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The First Marblehead (NYSE:FMD)

Q3 2013 Earnings Call

April 29, 2013 5:00 pm ET

Executives

Gary F. Santo - Managing Director and Head of Capital Markets

Daniel Maxwell Meyers - Co-Founder, Chairman, Chief Executive Officer, President and Member of Award Committee

Kenneth S. Klipper - Chief Financial Officer, Principal Accounting Officer and Managing Director

Analysts

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Ann H. Heffron - Zacks Investment Research Inc.

Operator

Good day, and welcome to The First Marblehead Corporation Third Quarter Fiscal 2013 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Gary Santo, Managing Director, Capital Markets. Mr. Santo, the floor is yours, sir.

Gary F. Santo

Thank you, Mike, and good afternoon. Welcome to First Marblehead's earnings call for the third quarter of fiscal 2013. On today's call, we have Dan Meyers, our Chairman and CEO; and Ken Klipper, our CFO.

Before we begin, please note that various remarks that we may make about the company's future financial and operating performance, expectations, plans and prospects, including with regard to Union Federal Savings Bank, Tuition Management Systems, Cology LLC, and Monogram-based loan programs, as well as the prospects of the private education finance industry, constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not a representation by us that the future results, plans estimates, or expectations expressed or implied by us will be achieved. 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 results or the timing of events to be materially different than those expressed or implied by our forward-looking statements.

Important factors that could cause or contribute to those differences include: Demand for our Monogram platform; the successful marketing and sales of our clients Monogram-based loan offerings and the products and services offered by TMS and Cology; the volume, timing and performance of disbursed loans; our success in designing, implementing and commercializing private education loan programs through Union Federal and our compliance with regulatory approvals and conditions; the general interest rate and consumer credit environments; proceedings related to state and federal income tax matters; and the other factors set forth under the caption Risk Factors in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on February 8, 2013. Any forward-looking statements represent our views only as of April 29, 2013. Although we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely upon these forward-looking statements as representing our view as of any date subsequent to April 29.

During this call, we'll refer to net operating cash usage, which is a non-GAAP financial measure. A reconciliation to loss before income taxes, the most directly comparable GAAP measure, is included in the earnings press release posted on our website under the heading For Investors.

I'll now turn the call over to Dan.

Daniel Maxwell Meyers

Thank you, Gary, and welcome to this evening's call. I am pleased to report that First Marblehead continued to make substantial progress in implementing its business plan. Over the first 9 months of fiscal 2013, revenues have increased 16%, expenses have declined 10% and net operating cash usage has been reduced by 22% on a year-over-year basis.

The combination of our growing business lines, coupled with management's expense reduction efforts, has resulted in a 28% improvement in our fiscal year-to-date pre-tax operating results through March 31 as compared to 1 year ago.

The third quarter of the fiscal year is historically the quietest from a loan origination perspective. With peak season just a few months away, the majority of the activity in the quarter comes from second disbursements on existing book volume. That said, First Marblehead facilitated approximately $16 million in new Monogram-based originations during the quarter, raising our total for the fiscal year to approximately $118 million, a 122% increase over the same period last year.

Our presence in the marketplace continue to grow, with Monogram-based products now recommended on over 1,000 school lender lists nationwide, an increase of over 42% compared to this time last year.

Reaching the 1,000-college milestone in such a short period -- time period is a testament both to Monogram's comparative advantage in its product structure and to our national sales coverage team. In addition, our Monogram-based products continue to gain market acceptance as students and their families seek choice in their options to finance a college education. We believe that we are poised to take advantage of this demand as we enter the upcoming peak processing season.

We are pleased by the ultrahigh credit quality of the portfolios that our Monogram-based programs have generated. The weighted average FICO score on our book portfolio remains a strong 758, with cosigners represented on approximately 87% of these loans. 62% of applicants on book loans have selected immediately cash-flowing repayment options, and 93% selected repayment terms of 15 years or less. As the brand has matured and the portfolio grew, one thing has remained: Our steadfast commitment to providing prudent and responsible underwriting through an application process designed to provide transparency and choice to our borrowers.

