FMD: Cology Acquisition and Fourth Quarter Update (FMD)

By Ann Heffron, CFA

On October 3, 2012, FMD (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 31).

• 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 FMD.

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.

To view a free copy of our most recent research report on FMD, visit Ann Heffron's page at Zacks Small-Cap Research .