UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-31825
THE FIRST MARBLEHEAD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of |
04-3295311 (I.R.S. Employer | |
The Prudential Tower 800 Boylston Street, 34th Floor Boston, Massachusetts (Address of principal executive offices) |
02199-8157 (Zip Code) |
Registrants telephone number, including area code: (800) 895-4283
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, $0.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) of this chapter is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ (Do not check if a |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held on December 31, 2013 by non-affiliates of the registrant (without admitting that any person whose shares are not included in the calculation is an affiliate) was approximately $61,857,733 based on the last reported sale price of the common stock on the New York Stock Exchange on December 31, 2013. For the purposes of the immediately preceding sentence, the term affiliate refers to each director, executive officer and greater than 10% stockholder of the registrant as of December 31, 2013 and ownership excludes shares issuable upon vesting of restricted stock units and exercise of outstanding stock options.
Number of shares of the registrants common stock outstanding as of September 8, 2014: 11,521,957.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended June 30, 2014. Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, information required by Items 10, 11, 12, 13 and 14 of Part III have been omitted from this report (except for information required with respect to our executive officers and code of ethics, which is set forth under Executive Officers of the Registrant and Code of Ethics in Part I of this annual report, respectively) and are incorporated by reference to the definitive proxy statement to be filed with the Securities and Exchange Commission.
THE FIRST MARBLEHEAD CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2014
FIRSTMARBLEHEAD and MONOGRAM are registered service marks and GATE is a service mark of The First Marblehead Corporation. BORROWSMART is a registered service mark of Tuition Management Systems LLC. UNION FEDERAL is a registered service mark of Union Federal Savings Bank. COLOGY and VOLTA are service marks of Cology LLC. All other trademarks, service marks or trade names appearing in this annual report are the property of their respective owners.
In addition to historical information, this annual 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, or the Securities Act. 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, proceedings related to our federal and state income tax returns, including any challenge to the tax refunds previously received as a result of the audit being conducted by the Internal Revenue Service, and the proposed dissolution of Union Federal Savings Bank, including the timing of any such dissolution, and any costs relating to the dissolution, or a decision not to proceed with the proposed dissolution for any reason, including, without limitation, the failure to receive the necessary corporate or regulatory approvals, other than statements of historical facts, are forward-looking statements. The words
anticipates, believes, estimates, expects, intends, may, observe, plans, projects, 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 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 described in Item 7 of this annual report, and factors including, but not limited to, those set forth under the caption Risk Factors in Item 1A of this annual 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 September 10, 2014.
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 and FMD to refer to The First Marblehead Corporation on a stand-alone basis. We use the term education loan to refer to private education loans that 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 ended June 30, 2014 as fiscal 2014.
Item 1. | Business |
Overview
We are a specialty finance company focused on the education financing marketplace in the United States. We provide loan programs on behalf of our lender clients for undergraduate and graduate students and for college graduates seeking to refinance private education loan obligations. We offer a fully integrated suite of services through our Monogram® loan product service platform, which we refer to as our Monogram platform. We partner with lenders to design and administer education loan programs through our Monogram platform, which are typically school-certified. These programs are designed to be marketed through educational institutions or to prospective borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the capital markets. In addition, as discussed below, we offer a number of other services on a stand-alone fee-for-service basis in support of our clients, including tuition management, loan processing and disbursement, loan origination, portfolio management and securitization services.
Through FMDs subsidiary Union Federal Savings Bank, which we refer to as Union Federal, we offer traditional retail banking products, including residential and commercial mortgages, time deposits and money market demand accounts, on a stand-alone basis. In addition, Union Federal previously generated additional revenues by originating Monogram-based education loan portfolios. On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the Office of the Comptroller of the Currency, or OCC, and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to offer banking services through Union Federal. On June 13, 2014, Union Federal notified FMD that it would no longer originate education loans under its Monogram-based loan program. We expect the dissolution process to be complete by the end of fiscal 2015.
Our product and service offerings are focused on the following three principal revenue lines:
| Partnered lendingWe provide customized Monogram-based education loan programs for lenders who wish to hold originated portfolios to maturity. We may provide credit enhancements by funding participation interest accounts, which we refer to as participation 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 income generated on the loans. 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. |
| Fee-for-serviceLoan origination, portfolio management, analytical and structuring services and tuition management services are each available on a stand-alone, fee-for-service basis. We offer outsourced tuition planning, tuition billing, refund management and payment technology services for universities, colleges and secondary schools through FMDs subsidiary Tuition Management Systems, LLC, which we refer to as TMS. TMS provides such services on behalf of over 700 educational institutions. In addition, through FMDs subsidiary Cology LLC, we earn fees for the processing and disbursement of education loans on behalf of its approximately 300 credit union and other lender clients. |
1
| Capital marketsOur capital markets experience coupled with our loan performance database and risk analytics capabilities provide specialized insight into funding options available to our lender 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 net interest income by retaining a portion of the equity in any of these transactions. |
Education loans are funded by private sector lenders and are not guaranteed by the federal government. They are intended to be used by borrowers who have first utilized other sources of education funding, including family savings, scholarships, grants and federal and state loans. For the 2012-2013 academic year, we believe that there was a funding gap in post-secondary education in the United States of approximately $150 billion between the costs of attendance and these sources of education funding, based on information from the National Center for Education Statistics and The College Board. We believe that enrollment in post-secondary education institutions will continue to increase over the next several years, as will costs of attendance. We also believe that education loan products will continue to be necessary for students and their families after applying family savings and exhausting all available scholarships, grants and federal and state loans.
The lifecycle of an education loan, which can be over 20 years long, consists of a series of processes, many of which are highly regulated, and involves many distinct parties. As a result, the activities associated with designing, implementing, financing and administering education loan programs are complex, resource intensive and costly. We offer specialized knowledge, experience and capabilities to assist clients in participating in the education loan market. Our service offerings are intended to serve a range of potential client needs throughout the life-cycle of an education loan. For example, we can assist clients in developing all aspects of an education loan program based on our Monogram platform, or we can provide tailored loan origination, portfolio management and other services to meet our clients specific needs. In addition, through TMS, we provide students and their families with the opportunity to structure tuition payment plans that meet their financial needs while providing a broad array of tuition payment options.
Our clients in the past have typically been lenders that desired to supplement their existing federal education loan or other consumer lending programs with a private education loan offering. In response to legislative changes that eliminated the Federal Family Education Loan Program, or FFELP, as of July 2010, many lenders have re-evaluated their business strategies related to education lending. We believe that these legislative changes as well as general economic conditions, capital markets disruptions and the declining credit performance of consumer-related loans, including education loans, have contributed to an overall reluctance by many lenders to focus on their education lending business segments. As a result, we believe that there is significant unmet demand for education loans and generally less competition than previously in addressing that demand. As market conditions for other consumer finance segments improve, we believe that more lenders will focus on education lending and consider education loans as part of an array of consumer lending products offered to their customers. One of our primary goals is to educate national and regional lenders on the opportunity to provide education loans in a manner that meets their desired risk control and return objectives. A related challenge, although growth in our partnered lending activities is not contingent upon it, is to successfully finance education loans generated through our Monogram platform through capital market transactions or other sources of capital.
Our near-term financial performance and future growth depend, in large part, on growing our client base by successfully marketing our Monogram platform, TMS services and Cology LLC services.
Business Model
Since the beginning of fiscal 2009, we have significantly refined our service offerings and added fee-for-service offerings. In fiscal 2010, we completed the development of our Monogram platform, including an enhanced application interface, an expanded credit decisioning model and additional reporting capabilities. We continue to incorporate refinements to our Monogram platform. In fiscal 2011, we began originating Monogram-based education loans under loan program agreements and began offering outsourced tuition planning, tuition billing and payment technology services for educational institutions through TMS. In fiscal 2012, we began
2
offering refund management services to educational institutions and students through TMS. In fiscal 2013, we began providing education loan processing and disbursement services to credit union and other lender clients through Cology LLC. As of September 10, 2014, we have loan program agreements based on our Monogram platform with three lender clients.
Monogram Platform
Our Monogram platform integrates our program design, marketing support, loan origination and portfolio management service offerings. It enables lenders to offer consumers education loans with competitive terms and clear pricing alternatives, with product options based on the credit profiles of qualified applicants. Specifically, a lender can customize the range of loan terms offered to their qualified applicants, such as repayment options, repayment terms and borrower pricing.
The product can be structured to offer lenders and other financial institutions a make and hold or make and sell loan program. In make and hold loan programs, lenders finance the education loans on their balance sheet and generally intend to hold the loans through scheduled repayment, prepayment or default. In make and sell loan programs, lenders intend to hold the education loans on their balance sheet for some limited period of time before disposing of the loans in a capital market transaction or whole loan sale. We believe that the education loans generated through our Monogram platform will generally have shorter repayment periods, an increased percentage of borrowers making payments while in school, higher cosigner participation rates, an overall better credit profile and lower estimated default rates in each case when compared to loan products we previously facilitated.
We designed our Monogram platform to generate recurring revenue with less dependence on the securitization market and third-party credit enhancements. In connection with our Monogram platform, we have invested, and may continue to invest, specified amounts of capital as a credit enhancement feature to various lenders loan programs. The amount of any contribution offered to a particular lender would be determined by the anticipated size of the lenders program, the underwriting guidelines of the program and the particular terms of our business relationship with the lender. We believe this approach provides assurances to lenders that we are committed to the quality of our new proprietary scoring models and risk mitigation and pricing strategies. In connection with certain of our lender clients Monogram-based loan programs, we have provided credit enhancement by funding participation accounts to serve as a first-loss reserve for defaulted program loans. We have made initial deposits toward our credit enhancement arrangements and agreed to provide periodic supplemental deposits, up to specified limits, during the disbursement periods under our loan program agreements based on the credit mix and volume of disbursed program loans and adjustments to default projections, if any, for program loans. To the extent that outstanding loan volume decreases as a result of repayment, or if actual loan volumes or default experience are less than reflected in our funded amounts, we are eligible to receive periodic releases of funds. The timing and amount of releases, if any, from the participation accounts are uncertain and vary among the loan programs. In consideration for funding participation accounts, we are entitled to receive a share of the interest income generated on the loans.
As part of our Monogram platform, we monitor the performance of loan accounts after origination and tailor risk mitigation strategies according to the performance patterns of those accounts. We have built a flexible infrastructure to support our portfolio management strategy, which requires extensive operational and data integration among the loan servicer, multiple default prevention and recovery agencies and us. Finally, we provide extensive customer service to each client, including ongoing analysis and comprehensive reporting of loan performance data.
We offer the following fully integrated suite of services through our Monogram platform or as stand-alone services tailored for our clients specific needs:
Program Design
Education loans are a complex asset class that requires sophisticated analytical capabilities combining effective, quantitative underwriting, responsible marketing and dynamic portfolio management. At the core of
3
our Monogram platform resides over 20 years of education loan performance data that we have used to create a suite of proprietary risk models, including proprietary underwriting, fraud and collectability scorecards. We believe that these risk models can be used throughout the lifecycle of an education loan to manage risk, optimize performance and potentially improve profitability.
Lenders face an array of choices in attempting to satisfy their strategic and financial goals, as well as the needs of their borrowers. In designing education loan programs, the factors that lenders generally consider include:
| Borrower creditworthiness and eligibility criteria; |
| Loan limits, including minimum and maximum loan amounts on both an annual and aggregate basis; |
| Interest rates, including the frequency and method of adjustment; |
| Amount of fees charged to the borrower, including origination, guaranty and late fees; |
| Repayment terms, including maximum repayment term, minimum monthly payment amounts, rate reduction incentive programs and deferment and forbearance options; |
| Appropriate credit enhancement levels to ensure repayment of defaulted principal and interest payments; |
| Loan servicing, default management and collection arrangements; |
| Asset financing or loan disposition alternatives; and |
| Legal compliance with numerous federal laws and regulations as well as numerous state laws that replicate and, in some cases, expand upon, the requirements of federal laws. |
We help lender clients design their education loan programs and customize each program for our lender clients in order to satisfy their particular needs. Although we assist lenders in selecting the underwriting criteria to be used in their loan programs, each lender has ultimate control over, and responsibility for, the selection of their underwriting criteria, and we are obligated to comply with the lenders criteria.
Marketing Support
While creating their loan marketing programs, lenders face choices in the channels and media available to them to reach potential borrowers, including financial aid offices, online advertising, direct mail campaigns, e-mail campaigns and print advertising. As part of our Monogram platform, we can provide marketing support services for a fee based on loan volume disbursed, depending on the level of services provided to each client. With our focus on school-certified loan programs, we also believe that financial aid offices and other school contacts are, and will continue to be, an important distribution channel. In addition, we believe that TMS relationships with educational institutions and potential borrowers will complement our distribution strategy.
Loan Origination
As part of our Monogram platform, we offer loan origination services for a fee based on loan volume disbursed. We have developed proprietary processing platforms, applications and infrastructure, supplemented by customized vendor solutions, for use in providing loan processing services.
Prospective and current students and their families confront a complicated process when applying for financial aid. We provide online resources and a staff of customer service personnel who understand the terms of our clients education loan programs and the financial aid process as a whole. In addition to a customer service function, we can provide personnel to respond to requests for loan materials and loan applications.
Once an applicant submits an application for processing, our customized credit decision software applies parameters that have been configured for each lender clients specific program and analyzes, often within seconds, the submitted application. This analysis results in a credit decision and also generates specific loan terms offered by the lender client, aligning product options made available to qualified applicants with their
4
credit risk. Once a loan application is complete, we communicate an initial determination to the applicant(s), informing him or her whether the application has passed the credit analysis, been rejected or is in review. Once a loan application passes the credit analysis, and the applicant has selected his or her loan terms from the available options, we generate a credit agreement, which is a legal contract between the applicant, cosigner, if any, and lender that contains the terms and conditions of the loan for the applicant based on lender-specific templates.
Once we have obtained all applicant data, including the signed credit agreement, required certifications from the school or applicant, and any required income or employment verification, we approve the application. We refer to the education loan at this point in the process as having been facilitated. Once we disburse loan funds on behalf of the lender, we refer to the loan as fully or partially disbursed.
In performing our loan origination services, we are required to comply with applicable laws and regulations relating to loan documentation, disclosure and processing, including consumer protection disclosures. The lenders with which we work generally assume responsibility for compliance with federal and state laws regarding the forms of loan documentation and disclosure, and we are generally responsible for populating such forms in accordance with the program guidelines. We are also responsible for maintaining processes and systems that properly execute the lenders origination requirements and administer their credit agreement templates and required disclosures. In addition, we may deliver each lenders privacy policy, and prepare and deliver disclosures required by the Truth-in-Lending Act, or TILA, as well as various state law disclosures, to borrowers.
We also monitor developments in state and federal requirements for loan processing and implement changes to our systems and processes based on our analysis and input we receive from clients and industry groups.
Portfolio Management
Once loans are disbursed, holders of the loans may outsource the management of such loans to third-party service providers, such as us. In our role as portfolio manager, we monitor the performance of portfolio vendors, including both loan servicers and collection agencies. For portfolio management services, we charge a fee generally based on the aggregate principal balance of education loans under management for the client.
We use a multi-faceted approach to portfolio management. To maximize the performance of each portfolio, we receive updated credit bureau data on each borrower and each cosigner each quarter and use it in combination with monthly performance data and experiential data to re-evaluate the risk profile of the portfolio. We use our proprietary risk models to develop portfolio management strategies and determine the level of resources we apply to each account, including when the account is outsourced to a collection agency and which agency is used in that process. For example, certain collection agencies may specialize in early-stage delinquencies while others may specialize in the collection of defaulted loans. This process requires a highly integrated infrastructure among the loan servicers, collection agencies and us and involves extensive data analysis on each account as it moves through its repayment lifecycle. We believe this approach allows us to manage and control losses over time.
We work with a network of vendors to manage education loans on behalf of our clients. The Pennsylvania Higher Education Assistance Agency, also known as AES and which we refer to as PHEAA, provides the servicing for a majority of the loans we facilitate. Generally, loan servicers establish and maintain contact with borrowers whose loans are current and collection agencies establish and maintain contact with borrowers whose loans are delinquent or defaulted. Duties of the portfolio management vendors include, for example, preparing repayment invoices, payment collection, maintaining borrower payment records, responding to borrower inquiries and reporting information to the loan owner. In addition, portfolio vendors may perform skip-tracing services, make collections calls and conduct other collections activities, and report borrower delinquencies or defaults to credit bureaus.
Loan Securitization
Although some lenders originate loans and then hold them for the life of the loan, other lenders originate and then seek to dispose of the loans, either through a sale of whole loans or by means of a securitization. Whole loans can be purchased by other financial institutions or by entities that serve to warehouse the loans for some
5
period of time, pending permanent financing, including loan securitization. In the typical securitization process, a special purpose entity obtains education loans from the originating lenders or their assignees, which relinquish to the special purpose entity their ownership interest in the loans. The debt instruments issued by the special purpose entity to finance the purchase of these education loans are obligations of the special purpose entity, not the originating lenders or their assignees. Through both the structure of those asset-backed securities, or ABS, as well as the composition of the underlying portfolio, risk can be distributed in a manner which may appeal to potential ABS investors.
Securitizations have historically provided several benefits to lenders and developed into a diverse, flexible funding mechanism for the financing of private education loan pools. Among other things, securitizations enabled lender clients to sell potentially otherwise illiquid assets in both the public and private securities markets, and to limit credit and interest rate risk. Although this flexibility added to the complexity of the funding process, it also enabled the originating lender to reduce the cost of financing and recycle capital, thereby improving the economics of the loan program and improving loan terms by passing incremental savings back to the borrower.
Structuring securitizations requires a high level of specialized knowledge and experience regarding both the capital markets generally, and the borrower repayment and default characteristics specifically. The process of issuing ABS in a securitization requires compliance with state and federal securities laws, as well as coordination among originating lenders, servicers, securities rating agencies, attorneys, securities dealers, structural advisors, trust management providers and auditors.
We have structured and facilitated 38 securitizations, consisting entirely of education loans, involving debt issuances in the aggregate original principal amount of $17.5 billion. We have securitized loan pools using various financing structures, including both public offerings registered with the Securities and Exchange Commission, or SEC, and private placements, and have utilized various ABS, including borrowings from commercial paper conduits, London Interbank Offered Rate, or LIBOR, floating rate notes, auction-rate debt and senior-subordinate and third-party credit enhanced debt.
We believe that our capital markets experience gives us specialized insight into funding options available to our lender clients. In addition, the extensive database provided by our education loan repayment statistics dating back to 1986 has helped us in the past to optimize the financing of the education loan pools our clients generated. We have used this data to estimate the default, recovery and prepayment characteristics of the different types of loans that constitute a loan pool. We believe that our experience and historical data will assist us in future discussions with rating agencies, insurance providers, underwriters and securities investors relating to financing structures and terms.
We believe that conditions in the capital markets generally improved in fiscal 2014 as compared to recent years. In particular, investors in ABS demonstrated increased interest in ABS backed by private education loans, resulting in a reduction in credit spreads applicable to these securities. In addition, in calendar 2013, private and federal education loan ABS issuances combined exceeded $20.0 billion for the second calendar year in a row. We believe that these trends indicate that the economics of private education loan ABS are starting to become more attractive to issuers in the private education loan securitization marketplace. However, we have not completed a securitization transaction since fiscal 2008, and if we execute a financing transaction in the capital markets, the structure and economics of any such transaction may be materially different from prior transactions that we have sponsored. Such differences may include lower revenues as a result of comparatively wider credit spreads and lower advance rates.
TMS
TMS offers outsourced tuition planning, tuition billing, refund management and payment technology services for universities, colleges and secondary schools. TMS provides such services on behalf of over 700 educational institutions. Through BorrowSmart®, TMS helps students and their families manage education costs by developing sustainable, low cost tuition payment strategies. In addition, TMS provides solutions to schools for
6
the collection and processing of tuition payments and data. These diverse product and service offerings are marketed as the TMS Campus Advantage. These services include:
| Early affordability planning and counseling delivered through multiple channels, which allows students and their families to review and consider a series of education payment options that minimize borrowing through the utilization of payment plans and school specified loan products; |
| Flexible payment plans, which aggregate school payments into a single reporting and disbursement interface for schools; |
| Comprehensive tuition billing and presentment (paper-based and electronic), which maximize the effectiveness of paper and electronic bills for the student and the school; |
| Payment processing, which allows schools to provide choices to their students and their families through multiple channels and methods; |
| Student account management through the TMS Student Account Center, a web-based portal that reflects school branding, supports multi-channel access to TMS product suite and is tightly integrated with the schools student information system, allowing schools to outsource billing and payment processing services to TMS while remaining the system of record; and |
| Refund management services, which facilitate for schools the process of disbursing student account credit balances that occur when payments, loan proceeds and/or financial aid credits exceed charges to the student account. The services allow schools to offer three refund choices: prepaid cards, ACH direct deposit and checks, allowing the schools to streamline their refund operations while reducing their overall disbursement expenses and enhancing the customer experience. |
TMS earns enrollment and transaction-based fees from students and families that participate in its various payment plans. Enrollment fee revenue is recognized over the period in which services are provided to customers. Transaction-based fees are recognized in the period the transaction takes place. TMS also earns fees from schools for various billing, payment processing, refund management, implementation and subscription services. These fees are recognized over the period in which the services are provided. We believe that the size and quality of TMS customer base provides an opportunity to expand our school relationships and offer diversified products and services that complement our education finance and loan processing capabilities, as well as serving as a source of significant recurring revenue.
Cology LLC
Cology LLC is a leading supplier of outsourced loan origination and technology solutions to education loan providers, including credit unions, community, regional and national banks and educational institutions. Through its services, Cology LLC provides easy market entry options for existing and new providers, targeted growth strategies to help organizations expand their education lending businesses and customized portfolio management services to help optimize the quality and performance of their education loan assets. These services include:
| Custom program design consultationhelping lenders and providers develop programs that meet the specific needs of their customers and members; |
| Implementation and product launch servicesproviding quality and speed to market; |
| Outsourced back-office services, including application intake, underwriting, document collection and disbursementproviding the people and processes needed to support lender programs without the need for significant infrastructure; and |
| Outsourced and remote-access technology solutionsoffering the flexibility to manage and administer the programs on a versatile, customizable technology platform. |
Cology LLC supports over 700 education loan programs and provides education loan solutions to approximately 300 credit union and other lender clients.
7
General Developments
We have summarized below certain developments affecting our business since the beginning of fiscal 2014:
| On November 12, 2011, we received notice that the Massachusetts Appellate Tax Board, or ATB, had issued an order, which we refer to as the ATB Order, in cases related to the Massachusetts tax treatment of GATE Holdings, Inc., which we refer to as GATE, a former subsidiary of FMD, for fiscal 2004 through fiscal 2006. On April 17, 2013, the ATB issued its opinion confirming the rulings and findings included in the ATB Order, which we refer to as the ATB Opinion. On July 22, 2013, we filed an appeal of certain of the ATBs findings in the Massachusetts Appeals Court. On December 18, 2013, the Massachusetts Supreme Judicial Court, or SJC, notified us that it had elected to hear our appeal of the ATBs findings and, as a result, our appeal will not be heard by the Massachusetts Appeals Court. The SJC has informed us that it expects to schedule oral arguments for early October 2014. If we are unsuccessful in an appeal of the ATB Order, we could be required to make additional tax payments, including interest, for GATEs taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position. As of June 30, 2014, we had accrued a total income tax liability of $25.9 million, including interest, on our consolidated balance sheet related to this matter. See Item 3, Legal Proceedings, and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. |
| Our federal income tax returns have been under audit by the Internal Revenue Service, or IRS, in connection with the sale of the trust certificate of NC Residual Owners Trust, which we refer to as the Trust Certificate. We announced on August 15, 2013 that, as part of that audit process, we expected to receive a Notice of Proposed Adjustment, or NOPA, from the IRS. On September 10, 2013 we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. The NOPAs propose to disallow the loss that generated the tax refunds that we previously received in the amounts of $176.6 million in connection with our sale of the Trust Certificate and the $45.1 million income tax refund received in October 2010. The NOPAs also propose to require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any. The NOPAs do not address tax years beyond June 30, 2011. The NOPAs are only initial IRS positions and not final determinations and, as a result, do not require any tax payment at this time. We did not record an accrual for this matter in our consolidated financial statements at June 30, 2014. We are vigorously contesting the proposed adjustments with the IRS and we continue to believe we have a strong position as it relates to this matter. The process of resolving this issue, which may include an appeals process with the IRS and litigation in the U.S. Tax Court and the U.S. Court of Appeals, may extend over multiple years depending on how it progresses through the IRS and, if necessary, the courts. See Item 3, Legal Proceedings, Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012Overall ResultsInternal Revenue Service Audit included in Item 7 of this annual report and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. |
| On November 12, 2013, the FMD stockholders approved a 1-for-10 reverse stock split of FMDs issued and outstanding shares of common stock, which was effected on December 2, 2013. In addition, FMDs authorized shares of common stock were proportionately decreased from 250,000,000 shares to 25,000,000 shares. The shares of common stock retained a par value of $0.01 per share. Our consolidated financial statements and the notes to our consolidated financial statements included in Item 8 of this annual report give retroactive effect to the reverse stock split for all periods presented. Accordingly, stockholders equity reflects the impact of the reverse stock split by reclassifying from common stock to |
8
additional paid-in capital an amount equal to the par value of the decreased number of shares issued resulting from the reverse stock split. The impact on our consolidated balance sheet was a decrease of $1.1 million in common stock with an offsetting increase to additional paid-in capital. |
| On January 23, 2014, FMD, Union Federal and RBS Citizens, N.A., or Citizens, entered into a loan purchase and sale agreement. Pursuant to the loan purchase and sale agreement, Union Federal agreed to sell to Citizens a portfolio of education loans at a purchase price equal to 103.5% of the aggregate outstanding principal balance of the education loans as of the applicable cut-off date for the sale plus any accrued but unpaid interest. On March 28, 2014, Union Federal completed the first of what was expected to be two closings by selling to Citizens a portfolio of education loans with an aggregate outstanding principal balance of approximately $39.8 million. Union Federal received $43.1 million in sale proceeds and recognized an approximately $1.4 million gain on the sale. |
| On April 2, 2014, FMD filed a complaint in the Delaware Court of Chancery, or Chancery Court, against NC Residuals Owners Trust, which we refer to as NC Residuals, and The Wilmington Trust Company in its capacity as owner trustee, which we refer to as the Owner Trustee, of certain of the securitization trusts that we previously facilitated, which we refer to as the GATE Trusts. The action seeks declaratory relief and specific performance related to claims by NC Residuals that it has certain legal and beneficial interests in the GATE Trusts and breach by NC Residuals of certain of its contractual obligations. In particular, NC Residuals has claimed ownership of the GATE Trusts and also demanded delivery of all cash distributions received on or after March 31, 2009 related to the GATE Trusts. See Item 3, Legal Proceedings, and Note 13, Commitments and ContingenciesNC Residuals Owners Trust Litigation, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. |
| On April 30, 2014, FMD, First Marblehead Education Resources, Inc., or FMER, and SunTrust Bank entered into a twelfth amendment, effective as of May 1, 2014, to the loan program agreement, as amended, among FMD, FMER and SunTrust Bank, which we refer to as the SunTrust Loan Program Agreement. The twelfth amendment, among other things, allows SunTrust Bank to offer the Union Federal® Private Student Loan Program funded by SunTrust Bank, upon satisfaction of mutual conditions set forth in the twelfth amendment. On June 13, 2014, the mutual conditions were satisfied and the Union Federal® Private Student Loan Program funded by SunTrust Bank was launched. Among other things, on June 13, 2014, Union Federal notified FMD that it would no longer originate education loans under its Monogram-based loan program. |
| On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the OCC and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to offer banking services through Union Federal. We expect the dissolution process to be complete by the end of fiscal 2015. |
| On May 30, 2014, FMD, FMER and SunTrust Bank entered into a thirteenth amendment, effective as of June 1, 2014, to the SunTrust Loan Program Agreement. Among other things, the thirteenth amendment extended the term of the SunTrust Loan Program Agreement to the earlier of September 30, 2017 or the date on which the account funded by FMD to provide credit enhancement for defaulted education loans under the program has reached its mutually agreed upon dollar limit. The thirteenth amendment also decreased the amount of credit enhancement FMD will provide to serve as a first-loss reserve for education loans under the program. |
| On June 25, 2014, FMD, Union Federal and Citizens entered into a new loan purchase and sale agreement. Pursuant to this June 2014 loan purchase and sale agreement, Union Federal sold to Citizens a portfolio of education loans at a purchase price equal to 103.5% of the aggregate outstanding principal |
9
balance of the education loans as of the applicable cut-off date for the sale plus any accrued but unpaid interest. The portfolio of education loans included certain education loans that were originally going to be sold as part of the expected second closing under the January 2014 loan purchase and sale agreement discussed above. Union Federal received $20.3 million in sale proceeds and recognized an approximately $700 thousand gain on the sale. |
Outlook
Our long-term success depends on our ability to attract additional lender clients and otherwise obtain additional sources of interim or permanent financing, such as securitizations or alternative financing transactions. As of September 10, 2014, we have loan program agreements based on our Monogram platform with three lender clients. While we have demonstrated market demand for Monogram-based education loans, we are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current economic and regulatory environment where lenders continue to evaluate their education lending business models. Additionally, as one of our current partner lender clients provides the majority of our Monogram-based loan program fees, we are subject to concentration risk as it relates to this revenue stream until we are able to attract additional lender clients. We believe, however, that the credit quality characteristics and interest rates of the Monogram-based loan portfolios originated to date 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.
