First Marblehead: The Future Returns

Feb. 4.09 | About: The First (FMD)

While the future is always uncertain, it is looking slightly brighter for First Marblehead (NYSE:FMD). The company’s quarterly report last Monday shows a company that is striving to ensure that it is still an independent entity when activity in the credit markets returns.

While the stock has been decimated and will likely never fully recover to its past levels, it does nevertheless offer an interesting play on increased federal involvement in the private label student loan market and student loans in general. Going forward the company has two significant items going for it, namely its recent ability to significantly reduce costs and the expansion of the Department of Education’s asset purchase program.

During the quarter, the company managed to only burn through $14.3 million dollars, leaving it with $198.6 million in cash on hand, this dramatic reduction from the previous year is a testament to management’s strong desire to see the company through the current environment. This can be seen by the sixty percent reduction in non-interest expenses from the year ago period. While the company’s quarterly report was awful, the majority of the expenses were no cash charges related to a reduction in the value of the company’s residuals portfolio. While these charges will likely continue, they do not dramatically impact the company’s financial position.

The only significant concern that I had with the quarter was the sharp reduction in deposits at the company’s federally chartered thrift, Union Federal Savings Bank. With deposits declining by over $100 million, it is clear that the company does not believe that the operation of a thrift is in the best interests of its shareholders. This really does not make much since given the current credit environment and the added importance of having a secure liquidity source but I would imagine that the company was doing this to satisfy federal regulators. In 2008, I had argued for the company to dramatically expand its banking operations so as to secure adequate funding sources, as a result, I am rather disappointed in this unfortunate turn of events.

Nevertheless, the next major catalyst for First Marblehead is the upcoming implementation and likely expansion of the Department of Education’s Asset Based Commercial Paper Conduit program and the Loan Purchase and Participation Program. While only currently set up to deal with FFELP loans and a limited amount of privately originated loans, it is likely that this program will be expanded to purchase loans such as those currently being held and originated by First Marblehead. While the company’s future is certainly tied to an expansion of the Department of Education’s lending programs, the company will likely be able to make it through to a thawing of the credit markets with its large cash position and a greatly reduced burn rate.

Disclosure: Long FMD