Performance on loans in our payment continue to be extremely strong. The percentage of loans, 31 or more days delinquent, remained less than 1%. Forbearance usage was also less than 1%, while defaults to date were less than 1/8 of 1%. With the portfolio still early in its life cycle, performance to date has met or exceeded expectations.

Turning to Tuition Management Systems. TMS is profitable for the quarter, with net operating cash usage during the first 9 months of fiscal 2013 improving more than 72% compared to 1 year ago.

Total tuition disbursements remained on track to exceed our target of $4 billion, despite the sale of 377 K-12 school contracts prior to the start of this fiscal year. In addition, same-school enrollment is up over 3% year-over-year. A strong sales pipeline has continued to feed TMS's new product growth with a total of 19 colleges now signed up for their refund management program, and 20 clients signed for their campus advantage program.

Our bank subsidiary, Union Federal, was profitable for the fifth consecutive quarter, with net operating cash usage during the first 9 months of fiscal '13 improving by $1.3 million. As of March 31, Union Federal has distribute -- dispersed more than $66 million in Monogram private student loans since program inception. The bank's balance sheet increased to $232 million as of March 31, driven by core deposit retention and strong deposit growth. As of March 31, the total risk-based capital ratio at Union Federal was approximately 25.9%, with the Tier 1 core capital ratio at roughly 9.5%.

Turning now to Cology LLC. Dispersed volume processed totaled $487 million for the 9 months ended March 2013, an increase of roughly 20% over the same period a year ago. I am very pleased by the efficiency with which our teams are integrating. Through unification of the business development and client development functions across the combined organization, we have been able to add 20 new clients while expanding Cology's program offerings across their entire customer base of over 270 lenders and credit unions.

We have begun to see initial results from our cross-selling efforts as Cology has engaged in discussions with its clients regarding First Marblehead-provided services such as school channel sales support and portfolio management. We believe that these discussions, together with the efforts of our other subsidiaries, provide First Marblehead with the diversity of products and services required to thrive in today's education finance marketplace.

Before turning the call over to Ken, let me say a few words about the capital markets. We believe that the private student loan asset-backed securities markets appears healthier now than at any point since 2007. In both primary and secondary markets, bonds are being placed and traded with increased uncertainty. In our last call, we discussed 2 of the key metrics which determined the economics of a securitization, funding costs and a required capital.

Funding cost have continued to improve due to both the growth of the investor base, as well as the quality of the collateral being financed in the market today. From the capital side, this quarter saw an important development as the benchmark issuer placed a new single-lay rated subordinate bond, the first such bond in the private student loan space since 2008. The market responded extremely favorably as significant investor oversubscription allowed the bond to price well inside initial guidance. The result was in a lower all-in cost of funds for the benchmark issuer compared to its prior transaction in October 2012, which did not include a subordinated bond. The inclusion of the subordinated bond increased the amount of funds raised as a percentage of student loans financed from 78% to 84%, reducing the capital requirement of the issuer. As we have stated in the past, the return of the subordinated bond market is a linchpin for market accessibility and that this transaction signals the continuing normalization of the private student loan ABS market. We will monitor developments in the capital markets relative to our other funding sources, remaining opportunistic in the use of the company's equity capital.

With that, I will now turn the call over to our Chief Financial Officer, Ken Klipper, after which, I will provide some closing comments.

Kenneth S. Klipper

Thanks, Dan, and good evening, everyone. Before getting into the specifics of the quarter, I would like to summarize some of the financial highlights that contributed to the company's improved performance for the third quarter and first 9 months of fiscal 2013.

Third quarter reflects the seasonality of the student loan industry as second semester disbursements for students were processed. Monogram-based loan disbursements were up 137% for the quarter to approximately $53 million compared to approximately $23 million for the same quarter a year ago. In addition, Cology dispersed approximately $216 million during the quarter. These increased disbursement levels, coupled with larger outstanding loan balances, led to higher administrative fee income during the quarter, which reinforces the impact of the life of loans fee structure that is integral to our Monogram business model. Monogram-related fee income of $2.1 million for the quarter doubled the Monogram fee income for all of fiscal 2012.