We are uncertain of the volume of education loans to be generated by the Monogram-based loan programs of our current lender clients, or any additional lender clients, including clients of Cology LLC. 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 Cology LLC and our ability to obtain 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 current 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 loan acquisition.
Competition
Based on the range of services that we offer, we believe that SLM Corporation, also known as Sallie Mae, is our principal competitor. Our business could be adversely affected if Sallie Maes private education loan program continues to grow, or if Sallie Mae seeks to market more aggressively to third parties the full range of services that we offer. Other education loan competitors include Wells Fargo & Company and Discover Financial Services. In addition, Nelnet Business Solutions, TouchNet Information Systems, Inc. and Higher One Holdings, Inc. compete directly with TMS and LendKey Technologies, Inc. and Campus Door Holdings, Inc. compete directly with Cology LLC.
To the extent that loan originators, including our clients or former clients, develop an internal capability to provide any of the services that we currently offer, demand for our services would decline. For example, a loan originator that has, or decides to develop, a portfolio management or capital markets function may not engage us for our services. Demand for our services could also be affected by developments with regard to federal loan programs. Historically, lenders in the education loan market have focused their lending activities on federal loans because of the relative size of the federal loan market and because the federal government guarantees repayment of those loans, thereby significantly limiting the lenders credit risk. Following the elimination of FFELP, many lenders have re-evaluated their business strategies related to education lending and exited the marketplace altogether. Education lenders are more focused on private education loans and some may seek to develop an internal capability to conduct the services we provide, which could result in a decline in the potential demand for our service offerings. We believe the most significant competitive factors in terms of developing education loan
10
products are technical and legal competence, including in connection with the process of originating education loans, cost, data relating to the performance of education loans, risk analytics capabilities, capital markets experience and reliability, quality and speed of service. We differentiate ourselves from other service providers by the range of services we can provide our clients, in a turn-key manner.
Several of our current and potential competitors have longer operating histories and significantly greater financial, marketing, technical or other competitive resources than we or our clients have, including funding capacity. As a result, our competitors or potential competitors may be better able to overcome capital markets dislocations, adapt more quickly to new or emerging technologies and changes in customer preferences or compete for skilled professionals, or may be able to devote greater resources to the promotion and sale of their products and services. In particular, 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 and making education loans on a recurring, or serialized, basis. These disadvantages for us are particularly acute as we have only been operating Monogram-based loan programs since fiscal 2011. In addition, competitors may be able to adopt more aggressive pricing policies in order to attract potential clients or borrowers, as applicable. We cannot assure you that we will be able to compete successfully with new or existing competitors. To remain competitive, we need to continue to invest in information technology, sales and marketing, legal, compliance and product development resources.
Proprietary Systems and Processes
Monogram Platform and VoltaSM Platform
In addition to our database that tracks historical education loan performance, we maintain advanced proprietary information processing systems, including our Monogram platform and Cology LLCs Volta platform. We use these information systems to analyze loan applications efficiently, expedite loan processing and enhance our other services.
Key benefits of our information processing systems include:
| The ability to analyze and assess loan applications based on a variety of underwriting and product factors, including flexibility to adapt to different product parameters required in customized client implementations; |
| A transaction/application processing system that includes automated updating of an applicants loan status that a borrower can access online or by telephone; |
| Automated preparation and secure electronic delivery of loan documents, including credit agreements and certain legal disclosures; |
| Online certification tools enabling financial aid offices to speed loan disbursement by quickly confirming student applicants enrollment status and financial need; |
| Reporting tools enabling clients to track and sort information about student applicants and borrowers, including application status and disbursement dates; |
| Custom built data transmission techniques designed to ensure that data are compiled, integrated and properly migrated both across our enterprise and to external third parties such as servicers, collection and placement agencies and other third-party vendors; and |
| Interfaces with internal accounting systems intended to ensure proper booking and tracking of loan information for our clients, as well as support for our capital markets group in its financing activities. |
We use a number of leading commercial products to secure, protect, manage and back-up data.
TMS
TMS maintains advanced proprietary systems in connection with the delivery of hosted, integrated education payment and refund solutions to schools and students and their families.
11
Key benefits of TMS systems include:
| Algorithms that use affordability parameters provided by the students or their families to create a series of education payment options that minimize borrowing through the utilization of payment plans and school specific loan products; |
| Billing solutions that deliver enterprise resource planning integration, regulatory compliance, bill presentment, online document management, online marketing tools and payment channel integration; |
| Aggregation of school payments across all channels and methods into a single reporting and disbursement interface, allowing a school to deliver choice to its students and families while reducing its workload burden; |
| Refund disbursement solutions that enable student choice of refund method and provide school administrators a single reporting and disbursement interface, allowing a school to deliver choice to its students and families while reducing its workload burden; |
| Real-time integration solutions for all major student information systems packages, which allows schools to outsource their billing and payment processing services to TMS without compromising information currency and timeliness; and |
| Counseling services delivered through Voice over Internet Protocol contact management technology that allows integration between TMS contact management system and supporting system to create an efficient personalized customer experience with reliable capture of data. |
TMS uses a number of leading commercial products to secure, protect, manage and back-up data.
Intellectual Property
FIRSTMARBLEHEAD, the checkered logo, MONOGRAM, MONTICELLO STUDENT LOANS and NATIONAL COLLEGIATE TRUST are registered service marks and GATE, GATE GUARANTEED ACCESS TO EDUCATION and PREPGATE are service marks of FMD. BORROWSMART, HELPING FAMILIES AFFORD EDUCATION, the partial apple logo, THE PROVEN PATH TO PAID STUDENTS IN YOUR CLASSROOMS, TUITION MANAGEMENT SYSTEMS, INC. and TUITIONCHARGE are registered service marks of TMS. UNION FEDERAL is a registered service mark of Union Federal. COLOGY, SABERTOOTH and VOLTA are service marks of Cology LLC. The federal registrations for these registered service marks expire at various times between 2015 and 2020, but the registrations may be renewed for additional 10-year terms provided that we continue to use the trademarks.
Education Loan Market Seasonality
Origination of education loans is generally subject to seasonal trends, with the volume of loan applications increasing during the summer and early fall months with the approach of tuition payment dates. We have also tended to process an increased volume of loan applications during November, December and January, as students and their families seek to borrow money to pay tuition costs for the spring semester. Historically, this seasonality of loan originations has impacted the amount of processing fees that we earned in a particular quarter and the level of expenses incurred to generate loan application volume and process the higher origination activity. In addition, TMS financial and operational results are also subject to seasonal trends, with plan enrollment activity and expenses generally increasing from March to July as TMS hires temporary staff to meet higher demand for enrollment in tuition payment plans for the succeeding school year.
Union Federal Regulatory Matters
In November 2006, we acquired Union Federal, a community savings bank located in North Providence, Rhode Island. Union Federal is a federally-chartered thrift that is regulated by the OCC. As a result of our ownership of Union Federal, FMD is a savings and loan holding company subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System, or the Federal Reserve. See
12
Government Regulation below and Risk FactorsRisks Related to Regulatory Matters included in Item 1A of this annual report for additional information.
In March 2010, the FMD Board of Directors adopted resolutions required by the U.S. Office of Thrift Supervision, or OTS, Union Federals regulator at that time, undertaking to support the implementation by Union Federal of its business plan, so long as Union Federal is owned or controlled by FMD, and to notify the OTS (and now the OCC effective in fiscal 2012) in advance of any distribution to FMD stockholders in excess of $1.0 million per fiscal quarter and any incurrence or guarantee of debt in excess of $5.0 million. These resolutions continue to be applied by the Federal Reserve. Distributions to FMD stockholders may be further restricted by the Federal Reserves required approval in those instances when such distributions exceed the net earnings of the prior 12-month period.
On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the OCC and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to be a savings and loan holding company subject to regulation, supervision and examination by the Federal Reserve.
Government Regulation
We provide financial services in connection with the creation, management and disposition of education loans, retail banking, such as mortgages and deposits, and education payment processing. Our business is highly regulated at both the state and federal level, through statutes and regulations that focus upon:
| Safety and soundness of FMD and Union Federal; |
| Licensure and examination of industry participants; |
| Regulation and disclosure of consumer loan and deposit terms; |
| Regulation of loan origination processing; and |
| Licensure and general regulation of loan collection and servicing. |
Failure to conform to any of these statutes or regulations may result in civil and/or criminal fines, and may affect the enforceability of the underlying consumer loan assets.
Many states have statutes and regulations that require the licensure of small loan lenders, loan brokers, credit services organizations, loan arrangers and collection agencies. Some of these statutes are drafted or interpreted to cover a broad scope of activities. While we believe we have satisfied all material licensing, registration and other regulatory requirements that could be applicable to us based on current laws and the manner in which we currently conduct business, we may determine that we need to submit additional license applications, and we may otherwise become subject to additional state licensing, registration and other regulatory requirements in the future. In particular, certain state licenses or registrations may be required if we change our operations, if regulators reconsider their prior guidance or if federal or state laws or regulations are changed. Even if we are not physically present in a state, its regulators may take the position that registration or licensing is required because we provide services to borrowers located in the state by mail, telephone, the Internet or other remote means.
To the extent that our services are conducted through Union Federal, state requirements for licensure are inapplicable. However, as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to as the Dodd-Frank Act, and the reduced preemption enjoyed by federal savings banks resulting from the Dodd-Frank Act, we may now be subject to state consumer protection laws in each state where we do business and those laws may be interpreted and enforced differently in different states. The Dodd-Frank Act changed the legal standard for federal savings association preemption of state laws so that state laws
13
are now preempted only if those laws stand in conflict with federal laws. This conflict preemption standard is consistent with the standard for national bank preemption of state laws.
As a federally-chartered thrift, Union Federals primary bank regulator is the OCC. As a savings and loan holding company, FMD is regulated by the Federal Reserve. Although the OCC and Federal Reserve are directed to implement existing OTS regulations, orders, resolutions, determinations and agreements for thrifts and their holding companies under the Home Owners Loan Act, or HOLA, the transition of supervisory functions from the OTS to the OCC (with respect to Union Federal) and the Federal Reserve (with respect to FMD) are expected, over time, to alter the supervisory approach for Union Federal and FMD. This could, in turn, affect the operations of FMD and Union Federal. The Dodd-Frank Act imposes consolidated capital requirements on savings and loan holding companies, but they are not effective until five years after enactment of the Dodd-Frank Act.
The Dodd-Frank Act also established the Consumer Financial Protection Bureau, or CFPB, as an independent agency within the Federal Reserve. The CFPB has been given broad powers, including the power to:
| Supervise non-depository institutions, including those that offer or provide education loans; |
| Supervise depository institutions with assets of $10 billion or more for compliance with consumer protection laws, as well as the service providers to such institutions; |
| Regulate consumer financial products, including education loans, and services offered primarily for personal, family or household purposes; |
| Promulgate rules with respect to unfair, deceptive or abusive practices; and |
| Take enforcement action against institutions under its supervision. |
The CFPB may institute regulatory measures that directly impact our business operations. The CFPB has initiated an examination program of non-depository institutions (which could include service providers such as FMER). The Federal Trade Commission, or FTC, maintains parallel authority to enforce Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices against non-depository financial providers, such as FMER, TMS and Cology LLC. The OCC maintains parallel authority to enforce Section 5 of the Federal Trade Commission Act against federal savings associations, such as Union Federal, as well as authority to examine and supervise federal savings associations with assets of less than $10 billion, such as Union Federal, for compliance with consumer protection laws.
The CFPB has significant rulemaking and enforcement powers and the potential reach of the CFPBs broad new rulemaking powers and enforcement authority on the operations of financial institutions offering consumer financial products or services, including FMD, is currently unknown. In addition, the Dodd-Frank Act established a Student Loan Ombudsman within the CFPB, who, among other things, receives, reviews and attempts to resolve informally complaints from education loan borrowers. To date, the Student Loan Ombudsman has issued three Annual Reports. The first of these reports, the 2012 Annual Report of the Student Loan Ombudsman, noted concerns that private education loan borrowers may not have fully understood all the terms and conditions of their different loans. As a result, we expect private education loan marketing practices will continue to be carefully scrutinized. The 2013 Annual Report of the Student Loan Ombudsman analyzed complaints received by the CFPB regarding education loans during the prior year, noting trends in complaints related to payment processing, loan modification, treatment of military families and other servicing practices. The 2014 Annual Report of the Student Loan Ombudsman again analyzed complaints received by the CFPB regarding education loans during the prior year, noting trends in complaints related to servicing practices and focused on issues related to co-signers. As a result, we expect marketing and origination statements made regarding co-signers to receive additional scrutiny. We also expect to see increased scrutiny of the entire life cycle of education loans by the CFPB and other regulatory and enforcement agencies.
As required by the Dodd-Frank Act, the CFPB and the Secretary of Education submitted a report in July 2012, addressing certain aspects of the private education loan market. In this report, the CFPB recommended that the U.S. Congress consider:
| Mandating school certification of borrowed amounts; |
14
| Making private education loans dischargeable in bankruptcy; |
| Clarifying the definition of private education loans under TILA to cover products that may serve as economic substitutes (such as credit lines for post-secondary expenses); |
| Creating a mechanism to help borrowers better understand their total debt obligations (such as a centralized mechanism similar to the National Student Loan Data System); and |
| Whether additional data should be required to enhance consumer decision-making and lender underwriting. |
At the same time that it issued the July 2012 report, the CFPB issued revised draft model disclosures for its Know Before You Owe campaign designed to provide additional information to consumers. The CFPB also has an Office of Students intended to provide students with tools to facilitate decision making regarding various credit products, including education loans. These initiatives, and similar efforts with respect to other credit and retail banking products, could increase our costs and the complexity of our operations.
The Department of Education issued substantially similar recommendations in the July 2012 report, including that the U.S. Congress consider:
| Both mandating school certification of borrowed amounts and ensuring that students have exhausted federal financial aid before obtaining a private education loan; |
| Making private education loans dischargeable in bankruptcy, taking into account the tradeoffs between increasing options for financial relief to distressed borrowers and the potential for higher costs and decreased availability of private education loans; |
| Excluding from the definition of private education loans all types of federal education loans, and potentially excluding certain private education loans made by non-profit lenders; and |
| Creating a centralized mechanism to help borrowers better understand their total student debt obligations. |
The Dodd-Frank Act also includes several provisions that could affect our future portfolio funding transactions, if any, including potential risk retention requirements applicable to any entity that organizes and initiates an ABS transaction, new disclosure and reporting requirements for each tranche of ABS, including new loan-level data requirements, and new disclosure requirements relating to the representations, warranties and enforcement mechanisms available to ABS investors.
We will continue to review state registration and licensing requirements, and we intend to pursue registration or licensing in applicable jurisdictions where we are not currently registered or licensed if we elect to operate through an entity that does not enjoy federal preemption of such registration or licensing requirements. We cannot assure you that we will be successful in obtaining additional state licenses or registrations in a timely manner, or at all. If we determine that additional state registrations or licenses are necessary, we may be required to delay or restructure our activities in a manner that will not subject us to such licensing or registration requirements. Compliance with state licensing requirements could involve additional costs or delays, which could have a material adverse effect on our business. Our failure to comply with these laws could lead to, among other things:
| Curtailment of our ability to continue to conduct business in the relevant jurisdiction, pending a return to compliance or processing of registration or a license application; |
| Administrative enforcement actions; |
| Class action lawsuits; |
| The assertion of legal defenses delaying or otherwise affecting the enforcement of loans; and |
| Criminal as well as civil liability. |
Any of the foregoing could have a material adverse effect on our business.
15
The Department of Education is currently engaged in a negotiated rulemaking process with respect to Part 668 of its regulations, including Subpart K, which governs how an institution requests, maintains, disburses, and otherwise manages funds received under Title IV of the Higher Education Act of 1965. Among other things, there are current proposals under discussion in the rulemaking that would revise existing regulations to address the allowable methods and procedures for institutions to pay students their Title IV student aid credit balances. It is possible that any revised provisions, once adopted and implemented, will limit the fees that we are able to charge related to disbursing refunds via prepaid cards, impact the terms and conditions under which refunds may be provided on those cards and reduce the number of institutions interested in disbursing refunds via prepaid cards, any of which could impede our ability to offer prepaid cards as a refund management option.
The consumer assets with which we deal are subject to the full panoply of state and federal regulation, and a defect in such assets could affect our business. Similarly, the growing complexity of regulation of loan origination and collection may affect the cost and efficiency of our operations. We have sought to minimize the risk created by consumer loan regulation in a number of ways. The securitizations that we facilitated prior to fiscal 2009 have involved sales by financial institutions regulated by the Federal Deposit Insurance Corporation, or FDIC, and other parties which represented and warranted that the assets in question were originated in compliance with all applicable law and were valid, binding and enforceable in accordance with their terms. Similarly, the securitization trusts have benefited from an assignment of representations and warranties made by the lender and by the applicable loan servicer regarding compliance with law in the origination and servicing of loan assets.
In delivering services, our operations must conform to consumer loan regulations that apply to lenders. These regulations include, but are not limited to, compliance with the Consumer Financial Protection Act, TILA, the Higher Education Opportunity Act, the Fair Credit Reporting Act, the USA PATRIOT Act, the Equal Credit Opportunity Act, the Gramm Leach Bliley Act, the Federal Trade Commission Act, the Fair Debt Collection Practices Act and numerous state laws that replicate and expand upon the requirements of federal law. In addition, there is increasing regulation of the type of electronic loan application processing that we conduct, as well as regulation of access to and use of consumer information databases. A growing number of states are imposing disparate and costly requirements on our operations, including protections against identity theft, privacy protection and data security protection. The Fair and Accurate Credit Transactions Act of 2003 imposed significant federal law requirements on loan application processors, including requirements with respect to resolving address inconsistencies, responding to red flags of potential identity theft and identity theft notices, producing notices of adverse credit decisions based on credit scoring and other requirements affecting both automated loan processing and manual exception systems. These requirements strained, and future legislation or regulation may also strain, our systems. Failure to comply with these requirements would interfere with our ability to develop and market our business model for processing services.
Employees
We had 294 employees at June 30, 2014, compared to 302 employees at June 30, 2013.
We are not subject to any collective bargaining agreements, and we believe our relationships with our employees are good.
Our Corporate Information
We were formed as a limited partnership in 1991 and were incorporated in Delaware in August 1994. Our principal executive offices are located at The Prudential Tower, 800 Boylston Street, 34th Floor, Boston, Massachusetts 02199. The telephone number of our principal executive offices is (800) 895-4283.
Available Information
Our Internet address is www.firstmarblehead.com. The contents of our website are not part of this annual report on Form 10-K, and our Internet address is included in this document as an inactive textual reference only. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on our website as soon as reasonably practicable after we
16
file such reports with, or furnish such reports to, the SEC. Alternatively, reports filed with or furnished to the SEC are available from the SEC on its website, www.sec.gov, by request from the Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 or by phone at (800) SEC-0330.
Executive Officers of the Registrant
The following table sets forth information regarding our executive officers as of September 10, 2014, including their ages as of such date:
Name |
Age | Position | ||||
Daniel Meyers |
51 | Chief Executive Officer and Chairman of the Board of Directors | ||||
Seth Gelber |
35 | Managing Director, President, Chief Operating Officer and a member of the Board of Directors | ||||
Alan Breitman |
44 | Managing Director, Chief Financial Officer and Chief Accounting Officer | ||||
William Baumer |
53 | Managing Director and Chief Risk Officer | ||||
Barry Heneghan |
40 | Managing Director, Business Development and Product Strategy | ||||
Suzanne Murray |
40 | Managing Director, General Counsel and Secretary |
Set forth below is certain information regarding the business experience of each of the above-named persons.
Daniel Meyers is a co-founder of First Marblehead. He has served as FMDs Chief Executive Officer and as a member of the FMD Board of Directors since September 2008, and as Chairman of the Board of Directors since May 2010. From September 2008 to August 2013, he served as FMDs President. Mr. Meyers also served as FMDs Chief Executive Officer and Chairman of the Board of Directors from FMDs incorporation in 1994 to September 2005 and as President from November 2004 to September 2005. Since October 2006, Mr. Meyers has served as the sole member, Chairman and Chief Executive Officer of Sextant Holdings, LLC, a private investment firm. From 1980 to 1991, Mr. Meyers was involved in arbitrage and derivatives trading at EF Hutton, Prudential Bache Securities, LF Rothschild Unterberg Towbin and Commodities Corporation, each of which were financial services firms. He began working on ABS financings in 1986. He currently serves as the Chair Emeritus of the Board of the Curry School of Education Foundation, as well as a consulting member of the finance committee of the Board of Visitors at the University of Virginia. Additionally, he is the Chairman of the Board of Steward Medical Group, a unit of Steward Healthcare System, a system of 11 hospitals headquartered in Boston, Massachusetts. He also serves on the Board of the Forum for the Future of Higher Education and is a member of the Education Funding Committee of the Consumer Bankers Association. Mr. Meyers received an A.B. in Economics from Brandeis University and completed the Owner President Management Program at the Harvard Graduate School of Business Administration.
Seth Gelber has served as a member of the FMD Board of Directors since November 2013, FMDs President since August 2013, Chief Operating Officer since August 2012 and as a Managing Director since September 2008. He served as FMDs Chief Administrative Officer from March 2010 to August 2012 and as FMDs Senior Vice President, Corporate Development from August 2008 to September 2008. From 2001 to 2006, Mr. Gelber held various positions at FMD in the Capital Markets and Product Strategy groups. Since October 2006, Mr. Gelber has served as President of Sextant Holdings, LLC, a private investment firm, the sole member of which is Mr. Meyers. From 1998 to 2001, Mr. Gelber served as a Legislative Assistant to Congressman Jack Quinn (N.Y.), primarily focused on education, telecommunication and banking legislation. Mr. Gelber received a B.A. from The George Washington University.
Alan Breitman has served as FMDs Managing Director, Chief Financial Officer and Chief Accounting Officer since August 2014. He served as a Managing Director of Corporate Fuel Advisors, LLC, a boutique investment bank working with middle market companies, from October 2006 to July 2014. From May 2001 to September 2006 and from September 1998 to October 1998, Mr. Breitman served as the Chief Financial Officer of MetroLights Advertising, LLC, a privately held domestic outdoor advertising company. From November 2000 to May 2001, he served as the Chief Financial Officer of TechSpace, Inc., a privately held provider of shared
17
office space. From November 1998 to October 2000, he served as the Vice President Finance and Accounting and Treasurer of Register.com, Inc., a publicly held international registrar of domain names. From August 1997 to August 1998, Mr. Breitman served as the Manager of Financial Planning and Analysis at Allaire Corporation, a publicly held developer of Internet development tools. From May 1997 to July 1997, he served as the Manager of Financial Planning and Analysis for Datamedic, a privately held developer of integrated point of care computerized patient record and practice management solutions. From May 1996 to May 1997, Mr. Breitman worked as both the Accounting Manager and Financial Analyst for Visibility, Inc., a privately held developer of manufacturing accounting systems. From 1995 to 1996, he was the Manager of Internal Financial Reporting for XTRA Corporation, a publicly held transportation lessor, and from 1992 to 1995, he was an auditor at Coopers & Lybrand, LLP, where he worked primarily with high technology and financial services companies. Mr. Breitman received a B.S. in business from Skidmore College.
William Baumer has served as FMDs Chief Risk Officer since September 2007, as a Managing Director since September 2008 and as the Chief Executive Officer of Union Federal since July 2010. Mr. Baumer served as FMDs Senior Vice President, Compliance from July 2004 to September 2007. From 2003 to June 2004, Mr. Baumer served as the Compliance Manager for the nationwide mortgage operations at Bank of America, N.A. From 2000 to 2003, Mr. Baumer was the Compliance Director-Core Banking for Fleet Boston Financial Corporation, a bank that was acquired by Bank of America, and was responsible for regulatory compliance programs in Fleets consumer, commercial and administrative staff units. He joined Fleet in 1984 and held various leadership positions in the Compliance, Audit, Credit and Retail Banking business units. Mr. Baumer received a B.S. from Franklin Pierce College and has earned Certified Regulatory Compliance Manager, Certified Internal Auditor and Certified Anti-Money Laundering Specialist certifications.
Barry Heneghan has served as FMDs Managing Director, Business Development and Product Strategy since January 2011. From August 2008 to December 2010, he served as a consultant to FMD. From February 2006 to August 2008, when it ceased active operations, Mr. Heneghan served as the Chief Executive Officer and President of Think Financial, a student loan marketing company. From 1996 to January 2006, Mr. Heneghan held various positions at FMD in the Business Development, Corporate Development and Product Strategy groups. From 1993 to 1996, Mr. Heneghan served as a Legislative Assistant to Congressman Jack Quinn (N.Y.). Mr. Heneghan received a B.A. from The George Washington University and an M.A. from Pennsylvania State University and attended the London School of Economics.
Suzanne Murray has served as FMDs General Counsel since August 2012 and as a Managing Director and FMDs Secretary since May 2012. Ms. Murray served as FMDs Acting General Counsel from May 2012 to August 2012 and as FMDs Senior Counsel, Corporate Law from March 2010 to April 2012. From October 2007 to February 2010, Ms. Murray was a Partner at Goodwin Procter LLP, a law firm, and from October 2000 to September 2007, Ms. Murray was an associate at Goodwin Procter. While at Goodwin Procter, Ms. Murray practiced general corporate and securities law, with an emphasis on mergers and acquisitions, SEC compliance and corporate governance matters. Ms. Murray received a B.A. from Boston College and a J.D. from Boston College Law School.
Code of Ethics
We have adopted a code of conduct that applies to FMD employees and officers, including FMDs principal executive officer, principal financial officer, principal accounting officer or controller or persons serving similar functions. We have also adopted a statement of business ethics that applies to FMD directors. We will provide a copy of FMDs code of conduct and statement of business ethics for FMD directors to any person without charge, upon written request to: Corporate Secretary, The First Marblehead Corporation, The Prudential Tower, 800 Boylston Street, 34th Floor, Boston, Massachusetts 02199. FMDs code of conduct and statement of business ethics for FMD directors, as well as FMDs corporate governance guidelines and the charters of the standing committees of the FMD Board of Directors, are posted on our website at www.firstmarblehead.com under the heading For InvestorsCorporate InformationGovernance Documents, and each of these documents is available in print to any stockholder who submits a written request to FMDs corporate secretary. If we amend FMDs code of conduct in the future or grant a waiver under FMDs code of conduct to any of the FMD directors
18
or executive officers, including FMDs principal executive officer, principal financial officer, principal accounting officer or controller or anyone performing similar functions, we intend to post information about such amendment or waiver on our website.
Item 1A. | Risk Factors |
Investing in FMD common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below in addition to the other information included in this annual report. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected, which, in turn, could have a negative impact on the price of FMD common stock. Although we have grouped risk factors by category, the categories are not mutually exclusive. Risks described under one category may also apply to another category, and you should carefully read the entire risk factors section, not just any one category of risk factors.
Risks Related to Our Industry, Business and Operations
Challenges exist in implementing revisions to our business model.
