SOURCE: The First Marblehead Corporation

The First Marblehead Corporation

February 09, 2015 16:05 ET

First Marblehead Announces Second Quarter Financial Results

BOSTON, MA--(Marketwired - Feb 9, 2015) -  The First Marblehead Corporation (NYSE: FMD) today announced its financial and operating results for the second quarter of fiscal 2015 as well as the six month period ended December 31, 2014.

For the second quarter of fiscal 2015, the Company recorded a net loss from continuing operations of $12.9 million, or $(1.12) per share, which included a one-time charge of $5.0 million related to the NC Residuals legal settlement, compared to a net loss from continuing operations of $8.7 million, or $(0.77) per share, for the second quarter of fiscal 2014. The increase in the net loss from continuing operations was primarily due to a $4.7 million increase in total expenses, principally the result of a legal settlement accrued during the quarter, partially offset by increased revenues. Revenues for the second quarter of fiscal 2015 increased $503 thousand, or 5%, to $11.1 million as compared to the second quarter of fiscal 2014. The increase in revenues included increases of $231 thousand in tuition management fees, $202 thousand in Monogram®-based fee revenues, and $102 thousand in fee income from the Company's subsidiary Cology LLC.

The discontinued operations of Union Federal Savings Bank ("Union Federal"), net of taxes, for the second quarter of fiscal 2015 was net income of $207 thousand, or $0.02 per share, compared to net income of $1.0 million, or $0.09 per share, for the second quarter of fiscal 2014. The $826 thousand decline was primarily due to lower revenues of $1.3 million offset by increased other income of $665 thousand.

For the six month period ended December 31, 2014, the Company recorded a net loss from continuing operations of $23.4 million, or $(2.04) per share, which included a one-time charge of $5.0 million related to the NC Residuals legal settlement, compared to a net loss of $20.7 million, $(1.84) per share, for the six month period ended December 31, 2013. The increase in the net loss from continuing operations was primarily due to a $4.7 million increase in total expenses, principally the result of a legal settlement accrued during the second quarter of fiscal 2015, partially offset by increased revenues. Revenues for the six month period ended December 31, 2014 increased $1.9 million, or 8%, to $25.3 million. The increase in revenues included increases of $630 thousand in Monogram-based fee revenues, $570 thousand in tuition management fees, $436 thousand in fair value changes to service revenue receivables, and $318 thousand in fee income from Cology LLC.

The discontinued operations of Union Federal, net of taxes, for the six month period ended December 31, 2014 was a net loss of $2.7 million, or $(0.24) per share, compared to net income of $1.5 million, or $0.13 per share, for the six month period ended December 31, 2013. The $4.2 million decline was primarily due to other expense of $1.9 million during the six month period ended December 31, 2014 coupled with lower revenues of $1.9 million and increased operating expenses of $471 thousand.

For the second quarter of fiscal 2015, total facilitated private education loan volumes, excluding Union Federal, were $117.7 million, consisting of $13.4 million of Monogram-based loans, a 26% increase over the same quarter of the prior year, and $104.3 million of loans facilitated by Cology LLC, a 31% increase over the same quarter of the prior year. Loan disbursements, excluding Union Federal, for the second quarter of fiscal 2015 totaled $122.4 million, consisting of $19.0 million of Monogram-based loans, a 37% increase over the same quarter of the prior year, and $103.4 million of loans disbursed by Cology LLC, a 19% increase over the same quarter of the prior year. 

For the six month period ended December 31, 2014, total facilitated private education loan volumes, excluding Union Federal, were $562.9 million, consisting of $97.9 million of Monogram-based loans, a 35% increase over the same period of the prior year, and $465.0 million of loans facilitated by Cology LLC, a 7% increase over the same period of the prior year. Loan disbursements, excluding Union Federal, for the six month period ended December 31, 2014 totaled $378.6 million, consisting of $61.6 million of Monogram-based loans, a 29% increase over the same period of the prior year, and $317.0 million of loans disbursed by Cology LLC, a 13% increase over the same period of the prior year. 