Expenses totaled $21.6 million for the quarter, down $3.5 million or 14% from the same quarter a year ago, as we have executed on our cost reduction efforts announced last April. Mainly as a result of these efforts, our net operating cash usage on non-GAAP financial measure totaled $7.9 million for the quarter, a 36% improvement from the same quarter a year ago. The net operating cash usage is the lowest level we have experienced since we began disclosing this metric in the second quarter of fiscal 2009. In the first 9 months of fiscal 2013, the net operating cash usage was $32.4 million, $9.2 million lower than for the 9 months ended March 31, 2012.

Because of the significance of various nonrecurring benefits totaling $14.9 million in other income and income taxes in the prior year's quarter, the nonrecurring benefits of $27.5 million for the 2012 fiscal year-to-date results, we believe a more accurate indicator of the company's financial results would be our loss from operations.

For the quarter ended March 31, 2013, the loss from operations was $8.8 million, an improvement of $2.6 million or 23% for the same quarter a year ago. For its first 9 months of fiscal 2013, the loss from operations was $34.6 million or 28% improvement from the $48 million loss from operations for the first 9 months of fiscal 2012.

I would now like to turn to some of the specifics for the 3- and 9-month periods ended March 31. While the launch from operations maybe the more accurate indicator to gauge the improvement in the company's financial results period-over-period, our EPS calculations are based on the company's net loss from continuing operations as opposed to our loss from operations.

The net loss from continuing operations for the quarter ended March 31, 2013, was $8.8 million or $0.08 per share compared to net income from continuing operations of $2.9 million or $0.03 per share for the same quarter a year ago. However, included in the March 31, 2012, quarterly results were $14.9 million or $0.13 per share of benefits related to the deconsolidation of the GATE trust in the sale of our trust administration business during that quarter.

The themes are also similar for the 9-month comparisons. Net loss from continuing operations was $35 million or $0.33 per share for the first 9 months of fiscal 2013 compared to a net loss from continuing operations of $19.6 million or $0.18 per share for the first 9 months of fiscal 2012. In addition to the $14.9 million or $0.13 per share of benefits described above, $12.6 million or $0.11 per share of income tax benefits were recognized based on the order issued by the Massachusetts Appellate Tax Board during the second quarter of fiscal 2012.

Facilitated loan volume for the quarter totaled $68 million, which includes $53 million from Cology and $16 million of Monogram-based loan originations. Facilitated Monogram-based loan originations are up 67% when compared to the same quarter a year ago. For the first 9 months of 2013 fiscal year, facilitated loan volumes totaled $220 million, including $118 million of Monogram loan volumes, which increased 122% from the prior year's 9-month period.

Disbursed loan volumes for the first 9 months of fiscal 2013 totaled $395 million, of which, $274 million was from Cology, $31 million from Union Federal and $89 million from partner lending.

Turning to revenues. Net interest income for the quarter increased $380,000 or 51% to $1.1 million when compared to the same period a year ago. For the 9 months ended March 31, 2013, net interest income almost doubled to $3.1 million. The increases for each period are almost entirely attributable to Union Federal as the bank continues to experience growth in its balance sheet. The bank's average assets grew from approximately $124 million for the quarter ended March 31, 2012, to approximately $207 million for the quarter ended March 31, 2013. The average yield for Union Federal rose slightly to 205 basis points from 196 basis points for the same quarter a year ago. Cost of funds for Union Federal approximated 84 basis points for the quarter, increasing slightly from a year ago as a result of the decline in the percentage of the deposit base comprised of TMS funds.

For the first 9 months of fiscal 2013, Union Federal's average assets increased to approximately $176 million, an 88% increase over the same period a year ago. In addition, the spread rose to 210 basis points from 134 basis points for the first 9 months of fiscal 2012.

Tuition payment processing fees earned by TMS were $7.5 million during the quarter compared to $7.7 million for the same quarter a year ago. For the first 9 months of fiscal 2013, revenues were $22.3 million, essentially flat when compared to the first 9 months of fiscal 2012. However, fiscal 2012's first 9-month results included $1.2 million of revenues related to certain K-12 contracts sold by TMS at the end of fiscal 2011 but recognized for accounting purposes in fiscal 2012.