Since the beginning of fiscal 2009, we have taken several measures to adjust our business in response to economic conditions. Most significantly, we refined our service offerings and added fee-for-service offerings such as loan origination services and portfolio management. In fiscal 2010, we completed the development of our Monogram platform, including an enhanced application interface, an expanded credit decisioning model and additional reporting capabilities. We continue to incorporate refinements to our Monogram platform. In fiscal 2011, we began originating Monogram-based education loans under loan program agreements and began offering outsourced tuition planning, tuition billing and payment technology services for educational institutions through TMS. In fiscal 2012, we began offering refund management services to education institutions and students through TMS. In fiscal 2013, we began providing education loan processing and disbursement services to credit union and other lender clients through Cology LLC. Successful sales of our service offerings, particularly our Monogram platform, TMS offerings and Cology LLC offerings, will be critical to stemming our losses and growing and diversifying our revenues and client base in the future.
We are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current economic and regulatory environment where there has been reluctance by many lenders to focus on education lending opportunities. As of September 10, 2014, we have loan program agreements with three lender clients for Monogram-based loan programs. The process of negotiating loan program agreements can be lengthy and complicated. Both the timing and success of contractual negotiations are unpredictable and partially outside of our control, and we cannot assure you that we will successfully identify potential clients or ultimately reach acceptable terms with any particular party with which we begin negotiations.
Moreover, we are uncertain of the extent to which borrowers will choose Monogram-based loans offered by our lender clients, which depends, in part, on competitive factors such as brand and pricing. Several of our current and potential competitors have longer operating histories and significantly greater financial, marketing, technical or other competitive resources than we or our clients have, including funding capacity. As a result, our competitors or potential competitors may be better able to overcome capital markets dislocations, adapt more quickly to new or emerging technologies and changes in customer preferences or compete for skilled professionals, or may be able to devote greater resources to the promotion and sale of their products and services. In particular, 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 and making education loans on a recurring, or serialized, basis. We are uncertain of the total application volume for fiscal 2015 and beyond, the extent to which application volume will ultimately result in disbursed loans and the overall characteristics of the disbursed loan portfolio.
Commercial banks have historically served as the initial funding sources for the education loans we facilitate and have been our principal clients. Since fiscal 2008, we have not facilitated securitization transactions
19
to support the long-term funding of education loans, and commercial banks may be facing liquidity and credit challenges from other sources, in particular mortgage, auto loan and credit card lending losses. In addition, the synergies that previously existed between federal and private education loan marketing have been eliminated by legislation that eliminated FFELP. As a result, many lenders have re-evaluated their business strategies related to education lending. In light of legislative and regulatory changes, general economic conditions, capital markets disruptions and the overall credit performance of consumer-related loans, the education loan business may be less attractive to commercial banks than in the past. Demand for our services may not increase unless additional lenders enter or re-enter the marketplace, which could depend in part on capital markets conditions and improved market conditions for other consumer financing segments.
Some of our former clients and competitors have exited the education loan market completely. To the extent that commercial banks exit the education loan market, the number of our prospective clients diminishes. One of our primary challenges is to convince national and regional lenders that they can address this market opportunity in a manner that meets their desired risk control and return objectives. A related challenge is to successfully finance education loans generated through our Monogram platform through capital market transactions or other sources of capital. We cannot assure you that we will be successful in either the short-term or the long-term in meeting these challenges.
Our business model depends on our ability to facilitate Monogram-based education loan volumes substantially in excess of those that we have originated to date and those contemplated by our current lender clients Monogram-based loan programs. We have been required to expend capital to support loan volume under our Monogram platform. Specifically, we have been required to provide credit enhancements for Monogram-based loans originated by certain of our lender clients by funding participation accounts to serve as a first-loss reserve for defaulted program loans. While we believe that we have sufficient capital resources to continue to provide such support to our Monogram platform under our business model, our ability to return to profitability while maintaining appropriate levels of liquidity will be predicated, in part, on our ability to fund participation accounts at levels lower than we are today, as well as the availability of higher capital markets advance rates than are available today.
We will need to facilitate substantial loan volume, achieve market acceptance of our Monogram platform and TMS offerings and continue to manage our expenses, among other things, in order to return to profitability.
Our ability to achieve and sustain profitability is dependent on many factors. Primarily, we believe that the following must occur in order for us to return to profitability:
| We need to facilitate loan volumes substantially in excess of those that we have originated to date, and substantially in excess of those contemplated by our current lender clients Monogram-based loan programs. Because the revenues that we expect to generate for Monogram-based loan programs will depend in part on the size, credit mix and actual performance of our lender clients loan portfolios, it is difficult for us to forecast the level or timing of our revenues or cash flows with respect to our Monogram platform generally or a specific lender clients Monogram-based loan program. |
| We need to attract additional lender clients, or otherwise obtain additional sources of interim or permanent financing, such as securitizations or alternative financing transactions, particularly given that one of our current partner lender clients provides the majority of our Monogram-based loan program fees, which subjects us to concentration risk as it relates to this revenue stream. |
| Deployment of our Monogram platform, and disbursed loan volume under our lender clients Monogram-based loan programs, has been limited, and we will need to gain widespread market acceptance of our Monogram platform among lenders, and of our lender clients Monogram-based loan programs among borrowers, in order to improve our long-term financial condition, results of operations and cash flow. If we do not succeed in doing so, we may need to re-evaluate our business plans and operations. |
| Deployment of TMS refund management services and its Student Account Center product has been limited, and we will need to gain widespread market acceptance of our refund management services and |
20
Student Account Center product among TMS existing clients as well as new clients, in order to improve our long-term financial condition, results of operations and cash flow. |
| We need to continue to actively manage our expenses in the current economic environment to better align costs with our business. In the past we have engaged in cost reduction initiatives and we may need to engage in similar cost reduction initiatives in the future. Despite our efforts to structure our business to operate in a cost-effective manner, some cost reduction measures could have unexpected negative consequences. If we are unable to successfully manage our expenses and run our business in a cost-effective manner, our results of operations would be harmed and it may impact our return to profitability. |
We have incurred net losses since fiscal 2008 and could incur losses in the future.
We have generated significant net losses since fiscal 2008, and may continue to incur losses. There can be no assurance that we will report net income in any future period. We must develop new lender client relationships and substantially increase our revenues derived from our Monogram platform, TMS offerings and Cology LLC offerings. We are actively managing our expenses in the current economic environment and in light of the status of our business. To the extent that we are not able to increase our revenues and continue to manage our operating expenses, we will continue to experience net losses.
We have provided credit enhancements in connection with Monogram-based loan programs for certain of our lender clients and may enter into similar arrangements in connection with future loan programs. As a result, we have capital at risk in connection with our lender clients loan programs. We may lose some or all of the capital we have provided and our financial results could be adversely affected.
In connection with certain of our lender clients Monogram-based loan programs, we have provided credit enhancements by funding participation accounts to serve as a first-loss reserve for defaulted program loans. We have limited amounts of cash available to offer to prospective clients, and there is a risk that lenders will not enter into loan program agreements with us unless we offer credit enhancement. We expect that the amount of any such credit enhancement arrangement offered to a particular lender would be determined based on the particular terms of the lenders loan program, including the anticipated size of the lenders program and the underwriting guidelines of the program, as well as the particular terms of our business relationship with the lender. Should additional lenders require credit enhancement from us as a condition to entering into a loan program agreement, our growth may be constrained by the level of capital available to us.
We have made deposits pursuant to our credit enhancement arrangements and agreed to provide periodic supplemental deposits, up to specified limits, during the disbursement periods under our loan program agreements based on the credit mix and volume of disbursed program loans and adjustments to default projections for program loans. To the extent that outstanding loan volume decreases as a result of repayments, or if actual loan volumes or default experience are less than our funded amounts, we are eligible to receive periodic releases of funds. The timing and amount of releases, if any, from the participation accounts are uncertain and vary among the loan programs. As of June 30, 2014, the fair value of our funded credit enhancements was $15.8 million. We could lose some or all of the amounts that we have deposited, or will deposit in the future, in the participation accounts, depending on the performance of the portfolio of program loans. Such losses would weaken our financial position and could damage business prospects for our Monogram platform.
Our Monogram platform is based on proprietary scoring models and risk mitigation and pricing strategies that we have developed. We have limited experience with the actual performance of loan portfolios generated by lenders based on our Monogram platform, and we may need to adjust marketing, pricing or other strategies from time to time based on the distribution of loan volume among credit tiers or competitive considerations. We must closely monitor the characteristics and performance of each lenders loan portfolio in order to suggest adjustments to the lenders programs and tailor our default prevention and collection management strategies. The infrastructure that we have built for such monitoring requires extensive operational and data integration among the loan servicer, multiple default prevention and recovery collection agencies and us. To the extent that our infrastructure is inadequate or we are otherwise unsuccessful in identifying portfolio performance characteristics
21
and trends, or to the extent that lenders are unwilling to adjust their loan programs, our risk of losing amounts deposited in the participation accounts may increase.
The outsourcing services market for education financing is competitive and if we are not able to compete effectively, our revenues and results of operations may be adversely affected.
We offer our clients and prospective clients, national and regional financial and educational institutions, services in structuring and supporting their education loan programs and tuition payment processing plans. The outsourcing services market in which we operate is competitive with a number of active participants, some of which have longer operating histories and significantly greater financial, marketing, technical or other competitive resources than we or our clients have, including funding capacity. As a result, our competitors or potential competitors may be better able to overcome capital markets dislocations, adapt more quickly to new or emerging technologies and changes in customer preferences or compete for skilled professionals, build upon efficiencies based on a larger volume of loan transactions, fund internal growth and compete for market share, than we are. In particular, competitors with larger customer bases, greater name or brand recognition or more established customer relationships than us or those of our clients have an advantage in attracting loan applicants at a lower acquisition cost. These disadvantages are particularly acute for us because we have only been operating Monogram-based loan programs since fiscal 2011.
Based on the range of services that we offer, we believe that Sallie Mae is our principal competitor. Our business could be adversely affected if Sallie Maes private education loan program continues to grow, or if Sallie Mae seeks to market more aggressively to third parties the full range of services that we offer. Other education loan competitors include Wells Fargo & Company and Discover Financial Services. In addition, Nelnet Business Solutions, TouchNet Information Systems, Inc. and Higher One Holdings, Inc. compete directly with TMS and LendKey Technologies, Inc. and Campus Door Holdings Inc. compete directly with Cology LLC.
We may face competition from loan originators, including our clients or former clients, if they choose to develop an internal capability to provide any of the services that we currently offer. For example, a loan originator that has developed, or decides to develop, a portfolio management or capital markets function may not choose to engage us for our services. Demand for our services could also be affected by developments with regard to federal loan programs. Historically, lenders in the education loan market have focused their lending activities on federal loans because of the relative size of the federal loan market and because the federal government guarantees repayment of those loans, thereby significantly limiting the lenders credit risk. Following the elimination of FFELP, lenders are more focused on private education loans and some may seek to develop an internal capacity to conduct the services that we provide, which could result in a decline in the potential market for our services.
We cannot assure you that we will be able to compete successfully with new or existing competitors. If we are not able to compete effectively, our results of operations may be adversely affected.
The growth of our business could be adversely affected by changes in government education loan programs or expansions in the population of students eligible for loans under government education loan programs.
We focus our business on the market for private education loans, and the majority of our business is concentrated in products for post-secondary education. The availability and terms of loans that the government originates or guarantees affects the demand for private education loans because students and their families often rely on private education loans to bridge a gap between available funds, including family savings, scholarships, grants and federal and state loans, and the costs of post-secondary education. The federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student eligibility. These guidelines are generally adjusted in connection with funding authorizations from the U.S. Congress for programs under the Higher Education Act of 1965. Recent federal legislation expanded federal grant and loan assistance, which could weaken the demand for private education loans. The creation of similar federal or state programs that make additional government loan funds available could decrease the demand for private education loans.
22
Access to alternative means of financing the costs of education may reduce demand for private education loans.
The demand for private education loans could weaken if student borrowers use other vehicles to bridge the gap between available funds and costs of post-secondary education. These vehicles include, among others:
| Home equity loans or other borrowings available to families to finance their education costs; |
| Pre-paid tuition plans, which allow families to pay tuition at todays rates to cover tuition costs in the future; |
| Section 529 plans, which include both pre-paid tuition plans and college savings plans, that allow a family to save funds on a tax-advantaged basis; |
| Education IRAs, now known as Coverdell Education Savings Accounts, under which a holder can make annual contributions for education savings; |
| Government education loan programs, generally, and interest rates on the loans under these programs, specifically; and |
| Direct loans from colleges and universities. |
In addition, certain colleges and universities offer discounts to tuition costs and fees as a way to maintain their competitive positioning in the education marketplace. If demand for private education loans weakens, we would experience reduced demand for our services, which could have a material adverse effect on our results of operations.
Continuation of the current economic conditions could adversely affect the education loan industry.
High unemployment rates and the unsteady financial sector have adversely affected many consumers, loan applicants and borrowers throughout the country. Loan applicants that have experienced trouble repaying credit obligations may not be able to meet the credit standards of our lender clients Monogram-based loan programs, which could limit our lending market or have a negative effect on the rate at which loan applications convert into disbursed loans. In addition, current borrowers may experience more trouble in repaying credit obligations, which could increase loan delinquencies, defaults and forbearance, or otherwise negatively affect loan portfolio performance and the estimated fair value of our service revenue receivables and our participation accounts. Forbearance programs may have the effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance. In addition, some consumers may find that higher education is an unnecessary investment during turbulent economic times and defer enrollment in educational institutions until the economy improves or turn to less costly forms of secondary education, thus decreasing education loan application and funding volumes. Finally, many lending institutions have been reluctant to lend and have significantly tightened their underwriting standards, and several clients and potential clients have exited the education loan business and may not seek our services as the economy improves. If the adverse economic environment continues, our financial condition may deteriorate for any one of the foregoing reasons.
If our clients do not actively or successfully market and fund education loans, our business will be adversely affected.
We have in the past relied, and will continue to rely in part, on our clients to market and fund education loans to borrowers. If our clients do not devote sufficient time, emphasis or resources to marketing their Monogram-based loan programs or are not successful in these efforts, then we may not reach the full potential of our capacity for disbursed loan volume and our business will be adversely affected. In addition, our lender clients Monogram-based loan programs, and related marketing efforts, may not necessarily extend nationwide and, in fact, may focus on a limited geographic footprint.
In addition, if education loans were or are marketed by our clients in a manner that is found to be unfair, deceptive or abusive, or if the marketing, origination or servicing violated or violates any applicable law, federal
23
or state unfair and deceptive practices acts could impose liability or, in limited circumstances, create defenses to the enforceability of the loan. Investigations by state Attorneys General, the CFPB, the U.S. Congress or others could have a negative impact on lenders desire to originate and market education loans. The Higher Education Opportunity Act creates significant additional restrictions on the marketing of education loans.
If we fail to manage our cost reductions effectively, our business could be disrupted and our financial results could be adversely affected.
We have engaged in cost reduction initiatives in the past and we may engage in cost reduction initiatives in the future. These types of cost reduction activities are complex. Even if we carry out these strategies in the manner we expect, we may not be able to achieve the efficiencies or savings we anticipate, or on the timetable we anticipate, and any expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Furthermore, we continue to experience negative net operating cash flows. Our continued use of cash to fund operations may necessitate further significant changes to our cost structure if we are unable to grow our revenue base to the level necessary to fund our ongoing operations.
In addition, cost reduction initiatives have placed and will continue to place a burden on our management, systems and resources, generally increasing our dependence on key persons and reducing functional back-ups. We must retain, train, supervise and manage our employees effectively during this period of change in our business and our ability to respond in a timely and effective fashion to unanticipated exigencies of our business model could be negatively affected during this transition.
Although we believe that our capital resources as of June 30, 2014, which include proceeds of tax refunds under audit, are sufficient to satisfy our operating needs for the succeeding 12 months, we cannot assure you that they will be sufficient, particularly in light of ongoing income tax audits. See Item 3, Legal Proceedings, Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012Overall ResultsInternal Revenue Service Audit included in Item 7 of this annual report and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. Insufficient funds could require us to, among other things, terminate additional employees, which could, in turn, place additional strain on any remaining employees and could further disrupt our business, including our ability to grow and expand our business.
We may outsource some borrower or client service functions in an effort to reduce costs, take advantage of technologies and effectively manage the seasonality associated with education loan volume and tuition payment processing. We rely on our vendors to provide high levels of service and support. Our reliance on external vendors subjects us to risks associated with inadequate or untimely service and could result in problems with service or support that we would not experience if we performed the service functions in-house.
If we are unable to manage our cost reductions, or if we lose key employees or are unable to attract and properly train new employees, our operations and our financial results could be adversely affected.
If we are unable to retain our key employees and hire qualified sales and technical personnel, our ability to compete could be harmed.
Our future success depends upon the continued services of our executive officers and other personnel who have critical industry experience and relationships. There is significant competition for talented individuals in our industry, which affects both our ability to retain key employees and hire new ones. Members of our senior management team have left First Marblehead over the years for a variety of reasons, and we cannot be certain that there will not be additional departures, which may be disruptive to our operations. The loss of the services of any of our officers or key employees could hinder or delay the implementation of our business model and the development and introduction of, and negatively impact our ability to sell, our services.
24
If competitors or potential competitors acquire or develop an education loan database or advanced loan information processing systems, our business could be adversely affected.
We own a database of historical information on education loan performance that we use to help us enhance our proprietary origination risk score model, determine the terms of portfolio funding transactions and derive the estimates and assumptions we make in preparing our consolidated financial statements and cash flow models. We have also developed a proprietary loan information processing system to enhance our application processing and loan origination capabilities. We believe that our education loan database and loan information processing system provide us with a competitive advantage in offering our services. A third party could create or acquire databases and systems such as ours. As lenders and other organizations in the education loan market originate or service loans, they compile over time information for their own education loan performance database. Our competitors and potential competitors may have originated or serviced a greater volume of education loans than we have over the past several years, which may have provided them with comparatively greater borrower or loan data, particularly during the most recent economic cycle. If a third party creates or acquires an education loan database or develops a loan information processing system, our competitive positioning, ability to attract new clients and business could be adversely affected.
If we are unable to protect the confidentiality of our proprietary information and processes, the value of our services and technology could be adversely affected.
We rely on trade secret laws and restrictions on disclosure to protect our proprietary information and processes. We have entered into confidentiality agreements with third parties and with most of our employees to maintain the confidentiality of our trade secrets and proprietary information. These methods may neither effectively prevent use or disclosure of our confidential or proprietary information nor provide meaningful protection for our confidential or proprietary information if there is unauthorized use or disclosure.
We own no material patents. Accordingly, our technology, including our loan information processing systems, is not covered by patents that would preclude or inhibit competitors from entering our market. Monitoring unauthorized use of the systems and processes that we have developed is difficult, and we cannot be certain that the steps that we have taken will prevent unauthorized use of our technology. Furthermore, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and services could be adversely affected.
Our business processes are becoming increasingly dependent upon technological advancement, and we could lose clients and market share if we are not able to keep pace with rapid changes in technology.
Our future success depends, in part, on our ability to process loan applications and tuition-related payments in an automated manner with high-quality service standards. The volume of loan originations and tuition-related payments that we are able to process is based, in large part, on the systems and processes we have implemented and developed. These systems and processes are becoming increasingly dependent upon technological advancement, such as the ability to review applications and process loans and payments over the Internet, accept electronic signatures and provide initial decisions instantly. Our future success also depends, in part, on our ability to develop and implement technology solutions that anticipate and keep pace with continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis. In addition, the industry in which TMS competes has undergone rapid technological change over the past several years. We have made, and need to continue to make, investments in our technology platform in order to provide competitive products and services to our clients. If competitors in any business line introduce products, services, systems and processes that are better than ours or that gain greater market acceptance, those that we offer or use may become obsolete or noncompetitive. In addition, if we fail to execute our lender clients origination requirements or properly administer our clients credit agreement templates or required disclosures, if TMS fails to properly administer its tuition payment plans or other services or if Cology LLC fails to properly provide its education loan processing and disbursement services, we could be subject to breach of contract claims and related damages. Any one of these circumstances could have a material adverse effect on our business reputation and ability to obtain and retain clients.
25
We may be required to expend significant funds to develop or acquire new technologies. If we cannot offer new technologies as quickly as our competitors, we could lose clients and market share. We also could lose market share if our competitors develop more cost effective technologies than those we offer or develop.
Our business could be adversely affected if PHEAA fails to provide adequate, proper or timely services or if our relationship with PHEAA terminates.
As of June 30, 2014, PHEAA served as the sole loan servicer for our Monogram-based loan programs. Our arrangements with PHEAA allow us to avoid the overhead investment in servicing operations, but require us to rely on PHEAA to adequately service the education loans, including collecting payments, responding to borrower inquiries, effectively implementing servicing guidelines applicable to loans and communicating with borrowers whose loans have become delinquent. Reliance on PHEAA and other third parties to perform education loan servicing or collections subjects us to risks associated with inadequate, improper or untimely services. In the case of PHEAA, these risks include the failure to properly administer servicing guidelines, including forbearance programs, and failure to provide notice of developments in prepayments, delinquencies and defaults, and usage rates for forbearance programs, including alternative payment plans. In the case of third-party collection agencies, these risks include failure to properly administer collections guidelines and compliance with federal and state laws and regulations relating to interactions with debtors. If our relationship with PHEAA terminates, we would either need to expand our operations or develop a relationship with another loan servicer, which could be time consuming and costly. In such event, our business could be adversely affected.
An interruption in or breach of our information systems, or those of a third party on which we rely, may result in lost business.
We rely heavily upon communications and information systems to conduct our business. Our systems and operations are potentially vulnerable to damage or interruption from network failure, hardware failure, software failure, power or telecommunications failures, computer viruses and worms, penetration of our network by hackers or other unauthorized users and natural disasters. Any failure, interruption or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received, slower processing of applications or tuition-related payments and reduced efficiency in loan processing or our other services, including TMS and Cology LLCs offerings. A failure, interruption or breach in security could also result in an obligation to notify clients in a number of states that require such notification, with possible civil liability and potentially large fines and penalties resulting from such failure, interruption or breach. Although we maintain and periodically test a business continuity and disaster recovery plan, the majority of our infrastructure and employees are concentrated in the Boston, Massachusetts, Providence, Rhode Island and Sacramento, California metropolitan areas. An interruption in services for any reason could adversely affect our ability to activate our contingency plan if we are unable to communicate among locations or employees.
We cannot assure you that systems failures, interruptions or breaches will not occur, or if they do occur that we or the third parties on whom we rely will adequately address them. The precautionary measures that we have implemented to avoid systems outages and to minimize the effects of any data or communication systems interruptions may not be adequate, and we may not have anticipated or addressed all of the potential events that could threaten or undermine our information systems. The occurrence of any systems failure, interruption or breach could significantly impair the reputation of our brand, diminish the attractiveness of our services and harm our business.
26
If we or one of our third-party service providers experience a data security breach and confidential customer information is disclosed, we may be subject to penalties imposed by regulators, civil actions for damages and negative publicity, which could be costly, affect our customer relationships and have a material adverse effect on our business. In addition, state and federal legislative proposals, if enacted, may impose additional requirements on us to safeguard confidential customer information, which may result in increased compliance costs.
Data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislation, legislative proposals and regulatory rule-making to address data privacy and security. Consequently, we may be subject to rapidly changing and increasingly extensive requirements intended to protect the consumer information that we process in connection with education loans and tuition payment plans. Implementation of systems and procedures to address these requirements has increased our compliance costs, and these costs may increase further as new requirements emerge. If we or one of our third-party service providers were to experience a data security breach, or if we were to otherwise improperly disclose confidential customer or consumer information, such breach or other disclosure could be costly, generate negative publicity about us and adversely affect our relationships with our clients, including the lenders and educational institutions with which we do business, any of which could have a material adverse effect on our business. In addition, such pending legislative proposals and regulations, if adopted, likely would result in substantial penalties for unauthorized disclosure of confidential consumer information. Failure to comply with those requirements could result in regulatory sanctions imposed on our lender clients and loss of business for us.
We may face risks related to litigation that could result in significant legal expenses and settlement or damage awards.
From time to time, we are subject to claims and litigation, which could seriously harm our business and require us to incur significant costs. In the past, we have been named as a defendant in securities class action lawsuits, and on August 28, 2013, a purported class action was filed in the United States District Court for the District of Massachusetts against FMD and certain of FMDs current and former officers and on October 23, 2013 a different plaintiff filed a related derivative action in the same court against certain of FMDs current and former officers and certain current and former members of the FMD Board of Directors. We are generally obligated, to the extent permitted by law, to indemnify our current and former officers and directors who are named as defendants in these lawsuits. Defending against litigation may require significant attention and resources of management. Regardless of the outcome, such litigation could result in significant legal expenses.
We may also be subject to employment claims in connection with employee terminations. In addition, companies in our industry whose employees accept positions with us may claim that we have engaged in unfair hiring practices. These claims may result in material litigation. We could incur substantial costs defending ourselves or our employees against those claims, regardless of their merits. In addition, defending ourselves from those types of claims could divert our managements attention from our operations.
If we are a party to material litigation and if the defenses we claim are ultimately unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could have a material adverse effect on our business and consolidated financial statements.
We are involved in litigation related to the ownership of the GATE Trusts. Adverse developments or an adverse resolution of this matter could have a material adverse effect on our consolidated financial positions and results of operations.
In April 2014, we filed a complaint in the Chancery Court against NC Residuals and the Owner Trustee. The action seeks declaratory relief and specific performance related to claims by NC Residuals that it has certain legal and beneficial interests in the GATE Trusts and breach by NC Residuals of certain of its contractual obligations. In particular, NC Residuals has claimed ownership of the GATE Trusts and also demanded delivery of all cash distributions received on or after March 31, 2009 related to the GATE Trusts. See Item 3, Legal
27
Proceedings, and Note 13, Commitments and ContingenciesNC Residuals Owners Trust Litigation, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. We are vigorously pursuing all of our claims in this matter and we believe we have a strong position as it relates to this matter. There can be no assurance, however, that our claims will be successful, and adverse developments with respect to, or an adverse resolution of, this matter could have a material adverse effect on our consolidated financial position and results of operations. In addition, we could incur substantial costs related to pursuing this litigation and it could divert our managements attention from our operations.
The dissolution of Union Federal may be time consuming and costly.
As of September 10, 2014, Union Federal is in the process of developing the voluntary dissolution plan and an estimate of related charges. Our current estimate of charges related to the voluntary dissolution plan is $3.0 million in the aggregate, which may increase over time. Furthermore, depending on the timing and extent of the dissolution process, FMD may purchase certain assets from Union Federal or advance funds to facilitate deposit redemptions on a temporary basis before the assets are ultimately liquidated. The costs associated with the dissolution of Union Federal could be significant and material. In addition, Union Federal may require assistance in the dissolution process and may require significant attention and resources of FMDs management.
Risks Related to Our Financial Reporting and Liquidity
Our liquidity could be adversely affected if the sale of the Trust Certificate does not result in the tax consequences that we expect or if we are unable to successfully resolve the pending state tax matters.
Effective March 31, 2009, we completed the sale of the Trust Certificate. In connection with the sale of the Trust Certificate, FMD entered into an asset services agreement, which we refer to as the Asset Services Agreement, pursuant to which FMD provided various consulting and advisory services to the purchaser of the Trust Certificate. The sale generated a cash refund of federal and state income taxes previously paid of $189.3 million. The federal and state income tax consequences of the sale of the Trust Certificate, however, are complex and uncertain. The IRS has been conducting an audit of our tax returns for fiscal 2007 through fiscal 2010, including a review of the tax treatment of the sale of the Trust Certificate, as well as the federal tax refunds previously received in the amounts of $176.6 million and $45.1 million. We announced on August 15, 2013 that, as part of the audit process, we expected to receive a NOPA from the IRS. On September 10, 2013 we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. In the NOPAs, the IRS asserts that our sale of the Trust Certificate should not be recognized for federal income tax purposes primarily because we retained the economic benefits and burdens of the Trust Certificate, including, among other things, retaining certain repurchase rights and data rights. The IRS further concludes that the transaction should be characterized as a financing instead of a sale and asserts that the sale of the Trust Certificate and the execution of the Asset Services Agreement had the impact of converting taxable income to the owner from an accrual basis to a cash basis. As a result, the NOPAs propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any. The NOPAs do not address tax years beyond June 30, 2011. While we have not recorded an accrual for this matter in our consolidated financial statements, such an accrual, if it becomes necessary, could be significant and material. The determination of whether or not to accrue a liability, if any, requires a significant amount of judgment and entails, by necessity, the need to incorporate estimates.