The increase in Monogram-based loan volume for the three and six months ended December 31, 2014 as compared to the same periods a year ago was primarily the result of the Union Federal® Private Student Loan Program funded by SunTrust Bank, which was launched on June 13, 2014. In addition, for the six months ended December 31, 2014 as compared to the six months ended December 31, 2013, marketing programs employed during peak season contributed to the increased loan volume.

The increase in Cology LLC loan volume for the three and six months ended December 31, 2014 as compared to the same periods a year ago was primarily the result of organic growth at existing clients, including new loan programs.

 "The second quarter saw significant success with a number of the external issues facing the Company, specifically, we were notified that the IRS was no longer challenging the federal tax refunds we previously received, subject to the review of the Joint Committee on Taxation, we reached an agreement in principle to settle our litigation with NC Residuals Owners Trust and the purported class action and related derivative action were dismissed. In addition, we continued with the trend of revenue growth in conjunction with lowered ongoing operating expenses," said Daniel Meyers, Chairman and Chief Executive Officer.

Company Liquidity

As of December 31, 2014, the Company had cash and cash equivalents and short-term investments from continuing operations of $56.8 million compared to $65.1 million at September 30, 2014. The decrease of $8.3 million was primarily the result of cash used to fund continuing operations coupled with net fundings for participation interest accounts.

Quarterly Conference Call

First Marblehead will host a conference call on Monday, February 9, 2015 at 5:00 p.m. Eastern Time to discuss its operating results and provide an update on the Company's business. Investors and other interested parties are invited to listen to the conference call via a simultaneous internet broadcast on the Company's website at www.firstmarblehead.com, under "For Investors," or by (888) 317-6003 from the United States or (412) 317-6061 from abroad and entering the pass code 9399242.

A replay will be available approximately one hour after completion of the call on First Marblehead's website or by dialing (877) 344-7529 from the United States or (412) 317-0088 from abroad and entering the pass code 10059875. The replay will be available for two weeks.

About The First Marblehead Corporation: First Marblehead helps meet the need for education financing by offering national and regional financial institutions and educational institutions the Monogram® platform, an integrated suite of design, implementation and credit risk management services for private label, customizable private education loan programs. For more information, please see www.firstmarblehead.com. First Marblehead supports responsible lending and is a strong proponent of the smart borrowing principle, which encourages students to access scholarships, grants and federally-guaranteed loans before considering private education loans; please see www.SmartBorrowing.org. First Marblehead offers outsourced tuition planning, billing, payment technology services and refund management services through its subsidiary Tuition Management Systems LLC. For more information, please see www.afford.com. Through its subsidiary, Cology LLC, First Marblehead offers private education loan processing and disbursement services for lenders. For more information, please see www2.cology.com. Through its bank subsidiary, Union Federal, First Marblehead offers branch money market and time deposit products. For more information, please see www.unionfsb.com. Following the planned dissolution of Union Federal, First Marblehead will cease to offer banking services through Union Federal.