TMS revenues are primarily derived from enrollment fees, late payment fees and service fee income, which comprise approximately 45%, 23% and 32%, respectively, of the TMS fiscal 2013 revenues to date. These revenues were generated by approximately 175,000 of enrollments received over the 9 months ended March 31. We continue to believe that revenues for TMS for the 2013 fiscal year will be in a range of between $26 million and $27 million, which would be a mid-single-digit percentage increase after adjusting for the $1.4 billion in revenues recognized in fiscal 2012 that pertains to the sold contracts.

Administrative and other fees, which primarily include Monogram-based fee income and Cology processing fee income, rose approximately $833,000 compared to the prior year's third quarter. The increase is somewhat muted as the prior year's quarter included $1.5 million in revenues from special servicing for the NCSLT Trust which we transitioned during the second quarter of this year. Taking into account the elimination of the special servicing revenues received in the second quarter of fiscal 2012, the revenues for the March 31, 2013, quarter increased $2.3 million, as Monogram-based revenues rose $1.7 million on a $31.8 million increase in disbursement volume; while Cology revenues approximated $906,000, as disbursement volume totaled $216 million.

For the 9 months ended March 31, 2013, administrative fee income rose $2.1 million, driven by a $3.8 million increase in Monogram-based revenues, as disbursement volumes increased $68 million, coupled with the $1.5 million increase in Cology revenues as a result of the acquisition. These increases were partially offset by a $2.7 million decline in special servicing revenues.

As for expenses, expenses were down $3.5 million for the quarter ended March 31 compared to the same quarter a year ago. The improvement in expenses was primarily the result of $1.3 million in lower special servicing costs as the NCSLT Trust transition was completed last quarter; a reduction in professional fees of $800,000, primarily on higher legal costs incurred during the prior year due to the sale of our trust administration business and other corporate matters; and finally, $800,000 in higher compensation costs during last year's quarter as we implemented a certain cost savings initiative.

For the 9 months ended March 31, expenses were down 10% or $8.3 million to $71.2 million. Most of the savings were attributable to $2.9 million in lower special servicing costs, $2.6 million in lower marketing costs and $2.7 million in lower compensation costs during the current 9-month period.

Moving on to liquidity. Union Federal continued to experience significant growth in its deposit base. For the quarter, bank deposits grew approximately $37 million compared to $26 million in core deposit growth for the quarter ended December 31, 2012. The majority of the increased funding continues to come from our online and branch money market products. We continually evaluate our overall funding needs and interest rates paid to ensure we optimize Union Federal's liquidity requirements.

At March 31, 2013, our balance sheet remains very liquid, with approximately $191 million of cash, cash equivalents and short-term investments. The company and its nonbank subsidiaries held approximately $121 million compared to $135 million in the previous quarter. The change is principally related to the net operating cash usage of $7.9 million for the quarter, coupled with credit enhancement deposits to our partner lender clients and a capital contribution to Union Federal which totaled $5.1 million for the quarter.

On another matter, the Massachusetts Appellate Tax Board has recently issued its opinion that supports its decision from November 2011. As expected, the opinion is consistent with what we have previously disclosed when the decision was originally issued. We will continue to work with our outside advisors to assess our position, but we would expect to continue the appeals process. We have an accrual on our balance sheet for this contingency, which we have been advised will not need to be paid out, if at all, until the completion of the appeals process. The opinion is available on the ATB's website for those who may be interested in the underlying specifics.

In closing, we are very focused on our 2014 fiscal year. We have already begun laying the foundation for the upcoming peak lending season. We expect to see continued improvement in our net operating cash usage as we grow revenues across the organization while maintaining our diligence around our expense base.

I will now turn the call back to Dan.

Daniel Maxwell Meyers

Thanks, Ken. Before opening the call to questions, I would like to say a few words about the lending and regulatory environment. From the moment we first contemplated our Monogram platform, we have remained laser-focused on providing enhanced choice, which can only be offered to a deliberately transparent application and disclosure process that assist well-informed borrowers. First Marblehead is committing to helping students and their families make responsible financial decisions as they seek to achieve their education goals, a concept we often refer to as Smart Borrowing.