The ongoing IRS audit or any other investigation, audit, appeals proceeding or suit relating to the sale of the Trust Certificate could result in substantial costs. A state taxing authority could also challenge our tax position in connection with the transactions, notwithstanding our receipt of any income tax refund.
28
In addition, we are involved in several matters relating to the Massachusetts tax treatment of GATE. We took the position in the ATB proceedings that GATE was properly taxable as a financial institution and not as a business corporation and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue, or the Commissioner, took alternative positions: that GATE was properly taxable as a business corporation, or that GATE was taxable as a financial institution, but was not entitled to apportionment or was subject to 100% Massachusetts apportionment. In December 2009, the Commissioner made additional assessments of taxes, along with accrued interest, of approximately $11.9 million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. On November 9, 2011, the ATB issued the ATB Order which concurred with our position that GATE was a financial institution but disagreed with our methodology utilized to apportion income. In the third quarter of fiscal 2012, we made a $5.1 million payment that satisfied our obligation to the Massachusetts Department of Revenue for GATEs taxable years ended June 30, 2004, 2005 and 2006. On April 17, 2013, the ATB issued the ATB Opinion. On July 22, 2013, we filed an appeal of certain of the ATBs findings in the Massachusetts Appeals Court. The appeal of the ATBs findings includes a refund claim with respect to the $5.1 million payment made in the third quarter of fiscal 2012. The Commissioner has decided not to appeal the ATBs other findings. On December 18, 2013, the SJC notified us that it had elected to hear our appeal of the ATBs findings and, as a result, our appeal will not be heard by the Massachusetts Appeals Court. The SJC has informed us that it expects to schedule oral arguments for early October 2014. If we are unsuccessful in an appeal of the ATB Order, we could be required to make additional tax payments for GATEs taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position. On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for our taxable years ended June 30, 2008 and 2009. This assessment included approximately $822 thousand of additional tax liability and an assessment for penalties of $4.1 million. We accrued for the additional tax liability, including interest, in fiscal 2013 but have not accrued for the penalties as we believe that it is more likely than not that the penalties will ultimately be abated, which is consistent with the Massachusetts Department of Revenues treatment of our taxable years ended June 30, 2004, 2005 and 2006. As of June 30, 2014, we had accrued a total income tax liability of $25.9 million, including interest, related to the 2008 and 2009 tax returns for GATE, which amount was included in income taxes payable on our consolidated balance sheet. On August 26, 2013, we filed an application to have the assessed amounts abated in full. On March 26, 2014, the Massachusetts Department of Revenue denied our application. While we have filed an appeal of this matter with the ATB, it is on hold pending resolution of our appeal of the ATB Order. We cannot predict the outcome of this matter or the timing of such payments, if any, at this time.
See Item 3, Legal Proceedings, Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012Overall ResultsInternal Revenue Service Audit included in Item 7 of this annual report and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information on these matters.
If sufficient funds to finance our business and meet our obligations are not available to us when needed or on acceptable terms, we may be required to delay, scale back, otherwise alter our strategy or cease operations.
We have generated significant net losses since fiscal 2008, and we cannot predict at this time when or if we will return to profitability. Furthermore, while we have made progress towards reducing our overall cash needs, we continue to utilize significant levels of cash to fund the many priorities required of a diverse business such as ours. We may require additional funds for our products, operating expenses, including expenditures relating to TMS and Cology LLC, capital in connection with credit enhancement arrangements for Monogram-based loan programs or capital markets financings, the pursuit of regulatory approvals, acquisition opportunities and the expansion of our capabilities. Historically, we have satisfied our funding needs primarily through fees earned from education loan asset-backed securitizations. We have not accessed the securitization market since fiscal 2008, and the securitization market may not be accessible to us in the future or, if available, not on terms that are acceptable to us. We have also satisfied our funding needs through equity financings. We cannot be certain that additional public or private financing would be available in amounts or on terms acceptable to us, if at all.
29
Although we believe that our capital resources as of June 30, 2014, which include proceeds of tax refunds under audit, are sufficient to satisfy our operating needs for the succeeding 12 months, we cannot assure you that they will be sufficient. In particular, as we announced on August 15, 2013, as part of the audit process, we expected to receive a NOPA from the IRS. On September 10, 2013 we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. The NOPAs propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any. The NOPAs do not address tax years beyond June 30, 2011. See Item 3, Legal Proceedings, Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012Overall ResultsInternal Revenue Service Audit included in Item 7 of this annual report and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
Insufficient funds could require us to delay, scale back or eliminate certain of our products, eliminate our ability to provide credit enhancement commitments to prospective clients relating to Monogram-based loan programs, curtail, delay or terminate plans for TMS or Cology LLC, terminate personnel, further scale back our expenses or cease operations.
If the estimates we make, or the assumptions on which we rely, in preparing our consolidated financial statements prove inaccurate, our actual results may vary materially from those reflected in our consolidated financial statements.
Our consolidated financial statements include a number of estimates, which reflect managements judgments. Some of our estimates also rely on certain assumptions. The most significant estimates we make include income taxes relating to uncertain tax positions under Accounting Standards Codification, or ASC, 740, Income Taxes, or ASC 740, the valuation of our service revenue receivables and deposits for participation accounts and our determination of goodwill and intangible asset impairment.
In our determination of the fair value of our service revenue receivables and deposits for participation accounts, we use discounted cash flow modeling techniques and certain assumptions to estimate fair value because there are no quoted market prices.
Our key assumptions to estimate fair value include, as applicable:
| Discount rates, which we use to estimate the present value of our future cash flows; |
| The annual rate and timing of education loan prepayments; |
| The trend of interest rates over the life of the loan pool, including the forward LIBOR curve, which is a projection of future LIBOR rates over time; |
| The expected annual rate and timing of education loan defaults, including the effects of various risk mitigation strategies, such as basic forbearance and alternative payment plans and school and lender guarantees; |
| In the case of participation accounts, the timing of the return of capital; |
| The expected amount and timing of recoveries on defaulted education loans; and |
| The fees and expenses of the securitization trusts. |
Because our estimates rely on quantitative and qualitative factors, including our historical experience, to predict default, recovery and prepayment rates, managements ability to determine which factors should be more heavily weighted in our estimates, and to accurately incorporate those factors into our loan performance assumptions, are subjective and can have a material effect on valuations.
30
If the actual performance of the education loan portfolios held by us or our clients who hold Monogram-based loans were to vary appreciably from the assumptions we use, we might need to adjust our key assumptions. Such an adjustment could materially affect our earnings in the period in which our assumptions change. In addition, our actual service revenue receivables or releases from participation accounts could be significantly less than reflected in our current consolidated financial statements. In particular, economic, regulatory, competitive and other factors affecting the key assumptions used in the cash flow model could cause or contribute to differences between actual performance of the portfolios and our other key assumptions.
We have guaranteed the performance of Union Federals obligations under three loan purchase and sale agreements and have agreed to provide an indemnity for third-party claims on behalf of Union Federal under an indenture. We may incur substantial costs if we have to perform obligations of Union Federal or indemnify third parties, which could have a material adverse effect on our liquidity or financial condition.
In connection with Union Federals sale of an education loan portfolio in October 2009, FMD delivered a performance guaranty to the purchaser of the loan portfolio. See Note 13, Commitments and ContingenciesPerformance Guaranty, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. If Union Federal were to default in the performance of any of its obligations or agreements under the loan purchase and sale agreement, including its indemnification or loan repurchase obligations, FMD would be required to perform such obligations. As a result, we could incur substantial costs pursuant to the performance guaranty if Union Federal were unable to perform its obligations.
In connection with Union Federals sales of two education loan portfolios to Citizens in March 2014 and June 2014, Union Federal agreed to repurchase education loans under certain circumstances. These repurchase obligations do not expire and are in addition to FMDs indemnification obligations discussed below. Furthermore, FMD agreed to guarantee to Citizens the full and prompt performance by Union Federal of its obligations and agreements, including its loan repurchase obligations, under the loan purchase and sale agreements and agreed to indemnify Citizens against losses sustained as a result of any breach of Union Federals representations, warranties and covenants or any act or omission of Union Federal prior to the closing dates for the loan sales, as applicable. See Note 13, Commitments and ContingenciesIndemnificationsCitizens Loan Sales, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. If Union Federal were to default in the performance of any of its obligations or agreements under the loan purchase and sale agreements, including its loan repurchase obligations, FMD would be required to perform such obligations. We may also incur substantial costs in the event of an indemnification claim under the loan purchase and sale agreements. Any of these events could have a material adverse effect on our liquidity or financial condition.
In April 2010, FMD and certain of its subsidiaries entered into agreements relating to the restructuring of the education loan warehouse facility of FMDs indirect subsidiary UFSB Private Loan SPV, LLC, or UFSB-SPV. In connection with the restructuring, FMD agreed, among other things, to provide a separate indemnity for third-party claims by or on behalf of borrowers against the third-party conduit lender under the facility based on loan origination errors under the facility. See Note 13, Commitments and ContingenciesIndemnificationsUnion Federal, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information. As a result, we may incur substantial costs in the event of a claim for damages related to the facility, which could have a material adverse effect on our liquidity or financial condition.
Changes in macro-economic conditions, including interest rates, could affect the value of our additional structural advisory fees, residual receivables, participation accounts and investments available-for-sale, as well as demand for education loans and our services.
Education loans held by us and the securitization trusts facilitated by us typically carry floating interest rates tied to prevailing short-term interest rates. Changes in interest rates could have the following effects on us:
| Higher interest rates would increase the cost of the loan to the borrower, which, in turn, could cause an increase in delinquency and default rates for outstanding education loans, as well as increased use of forbearance programs; |
31
| Higher interest rates, or the perception that interest rates could increase in the future, could cause an increase in full or partial prepayments; or |
| Higher interest rates could reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to decline. |
In addition to higher interest rates, other factors, such as challenging economic times, including high unemployment rates, can also lead to an increase in delinquency and default rates. If the prepayment or default rates increase for the education loans held by us or our Monogram platform clients, we may experience a decline in the value of service revenue receivables and our participation accounts, as well as a decline in fees related to Monogram-based loan programs in the future, which could cause a decline in the price of FMD common stock and could also prevent, or make more challenging, any future portfolio funding transactions.
Economic conditions and interest rate risk could also adversely impact the fair value and the ultimate collectability of our investments available-for-sale. Changes in the fair value of investments available-for-sale are recorded as unrealized gains and losses through other comprehensive income, a component of stockholders equity. Should an investment be deemed other than temporarily impaired, we would be required to write down the carrying value of the investment through earnings to the extent the loss is due to a credit event. Such write down(s) may have a material adverse effect on our financial condition and results of operations.
A significant portion of the purchase price for our acquisition of TMS and our acquisition of a substantial portion of the operating assets of the Cology Sellers is allocated to goodwill and intangible assets that are subject to periodic impairment evaluations. An impairment loss could have a material adverse impact on our financial condition and results of operations.
At June 30, 2014, we had $20.1 million of goodwill and $21.8 million of intangible assets related to our acquisition of TMS and our acquisition of a substantial portion of the operating assets of Cology, Inc. and its affiliates, which we refer to as the Cology Sellers. As required by current accounting standards, we review intangible assets for impairment either annually or whenever changes in circumstances indicate that the carrying value may not be recoverable.
The risk of impairment to goodwill is higher during the early years following an acquisition. This is because the fair values of these assets align very closely with what we paid to acquire the reporting units to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value (typically referred to as headroom) is smaller at the time of acquisition. Until this headroom grows over time, due to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges. When impairment charges are triggered, they tend to be material due to the size of the assets involved. TMS business would be adversely affected, and impairment of goodwill could be triggered, if any of the following were to occur: higher attrition rates than planned as a result of the competitive environment or our inability to provide products and services that are competitive in the marketplace, lower-than-planned adoption rates of refund management and Student Account Center products, higher-than-expected expense levels to provide services to TMS clients, a lower interest rate environment than depicted by the LIBOR curve, shorter hold periods or lower cash balances than contemplated, which would reduce our overall net interest income opportunity for cash that is held by us on behalf of TMS school clients, increases in equity returns required by investors and changes in our business model that may impact one or more of these variables. Cology LLCs business would be adversely affected, and impairment of goodwill could be triggered, if any of the following were to occur: higher attrition rates than planned, a lack of acceptance of Monogram products and services by its credit union and other lender clients, higher-than-expected expense levels to provide services to Cology LLC clients and changes in our business model that may impact one or more of these variables.
32
Risks Related to Asset-Backed Securitizations and Other Funding Sources
Our financial results and future growth may continue to be adversely affected if we are unable to structure securitizations or alternative financings.
Although our Monogram platform has been designed to generate recurring revenues with less dependence on the securitization market and third-party credit enhancement, a return to profitability is dependent on a number of factors, including the facilitation of loan volumes substantially in excess of those that we have originated to date, and substantially in excess of those contemplated by our current lender clients Monogram-based loan programs or other financing alternatives, expense management and growth at TMS and Cology LLC. Accordingly, our future financial results and growth may continue to be affected by our inability to structure securitizations or alternative financing transactions involving education loans on terms acceptable to us. In particular, such transactions may enable us to generate fee revenues or access and recycle capital previously deployed as credit enhancement for interim financing facilities. If we are able to facilitate securitizations in the near-term, we expect the structure and economics of the transactions to be substantially different from our past transactions, including lower revenues and lower advance rates.
If our inability to access the ABS market on acceptable terms continues, our revenues may continue to be adversely impacted, and we may continue to generate net losses, which would further erode our liquidity position.
A number of factors, some of which are beyond our control, have adversely affected or may adversely affect our portfolio funding activities and thereby adversely affect our results of operations.
The success of our business may depend on our ability to structure securitizations or other funding transactions for our clients loan portfolios. Several factors have had, or may have, a material adverse effect on both our ability to structure funding transactions and the revenue we may generate for providing our structural advisory and other services, including the following:
| Volatility in the capital markets generally or in the education loan ABS sector specifically, which could restrict or delay our access to the capital markets; |
| The timing and size of education loan asset-backed securitizations that other parties facilitate, or the adverse performance of, or other problems with, such securitizations, which could impact pricing or demand for our future securitizations, if any; |
| Challenges to the enforceability of education loans based on violations of federal or state consumer protection or licensing laws and related regulations, or imposition of penalties or liabilities on assignees of education loans for violations of such laws and regulations; |
| Our inability to structure and gain market acceptance for new products or services to meet new demands of ABS investors, rating agencies or credit facility providers; and |
| Changes to bankruptcy laws that change the current non-dischargeable status of private education loans, which could materially adversely affect the profitability of the loan portfolios if applied to loans originated prior to the date of the change. |
Recent legislation will affect the terms of future securitization transactions.
The SEC is considering new rules governing issuance of securities backed by education loans, which may affect the desirability of issuing this type of ABS as a funding strategy. In addition, the Dodd-Frank Act grants federal banking regulators substantial discretion in developing specific risk retention requirements for all types of consumer credit products and requires the SEC to establish new data requirements for all issuers, including standards for data format, asset-level or loan-level data, the nature and extent of the compensation of the broker or originator and the amount of risk retention required by loan securitizers.
33
The Dodd-Frank Act and its implementing regulations, once adopted, will affect the terms of future securitization transactions, if any, that we facilitate and may result in greater risk retention and less flexibility for us in structuring such transactions.
In structuring and facilitating securitizations of our clients education loans, administering securitization trusts or providing portfolio management, we may incur liabilities to transaction parties.
We facilitated and structured a number of special purpose trusts that have been used in securitizations to finance education loans that our clients originated, including securitization trusts that have issued auction rate notes. Under applicable state and federal securities laws, if investors incur losses as a result of purchasing ABS that those securitization trusts have issued, we could be deemed responsible and could be liable to those investors for damages. We could also be liable to investors or other parties for certain updated information that we have provided subsequent to the original ABS issuances by the trusts. If we have failed to cause the securitization trusts or other transaction parties to disclose adequately all material information regarding an investment in any securities, if we or the trusts made statements that were misleading in any material respect in information delivered to investors in any securities or if we breached any duties as the structuring advisor, administrator or special servicer of the securitization trusts, it is possible that we could be sued and ultimately held liable to an investor or other transaction party. This risk includes failure to properly administer or oversee servicing or collections guidelines and may increase if the performance of the securitization trusts loan portfolios degrades, and rating agencies over the past several years have downgraded various ABS issued by the trusts we facilitated. Investigations by state Attorneys General, as well as private litigation, have focused on auction rate securities, including the marketing and trading of such securities. It is possible that we could become involved in such matters in the future. In addition, under various agreements entered into with underwriters or financial guaranty insurers of those ABS, as well as certain lenders, we are contractually bound to indemnify those persons if an investor is successful in seeking to recover any loss from those parties and the securitization trusts are found to have made a materially misleading statement or to have omitted material information.
If we are liable to an investor or other transaction party for a loss incurred in any of the securitizations that we have facilitated or structured and any insurance that we may have does not cover this liability or proves to be insufficient, our results of operations or financial position could be materially adversely affected.
We may determine to incur near-term losses based on longer-term strategic considerations.
We may consider long-term strategic considerations more important than near-term economic gains when assessing business arrangements and opportunities, including financing arrangements for education loans. For example, we expect the structure and pricing terms in near-term future securitization transactions, if any, to be substantially different from our past transactions, including lower revenues and lower advance rates. We may nevertheless determine to participate in, or structure, future financing transactions based on longer-term strategic considerations. As a result, net cash flows over the life of a future securitization trust, particularly any trust that we may facilitate in the near-term as we re-enter the securitization market, could be negative as a result of transaction size, transaction expenses or financing costs.
Risks Related to Regulatory Matters
We are subject to, or will become subject to, new supervision and regulations which could increase our costs of compliance and alter our business practices.
Various regulators have increased diligence and enforcement efforts and new laws and regulations have been passed or are under consideration in the U.S. Congress as a result of turbulence in the financial services industry. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and the federal agencies are given significant discretion in drafting the implementing rules and regulations. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time.
34
As a federally-chartered thrift, Union Federals primary bank regulator is the OCC. As a savings and loan holding company, FMD is regulated by the Federal Reserve. The Dodd-Frank Act imposes consolidated capital requirements on savings and loan holding companies, but these requirements are not effective until five years after enactment of the Dodd-Frank Act.
The Dodd-Frank Act established the CFPB as an independent agency within the Federal Reserve. The CFPB has been given broad powers, including the power to:
| Supervise non-depository institutions, including those that offer or provide education loans; |
| Supervise depository institutions with assets of $10 billion or more for compliance with consumer protection laws, as well as the service providers to such institutions; |
| Regulate consumer financial products, including education loans, and services offered primarily for personal, family or household purposes; |
| Promulgate rules with respect to unfair, deceptive or abusive practices; and |
| Take enforcement action against institutions under its supervision. |
The CFPB may institute regulatory measures that directly impact our business operations. The CFPB has initiated an examination program of non-depository institutions (which could include service providers such as FMER). The FTC maintains parallel authority to enforce Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices against non-depository financial providers, such as FMER, TMS and Cology LLC. The OCC maintains parallel authority to enforce Section 5 of the Federal Trade Commission Act against federal savings associations, such as Union Federal, as well as authority to examine and supervise federal savings associations with assets of less than $10 billion, such as Union Federal, for compliance with consumer protection laws.
The CFPB has significant rulemaking and enforcement powers and the potential reach of the CFPBs broad new rulemaking powers and enforcement authority on the operations of financial institutions offering consumer financial products or services, including FMD, is currently unknown. In addition, the Dodd-Frank Act established a Student Loan Ombudsman within the CFPB, who, among other things, receives, reviews and attempts to resolve informally complaints from education loan borrowers. To date, the Student Loan Ombudsman has issued three Annual Reports. The first of these reports, the 2012 Annual Report of the Student Loan Ombudsman, noted concerns that private education loan borrowers may not have fully understood all the terms and conditions of their different loans. As a result, we expect private education loan marketing practices will continue to be carefully scrutinized. The 2013 Annual Report of the Student Loan Ombudsman analyzed complaints received by the CFPB regarding education loans during the prior year, noting trends in complaints related to payment processing, loan modification, treatment of military families and other servicing practices. The 2014 Annual Report of the Student Loan Ombudsman again analyzed complaints received by the CFPB regarding education loans during the prior year, noting trends in complaints related to servicing practices and focused on issues related to co-signers. As a result, we expect marketing and origination statements made regarding co-signers to receive additional scrutiny. We also expect to see increased scrutiny of the entire life cycle of education loans by the CFPB and other regulatory and enforcement agencies.
The CFPBs initiatives and similar efforts with respect to other credit and retail banking products could increase our costs and the complexity of our operations. See BusinessGovernment Regulation included in Item 1 of this annual report for additional information.
The Dodd-Frank Act also includes several provisions that could affect our future portfolio funding transactions, if any, including potential risk retention requirements applicable to any entity that organizes and initiates an ABS transaction, new disclosure and reporting requirements for each tranche of ABS, including new loan-level data requirements, and new disclosure requirements relating to the representations, warranties and enforcement mechanisms available to ABS investors. The Dodd-Frank Act may have a material impact on our operations, including through increased operating and compliance costs.
35
The Department of Education is currently engaged in a negotiated rulemaking process with respect to Part 668 of its regulations, including Subpart K, which governs how an institution requests, maintains, disburses, and otherwise manages funds received under Title IV of the Higher Education Act of 1965. Among other things, there are current proposals under discussion in the rulemaking that would revise existing regulations to address the allowable methods and procedures for institutions to pay students their Title IV student aid credit balances. It is possible that any revised provisions, once adopted and implemented, will limit the fees that we are able to charge related to disbursing refunds via prepaid cards, impact the terms and conditions under which refunds may be provided on those cards and reduce the number of institutions interested in disbursing refunds via prepaid cards, any of which could impede our ability to offer prepaid cards as a refund management option.
We are subject to regulation as a savings and loan holding company, and Union Federal is regulated extensively. We could incur additional costs in complying with regulations applicable to savings and loan holding companies and savings banks, or significant penalties if we fail to comply.
As a result of our acquisition of Union Federal in November 2006, we became subject to regulation as a savings and loan holding company, and our business is limited to activities that are financial or real-estate related. FMD is subject to regulation, supervision and examination by the Federal Reserve. The Federal Reserve and the OCC each have certain types of enforcement authority over us, including the ability in certain circumstances to impose civil and monetary penalties for violations of federal banking laws and regulations or for unsafe or unsound banking practices. Any such actions could adversely affect our reputation, liquidity or ability to execute our business plan. In addition, we could incur significant penalties if we fail to comply.
Union Federal is subject to regulation, supervision and examination by the OCC and the FDIC. Such regulation covers all banking business, including activities and investments, lending practices, safeguarding deposits, capitalization, risk management policies and procedures, relationships with affiliated companies, efforts to combat money laundering, recordkeeping and conduct and qualifications of personnel. In particular, a failure to meet minimum capital requirements could result in initiation of certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on our operations and our consolidated financial statements.
We could incur additional costs in complying with regulations applicable to savings and loan holding companies and federally-chartered thrifts, or significant penalties if we fail to comply. Our ability to comply with all applicable laws and rules depends largely on our establishment and maintenance of a system to ensure such compliance, as well as our ability to retain qualified compliance personnel.
We may become subject to additional state registration or licensing requirements, which could increase our compliance costs significantly and may result in other adverse consequences.
Many states have statutes and regulations that require the licensure of small loan lenders, loan brokers, credit services organizations, loan arrangers and collection agencies. Some of these statutes are drafted or interpreted to cover a broad scope of activities. While we believe we have satisfied all material licensing, registration and other regulatory requirements that could be applicable to us based on current laws and the manner in which we currently conduct business, we may determine that we need to submit additional license applications, and we may otherwise become subject to additional state licensing, registration and other regulatory requirements in the future. In particular, certain state licenses or registrations may be required if we change our operations, if regulators reconsider their prior guidance or if federal or state laws or regulations are changed. Even if we are not physically present in a state, its regulators may take the position that registration or licensing is required because we provide services to borrowers located in the state by mail, telephone, the Internet or other remote means.
To the extent that our services are conducted through Union Federal, state requirements for licensure are inapplicable. However, as a result of the enactment of the Dodd-Frank Act and the reduced preemption enjoyed by federal savings banks resulting from the Dodd-Frank Act, we may now be subject to state consumer protection laws in each state where we do business and those laws may be interpreted and enforced differently in
36
different states. We will continue to review state registration and licensing requirements, and we intend to pursue registration or licensing in applicable jurisdictions where we are not currently registered or licensed if we elect to operate through an entity that does not enjoy federal preemption of such registration or licensing requirements. We cannot assure you that we will be successful in obtaining additional state licenses or registrations in a timely manner, or at all. If we determine that additional state registrations or licenses are necessary, we may be required to delay or restructure our activities in a manner that will not subject us to such licensing or registration requirements. Compliance with state licensing requirements could involve additional costs or delays, which could have a material adverse effect on our business. Our failure to comply with these laws could lead to, among other things:
| Curtailment of our ability to continue to conduct business in the relevant jurisdiction, pending a return to compliance or processing of registration or a license application; |
| Administrative enforcement actions; |
| Class action lawsuits; |
| The assertion of legal defenses delaying or otherwise affecting the enforcement of loans; and |
| Criminal as well as civil liability. |
Any of the foregoing could have a material adverse effect on our business.
We may be exposed to liability for failures of third parties with which we do business to comply with the registration, licensing and other requirements that apply to them.
Third parties with which we do, or have done, business, including federal and state chartered financial institutions and non-bank loan marketers, are subject to registration, licensing and governmental regulations, including TILA and other consumer protection laws and regulations. For example, some of the third-party marketers with which we have done or may do business may be subject to state registration or licensing requirements and laws and regulations, including those relating to loan brokers, small loan lenders, credit services organizations, loan arrangers and collection agencies. As a result of the activities that we conduct or may conduct for our clients, it may be asserted that we have some responsibility for compliance by third parties with whom we do business with the laws and regulations applicable to them, whether on contractual or other grounds. If it is determined that we have failed to comply with our obligations with respect to these third parties, we could be subject to civil or criminal liability. Even if we bear no legal liability for the actions of these third parties, the imposition of licensing and registration requirements on them, or any sanctions against them for conducting business without a license or registration, may reduce the volume of loans we process from them in the future.
Regulatory agencies have increased their expectations with respect to how regulated institutions oversee their relationships with service providers, which could impact us as both a provider of services to financial institutions as well as a consumer of such services by third-party service providers.
The CFPB and, more recently, the OCC and the Federal Reserve, have issued guidance documents outlining their expectations of supervised banks and non-banks with respect to their relationships with service providers that increase the responsibilities of parties to vet and supervise the activities of service providers to ensure compliance with federal consumer financial laws. Regulators increasingly espouse a life cycle approach to vendor management that includes five important stages of the vendor relationship, including planning, due diligence and service provider selection, contract negotiation, ongoing monitoring and termination. The issuance of regulatory guidance, and the enforcement of the enhanced vendor management standards via examination and investigation of us or any third party with whom we do business, may increase our costs, require increased management attention and adversely impact our operations. In the event we should fail to meet the heightened standards for management of service providers, either in our supervision of vendors or as a result of acts or omissions of counter parties who are deficient in their supervision of us as a service provider, we could in the future be subject to supervisory orders to cease and desist, civil monetary penalties or other actions due to claimed noncompliance, which could have an adverse effect on our business, financial condition and operating results.
37
Failure to comply with consumer protection laws could subject us to civil and criminal penalties or litigation, including class actions, and have a material adverse effect on our business.
We are subject to a broad range of federal and state consumer protection laws applicable to our student lending, mortgage lending and other retail banking activities, including laws governing fair lending, unfair, deceptive and abusive acts and practices, service member protections, licensing, interest rates and loan fees, disclosures of loan terms, marketing, brokering, servicing, collections and foreclosure.
Violations or changes in federal or state consumer protection laws or related regulations, or in the prevailing interpretations thereof, may expose us to litigation, result in greater compliance costs, constrain the marketing of education loans, adversely affect the collection of balances due on the loan assets held by securitization trusts or otherwise adversely affect our business. We could incur substantial additional expense complying with these requirements and may be required to create new processes and information systems. Moreover, changes in federal or state consumer protection laws and related regulations, or in the prevailing interpretations thereof, could invalidate or call into question the legality of certain of our services and business practices.
