had any significant continuing involvement in the operations relating to the NCSLT Trusts and the GATE Trusts once FMER ceased to provide special servicing to these trusts. Further, we concluded that this would occur within an appropriate assessment period for both the NCSLT Trusts and the GATE Trusts. As such, we reported the operations and activities relating to the NCSLT Trusts, the GATE Trusts and FMDS within discontinued operations for all prior periods presented.

For additional information, see Note 3, "Discontinued Operations," in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report and Note 3, "Discontinued Operations," in the notes to our consolidated financial statements included in Item 8 of Part II of our Annual Report.

Overall Results

The following table summarizes the results of our consolidated operations:



                                                          Three months ended          Change  between
                                                            September 30,                 periods
                                                         2012           2011            2012 - 2011
                                                                   (dollars in thousands)
Revenues:
Net interest income:
Interest income                                        $   1,193      $     554      $             639
Interest expense                                            (273 )         (239 )                  (34 )

Net interest income                                          920            315                    605
Provision for loan losses                                     74            172                    (98 )

Net interest income after provision for loan losses          994            487                    507
Non-interest revenues:
Tuition payment processing fees                            7,424          7,279                    145
Administrative and other fees                              3,415          2,389                  1,026
Fair value changes to service revenue receivables            838            948                   (110 )

Total non-interest revenues                               11,677         10,616                  1,061

Total revenues                                            12,671         11,103                  1,568
Total non-interest expenses                               26,208         30,681                 (4,473 )

Loss from operations                                     (13,537 )      (19,578 )                6,041
Other income                                                  -           1,124                 (1,124 )

. . .
  Add FMD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FMD - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.