Statements in this press release, including the financial tables, regarding First Marblehead's future revenue, expenses and other financial and operating results and liquidity, including statements concerning the decision by the Internal Revenue Service ("IRS") to not challenge the federal tax refunds we previously received in the amounts of $176.6 million and $45.1 million, the review of such decision by the Joint Committee on Taxation and any change in the IRS's position as a result of such review, the planned dissolution of Union Federal and the agreement in principle to settle our litigation with NC Residuals Owners Trust, as well as any other statements that are not purely historical, constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon our historical performance, and on our plans, estimates and expectations as of February 9, 2015. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future results, plans, estimates, intentions or expectations expressed or implied by us will be achieved. You are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive and other factors, which may cause our actual financial or operating results, a change in the IRS's position as a result of the review by the Joint Committee on Taxation, the planned dissolution of Union Federal and the agreement in principle to settle our litigation with NC Residuals Owners Trust, or the timing of events, to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include: market acceptance of, and demand for, our Monogram platform and fee-based service offerings, including our success in negotiating loan program agreements with additional clients; the successful sales and marketing of Monogram-based loan offerings, including the volume of loan applications and the extent to which loan applications ultimately result in disbursed loans; the volume, timing and performance of disbursed loans; the size and structure of any credit enhancement provided by First Marblehead in connection with our Monogram platform; the successful sales and marketing of the products and services offered by Tuition Management Systems LLC and Cology LLC; other changes to our business model or business effects, including the effects of industry, economic or political conditions outside of our control; capital markets conditions and our ability to structure securitizations or alternative financings; the size, structure and timing of any such securitizations or alternative financings; our ability to further reduce our operating expenses without adversely affecting our business; the timing and receipt by First Marblehead of formal written confirmation from the IRS of its decision not to make the adjustments proposed in the Notices of Proposed Adjustments, the outcome of the review by the Joint Committee on Taxation, and any reconsideration by the IRS as a result of the review by the Joint Committee on Taxation; resolution of litigation and regulatory proceedings pertaining to our Massachusetts state income tax returns; the planned dissolution of Union Federal, including the timing of any such dissolution, and any costs relating to the planned dissolution or a decision not to proceed with the planned dissolution for any reason, including, without limitation, the failure to receive the necessary regulatory approvals; our ability to finalize the terms of the agreement in principle to settle our litigation with NC Residuals Owners Trust and to enter into the related settlement agreement; First Marblehead's and Firstmark Services' ability to transition loan processing services to Firstmark Services; the possibility that First Marblehead may be unable to achieve expected operating efficiencies following the transition of services to Firstmark Services within the expected time-frames or at all; Firstmark Services' success in delivering loan origination services to First Marblehead and its lender clients; customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with customers or clients) that are greater than expected following the transition of services; the estimates and assumptions we make in preparing our financial statements, including quantitative and qualitative factors used in determining the estimate of the fair value of service revenue receivables and deposits for participation interest accounts; and the other factors set forth under the caption "Part II - Item 1A. Risk Factors" in First Marblehead's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 2014. Important factors that could cause or contribute to future adjustments to the estimates and assumptions we make in preparing our financial statements include: actual transactions or market observations relating to asset-backed securities, loan portfolios or corporate debt securities; variances between our performance assumptions and the actual performance of the loan portfolios held by the GATE trusts, Union Federal or First Marblehead's clients (the "Portfolios"); economic, legislative, regulatory, competitive and other factors affecting discount, default, recovery and prepayment rates on the Portfolios, including general economic conditions, the consumer credit environment and unemployment rates; management's determination of which qualitative and quantitative factors should be weighed in our estimates, and the weight to be given to such factors; capital markets receptivity to securities backed by private education loans; interest rate trends; the outcome of the review by the Joint Committee on Taxation of the IRS's decision to not challenge the federal tax refunds previously received and any reconsideration by the IRS as a result of the review by the Joint Committee on Taxation; the resolution of litigation pending before the Massachusetts Appellate Tax Board in the cases pertaining to our Massachusetts state income tax returns for fiscal 2008 and fiscal 2009; the planned dissolution of Union Federal, including the timing of any such dissolution, and any costs relating to the planned dissolution or a decision not to proceed with the planned dissolution for any reason, including, without limitation, the failure to receive the necessary regulatory approvals; and our ability to finalize the terms of the agreement in principle to settle our litigation with NC Residuals Owners Trust and to enter into the related settlement agreement. We specifically disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date of this press release, even if our estimates change, and you should not rely on those statements as representing our views as of any date subsequent to the date of this press release.

   
The First Marblehead Corporation and Subsidiaries  
Consolidated Statements of Operations  
For the Three and Six Months Ended December 31, 2014 and 2013  
(unaudited)  
(dollars and shares in thousands, except per share amounts)  
   