As a result, we believe that our process meets and exceeds the requirements of Title X of the Higher Education Act. As our applicants make their way to our web interface, they are given the opportunity to select different repayment types and terms, seeing in realtime the effect of these choices, allowing them to choose the plan best suited to their individual needs. Through the application experience, students and their families are given clear disclosure regarding the nature of the obligation that they are undertaking, as well as the option to compare terms or cancel the loan completely. Monogram's focus on borrower education continues beyond the application process, persisting throughout the life of the loan.

Keeping borrowers informed of their repayment options and offering timely assistance, our key components of our portfolio management. If a borrower experiences difficulties in making their payments after they graduate, we stand ready with a number of options to help avoid default and get them back on the path of repayment. As regulators and legislators have sought to understand more about what private student lenders can offer, we have been more than happy to share with them Monogram's features. We have never lost sight of the fact that the core of our business depends on our ability to get the right loans into the hands of the right students, at the right schools for the right education, and we remain steadfast in our approach.

I will now open the call up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And the first question we have comes from Chris Donat of Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Dan, I want to revisit something you said on last quarter's conference call about not wanting to do any demonstration projects. I think that was a phrase you used as far as securitizations go, because I think there's a view out there that maybe in these market conditions, maybe the right thing to do for First Marblehead is to get out with a securitization. But I just wanted to get a sense of your thought process on weighing sort of -- or trying to optimize what's the best transaction for sort of the near term and then longer term for the company on -- based on the conditions we've seen, particularly this past quarter in the private student loan ABS market.

Daniel Maxwell Meyers

Sure. Well, let me try and break that into -- this is a little bit stream of conscious, but let me try and break this into kind of 3 general areas. First of all, we're stewards of our shareholders' equity capital, and we take that responsibility very clearly. So in terms of doing things just on a demonstration basis where we want to prove that we have the ability to take, what I call, an ultrahigh quality portfolio and monetize it or securitize it just for that specific period -- purpose, I remain in thinking that that's not a good use. The second is, is that in front of me, I have some indicated spreads for the industry and the benchmark issuer that go back a year. Now clearly, for the last year, I've been saying that the markets are becoming either actionable or are actionable. If we looked at the class B and C bonds, a year ago, they were trading at relative indicative spreads over LIBOR somewhere between a little over plus 500 and plus 600. And they have now dropped to, well, the exact number that I have in front of me is for the B bonds, which would be AA rated bond, just under LIBOR plus 200; and for the C bond, just over around 237 over -- so you've seen that those spreads have declined by as much as almost 400 basis points over the time period. At the same time, the AAA rated tranches have generally gone from the plus 150, 200 area to the plus 50, plus 70 area. So if we had done a securitization a year ago, even though we thought it was actionable, it would still yield a positive ROE across the life of the loan portfolio for the company and its shareholders. We would've left an awful lot on the table. And if anything, we have seen that the subordinated bonds, the A and AA rated bond spreads in the secondary markets have come in the most in the last 3 to 6 months, as the benchmark issuer's last deal was tremendously oversubscribed. As a matter fact, the largest oversubscription I've ever seen in my career. So item number 2 could be summarized as, if we had gone prior to this drop in spread, we would've left a lot of our shareholders' money on the table. The third is that it's not our only option. Through a partnered lending in our banks own balance sheet, in our own use of capital, we look at those leverage ratios and those capital cost ratios essentially every single day. We target things, as Ken mentioned, that it was a small uptick, very small uptick in cost of funds at Union Federal, but that's because of a good thing because the bank's balance sheet was growing, and the ratio of new deposits to TMS float deposits had increased. So overall, for the company, not a bad thing, actually, probably a good thing. But still, more efficient than executing even in this diminished spread environment that we're seeing now. So for those 3 reasons, I think we remain aware and vigilant, and we're watching this on an everyday basis. But I think the one thing that nobody's going to accuse us of is being stylish.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

I appreciate that. Okay. And I had another question, just about the loans you did originate this quarter. I'm just trying to understand sort of the mix and how the sort of the percent of repeat customers you have there. And I'm not sure I caught the right word for that, but is it a serial customer?