Violations of the laws or regulations governing our operations, or the operations of our clients, could result in the imposition of civil or criminal penalties, the cancellation of our contracts to provide services or our exclusion from participating in education loan programs. These penalties or exclusions, were they to occur, would impair our business reputation and ability to operate our business. In some cases, such violations may render the loan assets unenforceable.
Recent legislative proposals could affect the ability of an owner of an education loan to receive all of the principal and interest due, including proposals to change the non-dischargeability of education loans in bankruptcy, the obligation of borrowers who die or become disabled and the obligation of borrowers whose financial circumstances make repayment difficult. If the legislative proposals are enacted, it could adversely affect the loan portfolios under our Monogram platform, including loans for which we have provided credit enhancements with certain of our partner lender clients, and adversely affect the overall desirability of private education loan assets to investors.
Under current law, education loans can be discharged in bankruptcy only upon a court finding of undue hardship if the borrower were required to continue to make loan payments. Legislation has been introduced in both houses of the U.S. Congress that would generally end the bankruptcy exemption from dischargeability for certain private education loans. If enacted as initially proposed, this legislation would apply retroactively to private education loans already made, and would not require the borrower to make any payments before seeking discharge in bankruptcy. This legislation is substantially similar to legislation that was previously introduced in both houses of the U.S. Congress. If enacted, such legislation may adversely affect the performance of the education loans under our Monogram platform, restrict the availability of capital to fund education loans and increase loan pricing to borrowers to compensate for the additional risk of bankruptcy discharge, which could adversely affect the competitiveness of our Monogram platform and our ability to engage lenders to fund loans based on our Monogram platform.
In addition, the July 2012 report on private education lending released by the CFPB recommended that the U.S. Congress reconsider the advisability of continuing the current non-dischargeable status of private education loans.
In addition, the CFPB has raised concerns that education loan servicers have taken insufficient measures to enter into work-outs with borrowers who are having difficulties repaying their education loans, and there is legislation pending to affect the obligations of both borrowers and co-signers on loans obtained by a borrower who dies or becomes disabled. Similar to the dischargeability issue, although our operations would not be directly affected because we are not engaged in the servicing of education loans, these proposals may make private education loans less attractive to investors.
38
Recent litigation has sought to re-characterize certain loan marketers and other originators as lenders; if litigation on similar theories were successful against us or any third-party marketer we work with, the education loans that we facilitate would be subject to individual state consumer protection laws.
A majority of the lenders with which we work are federally-insured banks and credit unions. As a result, they are able to charge the interest rates, fees and other charges available to the most favored lender in their home state. In addition, our lender clients or prospective lender clients may be chartered by the federal government and enjoy preemption from enforcement of state consumer protection laws. In providing our education loan services to our lender clients, we do not act as a lender, guarantor or loan servicer, and the terms of the education loans that we facilitate are regulated in accordance with the laws and regulations applicable to the lenders.
The association between marketers of high-interest payday loans, tax-return anticipation loans, subprime credit cards and online payment services, on the one hand, and banks, on the other hand, has come under recent scrutiny. Recent litigation asserts that loan marketers use lenders with a bank charter that authorizes the lender to charge the most favored interest rate available in the lenders home state in order to evade usury and interest rate caps, and other consumer protection laws imposed by the states where they do business. Such litigation has sought, successfully in some instances, to re-characterize the loan marketer as the lender for purposes of state consumer protection law restrictions. Similar civil actions have been brought in the context of gift cards. Moreover, federal banking regulators and the FTC have undertaken enforcement actions challenging the activities of certain loan marketers and their bank partners, particularly in the context of subprime credit cards. We believe that our activities, and the activities of third parties whose marketing on behalf of lenders may be coordinated by us, are distinguishable from the activities involved in these cases.
Additional state consumer protection laws would be applicable to the education loans we facilitate if we, or any third-party loan marketer engaged by us, were re-characterized as a lender, and the education loans (or the provisions governing interest rates, fees and other charges) could be unenforceable unless we or a third-party loan marketer had the requisite licenses or other authority to make such loans. In addition, we could be subject to claims by consumers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial delay or cost to us. There have been no actions taken or threatened against us on the theory that we have engaged in unauthorized lending; however, if such actions occurred, they could have a material adverse effect on our business.
Risks Related to Ownership of FMD Common Stock
The price of FMD common stock may be volatile.
The trading price of FMD common stock may fluctuate substantially, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in your shares of FMD common stock. Those factors that could cause fluctuations include, but are not limited to, the following:
| The success of our Monogram platform, our fee-for-service offerings, our TMS offerings and our Cology LLC offerings, including our ability to attract new clients for each of our product offerings; |
| Announcements by us, our competitors or our potential competitors of acquisitions, new products or services, significant contracts, commercial relationships or capital markets activities; |
| Actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts, including as a result of the timing, size or structure of any portfolio funding transactions; |
39
| Developments or the perception of developments in litigation or proceedings in which we are involved, including: |
| any challenges to tax refunds previously received in the amounts of $176.6 million and $45.1 million as a result of the ongoing IRS audit of our past tax returns, including as a result of the NOPAs we received on September 10, 2013, which, if the IRS positions are successful, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any; |
| the resolution of our appeal of the ATB Order in the cases pertaining to our Massachusetts state income tax return; and |
| the purported class action filed against FMD and certain of FMDs current and former officers in the United States District Court for the District of Massachusetts in August 2013 and the related derivative action filed against certain of FMDs current and former officers and certain current and former members of the FMD Board of Directors in the United States District Court for the District of Massachusetts in October 2013; |
| Difficulties we may encounter in structuring securitizations or alternative financings, including disruptions in the education loan ABS market or demand for securities offered by securitization trusts that we facilitate, or the loss of opportunities to structure securitization transactions; |
| General economic conditions and trends, including unemployment rates and economic pressure on consumer asset classes such as education loans; |
| Legislative initiatives affecting federal or private education loans, including initiatives relating to bankruptcy dischargeability and the federal budget and regulations implementing the Dodd-Frank Act; |
| Changes in the education finance marketplace generally; |
| Negative publicity about the education loan market generally or us specifically; |
| Regulatory developments or sanctions directed at us; |
| Price and volume fluctuations in the overall stock market and volatility in the ABS market, from time to time; |
| Significant volatility in the market price and trading volume of financial services and process outsourcing companies; |
| Major catastrophic events; |
| Purchases or sales of large blocks of FMD common stock or other strategic investments involving us; |
| Dilution from raising capital through a stock or other equity instrument issuance; or |
| Departures or long-term unavailability of key personnel, including FMDs Chief Executive Officer, who we believe has unique insights and experience at this point of change in our business and the education loan industry. |
Securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. In August 2013, a purported class action was filed against FMD and certain of FMDs current and former officers in the United States District Court for the District of Massachusetts. The plaintiff alleges, among other things, that the defendants made false and misleading statements and failed to disclose material information in various SEC filings, press releases and other public statements concerning our corporate income tax filings. The complaint alleges various claims under the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint seeks, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and proper. No class has been certified in the action. In addition, in October 2013, a different plaintiff filed a related derivative action in the same court against certain of FMDs current and former officers and certain current and former members of the FMD Board of Directors. The plaintiff
40
alleges, among other things, that the defendants breached their fiduciary duties to FMD by making, or not preventing, purported false and misleading statements concerning FMDs corporate income tax filings. The plaintiff also asserts claims for unjust enrichment and corporate waste. The complaint seeks, among other relief, a return of all damages purportedly sustained by FMD as well as changes to corporate governance policies and procedures.
The defendants in each action intend to vigorously defend themselves, however, there can be no assurance that the defenses will be successful, and regardless of the merits of their defenses, the price of FMD common stock could be adversely affected by a perception of risk in connection with these lawsuits, including any such perception that may arise out of any adverse developments and/or an adverse resolution of either lawsuit. In addition, adverse developments and/or an adverse resolution of either lawsuit could have a material effect on our consolidated financial position and results of operations, which could, in turn, have a negative effect on the price of FMD common stock. Although we carry insurance for these types of claims, we are not presently able to reasonably estimate potential losses, if any, related to the lawsuit and a judgment significantly in excess of our insurance coverage could materially and adversely affect our financial condition, results of operations and cash flows.
Stockholders that own large blocks of FMD common stock could substantially influence matters requiring approval by FMD stockholders and could limit your ability to influence the outcome of key transactions, including a change of control.
There are certain investors that hold large blocks of FMD common stock, which could impact the outcome of key transactions. In addition, FMDs directors and executive officers owned approximately 9.4% of the outstanding shares of FMD common stock as of June 30, 2014, excluding shares issuable upon vesting of outstanding restricted stock units and shares issuable upon exercise of outstanding vested stock options. These stockholders, if acting together, could substantially influence matters requiring approval by FMD stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive FMD stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of FMD common stock.
Some provisions in FMDs restated certificate of incorporation and amended and restated by-laws may deter third parties from acquiring us.
FMDs restated certificate of incorporation and amended and restated by-laws contain provisions that may make the acquisition of our company more difficult without the approval of the FMD Board of Directors, including the following:
| Only the FMD Board of Directors, FMDs Chairman of the Board or FMDs President may call special meetings of FMD stockholders; |
| FMD stockholders may take action only at a meeting of FMD stockholders and not by written consent; |
| We have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; |
| FMDs directors may be removed only for cause by the affirmative vote of a majority of the directors present at a meeting duly held at which a quorum is present, or by the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and |
| We impose advance notice requirements for stockholder proposals. |
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire.
41
Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control that FMD stockholders might consider to be in their best interests.
We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits business combinations between a Delaware corporation and an interested stockholder, which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporations voting stock, for a three-year period following the date that such stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that FMD stockholders might consider to be in their best interests.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
We lease buildings for our executive offices and operations. Our headquarters are located in Boston, Massachusetts, and we have additional offices related to our continuing operations in Medford, Massachusetts, Warwick, Rhode Island, Mather, California, Scottsdale, Arizona, and Bedford, Massachusetts.
The following table summarizes information as of September 10, 2014 with respect to the principal facilities that we lease:
Location |
Principal activities |
Area (sq. feet) |
Lease expiration date | |||||
Boston, MA |
Headquarters | 26,296 | 2015 | |||||
Medford, MA |
Loan Processing | 84,458 | 2017 | |||||
Warwick, RI |
TMS | 27,249 | 2015 | |||||
Mather, CA |
Cology LLC | 10,297 | 2016 | |||||
Scottsdale, AZ |
Cology LLC | 2,911 | 2016 | |||||
Bedford, MA |
Information Technology | 3,000 | 2015 |
In connection with our expense control initiatives, we have sought to reduce our occupancy costs. In particular:
| The lease relating to our Bedford, Massachusetts location expires in January 2015 and will not be renewed. We entered into an agreement with a data center provider in Northborough, Massachusetts for a license to exclusively use certain space within the data center as a replacement for our Bedford, Massachusetts location. The effective date of the agreement is September 1, 2014 with a commencement date of December 1, 2014 for a term of one year with renewal options. We expect that the Northborough, Massachusetts space will result in cost savings for us. |
| The lease relating to our Medford, Massachusetts location originally covered 153,156 square feet. In November 2010, we amended the lease which, among other things, reduced the rented space by 59,790 square feet as of April 1, 2011 and extended the term of the lease to March 31, 2017. In July 2011, we further reduced the leased space by 8,908 square feet. |
| The lease relating to our Boston, Massachusetts location originally covered 57,647 square feet. In March 2014, we amended the lease which, among other things, reduced the rented space by 31,351 square feet as of March 31, 2014 and extended the term of the lease to March 31, 2015. |
| In June 2014, we entered into a sublease agreement for our Scottsdale, Arizona location through the remainder of our lease term. |
We do not anticipate significant difficulty in obtaining lease renewals or alternate space as needed.
42
Item 3. | Legal Proceedings |
Internal Revenue Service Audit
Effective March 31, 2009, we completed the sale of the Trust Certificate. In connection with the sale of the Trust Certificate, FMD entered into the Asset Services Agreement pursuant to which FMD provided various consulting and advisory services to the purchaser of the Trust Certificate. As a result of the sale of the Trust Certificate, as well as our operating losses incurred in fiscal 2009, we recorded an income tax receivable for federal income taxes paid on taxable income in prior fiscal years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables. In April 2010, the IRS commenced an audit of our tax returns for fiscal 2007 through fiscal 2009, including a review of the tax treatment of the sale of the Trust Certificate and the federal tax refund previously received in the amount of $176.6 million. Such audits are consistent with the practice of the Joint Committee of Taxation, which requires the IRS to perform additional procedures for a taxpayer who receives a tax refund in excess of $2.0 million, which may include an audit of such taxpayers tax return. The IRS is also auditing our fiscal 2010 tax return in light of the $45.1 million income tax refund that we received in October 2010.
We announced on August 15, 2013 that, as part of the audit process, we expected to receive a NOPA from the IRS. On September 10, 2013 we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. In the NOPAs, the IRS asserts that our sale of the Trust Certificate should not be recognized for federal income tax purposes primarily because we retained the economic benefits and burdens of the Trust Certificate, including, among other things, retaining certain repurchase rights and data rights. The IRS further concludes that the transaction should be characterized as a financing instead of a sale and asserts that the sale of the Trust Certificate and the execution of the Asset Services Agreement had the impact of converting taxable income to the owner from an accrual basis to a cash basis. As a result, the NOPAs propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any. The NOPAs do not address tax years beyond June 30, 2011. The NOPAs are only initial IRS positions and not final determinations and, as a result, do not require any tax payment at this time.
The ongoing IRS audit or any other investigation, audit, appeals proceeding or suit relating to the sale of the Trust Certificate could result in substantial costs. A state taxing authority could also challenge our tax position in connection with the transactions, notwithstanding our receipt of any income tax refund.
The determination of whether or not to accrue a liability, if any, requires a significant amount of judgment and entails, by necessity, the need to incorporate estimates. We have considered the requirements of ASC 740 and the impact of the NOPAs, along with other information supporting our overall tax position, in our assessment of the ultimate outcome of this matter with the IRS, and based on our analysis, we did not record an accrual related to this matter in our consolidated financial statements at June 30, 2014. Such an accrual, if it becomes necessary, could be significant and material to our consolidated financial statements.
We are vigorously contesting the proposed adjustments with the IRS, and we continue to believe we have a strong position as it relates to this matter; however, we cannot predict the timing or outcome of the IRS audit. The process of resolving this issue, which may include an appeals process with the IRS and litigation in the U.S. Tax Court and the U.S. Court of Appeals, may extend over multiple years depending on how it progresses through the IRS and, if necessary, the courts. Assuming this matter advances unresolved through the IRS administrative process and the courts, we are not required to make tax payments, if any, until the matter is fully resolved, which may be several years from now. However, if we receive an unfavorable outcome from the U.S. Tax Court and appeal, we must post a bond, which could have a significant cost and, depending on our financial condition, may not be obtainable, in order to prevent collection of the tax deficiency.
43
See Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012Overall ResultsInternal Revenue Service Audit included in Item 7 of this annual report and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
Massachusetts Appellate Tax Board Matters
We are involved in several matters relating to the Massachusetts tax treatment of GATE, a former subsidiary of FMD, including The First Marblehead Corp. v. Commissioner of Revenue, ATB Docket No. C293487, which was instituted on September 5, 2007; GATE Holdings, Inc. v. Commissioner of Revenue, ATB Docket No. C305217, which was instituted on March 16, 2010; The First Marblehead Corp. v. Commissioner of Revenue, ATB Docket No. C305241, which was instituted on March 22, 2010; and GATE Holdings, Inc. v. Commissioner of Revenue, ATB Docket No. C305240, which was instituted on March 22, 2010. We took the position in the ATB proceedings that GATE was properly taxable as a financial institution and not as a business corporation and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The Commissioner took alternative positions: that GATE was properly taxable as a business corporation, or that GATE was taxable as a financial institution, but was not entitled to apportionment or was subject to 100% Massachusetts apportionment. In September 2007, we filed a petition with the ATB seeking a refund of state taxes paid for our taxable year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of taxes, along with accrued interest, of approximately $11.9 million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. For the 2005 and 2006 taxable years, only one of the two assessments made by the Commissioner would ultimately be allowed. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE and us. In April 2011, the ATB held an evidentiary hearing on the foregoing, and the parties filed their final briefs in September 2011. On November 9, 2011, the ATB issued the ATB Order regarding these proceedings. The ATB Order reflected the following rulings and findings:
| GATE was properly taxable as a financial institution, rather than a business corporation, for each of the tax years at issue; |
| GATE was entitled to apportion its income under applicable provisions of Massachusetts tax law for each of the tax years at issue; |
| GATE properly calculated one of the two applicable apportionment factors used to calculate GATEs financial institution excise tax; |
| GATE incorrectly calculated the other apportionment factor, which we refer to as the Property Factor, by excluding all income from trust-owned education loans outside of Massachusetts rather than including such income for the purposes of GATEs Massachusetts state tax returns; and |
| All penalties assessed to FMD and GATE were abated. |
In connection with the ATB Order, as well as the expiration of the statute of limitations applicable to GATEs taxable year ended June 30, 2007, we recognized an income tax benefit of $12.5 million during the second quarter of fiscal 2012. In the third quarter of fiscal 2012, we made a $5.1 million payment that satisfied our obligation to the Massachusetts Department of Revenue for GATEs taxable years ended June 30, 2004, 2005 and 2006.
On April 17, 2013, the ATB issued the ATB Opinion. We had argued that the loan servicers activities, which were conducted outside of Massachusetts on behalf of the trusts, determined the location of the loans for purposes of the Property Factor. The ATB disagreed and determined that the loan servicers activities should not be attributed to GATE and further determined that, for purposes of the Property Factor, the trust-owned education loans were located in Massachusetts, GATEs commercial domicile, and, therefore, were subject to 100% Massachusetts apportionment.
44
On July 22, 2013, we filed an appeal of the ATBs findings with regard to the Property Factor in the Massachusetts Appeals Court (No. 2013-P-0935). The Commissioner has decided not to appeal the ATBs other findings. On December 18, 2013, the SJC notified us that it had elected to hear our appeal of the ATBs findings and, as a result, our appeal will not be heard by the Massachusetts Appeals Court. The SJC has informed us that it expects to schedule oral arguments for early October 2014. If we are unsuccessful in an appeal of the ATB Order, we could be required to make additional tax payments, including interest, as discussed below, for GATEs taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position.
On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for our taxable years ended June 30, 2008 and 2009. This assessment included approximately $822 thousand of additional tax liability and an assessment for penalties of $4.1 million. We accrued for the additional tax liability, including interest, in fiscal 2013 but have not accrued for the penalties as we believe that it is more likely than not that the penalties will ultimately be abated, which is consistent with the Massachusetts Department of Revenues treatment of our taxable years ended June 30, 2004, 2005 and 2006. As of June 30, 2014, we had accrued a total income tax liability of $25.9 million, including interest, related to the 2008 and 2009 tax returns for GATE, which amount was included in income taxes payable on our consolidated balance sheet. On August 26, 2013, we filed an application to have the assessed amounts abated in full. On March 26, 2014, the Massachusetts Department of Revenue denied our application. While we have filed an appeal on this matter with the ATB, it is on hold pending resolution of our appeal of the ATB Order. We expect the outcome for the 2008 and 2009 tax years to be influenced by the SJCs decision on our appeal of the ATBs findings. We cannot predict the outcome of this matter or the timing of such payments, if any, at this time.
It is reasonably possible that our liability for this uncertain tax benefit may increase or decrease within the next 12 months if a decision is rendered by the SJC. However, we cannot reasonably estimate a range of potential changes in such benefit as the outcome of the appeal is subject to uncertainty.
Federal Class Action Lawsuits
On August 28, 2013, a purported class action was filed in the United States District Court for the District of Massachusetts against FMD, Daniel Meyers, FMDs Chief Executive Officer and Chairman of the FMD Board of Directors, and Kenneth Klipper, FMDs former Chief Financial Officer and Managing Director. The action is entitled Smith v. The First Marblehead Corp. et al., Civ. A. No. 13-cv-12121-PBS (D. Mass.). The plaintiff alleges, among other things, that the defendants made false and misleading statements and failed to disclose material information in various SEC filings, press releases and other public statements concerning our corporate income tax filings. The complaint alleges various claims under the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint seeks, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and proper. In December 2013, the court appointed a lead plaintiff and lead counsel. On February 20, 2014, an amended complaint was filed by the lead plaintiff and contained similar allegations as the earlier complaint. On April 7, 2014, we filed a motion to dismiss the amended complaint. On May 22, 2014, the lead plaintiff filed its opposition to our motion to dismiss. On June 23, 2014, we filed a reply brief in support of our motion to dismiss the amended complaint. On June 30, 2014, the court heard arguments on the motion to dismiss. A class has not been certified in the action as of September 10, 2014.
On October 23, 2013, a different plaintiff filed a related derivative action in the same court against Daniel Meyers, Kenneth Klipper and current and former members of the FMD Board of Directors Peter Drotch, George Daly, William Hansen, Thomas Eddy, Dort Cameron III, Nancy Bekavac, Stephen Anbinder, Peter Tarr, William Berkley, and Henry Cornell. The action is entitled Noel v. Daniel Meyers, et al., Civ. A. No. 13-cv-12683-PBS (D. Mass.). The plaintiff alleges, among other things, that the defendants breached their fiduciary duties to FMD by making, or not preventing, purported false and misleading statements concerning FMDs corporate income tax filings. The plaintiff also asserts claims for unjust enrichment and corporate waste. The complaint seeks, among other relief, a return of all damages purportedly sustained by FMD as well as changes to corporate governance policies and procedures. On January 23, 2014, this action was stayed pending the resolution and disposition of the Smith action.
45
The defendants in each action intend to vigorously defend themselves. There can be no assurance, however, that the defenses will be successful, and adverse developments and/or an adverse resolution of either lawsuit could have a material effect on our consolidated financial position and results of operations. In addition, the costs associated with the defenses will be incurred by FMD. We are not presently able to estimate potential losses, if any, related to the lawsuits and, although we carry insurance for these types of claims, a judgment significantly in excess of our insurance coverage could be material to our consolidated financial statements.
NC Residual Owners Trust Litigation
On April 2, 2014, FMD filed a complaint in the Chancery Court against NC Residuals and the Owner Trustee. The action is entitled The First Marblehead Corporation v. NC Residuals Owners Trust, et. al., C.A. No. 9500-VCN, and seeks declaratory relief and specific performance as described below.
GATE, a former subsidiary of FMD, was the owner of certain beneficial interests in the GATE Trusts as well as certain beneficial interests in certain other securitization trusts that we previously facilitated, which we refer to as the NCSLT Trusts. GATE assigned and transferred all of its interests in the GATE Trusts to FMD pursuant to a transfer and assignment agreement. As part of that agreement, GATE agreed to, among other things, execute and deliver all documents that may be necessary to transfer, assign and deliver to and vest in FMD ownership of the GATE Trusts on the records of the Owner Trustee.
After the transfer of its interests in the GATE Trusts to FMD, GATEs remaining assets consisted of its interests in the NCSLT Trusts and it was statutorily converted into NC Residuals and, immediately thereafter, the Trust Certificate was sold.
From 2009 until late 2013, FMD received regular cash distributions as the beneficial owner of the GATE Trusts and has continually reflected the GATE Trusts on its consolidated balance sheets. As of June 30, 2014, the value of the GATE Trusts on our consolidated balance sheet was $12.0 million and, through June 30, 2014, the GATE Trusts had generated cash distributions of $5.2 million, of which $1.5 million is currently being withheld. As of July 2013, the Owner Trustee had not received documentation required to transfer ownership on the records of the Owner Trustee of the GATE Trusts to FMD and the Owner Trustees books and records still reflected that GATE was the beneficial owner of the GATE Trusts. FMD requested that NC Residuals, as successor to GATE, execute certain documents necessary to cause FMD to become properly reflected as the GATE Trusts registered owner in the Owner Trustees books and records, in accordance with NC Residuals obligations under the transfer and assignment agreement. NC Residuals has refused to comply with FMDs request and has claimed ownership of the GATE Trusts and has also demanded that FMD deliver to it trust certificates reflecting ownership of the GATE Trusts and all cash distributions received on or after March 31, 2009 related to the GATE Trusts.
FMD has requested that the Chancery Court:
| Declare that FMD has the right to receive the cash distributions with respect to the GATE Trusts pursuant to the transfer and assignment agreement; |
| Declare that FMD is entitled to all rights, title and interest in the GATE Trusts and that NC Residuals has no such rights, title or interest; and |
| Issue an order requiring specific performance by NC Residuals of its obligations under the transfer and assignment agreement to execute and deliver all documents required to properly register FMD as the owner of the GATE Trusts on the records of the Owner Trustee. |
FMD and NC Residuals have agreed to submit this matter to non-binding mediation and, as such, NC Residuals has not yet answered FMDs complaint. The non-binding mediation is scheduled for September 22, 2014. We are vigorously pursuing all of our claims in this matter and we believe we have a strong position as it relates to this matter. There can be no assurance, however, that our claims will be successful, and adverse developments or an adverse resolution could have a material adverse effect on our consolidated financial position and results of operations.
46
We are involved from time to time in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, there are no matters outstanding, other than those referenced above, that would have a material adverse impact on our operations or financial condition.
Item 4. | Mine Safety Disclosures |
Not applicable.
47
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information and Holders
FMD common stock is listed on the New York Stock Exchange, or NYSE, under the trading symbol FMD. The following table sets forth the high and low sales prices of FMD common stock, as reported by the NYSE, for each quarterly period within our two most recent fiscal years, all adjusted for the 1-for-10 reverse stock split that was effective on December 2, 2013:
High | Low | |||||||
Fiscal 2014 |
||||||||
First Quarter |
$ | 19.20 | $ | 6.70 | ||||
Second Quarter |
10.50 | 5.90 | ||||||
Third Quarter |
7.50 | 5.40 | ||||||
Fourth Quarter |
6.23 | 4.00 | ||||||
Fiscal 2013 |
||||||||
First Quarter |
$ | 12.40 | $ | 10.00 | ||||
Second Quarter |
11.60 | 6.10 | ||||||
Third Quarter |
10.90 | 7.60 | ||||||
Fourth Quarter |
13.00 | 9.80 |
Computershare Trust Company, N.A. is the transfer agent and registrar for FMD common stock. As of the close of business on September 8, 2014, we had 51 holders of record of FMD common stock. This number does not include stockholders for whom shares are held in street or nominee name.
48
Performance Graph
Historically, we have compared the return of FMD common stock to that of the Dow Jones U.S. Index and the Dow Jones U.S. Financial Services Index. However, beginning with this annual report, we chose to compare the return of FMD common stock to that of the Russell 2000 Index and the Dow Jones U.S. Specialty Finance Index. For purposes of a broad equity market comparison, we chose the Russell 2000 Index as it measures the performance of the small-cap segment of the U.S. equities market with constituents that are more closely aligned to FMD in terms of size, market capitalization and liquidity than under the Dow Jones U.S. Index. For purposes of an industry index comparison, we chose the Dow Jones U.S. Specialty Finance Index, a subsector of the Dow Jones U.S. Financial Services Index, as it is limited to companies that are more closely aligned with FMDs business.
The following graph compares the cumulative five-year total return attained by stockholders on FMD common stock relative to the cumulative total returns of the Dow Jones U.S. Index, the Russell 2000 Index, the Dow Jones U.S. Financial Services Index and the Dow Jones U.S. Specialty Finance Index. The graph tracks the performance of a $100 investment in FMD common stock and in each of the indices (with the reinvestment of all dividends) from June 30, 2009 to June 30, 2014.
The information included under the heading Performance Graph is furnished and not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed to be soliciting material subject to Regulation 14A or incorporated by reference in any filing under the Securities Act or the Exchange Act.
Dividends
We did not declare any dividends in fiscal 2014 or fiscal 2013, and we do not expect to declare any dividends in the foreseeable future. Any decision to pay future dividends will be made by the FMD Board of
49
Directors and will depend upon applicable regulatory approvals and our earnings, financial condition, capital and regulatory requirements and such other factors as the FMD Board of Directors deems relevant. In connection with the termination of the supervisory agreement that we had entered into in July 2009 with the OTS, which was the primary federal regulator of Union Federal prior to the OCC, the FMD Board of Directors adopted resolutions requiring FMD to notify the OCC in advance of any distributions to our stockholders in excess of $1.0 million in any fiscal quarter.