    Three months ended
December 31,
    Six months ended
December 31,
 
    2014     2013     2014     2013  
Revenues:                        
  Tuition payment processing fees   $ 7,869     $ 7,638     $ 16,156     $ 15,586  
  Administrative and other fees     2,905       2,564       7,785       6,867  
  Fair value changes to service revenue receivables     368       437       1,318       882  
    Total revenues     11,142       10,639       25,259       23,335  
Expenses:                                
  Compensation and benefits     8,386       8,204       18,297       18,406  
  General and administrative     15,711       11,217       30,258       25,481  
    Total expenses     24,097       19,421       48,555       43,887  
Other income     318       359       374       431  
Loss from continuing operations, before income taxes     (12,637 )     (8,423 )     (22,922 )     (20,121 )
Income tax expense from continuing operations     275       258       518       533  
Net loss from continuing operations     (12,912 )     (8,681 )     (23,440 )     (20,654 )
Discontinued operations, net of taxes     207       1,033       (2,706 )     1,452  
Net loss   $ (12,705 )   $ (7,648 )   $ (26,146 )   $ (19,202 )
  Net loss per basic and diluted common share:                                
    From continuing operations   $ (1.12 )   $ (0.77 )   $ (2.04 )   $ (1.84 )
    From discontinued operations     0.02       0.09       (0.24 )     0.13  
    Total basic and diluted net loss per common share   $ (1.10 )   $ (0.68 )   $ (2.28 )   $ (1.71 )
                                 
Basic and diluted weighted-average common shares outstanding     11,527       11,283       11,456       11,248  
                                 
                                 
   
The First Marblehead Corporation and Subsidiaries  
Consolidated Balance Sheets  
As of December 31, 2014 and June 30, 2014  
(unaudited)  
(dollars and shares in thousands, except per share amounts)  
             
    December 31,
2014
    June 30,
2014
 
Assets            
Cash and cash equivalents   $ 46,590     $ 33,955  
Short-term investments, at cost     10,255       40,057  
Restricted cash     157,705       94,436  
Deposits for participation interest accounts, at fair value     16,498       15,834  
Service revenue receivables, at fair value     13,491       13,979  
Goodwill     20,066       20,066  
Intangible assets, net     20,613       21,769  
Property and equipment, net     5,332       5,819  
Other assets     8,934       8,163  
  Assets from continuing operations     299,484       254,078  
  Assets from discontinued operations     144,353       188,806  
    Total assets   $ 443,837     $ 442,884  
Liabilities and Stockholders' Equity                
Liabilities:                
  Restricted funds due to clients   $ 157,438     $ 94,272  
  Accounts payable, accrued expenses and other liabilities     14,072       11,050  
  Income taxes payable     26,917       26,582  
  Net deferred income tax liability     1,833       1,655  
Liabilities from continuing operations     200,260       133,559  
Liabilities from discontinued operations     121,379       162,827  
    Total liabilities     321,639       296,386  
Commitments and contingencies:                
Stockholders' equity:                
  Common stock, par value $0.01 per share; 25,000 shares authorized; 12,595 and 12,260 shares issued; 11,527 and 11,300 shares outstanding     125       122  
  Additional paid-in capital     464,981       462,328  
  Accumulated deficit     (154,537 )     (128,391 )
  Treasury stock, 1,068 and 960 shares held, at cost     (188,371 )     (187,860 )
  Accumulated other comprehensive income     --       299  
    Total stockholders' equity     122,198       146,498  
    Total liabilities and stockholders' equity   $ 443,837     $ 442,884  
                 
                 
                 
The First Marblehead Corporation and Subsidiaries
Facilitated and Disbursed Loan Volume Data
For the Three and Six Months Ended December 31, 2014 and 2013
(unaudited)
(dollars in thousands)
 

The following tables present our private education loan facilitation metrics with respect to our Monogram-based loan programs, excluding Union Federal, for the three and six months ended December 31, 2014 and 2013, as well as the private education loans processed by Cology LLC for these periods.

 
    Three months ended December 31,
    2014   2013
    Partnered
Lending
  Cology LLC   Total   Partnered
Lending
  Cology LLC   Total
    (dollars in thousands)
Facilitated Loans   $ 13,378   $ 104,290   $ 117,668   $ 10,585   $ 79,434   $ 90,019
Disbursed Loans     19,023     103,379     122,402     13,928     86,938     100,866
                                     
     
    Six months ended December 31,
    2014   2013
    Partnered
Lending
  Cology LLC   Total   Partnered
Lending
  Cology LLC   Total
    (dollars in thousands)
Facilitated Loans   $ 97,928   $ 464,965   $ 562,893   $ 72,479   $ 436,544   $ 509,023
Disbursed Loans     61,607     316,978     378,585     47,660     281,418     329,078
                                     