Daniel Maxwell Meyers

Yes it's a serialization, that's right.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And so can you give me a sense of maybe out of your existing originations you've done in the past and what -- this quarter represents serialization loans?

Daniel Maxwell Meyers

Well, let me try and give you some program to date grade level metrics. One of the things we wouldn't want to see is a big lumping of either loans or applications or book loans that were all clumped towards upper-class students, because that would give you less opportunity to have repeat borrowers as they progress to their academic metrics. So for us, across our entire portfolio, we're seeing ranges of kind of freshman classes and sophomore classes in the 19% to 20% level, but never in any one of the slices of the portfolio exceeding 30% in any academic year. And we like that even though there's usually a small trend in private student loans to have the students borrow a little more in their upper-class years because they've exhausted savings and they've exhausted parental resources and other sources of funding, so they seek low-cost alternatives like ours. So that's a completely normal thing. So as we go through, you have good news by having plenty of fresh underclass borrowers coming in to the pipeline. But at the same time, when you saw the growth in the school lender list number going from up over 40% in a 12-year -- 12 month year-over-year basis, now to about 1,003, we said over 1,000. You're seeing lots of fresh new clients, lots of fresh new students, but also the ability to have some serialization going on in the portfolio, all the good things. We think we're right on our metrics there. We've seen nothing that concerns us in that regard.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. So when I think about the 40% of new institutions on the lender list there, those can come in kind of across the board, right, as far as freshman, sophomores, et cetera?

Daniel Maxwell Meyers

Yes. But -- and if there was a skew, you'd see it by having some giant number of 40% or 50% of the kids being a third year or fourth year undergraduate or something along those lines. And the highest number I'm seeing across this data right now is about 27% -- 27%, 28% in the breakdowns. So just a tiny skew to upper-class years, which makes sense.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then one question on expenses here. Ken, you made the comment that you expect the cash usage to decrease in coming quarters. I'm not going to put you in a box and ask you to quantify exactly how much. But on the expense side, are we at the end of your cost-reduction initiatives or is there a little bit more to go here?

Daniel Maxwell Meyers

Yes. I'll take the front end of that and then I'll give it to Ken. I mean, one of the issues is that we're still sorting out all the opportunities available to us from Cology. It's a different process. And in some cases, there's a different client, but we're integrating. I said in the call that the integration's going very well from a sales perspective. I also think it's going well from an operations perspective. But we're trying to figure out exactly the best way to maximize shareholder value and get the greatest operating efficiencies as we go forward. So I think some of that as we approach kind of the second quarter that -- we're in the second quarter under which we've operated Cology in and of itself, we've really focused much more on the revenue side and making sure that everything that we have at First Marblehead be available to Cology and its clients. But obviously, we're trying to make sure that we're running the right operation as well. Ken?

Kenneth S. Klipper

I mean, I think, Chris, Dan has summed it up very well. I mean we look at our opportunities both from a revenue perspective and from an expense base. It's a continuous process. And as we make changes to the business model, hopefully, those savings or improvements flow through to the bottom line, or in this case, as part of our net operating cash usage improvement.

Daniel Maxwell Meyers

And as our clients keep coming in the door as they did this week -- this year in signed colleges, it's about the plus 40% mark, and then lender institutions at Cology at around plus -- we grew originations there last year around 20%.

Kenneth S. Klipper

That's a driver to cost, too, because you get more efficient. But as the overall business grows, I think the 9-month number was something like originations going up 122% or something like that. I mean, you've got more paper to process. So some of the cost are on a percentage basis, and some of the costs are on an absolute basis.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then...

Kenneth S. Klipper

That's not trying to duck the issue at all, it's just -- it's reality.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Right, I get that. And then you also -- we should expect not this quarter, but in the September quarter, we'll see the seasonal spending in G&A on the I guess advertising and marketing? Is that...

Kenneth S. Klipper

And other variable costs related to the first quarter of our fiscal year origination processes. So, yes.

Daniel Maxwell Meyers

But to give you a little color there, I'm not going to give you a forward-looking statement, but I will say that if you look at the trend of what we've reported out, the efficiency is from the dead start when the starter starts the foot race. I have been rather dramatic, especially on the marketing side. It costs a disproportionate amount more to get you out of the blocks. And then over time, we have seen a significant tail-off in marketing expenses as a percentage of book-to-facilitated volume.