Issuer Purchases of Equity Securities
The following table provides information as of and for the fiscal quarter ended June 30, 2014 regarding shares of FMD common stock that were repurchased under our 2003 stock incentive plan, as amended and restated, which we refer to as our 2003 Plan, and our 2011 stock incentive plan, as amended, which we refer to as our 2011 Plan:
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum number of
shares that may yet be purchased under the plans or programs | |||||||||||
April 1 - 30, 2014 |
| $ | | | N/A | |||||||||
May 1 - 31, 2014 |
1,467 | 4.43 | | N/A | ||||||||||
June 1 - 30, 2014 |
| | | N/A | ||||||||||
|
|
|
|
|||||||||||
Total Purchases of Equity Securities(1) |
1,467 | $ | 4.43 | | ||||||||||
|
|
|
|
(1) | Participants in our 2003 Plan and our 2011 Plan may elect to satisfy tax withholding obligations upon vesting of restricted stock units by delivering shares of FMD common stock, including shares retained from the restricted stock units creating the tax obligation. Our 2003 Plan was approved by stockholders on November 16, 2009 and expired on September 14, 2013. Our 2011 Plan was approved by stockholders on November 14, 2011 and has an expiration date of November 14, 2021. |
Item 6. | Selected Financial Data |
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes under the heading, Financial Statements and Supplementary Data, included in Item 8 of this annual report and Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this annual report. We have derived the data from our consolidated financial statements, which were audited by KPMG LLP, an independent registered public accounting firm. The historical results presented here are not necessarily indicative of future results.
50
The results for fiscal year 2010 include the results of UFSB-SPV, a special purpose vehicle that financed certain education loans we originated. UFSB-SPV was deconsolidated on July 1, 2010 with 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)Improvement to Financial Reporting by Enterprises Involved With Variable Interest Entities, or ASU 2009-17.
Fiscal years ended June 30, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(dollars and shares in thousands, except per share data) | ||||||||||||||||||||
Consolidated Statements of Operations Data: |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Tuition payment processing fees |
$ | 28,186 | $ | 26,668 | $ | 26,544 | $ | 12,904 | $ | | ||||||||||
Administrative and other fees |
13,640 | 11,238 | 9,778 | 10,338 | 11,960 | |||||||||||||||
Fair value changes to service revenue receivables |
2,330 | 2,068 | 947 | (23,178 | ) | (13,567 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
44,156 | 39,974 | 37,269 | 64 | (1,607 | ) | ||||||||||||||
Expenses: |
||||||||||||||||||||
Compensation and benefits |
36,251 | 39,317 | 41,145 | 35,868 | 39,586 | |||||||||||||||
General and administrative |
47,629 | 51,950 | 59,901 | 54,295 | 54,781 | |||||||||||||||
Loss on education loans held-for-sale |
| | | | 69,702 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
83,880 | 91,267 | 101,046 | 90,163 | 164,069 | |||||||||||||||
Other income: |
||||||||||||||||||||
Net interest income |
202 | 349 | 699 | 654 | 5,929 | |||||||||||||||
Gain from deconsolidation of trusts |
| | 9,514 | | | |||||||||||||||
Other income |
582 | 2,112 | 2,475 | 8,399 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other income |
784 | 2,461 | 12,688 | 9,053 | 5,929 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from continuing operations, before income taxes |
(38,940 | ) | (48,832 | ) | (51,089 | ) | (81,046 | ) | (159,747 | ) | ||||||||||
Income tax expense (benefit) from continuing operations |
1,125 | 2,295 | (17,956 | ) | 194 | (25,457 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss from continuing operations |
(40,065 | ) | (51,127 | ) | (33,133 | ) | (81,240 | ) | (134,290 | ) | ||||||||||
Discontinued operations, net of taxes |
2,498 | 930 | 1,135,361 | (140,321 | ) | (36,612 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income |
$ | (37,567 | ) | $ | (50,197 | ) | $ | 1,102,228 | $ | (221,561 | ) | $ | (170,902 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income per basic common share: |
||||||||||||||||||||
From continuing operations |
$ | (3.55 | ) | $ | (4.77 | ) | $ | (3.00 | ) | $ | (8.05 | ) | $ | (13.49 | ) | |||||
From discontinued operations |
0.22 | 0.09 | 102.82 | (13.90 | ) | (3.68 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total basic net (loss) income per common share |
(3.33 | ) | (4.68 | ) | 99.82 | (21.95 | ) | (17.17 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income per diluted common share: |
||||||||||||||||||||
From continuing operations |
$ | (3.55 | ) | $ | (4.77 | ) | $ | (2.99 | ) | $ | (8.05 | ) | $ | (13.49 | ) | |||||
From discontinued operations |
0.22 | 0.09 | 102.59 | (13.90 | ) | (3.68 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total diluted net (loss) income per common share |
$ | (3.33 | ) | $ | (4.68 | ) | $ | 99.60 | $ | (21.95 | ) | $ | (17.17 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted-average shares outstanding: |
||||||||||||||||||||
Basic |
11,270 | 10,735 | 10,157 | 10,092 | 9,954 | |||||||||||||||
Diluted |
11,270 | 10,735 | 11,067 | 10,092 | 9,954 |
51
June 30, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 33,955 | $ | 58,599 | $ | 134,897 | $ | 165,564 | $ | 213,965 | ||||||||||
Short-term investments, at cost |
40,057 | 55,179 | 85,007 | 48,005 | 50,000 | |||||||||||||||
Restricted cash |
94,436 | 87,338 | 65,401 | 124,687 | | |||||||||||||||
Education loans held-for-sale, at lower of cost or fair value |
| | | | 105,082 | |||||||||||||||
Deposits for participation interest accounts, at fair value |
15,834 | 13,147 | 4,039 | 8,512 | | |||||||||||||||
Service revenue receivables, at fair value |
13,979 | 14,817 | 16,341 | 29,610 | 53,279 | |||||||||||||||
Goodwill and intangible assets |
41,835 | 44,259 | 40,470 | 42,479 | 823 | |||||||||||||||
Income taxes receivable |
| | | | 12,184 | |||||||||||||||
Total assets from continuing operations |
254,078 | 285,217 | 356,885 | 433,619 | 452,767 | |||||||||||||||
Total assets from discontinued operations |
188,806 | 187,076 | 100,920 | 7,219,163 | 128,793 | |||||||||||||||
Restricted funds due to clients |
94,272 | 86,994 | 104,981 | 124,194 | | |||||||||||||||
Income taxes payable |
26,582 | 25,923 | 23,414 | 39,979 | | |||||||||||||||
Education loan warehouse facility |
| | | | 218,059 | |||||||||||||||
Total liabilities from continuing operations |
133,559 | 127,495 | 146,151 | 188,413 | 253,597 | |||||||||||||||
Total liabilities from discontinued operations |
162,827 | 165,471 | 84,666 | 8,344,308 | 110,822 | |||||||||||||||
Total stockholders equity (deficit) |
146,498 | 179,327 | 226,988 | (879,939 | )* | 217,252 |
* | The June 30, 2011 stockholders deficit includes an accumulated deficit of $1.13 billion related to the securitization trusts that we previously consolidated. Total stockholders equity at June 30, 2014 and June 30, 2013 no longer included this deficit as a result of the deconsolidation of these securitization trusts in fiscal 2012. |
Item 7. | Managements 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 Selected Financial Data included in Item 6 of this annual report and Financial Statements and Supplementary Data included in Item 8 of this annual report. In addition to historical information, this discussion of our financial condition and results of operations contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements due to applications of our critical accounting policies and factors including, but not limited to, those set forth under the caption Risk Factors included in Item 1A of this annual report.
Executive Summary
Overview
We are a specialty finance company focused on the education financing marketplace in the United States. We provide loan programs on behalf of our lender clients for undergraduate and graduate students and for college graduates seeking to refinance private education loan obligations. We offer a fully integrated suite of services through our Monogram platform. We partner with lenders to design and administer education loan programs through our Monogram platform, which are typically school-certified. These programs are designed to be marketed through educational institutions or to prospective borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the capital markets. In addition, we offer outsourced tuition planning, tuition billing, refund management and payment technology services through TMS as well as loan processing and disbursement services through Cology LLC. We also offer a number of other services on a stand-alone, fee-for-service basis in support of our clients, including loan origination, portfolio management and securitization services.
Through Union Federal, we offer traditional retail banking products, including residential and commercial mortgages, time deposits and money market demand accounts, on a stand-alone basis. In addition, Union Federal previously generated additional revenues by originating Monogram-based education loan portfolios. On May 28,
52
2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the OCC and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to offer banking services through Union Federal. On June 13, 2014, Union Federal notified FMD that it would no longer originate education loans under its Monogram-based loan program. As a result of the planned dissolution and our evaluation under ASC 205-20, Presentation of Financial Statements Discontinued Operations, or ASC 205-20, we presented Union Federal as a discontinued operation in our consolidated financial statements. See Note 3, Discontinued OperationsUnion Federal, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
For a detailed description of our product and service offerings, see BusinessOverview included in Item 1 of this annual report.
Loan Processing and Origination
Our Monogram platform provides us with an opportunity to originate, administer, manage and finance education loans, and our lender clients Monogram-based loan programs are a significant component of our return to the education financing marketplace. As of September 10, 2014, we have loan program agreements with three lender clients for Monogram-based loan programs. The education loans that we originate on behalf of our partner lender clients are not included on our consolidated balance sheets but, rather, are included on the balance sheets of our partner lender clients. As such, none of the references in this annual report to education loans included on our consolidated balance sheets include the education loans processed by us on behalf of our partner lender clients.
During the second quarter of fiscal 2013, we began to process and disburse education loans through Cology LLC on behalf of its credit union and other lender clients. Cology LLC earns fees primarily based on the number of loan applications, loan certifications and disbursements it processes on behalf of its clients. Because Cology LLC is a loan processer, the education loans that it processes on behalf of its clients are not included on our consolidated balance sheets but, rather, are included on the balance sheets of its clients. As such, none of the references in this annual report to education loans included on our consolidated balance sheets include the education loans processed by Cology LLC on behalf of its clients.
The following table presents our loan facilitation metrics with respect to our Monogram-based programs, excluding Union Federal, for fiscal 2014 and fiscal 2013, as well as our loan facilitation metrics with respect to the education loans processed by Cology LLC for these years, which with respect to fiscal 2013, included only the period from its October 19, 2012 acquisition through June 30, 2013. We use the term facilitated loan to mean an education loan that has been approved following receipt of all applicant data, including the signed credit agreement, required certifications from the school and applicant and any required income or employment verification. We use the term disbursed loan to mean a loan for which loan funds have been disbursed on behalf of the lender. 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.
Fiscal 2014 | Fiscal 2013 | |||||||||||||||||||||||
Partnered Lending |
Cology LLC | Total | Partnered Lending |
Cology LLC (since acquisition) |
Total | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Facilitated Loans |
$ | 89,268 | $ | 579,755 | $ | 669,023 | $ | 101,343 | $ | 164,462 | $ | 265,805 | ||||||||||||
Disbursed Loans |
90,659 | 548,750 | 639,409 | 98,260 | 310,949 | 409,209 |
The decline in Monogram-based loan volume from fiscal 2013 to fiscal 2014 was primarily the result of a reduction in marketing spend year-over-year. While the reduction in marketing expenses adversely impacted the level of loan volumes, the reduction improved our overall cost of loan acquisition from fiscal 2013 to fiscal 2014.
53
Portfolio Performance
Credit performance of consumer-related loans generally has been adversely affected by general economic conditions in the United States over the past six 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 in more recent years, they may have a material adverse effect on consumer loan portfolio performance in the future. Our Monogram-based education loan portfolios are not yet fully exposed to significant adverse portfolio performance because a majority of these portfolios have yet to experience any significant 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 for loans that have similar credit characteristics as the Monogram-based education loan portfolios.
Capital Markets
We believe that conditions in the capital markets generally improved in fiscal 2014 as compared to recent years. In particular, investors in ABS demonstrated increased interest in ABS backed by private education loans, resulting in a reduction in credit spreads applicable to these securities. In addition, in calendar 2013, private and federal education loan ABS issuances combined exceeded $20.0 billion for the second calendar year in a row. We believe that these trends indicate that the economics of private education loan ABS are starting to become more attractive to issuers in the private education loan securitization marketplace. However, we have not completed a securitization transaction since fiscal 2008, and if we execute a financing transaction in the capital markets, the structure and economics of any such transaction may be materially different from prior transactions that we have sponsored. Such differences may include lower revenues as a result of comparatively wider credit spreads and lower advance rates.
Uncertainties
Our near-term financial performance and future growth depends, in large part, on our ability to successfully and efficiently market our Monogram platform, TMS offerings and Cology LLC offerings so that we may grow and diversify our client base and revenues. Facilitated and disbursed loan volumes are key elements of our financial results and business strategy, and we believe that the results to date demonstrate market demand for Monogram-based education loans.
We have invested in our distribution capabilities over the course of the past three years, including our school sales force and TMS, but we face challenges in increasing loan volumes. 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.
In addition, our future financial results and liquidity position could be materially impacted by the proceedings related to our federal and state income tax returns, including any challenge to the tax refunds previously received as a result of the audit being conducted by the IRS, as well as the possible inclusion of additional taxable income for such tax years under audit. See Results of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012Overall ResultsInternal Revenue Service Audit, below, Item 3, Legal Proceedings, and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
Outlook
Our long-term success depends on our ability to attract additional lender clients and otherwise obtain additional sources of interim or permanent financing, such as securitizations or alternative financing transactions. As of September 10, 2014, we have loan program agreements based on our Monogram platform with three lender clients. While we have demonstrated market demand for Monogram-based education loans, we are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current
54
economic and regulatory environment where lenders continue to evaluate their education lending business models. Additionally, as one of our current partner lender clients provides the majority of our Monogram-based loan program fees, we are subject to concentration risk as it relates to this revenue stream until we are able to attract additional lender clients. We believe, however, that the credit quality characteristics and interest rates of the Monogram-based loan portfolios originated to date 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.
We are uncertain of the volume of education loans to be generated by the Monogram-based loan programs of our current lender clients, or any additional lender clients, including clients of Cology LLC. 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 Cology LLC and our ability to obtain 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 current 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 loan 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 currently under consideration; |
| The extent to which our services and products, including our Monogram platform, TMS offerings and Cology LLC 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; |
| An adverse outcome in any challenge to federal tax refunds previously received in the amounts of $176.6 million and $45.1 million as a result of the audit of our past tax returns currently being conducted by the IRS, including as a result of the NOPAs we received from the IRS on September 10, 2013 that propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any; |
| An adverse outcome in the purported class action filed against FMD and certain of FMDs current and former officers in the United States District Court for the District of Massachusetts in August 2013 and the related derivative action filed against certain of FMDs current and former officers and certain current and former members of the FMD Board of Directors in the United States District Court for the District of Massachusetts in October 2013, if any insurance that we have does not cover this liability or proves to be insufficient; |
| Regulatory requirements applicable to TMS and FMD; |
| 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; |
55
| The underlying loan performance of the Monogram-based loan programs, including the net default rates, and the timing and amounts of receipt of excess credit enhancements, if any, that may be material to us; |
| The resolution of our appeal of the ATB Order 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; |
| Application of the Dodd-Frank Act, through the supervisory authority of the CFPB, which has the authority to regulate consumer financial products such as education loans, and to take enforcement actions against institutions that act as service providers to originators and processers of education loans, such as our subsidiaries FMER and Cology LLC; |
| 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. |
Results of OperationsFiscal Years ended June 30, 2014, June 30, 2013 and June 30, 2012
The financial results of operations include FMD and its subsidiaries for the fiscal years then ended. The results of Union Federal, for all fiscal years presented, as well as previously consolidated securitization trusts and the results of FMDs subsidiary First Marblehead Data Services, Inc., or FMDS, for the fiscal year ended June 30, 2012, are included in discontinued operations as discussed below.
Discontinued Operations
Union Federal
On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the OCC, and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to offer banking services through Union Federal.
The voluntary dissolution plan will outline managements intention to sell the assets of Union Federal, consisting primarily of its education loan, mortgage loan and investment portfolios, and settling its customer deposits at the earlier of maturity or the effectiveness of the dissolution. In addition to the exit costs discussed in Note 3, Discontinued OperationsUnion Federal, in the notes to our consolidated financial statements included in Item 8 of this annual report, we expect to incur charges related to lease obligations, legal fees and contract termination provisions in connection with the voluntary dissolution plan. Furthermore, depending on the timing and extent of the dissolution process, FMD may purchase certain assets from Union Federal or advance funds to facilitate deposit redemptions on a temporary basis before the assets are ultimately liquidated. We expect the dissolution process to be complete by the end of fiscal 2015.
As a result of the foregoing and our evaluation under ASC 205-20, we reported the operations and activities relating to Union Federal within discontinued operations for fiscal 2014, fiscal 2013 and fiscal 2012.
See Note 3, Discontinued OperationsUnion Federal, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
56
Securitization Trusts and FMDS
Upon our adoption of ASU 2009-16 and 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 three 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 remaining 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 FMDs 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. Further, we concluded that this would occur within an appropriate assessment period for both the NCSLT Trusts and the GATE Trusts. As a result, we reported the operations and activities relating to the NCSLT Trusts, the GATE Trusts and FMDS within discontinued operations for fiscal 2012.
See Note 3, Discontinued OperationsSecuritization Trusts and First Marblehead Data Services, Inc., in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
Overall Results
The following table summarizes the results of our consolidated operations:
Fiscal years ended June 30, | Change between periods better (worse) |
|||||||||||||||||||
2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Tuition payment processing fees |
$ | 28,186 | $ | 26,668 | $ | 26,544 | $ | 1,518 | $ | 124 | ||||||||||
Administrative and other fees |
13,640 | 11,238 | 9,778 | 2,402 | 1,460 | |||||||||||||||
Fair value changes to service revenue receivables |
2,330 | 2,068 | 947 | 262 | 1,121 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
44,156 | 39,974 | 37,269 | 4,182 | 2,705 | |||||||||||||||
Total expenses |
83,880 | 91,267 | 101,046 | 7,387 | 9,779 | |||||||||||||||
Total other income |
784 | 2,461 | 12,688 | (1,677 | ) | (10,227 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from continuing operations, before income taxes |
(38,940 | ) | (48,832 | ) | (51,089 | ) | 9,892 | 2,257 | ||||||||||||
Income tax expense (benefit) from continuing operations |
1,125 | 2,295 | (17,956 | ) | 1,170 | (20,251 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss from continuing operations |
(40,065 | ) | (51,127 | ) | (33,133 | ) | 11,062 | (17,994 | ) | |||||||||||
Discontinued operations, net of taxes |
2,498 | 930 | 1,135,361 | 1,568 | (1,134,431 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income |
$ | (37,567 | ) | $ | (50,197 | ) | $ | 1,102,228 | $ | 12,630 | $ | (1,152,425 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
The net loss from continuing operations for the fiscal year ended June 30, 2014 was $40.1 million, or $(3.55) per common share, compared to a net loss from continuing operations of $51.1 million, or $(4.77) per common share, for the fiscal year ended June 30, 2013. The improvement in the net loss year-over-year was
57
attributable to a $4.2 million increase in total revenues, a $7.4 million decline in expenses and a $1.2 million decrease in income tax expense, partially offset by a decline in other income of $1.7 million.
The net loss from continuing operations for the fiscal year ended June 30, 2013 was $51.1 million, or $(4.77) per basic common share, compared to a net loss from continuing operations of $33.1 million, or $(3.00) per basic common share, for the fiscal year ended June 30, 2012. The increase in the net loss year-over-year was primarily attributable to the results for fiscal 2012, which included significant benefits of $9.5 million related to the deconsolidation of the GATE Trusts, which is included in other income, as well as an income tax benefit from continuing operations of $18.0 million. The aggregate of these benefits was $27.5 million, or $2.49 per basic common share.
Revenues
Revenues include tuition payment processing fees earned by TMS, fee-for-service revenues for loan processing, origination and program support, fees for portfolio management services and fees related to our Monogram platform. Revenues also include fair value changes related to service revenue receivables.
Revenues were $44.2 million for the fiscal year ended June 30, 2014, up $4.2 million from $40.0 million for the fiscal year ended June 30, 2013. The increase in revenues for the fiscal year ended June 30, 2014 included a $2.2 million increase in fee income from Cology LLC, an increase of $1.6 million in Monogram-based fee revenues, an increase of $1.5 million in tuition management fees and an increase of $1.2 million in fees for portfolio management services. These increases were partially offset by $2.0 million in lower revenues from special servicing. Cology LLC completed its acquisition of a substantial portion of the operating assets of the Cology Sellers in October 2012 and, as a result, the fiscal year ended June 30, 2013 included fee income only for the period from the date of acquisition through June 30, 2013. The increase in Monogram-based fee revenues was primarily the result of increased loan portfolio balances at our partner lender clients. Due to the nature of the recurring fee structure under our Monogram-based programs, our Monogram-based fee income increases as portfolio sizes at our partner lender clients grow. The increase in tuition management fees was primarily due to increased credit card payment processing. The increase in portfolio management services fees was due to an increase in new clients as well as fees received for certain one-time services performed.
Revenues were $40.0 million for the fiscal year ended June 30, 2013, up $2.7 million from $37.3 million for the fiscal year ended June 30, 2012. The increase from fiscal 2012 to fiscal 2013 was primarily related to $4.6 million in higher fee income related to our Monogram platform as a result of significantly higher partnered lending loan disbursements, the inclusion of $2.2 million of revenues from Cology LLC for loan processing and increases in the valuation of our service revenue receivables of $1.1 million, partially offset by $5.1 million in lower revenues from special servicing and transition services related to the FMDS sale.
Fair value changes to service revenue receivables We record our service revenue receivables at fair value on our consolidated balance sheets. At June 30, 2014, our service revenue receivables consisted of additional structural advisory fee and residual receivables and represented the estimated fair value of the service revenue receivables expected to be collected over the life of the various separate securitization trusts that have purchased education loans facilitated by us, with no further service obligations on our part.
Changes in the estimated fair value of the service revenue receivables due, less any cash distributions received, are recorded in our consolidated statements of operations within fair value changes to service revenue receivables.
In the absence of market-based transactions, we use cash flow modeling techniques to derive an estimate of fair value for financial reporting purposes. Significant observable and unobservable inputs used to develop our fair value estimates include, but are not limited to, recovery, default and prepayment rates, discount rates and the forward LIBOR curve. See Note 9, Fair Value Measurements, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
58
Expenses
The following table reflects the composition of expenses:
Fiscal years ended June 30, | Change between periods better (worse) |
|||||||||||||||||||
2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Compensation and benefits |
$ | 36,251 | $ | 39,317 | $ | 41,145 | $ | 3,066 | $ | 1,828 | ||||||||||
General and administrative: |
||||||||||||||||||||
Third-party services |
14,689 | 14,651 | 15,907 | (38 | ) | 1,256 | ||||||||||||||
Depreciation and amortization |
5,288 | 4,347 | 4,615 | (941 | ) | 268 | ||||||||||||||
Marketing |
1,799 | 5,123 | 8,470 | 3,324 | 3,347 | |||||||||||||||
Occupancy and equipment |
10,856 | 11,379 | 10,913 | 523 | (466 | ) | ||||||||||||||
Servicer fees |
278 | 650 | 696 | 372 | 46 | |||||||||||||||
Merchant fees |
7,773 | 6,663 | 6,467 | (1,110 | ) | (196 | ) | |||||||||||||
Trust related special servicing expenses |
| 1,639 | 5,920 | 1,639 | 4,281 | |||||||||||||||
Other |
6,946 | 7,498 | 6,913 | 552 | (585 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total general and administrative |
47,629 | 51,950 | 59,901 | 4,321 | 7,951 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
$ | 83,880 | $ | 91,267 | $ | 101,046 | $ | 7,387 | $ | 9,779 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total number of employees from continuing operations at fiscal year-end |
281 | 289 | 293 |
Compensation and benefits Compensation and benefits expenses decreased to $36.3 million in fiscal 2014 from $39.3 million in fiscal 2013. The decrease of $3.0 million year-over-year was primarily driven by $2.1 million in lower salary expense due to a decline in average headcount and $1.2 million in lower severance-related costs.
Compensation and benefits expenses decreased to $39.3 million in fiscal 2013 from $41.1 million in fiscal 2012. The decrease of $1.8 million year-over-year was primarily due to approximately $700 thousand in lower severance related costs, $534 thousand in lower non-cash compensation and a $470 thousand decrease in salary expense as a result of an increase in costs capitalized for internally developed software. These decreases were partially offset by $348 thousand in higher variable sales compensation. Total headcount decreased in fiscal 2013 due to the implementation of certain expense reduction efforts. This decrease in headcount was largely offset by our hiring of 43 employees from the Cology Sellers in connection with the acquisition of a substantial portion of the operating assets of the Cology Sellers as of October 19, 2012.
General and administrative expenses General and administrative expenses decreased to $47.6 million in fiscal 2014 from $51.9 million in fiscal 2013. The decrease of $4.3 million was primarily driven by a $3.3 million decline in marketing costs coupled with a $1.6 million decrease in trust-related special servicing expenses as a result of the cessation of our special servicing obligations for certain of the securitization trusts that we previously facilitated. These decreases were partially offset by increased merchant fee expenses related to payment processing services performed by TMS of $1.1 million.
General and administrative expenses decreased to $51.9 million in fiscal 2013 from $59.9 million in fiscal 2012. The decrease of $8.0 million was largely driven by a decrease in trust related special servicing expenses, which declined $4.3 million year-over-year, primarily as a result of the cessation of our special servicing obligations for certain of the securitization trusts that we previously facilitated. Additionally, marketing costs decreased by $3.3 million year-over-year due to our investment in brand development of Union Federals Monogram-based loan programs in fiscal 2012.
59
Other Income
The following table reflects the components of other income:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Interest income |
$ | 227 | $ | 473 | $ | 950 | ||||||
Interest expense |
(25 | ) | (124 | ) | (251 | ) | ||||||
|
|
|
|
|
|
|||||||
Net interest income |
202 | 349 | 699 | |||||||||
Gain from deconsolidation of trusts |
| | 9,514 | |||||||||
Other income |
582 | 2,112 | 2,475 | |||||||||
|
|
|
|
|
|
|||||||
Total other income |
$ | 784 | $ | 2,461 | $ | 12,688 | ||||||
|
|
|
|
|
|
Net interest income Interest income primarily reflected interest earned on cash and cash equivalents and short-term investments of $213 thousand, $435 thousand and $468 thousand for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. The remaining interest income related to interest earned on our interest-bearing restricted cash of $14 thousand, $38 thousand and $482 thousand for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. The decrease in interest income from both fiscal 2013 to fiscal 2014 and fiscal 2012 to fiscal 2013 was the result of a decline in rates and, to a lesser extent, a decline in average balances held. Interest income for the fiscal years presented was partially offset by interest expense costs on various lease obligations.
Gain from deconsolidation of trusts During fiscal 2012, we recorded income related to the deconsolidation of the securitization trusts previously consolidated of $9.5 million largely relating to the re-establishment of the fair value of the residual interests that were previously eliminated upon our adoption of ASU 2009-17 on July 1, 2010.
Other income During fiscal 2014, we recorded other income of $582 thousand, consisting of $281 thousand in proceeds from the TERI settlement, discussed below, $225 thousand related to the sale of Cology LLCs loan servicing business and $76 thousand in cash recoveries on previously defaulted education loans held by FMD.
During fiscal 2013, we recorded other income of $2.1 million, consisting of $702 thousand in proceeds from the TERI settlement, discussed below, $946 thousand related to the sale of a defaulted loan portfolio, which was transferred by Union Federal to an indirect subsidiary of FMD in 2009, and $464 thousand in cash recoveries on previously defaulted education loans held by FMD.
During fiscal 2012, we recorded other income of $2.5 million, consisting of $1.6 million in proceeds from the TERI settlement, discussed below, and $790 thousand in cash recoveries on previously defaulted education loans held by FMD.
The TERI settlement proceeds recognized in each fiscal year presented above are the result of the resolution of certain matters related to TERIs confirmed plan of reorganization. This income represented cash distributions from the liquidating trust under TERIs confirmed plan of reorganization.
Income Taxes
We are subject to federal income tax, as well as income tax in multiple U.S. state and local jurisdictions. Our effective income tax rate is calculated on a consolidated basis. The IRS is auditing our tax returns for fiscal 2007 through fiscal 2010. We also remain subject to federal income tax examinations for fiscal 2011 through fiscal 2013. In addition, we are involved in several matters relating to the Massachusetts tax treatment of GATE, a former subsidiary of FMD. See Internal Revenue Service Audit below as well as Item 3, Legal Proceedings, and Note 13, Commitments and ContingenciesIncome Tax Matters, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information regarding these matters.