                                     

Use of Non-GAAP Financial Measures

In addition to providing financial measurements based on U.S. generally accepted accounting principles ("GAAP"), the Company has included in this press release an additional financial metric that it refers to as "net operating cash usage" that was not prepared in accordance with GAAP. The Company defines "net operating cash usage" to approximate cash required to fund its operations. "Net operating cash usage" is not directly comparable to the Company's consolidated statements of cash flows prepared in accordance with GAAP. Legislative and regulatory guidance discourages the use of, and emphasis on, non-GAAP financial metrics and requires companies to explain why a non-GAAP financial metric is relevant to management and investors.

The Company's management and its board of directors use this non-GAAP financial metric, in addition to GAAP financial measures, as a basis for measuring and forecasting the Company's core operating performance and comparing such performance to that of prior periods. This non-GAAP financial measure is also used by the Company in its financial and operational decision-making.

The Company believes that the inclusion of this non-GAAP financial metric helps investors to gain a better understanding of its results, including its expenses and liquidity position. In addition, the Company's presentation of this non-GAAP financial measure is consistent with how it expects that analysts may calculate their estimates of its financial results in their research reports and with how clients, investors, analysts and financial news media may evaluate its financial results.

There are limitations associated with reliance on any non-GAAP financial measure because any such measure is specific to the Company's operations and financial performance, which makes comparisons with other companies' financial results more challenging. Nevertheless, by providing both GAAP and non-GAAP financial measures, the Company believes that investors are able to compare its GAAP results to those of other companies, while also gaining a better understanding of its operating performance, consistent with management's evaluation.

"Net operating cash usage" should be considered in addition to, and not as a substitute for, or superior to, financial information prepared in accordance with GAAP. "Net operating cash usage" excludes the effects of income taxes, acquisitions or divestitures, participation interest account net fundings and changes in other assets and other liabilities that are solely related to short-term timing of cash payments or receipts.

In accordance with the requirements of Regulation G promulgated by the Securities and Exchange Commission, the table below presents the most directly comparable GAAP financial measure, loss from continuing operations, before income taxes, for the three and six months ended December 31, 2014 and 2013 and reconciles the GAAP measure to the comparable non-GAAP financial metric:

   
The First Marblehead Corporation and Subsidiaries  
Net Operating Cash Usage, a Non-GAAP Financial Measure  
For the Three and Six Months Ended December 31, 2014 and 2013  
(unaudited)  
(dollars in thousands)  
   
    Three months ended December 31,     Six months ended December 31,  
    2014     2013     2014     2013  
    (dollars in thousands)  
Loss from continuing operations, before income taxes     $ (12,637 )   $ (8,423 )   $ (22,922 )   $ (20,121 )
Adjustments to loss from continuing operations, before income taxes:                              
  Fair value changes to service revenue receivables   (368 )     (437 )     (1,318 )     (882 )
  Distributions from service revenue receivables   440       730       1,806       2,079  
  Depreciation and amortization   1,317       1,329       2,584       2,637  
  Stock-based compensation   837       905       2,656       2,893  
  Change in TMS deferred revenue   (1,756 )     (2,037 )     (446 )     (531 )
  Additions to property and equipment   (600 )     (699 )     (941 )     (1,370 )
  Other, net of cash flows from Union Federal   338       414       106       650  
    Non-GAAP net operating cash usage   $ (12,429 )   $ (8,218 )   $ (18,475 )   $ (14,645 )
                               
                               

The increase in "net operating cash usage" for the three and six months ended December 31, 2014 as compared to the same periods a year ago was primarily driven by increased expenses, largely the result of a $5.0 million legal settlement accrued during the three months ended December 31, 2014, partially offset by an improvement in revenues. The legal settlement is expected to be paid out by the end of fiscal 2015. 

Contact Information

  • Contact:
    Alan Breitman
    Chief Financial Officer
    The First Marblehead Corporation
    800 Boylston Street, 34th FL
    Boston, MA 02199
    617.638.2065