Operator

[Operator Instructions] The next question we have comes from Ann Heffron of Zacks.

Ann H. Heffron - Zacks Investment Research Inc.

I just have a couple of quick questions. Let's see. In your 10-K -- or 10-Q, I mean, you talked about a new partnered lending. While you said there are 4 partnered lending companies now as opposed to 3 previously, I'm wondering who the fourth is.

Kenneth S. Klipper

Well, I think we were looking at it from the SMC level, Ann. So there are 3 clients -- 3 external clients and one from "internal" client, which is the Union Federal Savings Bank.

Ann H. Heffron - Zacks Investment Research Inc.

Right. So there's SunTrust, Connecta, UFSB and who else?

Kenneth S. Klipper

Yes. There's a small firm based in Texas.

Ann H. Heffron - Zacks Investment Research Inc.

Okay. Are you having any more luck on getting more into...

Daniel Maxwell Meyers

Well, that's a forward-looking statement, Ann. But I will tell you that we have found that the pipeline conversations have been extraordinarily active of late.

Ann H. Heffron - Zacks Investment Research Inc.

Well, that's wonderful. Okay. Now as far as TMS goes, it was a small decline year-over-year, but I'm just sort of wondering, because if your business volumes are going up and revenues are going down even slightly, is that due to a changing business mix or margin pressure or...

Daniel Maxwell Meyers

No, it's changed -- well, Ken, stop me if I got this wrong, but we sold over 300 school clients earlier in the year, and the business is still growing to the point where revenue in total tuition disbursements up a little, revenue might be in the same ballpark. But that's with, I think, it was 377 school contracts going down, and we receive about $7 million for them. So to sell off a very large chunk of the TMS client list that we just didn't think fit strategically in where we were taking that business and still having revenue coming in at the same ballpark and having volumes go up. I'll tell you, I'm very pleased with that team. I think they've done a really good job.

Ann H. Heffron - Zacks Investment Research Inc.

Okay. But I'm just looking at third quarter to third quarters, would that be a factor in third quarter to third quarter?

Kenneth S. Klipper

So the third quarter to third quarter, remember, we still have this Nelnet, which is the sale that we're talking about here overhang. So in the third quarter of 2012, there's about $400,000 of what I'll call nonrecurring revenue compared to fiscal '13. So if you back that $400,000 out, you have a much better picture of what the ongoing business is.

Ann H. Heffron - Zacks Investment Research Inc.

Okay. And then just to get into your SG&A. You -- actually, your expenses came in much lower than I thought they would be SG&A expense. And you did explain why that was. But the lower special servicing costs or the lower professional fees, and is that going to continue on into the fourth quarter? And then in addition -- well, no, then I'll get one more question after that and then I'm finished.

Kenneth S. Klipper

Well, I mean, I think we had to be as somewhat careful about seasonality of our cost structures. But I think we feel like we've made progress, to your point, special servicing costs are out of the -- or rather mix. I think we would expect our marketing spend to be slightly higher in the fourth quarter than where we were in the third quarter compared to -- in order to get ready for the peak lending season coming up this summer. Not dramatic, but a very slight increase. So all in all, I would think our expense base remain relatively constant for the fourth quarter this year.

Ann H. Heffron - Zacks Investment Research Inc.

Okay. And then the final thing is, I think last year you said the third quarter compensation expense includes FICA and all sorts of stuff like that. And then you said that typically leads to a decline in the fourth quarter in compensation expense. Do you expect that to recur then, too?

Kenneth S. Klipper

Yes, I would expect that to take place to a small extent. I mean, the RSU -- I'm sorry, the payroll tax expense in this quarter that we just completed was about $0.5 million. So that won't go away completely, but it will narrow significantly for the fourth quarter this fiscal year.

Operator

[Operator Instructions]

It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Gary F. Santo

Thank you for your time and attention.

Daniel Maxwell Meyers

We greatly appreciate it.

Operator

And we thank you, sir, and to the rest of management for your time. The conference call is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day.

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