60
Our state income tax returns in jurisdictions other than Massachusetts remain subject to examination for various fiscal years ended between June 30, 2010 and June 30, 2014.
Income tax expense from continuing operations for fiscal 2014 was $1.1 million as compared to an income tax expense of $2.3 million in fiscal 2013 and income tax benefit of $18.0 million in fiscal 2012. The decrease in income tax expense from fiscal 2013 to fiscal 2014 was due to additional state tax liability and accrued interest of approximately $1.0 million recognized in fiscal 2013 related to the case pertaining to our Massachusetts state income tax returns for the 2008 and 2009 tax years. The benefit in fiscal 2012 was primarily the result of the recognition of an income tax benefit of $12.5 million during the second quarter of fiscal 2012 in connection with the ATB Order, as well as the expiration of the statute of limitations applicable to GATEs taxable year ended June 30, 2007. In addition, a $5.7 million benefit was recorded in the third quarter of fiscal 2012 related to the gain on the sale of FMDS, which was included in discontinued operations.
Beginning in fiscal 2011, we no longer had any taxable income in prior periods to offset current period net operating losses for federal income tax purposes. As a result, we recorded a net operating loss carryforward asset as of June 30, 2014 and June 30, 2013, totaling $58.1 million and $45.0 million, respectively, for which we recorded a full valuation allowance.
Under current law, we do not have remaining taxes paid within available net operating loss carryback periods, and it is more likely than not that our deferred tax assets will not be realized through future reversals of existing temporary differences or available tax planning strategies. Accordingly, we have determined that a valuation allowance was necessary for all of our deferred tax assets not scheduled to reverse against existing deferred tax liabilities as of June 30, 2014 and June 30, 2013. We will continue to review the recognition of deferred tax assets on a quarterly basis.
Internal Revenue Service Audit
Effective March 31, 2009, we completed the sale of the Trust Certificate. In connection with the sale of the Trust Certificate, FMD entered into the Asset Services Agreement pursuant to which FMD provided various consulting and advisory services to the purchaser of the Trust Certificate. As a result of the sale of the Trust Certificate, as well as our operating losses incurred in fiscal 2009, we recorded an income tax receivable for federal income taxes paid on taxable income in prior fiscal years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables. Furthermore, we received a federal income tax refund of $45.1 million in October 2010 related to the operating losses in fiscal 2010, which we applied to taxable income from fiscal 2008. In April 2010, the IRS commenced an audit of our tax returns for fiscal 2007 through fiscal 2009, including a review of the tax treatment of the sale of the Trust Certificate and the federal tax refund previously received in the amount of $176.6 million. Such audits are consistent with the practice of the Joint Committee of Taxation, which requires the IRS to perform additional procedures for a taxpayer who receives a tax refund in excess of $2.0 million, which may include an audit of such taxpayers tax return. The IRS is also auditing our fiscal 2010 tax return in light of the $45.1 million income tax refund that we received in October 2010.
We announced on August 15, 2013 that, as part of the audit process, we expected to receive a NOPA from the IRS. On September 10, 2013 we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. In the NOPAs, the IRS asserts that our sale of the Trust Certificate should not be recognized for federal income tax purposes primarily because we retained the economic benefits and burdens of the Trust Certificate, including, among other things, retaining certain repurchase rights and data rights. The IRS further concludes that the transaction should be characterized as a financing instead of a sale and asserts that the sale of the Trust Certificate and the execution of the Asset Services Agreement had the impact of converting taxable income to the owner from an accrual basis to a cash basis. As a result, the NOPAs propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments
61
that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any. The NOPAs do not address tax years beyond June 30, 2011.
The NOPAs are proposed recommendations of the reviewing agent in the IRS field office and, as such, are initial IRS positions and not final determinations, and, as a result, do not require any tax payment at the time of issuance. We have considered the requirements of ASC 740 and the impact of the NOPAs, along with other information supporting our overall tax position, in our assessment of the ultimate outcome of this matter with the IRS, and based on our analysis, we did not record an accrual related to this matter in our consolidated financial statements at June 30, 2014. Such an accrual, if it becomes necessary, could be significant and material to our consolidated financial statements.
We are vigorously contesting the proposed adjustments with the IRS, and we continue to believe we have a strong position as it relates to this matter; however, we cannot predict the timing or outcome of the IRS audit. The process of resolving this issue, which may include an appeals process with the IRS and litigation in the U.S. Tax Court and the U.S. Court of Appeals, may extend over multiple years depending on how it progresses through the IRS and, if necessary, the courts. Assuming this matter advances unresolved through the IRS administrative process and the courts, we are not required to make tax payments, if any, until the matter is fully resolved, which may be several years from now. However, if we receive an unfavorable outcome from the U.S. Tax Court and appeal, we must post a bond, which could have a significant cost and, depending on our financial condition, may not be obtainable, in order to prevent collection of the tax deficiency.
Discontinued Operations, Net of Taxes
The discontinued operations of Union Federal, net of taxes, for the fiscal year ended June 30, 2014 was $2.5 million, or $0.22 per common share, compared to $930 thousand, or $0.09 per common share, for the fiscal year ended June 30, 2013. The $1.6 million improvement year-over-year was primarily attributable to $2.1 million in gains on the sales of portfolios of education loans to Citizens and $600 thousand in increased net interest income, partially offset by other-than-temporary impairment losses on investments available-for-sale of $1.1 million. Discontinued operations, net of taxes, for the fiscal year ended June 30, 2012 of $1.1 billion primarily consisted of the operations and activities of the NCSLT Trusts, the GATE Trusts and FMDS. See Note 3, Discontinued Operations, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
Financial Condition
The changes in our financial condition from June 30, 2013 to June 30, 2014 are discussed below. The assets and liabilities of Union Federal have been segregated and reported as assets and liabilities of discontinued operations on our consolidated balance sheets.
Continuing Operations
Cash, Cash Equivalents and Short-term Investments
We had combined cash, cash equivalents and short-term investments of $74.0 million and $113.8 million at June 30, 2014 and June 30, 2013, respectively, representing interest-bearing and non-interest-bearing deposits, money market funds and certificates of deposit with highly-rated financial institutions.
The decrease of $39.8 million was primarily a result of $32.6 million to fund continuing operations, $2.7 million in additional deposits for participation accounts and $2.5 million for purchases of property and equipment.
Restricted Cash
At June 30, 2014, restricted cash on our consolidated balance sheets was $94.4 million, of which $93.9 million was held by TMS. Restricted cash at June 30, 2013 was $87.3 million, of which $86.7 million was held by TMS. The increase of $7.1 million from fiscal 2013 to fiscal 2014 in restricted cash was primarily due to the increased cash balance at TMS and timing of payments to educational institutions.
62
Restricted cash held by TMS represents tuition payments collected from students or their families on behalf of educational institutions. These cash balances are held in escrow under a trust agreement for the benefit of TMS educational institution clients and are generally subject to cyclicality, tending to peak in August of each school year, early in the enrollment cycle, and to decrease in May, the end of the school year. Over the last 12 months, TMS restricted cash balances ranged from a high of $327.0 million during August 2013 to a low of $33.6 million during May 2014. Restricted cash held by Cology LLC represents loan origination proceeds which it collects and disburses on behalf of its lender clients. Restricted cash held by FMER relates to recoveries on defaulted education loans collected on behalf of clients as well as undistributed loan origination proceeds. We record a liability on our consolidated balance sheets representing tuition payments due to our TMS clients, loan origination proceeds due to our Cology LLC clients and recoveries on defaulted education loans and education loan proceeds due to schools.
Deposits for Participation Interest Accounts
We recorded deposits for participation accounts at fair value on our consolidated balance sheets. Deposits for participation accounts increased by $2.7 million from $13.1 million at June 30, 2013 to $15.8 million at June 30, 2014. The increase year-over-year was primarily attributable to increased fundings in fiscal 2014 due to an increase in disbursed loan volumes for our partner lender clients. These amounts excluded $7.4 million in participation account funds that are due back to FMD and which we reclassified from deposits for participation accounts to cash and cash equivalents on our consolidated balance sheet as of June 30, 2014. The return of funds resulted from the thirteenth amendment to the SunTrust Loan Program Agreement, which was effective June 1, 2014, pursuant to which the amount of credit enhancement required in the participation account was reduced and such fund were contractually due back to FMD on June 30, 2014. The refund, net of an additional deposit for new program year loan volume (defined as loans expected to be funded during the year subsequent to the thirteenth amendment effective date), was $7.4 million, which we received on July 25, 2014.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible assets acquired. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability. In connection with our acquisition of assets from TMS and the Cology Sellers, we recorded other intangible assets related to the TMS customer list and tradename and the Cology Sellers customer list, each of which we amortize on a straight-line basis over 15 years, and TMS technology, which we amortize on a straight-line basis over six years. We record amortization expense in general and administrative expenses in our consolidated statements of operations.
As it relates to TMS, the customer list intangible asset is related to educational institutions with which TMS had existing tuition programs in place as of December 31, 2010. The trade name intangible asset relates to the name and reputation of TMS in the tuition payment industry. Intangible assets attributable to technology represented the replacement cost of software and systems acquired that are necessary to support operations, net of an obsolescence factor. Goodwill represents the value ascribed to the acquisition of TMS that cannot be separately ascribed to a tangible or intangible asset.
As it relates to Cology LLC, the customer list intangible asset is related to lender clients, including credit union and other lender clients, with which the Cology Sellers had existing loan origination and servicing programs in place as of October 19, 2012, the closing date of the acquisition. Goodwill represents the value ascribed to the acquisition of a substantial portion of the operating assets of the Cology Sellers that cannot be separately ascribed to a tangible or intangible asset.
In fiscal 2014, we evaluated our goodwill for impairment on May 31, which is our annual impairment testing date, and concluded that the fair market values of the TMS and Cology LLC reporting units were approximately 42% and 38%, respectively, in excess of our recorded book value and, therefore, were not impaired as of that date. In determining whether impairment exists, we assess impairment at the level of the TMS and Cology LLC reporting units. There have been no indicators of impairment since that date.
63
Various assumptions go into our assessment of whether there is any goodwill impairment to be recorded. The more meaningful assumptions that contribute to the cash flow model used to determine the fair value of the TMS reporting unit include the net retention rate of new and existing clients, the penetration rate achieved in the overall customer portfolio, adoption of refund management and Student Account Center products and pricing, the level of interest income to be earned by TMS on funds received but not yet disbursed to client schools, including the forward LIBOR curve, the level of cash balances and the applicable hold periods, all of which impact net interest income, expense levels at TMS and the discount rate used to determine the present value of the cash flow streams. TMS business would be adversely affected if any of the following were to occur: higher attrition rates than planned as a result of the competitive environment or our inability to provide products and services that are competitive in the marketplace, lower-than-planned adoption rates of refund management and Student Account Center products, higher-than-expected expense levels to provide services to TMS clients, a lower interest rate environment than depicted by the LIBOR curve, shorter hold periods or lower cash balances than contemplated, which would reduce our overall net interest income opportunity for cash that is held by us on behalf of TMS school clients, increases in equity returns required by investors and changes in our business model that may impact one or more of these variables. The more meaningful assumptions that contribute to the cash flow model used to determine the fair value of the Cology LLC reporting unit include loan volume growth, revenues related to the cross-selling of Monogram-based products and services, client attrition, costs required to support the assumed volume of the business and discount rates. Cology LLCs business would be adversely affected if any of the following were to occur: higher attrition rates than planned, a lack of acceptance of Monogram products and services by its credit union and other lender clients, higher-than-expected expense levels to provide services to Cology LLC clients and changes in our business model that may impact one or more of these variables.
At June 30, 2014 our goodwill balance was $20.1 million, of which $19.5 million related to TMS and $518 thousand related to Cology LLC.
At June 30, 2014, our net intangible assets balance was $21.8 million, of which $16.8 million related to TMS and $5.0 million related to Cology LLC. During the fiscal year ended June 30, 2014, we recorded amortization expense of $1.9 million related to TMS and $377 thousand related to Cology LLC.
Discontinued Operations
Cash and Cash Equivalents
Union Federal held a total of $86.4 million in cash and cash equivalents as of June 30, 2014, an increase of $63.1 million from $23.3 million as of June 30, 2013. The increase year-over-year was primarily a result of $63.4 million in proceeds received on the sales of portfolios of education loans to Citizens in fiscal 2014.
Investments Available-for-Sale
Investments available-for-sale held by Union Federal are reported at fair value at our consolidated balance sheet dates. Investments available-for-sale principally consisted of mortgage-backed federal agency securities at June 30, 2014 and June 30, 2013. The investments available-for-sale decreased $22.5 million from $84.8 million at June 30, 2013 to $62.3 million at June 30, 2014 primarily due to $12.2 million of principal repayments received, a net decrease of $9.9 million from purchase and sale activity and $970 thousand in other-than-temporary impairment losses.
Loans
All loans held by Union Federal have been classified as held-for-sale and recorded at the lower of cost or fair value as of June 30, 2014. Education loans decreased $41.1 million from $63.0 million at June 30, 2013 to $21.9 million at June 30, 2014 primarily due to the sales of portfolios of education loans to Citizens in fiscal 2014, which totaled approximately $59.0 million in aggregate outstanding principal, partially offset by new loan originations. Mortgage loans increased $3.7 million from $12.6 million at June 30, 2013 to $16.3 million at June 30, 2014 primarily due to new loan originations.
64
Deposits
Deposit liabilities held by Union Federal, comprised of demand deposits and time deposits, were $161.1 million and $164.0 million at June 30, 2014 and June 30, 2013, respectively. The decline year-over-year was primarily attributable to online competitors offering higher rates on money market deposits and local competitors offering higher rates on time deposits.
See Note 3, Discontinued OperationsUnion Federal, in the notes to our consolidated financial statements included in Item 8 of this annual report for additional information.
Contractual Obligations
Our consolidated contractual obligations consist of commitments under operating leases.
The following table below summarizes our contractual cash obligations related to continuing operations by period at June 30, 2014, excluding the offsetting effect of payments due to us under subleases:
Contractual obligations |
Payments due by period | |||||||||||||||||||
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Operating lease obligations(1) |
$ | 7,518 | $ | 3,691 | $ | 3,827 | $ | | $ | |
(1) | For additional information on our operating leases, see Item 2, Properties, in this annual report. |
Total Stockholders Equity
Total stockholders equity decreased from $179.3 million at June 30, 2013 to $146.5 million at June 30, 2014 as a result of our net loss of $37.6 million, partially offset by the change in accumulated other comprehensive income of $1.0 million for the net unrealized gains on our investments available-for-sale portfolio and an increase of $4.4 million in additional paid-in capital primarily for stock compensation.
Reverse Stock Split
On November 12, 2013, the FMD stockholders approved a 1-for-10 reverse stock split of FMDs issued and outstanding shares of common stock, which was effected on December 2, 2013. The shares of common stock retained a par value of $0.01 per share. In addition, FMDs authorized shares of common stock were proportionately decreased from 250,000,000 shares to 25,000,000 shares. Accordingly, stockholders equity reflects the impact of the reverse stock split by reclassifying from common stock to additional paid-in capital an amount equal to the par value of the decreased number of shares issued resulting from the reverse stock split. The impact on our consolidated balance sheet was a decrease of $1.1 million in common stock with an offsetting increase to additional paid-in capital.
Off-Balance Sheet Arrangements
We offer outsourcing services in connection with education loan programs, from program design through securitization of the education loans. We have historically structured and facilitated the securitization of education loans for our clients through a series of special purpose trusts. The principal uses of the securitization trusts we facilitated have been to generate sources of liquidity for our clients and make available more funds to students and colleges. In accordance with the guidance in ASC 810, Consolidation, we do not consolidate these securitization trusts as we are not deemed to be the primary beneficiary.
65
Liquidity and Capital Resources
Sources and Uses of Cash
The following is a discussion of sources and uses of cash on a U.S. generally accepted accounting principle, or GAAP, basis as presented in our consolidated statements of cash flows included in our consolidated financial statements included in Item 8 of this annual report. We also use a non-GAAP financial metric, net operating cash usage, when evaluating our cash and liquidity position, discussed in detail under Non-GAAP Measure: Net Operating Cash Usage below.
Net cash used in operating activities from continuing operations for fiscal 2014 was $36.3 million, compared with net cash used in operating activities from continuing operations of $51.9 million for fiscal 2013. The $15.6 million decrease in net cash used was principally the result of an $11.1 million lower net loss from continuing operations coupled with a decline in the net funding of participation accounts of $6.4 million and an overall reduction of $2.9 million in accounts payable funding. This was partially offset by increased funding for other assets as compared to the prior year.
We anticipate continuing to receive fees related to loan processing and origination and portfolio management services as well as fees related to Monogram-based loan programs. We believe that our cash, cash equivalents and short-term investments, coupled with the management of our expenses and these fees, will be adequate to fund our operating losses in the short term as we seek to expand our client and revenue base over the short and long term. We are uncertain, however, as to whether we will be successful in selling our Monogram platform to additional lenders or how much loan volume may be originated by current or any additional lenders in the future.
Net cash provided by investing activities from continuing operations for fiscal 2014 was $12.3 million compared with net cash used in investing activities of $24.1 million for fiscal 2013. The improvement of $36.4 million was the result of a $40.1 million increase in restricted cash and restricted funds due to clients due to the return of a $40.0 million deposit to TMS from Union Federal in fiscal 2013, an increase of $5.3 million in capital contributions to Union Federal and $4.7 million of net cash paid for the acquisition of a substantial portion of the operating assets of the Cology Sellers in fiscal 2013. This was partially offset by a reduction in the net proceeds received from short-term investments of $14.7 million.
Net cash used in financing activities from continuing operations was $717 thousand for fiscal 2014 compared to net cash used in financing activities of $338 thousand during fiscal 2013. The increase in net cash used in financing activities was primarily due to increased repurchases of common stock during fiscal 2014.
The OCC regulates all capital distributions by Union Federal directly or indirectly to us, including dividend payments. Union Federal is required to file a notice with the OCC at least 30 days before the proposed declaration of a dividend or approval of a proposed capital distribution by the Union Federal Board of Directors. Union Federal must file an application to receive the approval of the OCC for a proposed capital distribution when, among other circumstances, the total amount of all capital distributions (including the proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years.
A notice or application to make a capital distribution by Union Federal may be disapproved or denied by the OCC if it determines that, after making the capital distribution, Union Federal would fail to meet minimum required capital levels or if the capital distribution raises safety or soundness concerns or is otherwise restricted by statute, regulation or agreement between Union Federal and the OCC or a condition imposed by an OCC agreement. Under the Federal Deposit Insurance Corporation Improvement Act, or FDICIA, an FDIC-insured depository institution such as Union Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become undercapitalized (as such term is used in the FDICIA).
Sources and Uses of Liquidity
We expect to fund our short-term liquidity requirements primarily through cash and cash equivalents and revenues from operations, and we expect to fund our long-term liquidity requirements through a combination of
66
revenues from operations and various financing vehicles available to us. We may also utilize issuances of common stock, promissory notes or other securities or the potential sale of certain assets of FMD. We expect to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, or if we were to enter into a strategic arrangement with another company, we may need to sell additional equity or debt securities. Any sale of additional equity or convertible debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to further delay, reduce the scope of or eliminate one or more aspects of our operational activities, which could harm our business.
Our liquidity and capital funding requirements may depend on a number of factors, including:
| Cash necessary to fund our operations, including the operations of TMS and Cology LLC, and capital expenditures; |
| The extent to which our services and products, including our Monogram platform, TMS offerings and Cology LLC offerings, gain market share and remain competitive at pricing levels favorable to us; |
| The results of the audit conducted by the IRS of our tax returns for fiscal 2007 through fiscal 2010, which could result in challenges to tax refunds previously received in the amounts of $176.6 million in connection with our sale of the Trust Certificate and the $45.1 million income tax refund received in October 2010. In connection with the IRS audit, on September 10, 2013, we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. The NOPAs propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any; |
| The profitability of our Monogram platform, which is dependent on, among other things, the amount of loan volume our lender clients are able to generate and costs incurred to acquire such volume; |
| The extent to which we fund credit enhancement arrangements or contribute to credit facility providers in connection with our Monogram platform; |
| The ability to effectively and efficiently manage our expense base; |
| The resolution of our appeal of the ATB Order, which could also affect our state tax liabilities for fiscal 2008 and fiscal 2009; and |
| The timing, size, structure and terms of any securitization or other funding transactions that we structure, as well as the composition of the loan pool being securitized or sold. |
Liquidity is required for capital expenditures, working capital, business development expenses, business acquisitions, income tax payments, costs associated with alternative financing transactions, general corporate expenses, capital provided in connection with Monogram-based loan program credit enhancement arrangements or capital markets transactions. In order to preserve capital and maximize liquidity in challenging market conditions, we have in the past taken certain broad measures to reduce the risk related to education loans and residual receivables on our consolidated balance sheet, change our fee structure, add new products and reduce our overhead expenses. In addition, the FMD Board of Directors has eliminated regular quarterly cash dividends for the foreseeable future.
Restricted Funds Due to Clients
As part of our operations, we have cash that is recorded as restricted cash on our consolidated balance sheets because it is deposited with third party institutions and not available for our use. Included in restricted cash on our consolidated balance sheets are tuition payments due to schools, undisbursed loan origination proceeds and
67
recoveries on defaulted education loans. We record a liability on our consolidated balance sheets representing tuition payments due to our TMS clients, loan origination proceeds due to our Cology LLC clients and recoveries on defaulted education loans and education loan proceeds due to schools.
Non-GAAP Measure: Net Operating Cash Usage
In addition to providing financial measurements based on GAAP, we present below an additional financial metric that we refer to as net operating cash usage that was not prepared in accordance with GAAP. We define net operating cash usage to approximate cash requirements to fund our operations. Net operating cash usage is not directly comparable to our consolidated statements of cash flows prepared in accordance with GAAP. Legislative and regulatory guidance discourage the use of, and emphasis on, non-GAAP financial metrics and require companies to explain why a non-GAAP financial metric is relevant to management and investors.
Management and the FMD Board of Directors use this non-GAAP financial metric, in addition to GAAP financial measures, as a basis for measuring and forecasting our core operating performance and comparing such performance to that of prior periods. This non-GAAP financial measure is also used by us in our financial and operational decision-making.
We believe that the inclusion of this non-GAAP financial metric helps investors to gain a better understanding of our results, including our expenses and liquidity position. In addition, our presentation of this non-GAAP financial measure is consistent with how we expect that analysts may calculate their estimates of our financial results in their research reports and with how clients, investors, analysts and financial news media may evaluate our financial results.
There are limitations associated with reliance on any non-GAAP financial measure because any such measure is specific to our operations and financial performance, which makes comparisons with other companies financial results more challenging. Nevertheless, by providing both GAAP and non-GAAP financial measures, we believe that investors are able to compare our GAAP results to those of other companies, while also gaining a better understanding of our operating performance, consistent with managements 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 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 SEC, the table below presents the most directly comparable GAAP financial measure, loss from continuing operations, before income taxes, for the twelve months ended June 30, 2014 and June 30, 2013, and reconciles the GAAP measure to the comparable non-GAAP financial metric:
Twelve Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Loss from continuing operations, before income taxes |
$ | (38,940 | ) | $ | (48,832 | ) | ||
Adjustments to loss from continuing operations, before income taxes: |
||||||||
Fair value changes to service revenue receivables |
(2,330 | ) | (2,068 | ) | ||||
Cash distributions from service revenue receivables |
3,168 | 3,592 | ||||||
Depreciation and amortization |
5,288 | 4,347 | ||||||
Stock-based compensation |
4,400 | 4,209 | ||||||
Changes in TMS deferred revenue |
(293 | ) | (496 | ) | ||||
Additions to property and equipment |
(2,506 | ) | (3,465 | ) | ||||
Other, net of cash flows from Union Federal |
2,817 | 228 | ||||||
|
|
|
|
|||||
Non-GAAP net operating cash usage |
$ | (28,396 | ) | $ | (42,485 | ) | ||
|
|
|
|
68
Net operating cash usage for the fiscal year ended June 30, 2014 was $28.4 million, a $14.1 million, or 33%, reduction compared to the fiscal year ended June 30, 2013. The decrease of $14.1 million for fiscal 2014 as compared to fiscal 2013 was largely the result of a decrease in cash expenses of $8.6 million driven principally by decreases of $5.6 million in general and administrative expenses coupled with a decrease of $3.0 million in compensation and benefits expenses.
Net operating cash usage for the fiscal year ended June 30, 2014 included $4.2 million in cash generated from Union Federal, of which $2.1 million related to gains on the sales of portfolios of education loans to Citizens. We expect our net operating cash usage to be slightly adversely impacted by the absence of cash flows from Union Federal upon dissolution.
Support of Subsidiary Bank
Union Federal is a federally-chartered thrift that is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in initiation of certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on our liquidity. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union Federals assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classifications, however, are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Union Federals equity capital was $26.0 million at June 30, 2014, up from $21.6 million at June 30, 2013. Quantitative measures established by regulation to ensure capital adequacy require Union Federal to maintain minimum amounts and ratios of total capital and Tier 1 capital to risk-weighted assets (each as defined in the regulations). As of June 30, 2014 and June 30, 2013, Union Federal was well capitalized under the regulatory framework for prompt corrective action.
Union Federals regulatory capital ratios were as follows as of the dates below:
Regulatory Guidelines | June 30, | |||||||||||||||
Minimum | Well Capitalized |
2014 | 2013 | |||||||||||||
Capital ratios: |
||||||||||||||||
Tier 1 risk-based capital |
4.0 | % | 6.0 | % | 59.6 | % | 25.2 | % | ||||||||
Total risk-based capital |
8.0 | 10.0 | 59.5 | 26.0 | ||||||||||||
Tier 1 (core) capital |
4.0 | 5.0 | 13.5 | 11.7 |
FMD is subject to regulation, supervision and examination by the Federal Reserve, as a savings and loan holding company, and Union Federal is subject to regulation, supervision and examination by the OCC.
In March 2010, the FMD Board of Directors adopted resolutions required by the OTS, Union Federals regulator at that time, undertaking to support the implementation by Union Federal of its business plan, so long as Union Federal is owned or controlled by FMD, and to notify the OTS (and now the OCC effective in fiscal 2012) in advance of any distributions to FMD stockholders in excess of $1.0 million per fiscal quarter and any incurrence or guarantee of debt in excess of $5.0 million. These resolutions continue to be applied by the Federal Reserve. Distribution to FMD stockholders may be further restricted by the Federal Reserves required approval in those instances when such distributions exceed the net earnings of the prior 12-month period.
On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the OCC and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to be a savings and loan holding company subject to regulation, supervision and examination by the Federal Reserve.
69
Inflation
Inflation was not a material factor in either revenues or operating expenses during the periods presented.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with 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 consolidated 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 more fully described in Note 2, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included in Item 8 of this annual report.
On an ongoing basis, we evaluate our estimates 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:
| Income taxes relating to uncertain tax positions under ASC 740; and |
| The determination of goodwill and other intangible asset impairment. |
Income Taxes
Certain areas of accounting for income taxes require managements judgment, including determining the adequacy of liabilities for uncertain tax positions. Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. Judgments are made regarding various tax positions, which are often subjective and involve assumptions about items that are inherently uncertain. If actual factors and conditions differ materially from estimates made by management, the actual realization of liabilities for uncertain tax positions could vary materially from the amounts previously recorded.
Deferred tax assets arise from items that may be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years taxable income to which refund claims could be carried back. Valuation allowances are recorded against those deferred tax assets determined not likely to be realized. Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in our consolidated financial statements for which payment has been deferred, or a deduction taken on our tax return but not yet recognized as an expense in our consolidated financial statements.
70
Review of Goodwill and Intangible Assets for Impairment
On December 31, 2010, we completed our acquisition of the assets, liabilities and operations of TMS, formerly a division of KeyBank National Association. On October 19, 2012, Cology LLC acquired a substantial portion of the operating assets, and assumed certain liabilities, of the Cology Sellers. As a result of these acquisitions, we recorded goodwill and intangible assets. We test goodwill for impairment annually and more frequently if circumstances warrant.
Intangible assets acquired consist of the TMS customer lists, technology and tradename and the Cology Sellers customer list. The values of these intangible assets were estimated using valuation techniques, based on discounted cash flow analysis. These intangible assets are being amortized over the period the assets are expected to contribute to our cash flows. These intangible assets are subject to impairment tests in accordance with GAAP, generally, whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable.
We evaluate goodwill for impairment by comparing the fair values of the operations of the TMS and Cology LLC reporting units to their carrying values, including goodwill. If the fair value of the reporting unit exceeds the carrying value, goodwill is not deemed to be impaired. If the fair value is less than the carrying value, a further analysis is required to determine the amount of impairment, if any.
There are significant judgments involved in determining the fair values of the TMS and Cology LLC reporting units, including assumptions regarding the estimates of future cash flows from existing and new business activities, customer relationships, the value of existing customer contracts and the value of other intangible assets, as well as assumptions regarding what we believe a third party is willing to pay for all of the assets and liabilities of TMS and Cology LLC. The calculation also requires us to estimate the appropriate discount and growth rates to apply to those projected cash flows and an appropriate control premium to apply to arrive at a final fair value. Since the businesses are not publicly traded, and often there is not comparable market data available, there is a higher degree of judgment applied and the use of cash flows is weighted more heavily than the use of market multiples. In the event that we determine that our goodwill or intangible assets are impaired, the recognition of an impairment charge could have an adverse impact on our results of operations in the period that the impairment occurred or on our financial position. For fiscal 2014 and fiscal 2013, we recorded no goodwill impairment. We evaluated goodwill for impairment at our annual impairment testing date of May 31.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Continuing Operations
Interest rate risk is the primary market risk associated with our continuing operations. Management monitors interest rate risk matters and discusses such matters with the FMD Board of Directors. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. Interest rate risk applies to our interest-bearing cash and cash equivalents and short-term investments, as well as our service revenue receivables and deposits for participation accounts.
We invest our excess cash primarily in money market funds and certificates of deposits with original maturities of less than one year. Management regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve. The changes contemplated in these interest rate scenarios would result in immaterial changes to our overall results, largely as a result of the short-term nature of our interest-bearing assets.
We use current market interest rates and our expectations of future interest rates to estimate the fair value of our service revenue receivables and deposits for participation accounts. We believe that this approach adequately reflects the interest rate risk inherent in those estimates.
71
Discontinued Operations
Interest rate risk is the primary market risk associated with the discontinued operations of Union Federal. Management monitors interest rate risk matters and discusses such matters with the FMD Board of Directors and the Union Federal Board of Directors.
The risk-based interest-bearing assets of Union Federal are largely made up of investments available-for-sale, education loans and mortgage loans. The mix of fixed rate versus variable rate instruments for these assets as of June 30, 2014 are presented in the table below:
June 30, 2014 |
Amount | Variable | % Variable | Fixed | % Fixed | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Investments available-for-sale |
$ | 62,309 | $ | 20,383 | 32.7 | % | $ | 41,926 | 67.3 | % | ||||||||||
Education loans |
21,944 | 21,944 | 100.0 | | | |||||||||||||||
Mortgage loans |
16,371 | 3,304 | 20.2 | 13,067 | 79.8 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
$ | 100,624 | $ | 45,631 | 45.3 | % | $ | 54,993 | 54.7 | % | |||||||||||
|
|
|
|
|
|
The interest-bearing liabilities of Union Federal consisted of customer deposits, totaling $161.1 million at June 30, 2014. Of these deposits, approximately 86% were comprised of demand deposits, including savings deposits and money market deposits, which are generally subject to daily repricing. The remaining approximately 14% of customer deposits represented fixed rate time deposits, of which approximately 33% had maturities in excess of 12 months from June 30, 2014. Deposit pricing is subject to regular examination by a committee of senior managers from Union Federal and FMDs Finance and Governance, Risk and Compliance Departments. The committee considers competitors pricing, inflows and outflows of deposit balances and Union Federals funding requirements to make pricing decisions in order to attain the desired volume of deposits in each given duration and product type.
The investment decisions with respect to the interest rate characteristics of Union Federals interest-bearing assets are driven by the nature, volume and duration of its interest-bearing liabilities. Generally, the interest-bearing liabilities are either variable rate instruments or are of a short duration, as discussed above. Accordingly, we generally seek to invest in interest-bearing assets that are subject to frequent repricing or are of limited duration. As shown in the table above, at June 30, 2014, the education loan portfolio consisted entirely of variable rate loans that generally reprice in accordance with LIBOR. Additionally, approximately 33% of the investments available-for-sale and approximately 20% of the mortgage loan portfolio were also variable rate instruments. The remaining balance of the interest-bearing assets in the table above were fixed rate instruments. Of these fixed rate instruments, approximately 76% were available-for-sale securities, which had a weighted average life of 3.3 years.
Management regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve. The changes contemplated in these interest rate scenarios would result in immaterial changes to the results of Union Federal, largely as a result of a high percentage of assets that possess variable interest rates or are of a relatively short duration. Interest rate risk is further mitigated due to the short-term nature of the anticipated dissolution of Union Federal, which we expect to be completed by the end of fiscal 2015.
72
Item 8. | Financial Statements and Supplementary Data |
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The First Marblehead Corporation:
We have audited the accompanying consolidated balance sheets of The First Marblehead Corporation and subsidiaries (the Company) as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 2014. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of June 30, 2014, based on criteria established in Internal ControlIntegrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 10, 2014 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ KPMG LLP
Boston, Massachusetts
September 10, 2014
73
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2014 and 2013
(dollars and shares in thousands, except per share amounts)
2014 | 2013 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 33,955 | $ | 58,599 | ||||
Short-term investments, at cost |
40,057 | 55,179 | ||||||
Restricted cash |
94,436 | 87,338 | ||||||
Deposits for participation interest accounts, at fair value |
15,834 | 13,147 | ||||||
Service revenue receivables, at fair value |
13,979 | 14,817 | ||||||
Goodwill |
20,066 | 20,066 | ||||||
Intangible assets, net |
21,769 | 24,193 | ||||||
Property and equipment, net |
5,819 | 6,176 | ||||||
Other assets |
8,163 | 5,702 | ||||||
|
|
|
|
|||||
Assets from continuing operations |
254,078 | 285,217 | ||||||
Assets from discontinued operations |
188,806 | 187,076 | ||||||
|
|
|
|
|||||
Total assets |
$ | 442,884 | $ | 472,293 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Restricted funds due to clients |
$ | 94,272 | $ | 86,994 | ||||
Accounts payable, accrued expenses and other liabilities |
11,050 | 13,389 | ||||||
Income taxes payable |
26,582 | 25,923 | ||||||
Net deferred income tax liability |
1,655 | 1,189 | ||||||
|
|
|
|
|||||
Liabilities from continuing operations |
133,559 | 127,495 | ||||||
Liabilities from discontinuing operations |
162,827 | 165,471 | ||||||
|
|
|
|
|||||
Total liabilities |
296,386 | 292,966 | ||||||
Commitments and contingencies: |
||||||||
Stockholders equity: |
||||||||
Common stock, par value $0.01 per share; 25,000 shares authorized; 12,260 and 12,051 shares issued; 11,300 and 11,154 shares outstanding |
122 | 120 | ||||||
Additional paid-in capital |
462,328 | 457,927 | ||||||
Accumulated deficit |
(128,391 | ) | (90,824 | ) | ||||
Treasury stock, 960 and 897 shares held, at cost |
(187,860 | ) | (187,154 | ) | ||||
Accumulated other comprehensive income (loss) |
299 | (742 | ) | |||||
|
|
|
|
|||||
Total stockholders equity |
146,498 | 179,327 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 442,884 | $ | 472,293 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
74
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended June 30, 2014, 2013 and 2012
(dollars and shares in thousands, except per share amounts)
2014 | 2013 | 2012 | ||||||||||
Revenues: |
||||||||||||
Tuition payment processing fees |
$ | 28,186 | $ | 26,668 | $ | 26,544 | ||||||
Administrative and other fees |
13,640 | 11,238 | 9,778 | |||||||||
Fair value changes to service revenue receivables |
2,330 | 2,068 | 947 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
44,156 | 39,974 | 37,269 | |||||||||
Expenses: |
||||||||||||
Compensation and benefits |
36,251 | 39,317 | 41,145 | |||||||||
General and administrative |
47,629 | 51,950 | 59,901 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
83,880 | 91,267 | 101,046 | |||||||||
Other income: |
||||||||||||
Net interest income |
202 | 349 | 699 | |||||||||
Gain from deconsolidation of trusts |
| | 9,514 | |||||||||
Other income |
582 | 2,112 | 2,475 | |||||||||
|
|
|
|
|
|
|||||||
Total other income |
784 | 2,461 | 12,688 | |||||||||
|
|
|
|
|
|
|||||||
Loss from continuing operations, before income taxes |
(38,940 | ) | (48,832 | ) | (51,089 | ) | ||||||
Income tax expense (benefit) from continuing operations |
1,125 | 2,295 | (17,956 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net loss from continuing operations |
(40,065 | ) | (51,127 | ) | (33,133 | ) | ||||||
Discontinued operations, net of taxes |
2,498 | 930 | 1,135,361 | |||||||||
|
|
|
|
|
|
|||||||
Net (loss) income |
$ | (37,567 | ) | $ | (50,197 | ) | $ | 1,102,228 | ||||
|
|
|
|
|
|
|||||||
Net (loss) income per basic common share: |
||||||||||||
From continuing operations |
$ | (3.55 | ) | $ | (4.77 | ) | $ | (3.00 | ) | |||
From discontinued operations |
0.22 | 0.09 | 102.82 | |||||||||
|
|
|
|
|
|
|||||||
Total basic net (loss) income per common share |
$ | (3.33 | ) | $ | (4.68 | ) | $ | 99.82 | ||||
|
|
|
|
|
|
|||||||
Net (loss) income per diluted common share: |
||||||||||||
From continuing operations |
$ | (3.55 | ) | $ | (4.77 | ) | $ | (2.99 | ) | |||
From discontinued operations |
0.22 | 0.09 | 102.59 | |||||||||
|
|
|
|
|
|
|||||||
Total diluted net (loss) income per common share |
$ | (3.33 | ) | $ | (4.68 | ) | $ | 99.60 | ||||
|
|
|
|
|
|
|||||||
Weighted-average common shares outstanding: |
||||||||||||
Basic |
11,270 | 10,735 | 10,157 | |||||||||
Diluted |
11,270 | 10,735 | 11,067 |
See accompanying notes to consolidated financial statements.
75
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Fiscal years ended June 30, 2014, 2013 and 2012
(dollars in thousands)
2014 | 2013 | 2012 | ||||||||||
Net (loss) income |
$ | (37,567 | ) | $ | (50,197 | ) | $ | 1,102,228 | ||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Unrealized (losses) gains on investments available-for-sale arising during the period |
(61 | ) | (1,352 | ) | 329 | |||||||
Reclassification adjustment for net realized losses included in net loss |
1,102 | | | |||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income (loss) |
1,041 | (1,352 | ) | 329 | ||||||||
|
|
|
|
|
|
|||||||
Total comprehensive (loss) income |
$ | (36,526 | ) | $ | (51,549 | ) | $ | 1,102,557 | ||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
76
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
Fiscal years ended June 30, 2014, 2013 and 2012
(dollars and shares in thousands)
Non-voting convertible preferred stock issued |
Common stock |
Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income (loss), net of tax |
Total stockholders equity (deficit) |
|||||||||||||||||||||||||||||||||||
Issued | In treasury | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2011 |
133 | $ | 1 | 10,972 | $ | 110 | (840 | ) | $ | (186,551 | ) | $ | 449,075 | $ | (1,142,855 | ) | $ | 281 | $ | (879,939 | ) | |||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | | 1,102,228 | | 1,102,228 | ||||||||||||||||||||||||||||||
Accumulated other comprehensive income |
| | | | | | | | 329 | 329 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total comprehensive income |
| | | | | | | 1,102,228 | 329 | 1,102,557 | ||||||||||||||||||||||||||||||
Net stock issuance from vesting of stock units |
| | 94 | | (26 | ) | (277 | ) | | | | (277 | ) | |||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | 4,647 | | | 4,647 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at June 30, 2012 |
133 | $ | 1 | 11,066 | $ | 110 | (866 | ) | $ | (186,828 | ) | $ | 453,722 | $ | (40,627 | ) | $ | 610 | $ | 226,988 | ||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | (50,197 | ) | | (50,197 | ) | ||||||||||||||||||||||||||||
Accumulated other comprehensive loss |
| | | | | | | | (1,352 | ) | (1,352 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total comprehensive loss |
| | | | | | | (50,197 | ) | (1,352 | ) | (51,549 | ) | |||||||||||||||||||||||||||
Net stock issuance from vesting of stock units |
| | 100 | 1 | (31 | ) | (326 | ) | (1 | ) | | | (326 | ) | ||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | 4,214 | | | 4,214 | ||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock |
(133 | ) | (1 | ) | 885 | 9 | | | (8 | ) | | | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at June 30, 2013 |
| $ | | 12,051 | $ | 120 | (897 | ) | $ | (187,154 | ) | $ | 457,927 | $ | (90,824 | ) | $ | (742 | ) | $ | 179,327 | |||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | (37,567 | ) | | (37,567 | ) | ||||||||||||||||||||||||||||
Accumulated other comprehensive income |
| | | | | | | | 1,041 | 1,041 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total comprehensive loss |
| | | | | | | (37,567 | ) | 1,041 | (36,526 | ) | ||||||||||||||||||||||||||||
Net stock issuance from vesting of stock units |
| | 209 | 2 | (63 | ) | (706 | ) | (2 | ) | | | (706 | ) | ||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | 4,403 | | | 4,403 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Balance at June 30, 2014 |
| $ | | 12,260 | $ | 122 | (960 | ) | $ | (187,860 | ) | $ | 462,328 | $ | (128,391 | ) | $ | 299 | $ | 146,498 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
77
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended June 30, 2014, 2013 and 2012
(dollars in thousands)
2014 | 2013 | 2012 | ||||||||||
Cash flows from operating activities, net of effects of acquisition: |
||||||||||||
Net (loss) income |
$ | (37,567 | ) | $ | (50,197 | ) | $ | 1,102,228 | ||||
Discontinued operations, net of tax |
(2,498 | ) | (930 | ) | (1,135,361 | ) | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||||||
Non-cash gain from deconsolidation of trusts |
| | (9,514 | ) | ||||||||
Depreciation and amortization |
5,288 | 4,347 | 4,615 | |||||||||
Credit for loan losses |
(76 | ) | (464 | ) | (790 | ) | ||||||
Deferred income tax expense |
466 | 328 | 30 | |||||||||
Stock-based compensation |
4,400 | 4,209 | 4,647 | |||||||||
Service revenue receivable distributions |
3,168 | 3,592 | 14,216 | |||||||||
Other non-cash benefits |
| | (5,261 | ) | ||||||||
Changes in assets/liabilities: |
||||||||||||
Participation interest accounts |
(2,687 | ) | (9,108 | ) | 4,473 | |||||||
Fair value increase to service revenue receivables |
(2,330 | ) | (2,068 | ) | (947 | ) | ||||||
Other assets |
(2,768 | ) | 1,068 | 3,492 | ||||||||
Accounts payable, accrued expenses and other liabilities |
(2,328 | ) | (5,178 | ) | (6,514 | ) | ||||||
Income taxes payable |
659 | 2,509 | (16,568 | ) | ||||||||
|
|
|
|
|
|
|||||||
Cash used in operating activities continuing operations |
(36,273 | ) | (51,892 | ) | (41,254 | ) | ||||||
Cash provided by operating activities discontinued operations |
3,284 | 815 | 48,953 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by operating activities |
(32,989 | ) | (51,077 | ) | 7,699 | |||||||
Cash flows from investing activities, net of effects of acquisition: |
||||||||||||
Net cash paid for acquisition of operating assets of Cology, Inc. |
| (4,757 | ) | | ||||||||
Cash received for disposition of TMS K-12 contracts |
| | 700 | |||||||||
Capital contributions to Union Federal |
(450 | ) | (5,750 | ) | (4,700 | ) | ||||||
Purchases of short-term investments |
(52,245 | ) | (30,172 | ) | (85,007 | ) | ||||||
Proceeds from maturities of short-term investments |
67,367 | 60,000 | 50,000 | |||||||||
Net (increase) decrease in restricted cash |
(7,098 | ) | (21,937 | ) | 59,286 | |||||||
Net increase (decrease) in restricted funds due to clients |
7,278 | (17,987 | ) | (19,213 | ) | |||||||
Purchases of property and equipment |
(2,506 | ) | (3,465 | ) | (1,869 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) investing activities continuing operations |
12,346 | (24,068 | ) | (803 | ) | |||||||
Net cash provided by (used in) investing activities discontinued operations |
62,457 | (52,403 | ) | 51,581 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) investing activities |
74,803 | (76,471 | ) | 50,778 | ||||||||
Cash flows from financing activities, net of effects of acquisition: |
||||||||||||
Payments on capital lease obligations |
(11 | ) | (12 | ) | | |||||||
Repurchases of common stock |
(706 | ) | (326 | ) | (277 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities continuing operations |
(717 | ) | (338 | ) | (277 | ) | ||||||
Net cash (used in) provided by financing activities discontinued operations |
(2,658 | ) | 86,299 | (152,070 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by financing activities |
(3,375 | ) | 85,961 | (152,347 | ) | |||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in cash and cash equivalents |
38,439 | (41,587 | ) | (93,870 | ) | |||||||
Cash and cash equivalents, beginning of year |
81,910 | 123,497 | 217,367 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of year |
120,349 | 81,910 | 123,497 | |||||||||
Less: cash and cash equivalents of discontinued operations, end of year |
86,394 | 23,311 | (11,400 | ) | ||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents of continuing operations, end of year |
$ | 33,955 | $ | 58,599 | $ | 134,897 | ||||||
|
|
|
|
|
|
|||||||
Supplemental disclosures of cash flow information from continuing operations: |
||||||||||||
Income taxes paid |
| 12 | 5,179 | |||||||||
Supplemental disclosure of non-cash financing activities from continuing operations: |
||||||||||||
Conversion of preferred stock to common stock |
| 8 | |
See accompanying notes to consolidated financial statements.
78
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014, 2013 and 2012
(1) Nature of Business
Unless otherwise indicated, or unless the context of the discussion requires otherwise, all references in these notes to we, us, our and similar references mean The First Marblehead Corporation and its subsidiaries, on a consolidated basis. All references in these notes to First Marblehead and FMD mean The First Marblehead Corporation on a stand-alone basis. We use the term education loan to refer to private education loans that 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 ended June 30, 2014 as fiscal 2014.
We are a specialty finance company focused on the education financing marketplace in the United States. We provide loan programs on behalf of our lender clients for undergraduate and graduate students and for college graduates seeking to refinance private education loan obligations. We offer a fully integrated suite of services through our Monogram® loan product service platform (Monogram platform). We partner with lenders to design and administer education loan programs through our Monogram platform, which are typically school-certified. These programs are designed to be marketed through educational institutions or to prospective borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the capital markets. In addition, as discussed below, we offer a number of other services on a stand-alone, fee-for-service basis in support of our clients, including tuition management, loan processing and disbursement, loan origination, portfolio management and securitization services.
Through FMDs subsidiary Union Federal Savings Bank (Union Federal), we offer traditional retail banking products, including residential and commercial mortgages, time deposits and money market demand accounts, on a stand-alone basis. In addition, Union Federal previously generated additional revenues by originating Monogram-based education loan portfolios. On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the Office of the Comptroller of the Currency (OCC) and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. On June 13, 2014, Union Federal notified FMD that it would no longer originate education loans under its Monogram-based loan program. Following the dissolution of Union Federal, FMD will cease to offer banking services through Union Federal. As a result of the planned dissolution and our evaluation under Accounting Standards Codification (ASC) 205-20, Presentation of Financial Statements Discontinued Operations (ASC 205-20), we presented Union Federal as a discontinued operation in our consolidated financial statements. See Note 3, Discontinued OperationsUnion Federal, for additional information.
Our product and service offerings are focused on the following three principal revenue lines:
| Partnered lendingWe provide customized Monogram-based education loan programs for lenders who wish to hold originated portfolios to maturity. We may provide credit enhancements by funding participation interest accounts (participation 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 income generated on the loans. 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. |
| Fee-for-serviceLoan origination, portfolio management, analytical and structuring services and tuition management services are each available on a stand-alone, fee-for-service basis. We offer outsourced tuition planning, tuition billing, refund management and payment technology services for universities, |
79
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(1) Nature of Business (Continued)
colleges and secondary schools through FMDs subsidiary Tuition Management Systems, LLC (TMS). TMS provides such services on behalf of over 700 educational institutions. In addition, through FMDs subsidiary Cology LLC, we earn fees for the processing and disbursement of education loans on behalf of its approximately 300 credit union and other lender clients. |
| Capital marketsOur capital markets experience coupled with our loan performance database and risk analytics capabilities provide specialized insight into funding options available to our lender 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 net interest income by retaining a portion of the equity in any of these transactions. |
As of September 10, 2014, we have loan program agreements based on our Monogram platform with three lender clients, one of which provides the majority of our Monogram-based loan program fees. As a result, we are subject to concentration risk as it relates to this revenue stream until we are able to attract additional lender clients.
The education loans we originate on behalf of our partner lender clients as well as the education loans we process on behalf of Cology LLC clients are not included on our consolidated balance sheets but, rather, are included on the balance sheets of our partner lender and Cology LLC clients, respectively. As such, none of the references in these notes to our consolidated financial statements to education loans included in our consolidated balance sheets include the education loans originated by our partner lender clients or by Cology LLC on behalf of its clients.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). We eliminate from our financial results all significant intercompany transactions. Certain amounts in the prior years consolidated financial statements have been revised to conform to the current year presentation.
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 consolidated 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. On an ongoing basis, we evaluate our estimates 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.
Reverse Stock Split
On November 12, 2013, the FMD stockholders approved a 1-for-10 reverse stock split of FMDs issued and outstanding shares of common stock, which was effected on December 2, 2013. In addition, FMDs authorized shares of common stock were proportionately decreased from 250,000,000 shares to 25,000,000 shares. The shares of common stock retained a par value of $0.01 per share. The accompanying consolidated financial
80
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
statements and accompanying notes to our consolidated financial statements give retroactive effect to the reverse stock split for all periods presented. Accordingly, stockholders equity reflects the impact of the reverse stock split by reclassifying from common stock to additional paid-in capital an amount equal to the par value of the decreased number of shares issued resulting from the reverse stock split. The impact on our consolidated balance sheet was a decrease of $1.1 million in common stock with an offsetting increase to additional paid-in capital.
(a) | Consolidation |
Our consolidated financial statements include the accounts of FMD and its subsidiaries. We evaluate our involvement with certain variable interest entities (VIEs) and whether they should be consolidated, in accordance with ASC 810, Consolidation.
Effective July 1, 2010, we adopted Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)Accounting for Transfers of Financial Assets (ASU 2009-16), and ASU 2009-17, Consolidation (Topic 810)Improvement to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17), which amended the accounting for the consolidation of VIEs. The guidance requires that we evaluate whether to consolidate a VIE on an ongoing basis, as opposed to a trigger-based quantitative assessment under previous guidance. As a result of adopting the consolidation guidance, we were required to consolidate 14 securitization trusts that were facilitated by us because we determined that our services related to default prevention and collections management, for which we can only be removed for cause, combined with the variability that we absorbed as part of our securitization fee structure, made us the primary beneficiary of those trusts. In addition, we deconsolidated FMDs indirect subsidiary UFSB Private Loan SPV, LLC (UFSB-SPV) because we determined that we did not have the power to direct activities that most significantly impact UFSB-SPVs economic performance. In fiscal 2012, we deconsolidated the 14 securitization trusts we had consolidated as we no longer were the primary beneficiary of these trusts. See Note 3, Discontinued OperationsSecuritization Trusts and First Marblehead Data Services, Inc., for additional information.
We continually reassess our involvement with each VIE in which we have an interest and our determination of whether consolidation or deconsolidation of a VIE is appropriate. We monitor matters related to our ability to control economic performance, such as contractual changes in the services we provide, the extent of our ownership and the rights of third parties to terminate us as a service provider. In addition, we monitor the financial performance of each VIE for indications that we may or may not have the right to absorb benefits or the obligation to absorb losses associated with variability in the financial performance of the VIE that could potentially be significant to that VIE. If, for any reason, we determine that we can no longer be considered the primary beneficiary for a consolidated VIE, we would be required to deconsolidate such VIE. Deconsolidation of a VIE is accounted for in the same manner as the sale of a subsidiary, with a gain or loss recorded in our consolidated statements of operations to the extent that proceeds, if any, are more or less than the net assets of the VIE.
We monitor our involvement with nine off-balance sheet VIEs for which we have determined that we are not the primary beneficiary due to the sole, unilateral rights of other parties to terminate us in our role as service provider or due to a lack of obligation on our part to absorb benefits or losses of the VIE that would be significant to that VIE. A significant change to the pertinent rights of other parties or us, or a significant change to the ranges of possible financial performance outcomes used in our assessment of the variability of cash flows due to us, could cause us to change our determination of whether or not a VIE should be consolidated in future periods. Our determination to consolidate or deconsolidate a VIE may lead to increased volatility in our financial results and make comparisons of results between time periods challenging. Our maximum exposure to loss as a result of our involvement with such VIEs is the fair value of our service revenue receivables.
81
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
(b) | Cash Equivalents |
We consider highly liquid debt instruments with original maturities of three months or less on the date of purchase and investments in money market funds to be cash equivalents. Cash equivalents are carried at cost, which also approximates fair value.
(c) | Restricted Cash and Restricted Funds Due to Clients |
As part of our operations, we have cash that is recorded as restricted cash on our consolidated balance sheets because it is deposited with third party institutions and is not available for our use. In the case of TMS, it collects tuition payments from students or their families on behalf of educational institutions that are held under a trust agreement for the benefit of TMS educational institution clients. In the case of Cology LLC, it collects and disburses loan origination proceeds on behalf of its lender clients. Restricted cash held by our other subsidiary, First Marblehead Education Resources, Inc. (FMER), relates to recoveries on defaulted education loans collected on behalf of clients as well as undistributed loan origination proceeds. We record a liability on our consolidated balance sheets representing tuition payments due to our TMS clients, loan origination proceeds due to our Cology LLC clients and recoveries on defaulted education loans and education loan proceeds due to schools.
(d) | Deposits for Participation Interest Accounts |
We account for deposits for participation accounts in a manner similar to our service revenue receivables, which is discussed below, and we carry such deposits at fair value on our consolidated balance sheet. We estimate fair value based on the net present value of cash flows into and out of the participation accounts, based on the education loans originated by participating lenders at our consolidated balance sheet date. We record changes in estimated fair value, excluding cash funded by us or distributed out of the participation accounts to us, if any, in revenues as part of administrative and other fees. See Note 8, Deposits for Participation Interest Accounts, for additional information.
(e) | Service Revenue Receivables |
Service revenue receivables consist of our additional structural advisory fee and residual receivables, which we carry at fair value on our consolidated balance sheet. As required under GAAP, we recognized the fair value of additional structural advisory fee and residual receivables as revenue at the time the securitization trust purchased the education loans, but before we actually received payment, as these revenues were deemed to be earned at the time of the securitization. These amounts were deemed earned at securitization because:
| Evidence of an arrangement existed; |
| We provided the services; |
| The fee was fixed and determinable based upon a discounted cash flow analysis; and |
| There were no future contingencies or obligations due on our part. |
Payment of these receivables is contingent upon the following:
| Additional structural advisory fees are paid to us over time, based on the payment priorities established in the applicable indenture for each of the securitization trusts. We generally become entitled to receive these additional fees, plus interest, if applicable, once the ratio of securitization trust assets to liabilities, which we refer to as the parity ratio, reaches a stipulated level or after all noteholders have been paid in full. |
82
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
| Residuals associated with any securitization trusts that we facilitated are typically junior in priority to the rights of the holders of the asset-backed securities (ABS) issued in the securitizations and any additional structural advisory fees. In the absence of readily determinable market values, we update our estimates of the fair value of service revenue receivables on a quarterly basis, based on the present value of expected future cash flows. Such estimates include assumptions regarding discount rates, prepayment rates, default rates, recovery rates and forward interest rates, among others. If readily determinable market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. |
(f) | Goodwill and Intangible Assets |
Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible assets acquired. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability. In connection with our acquisition of TMS, we recorded other intangible assets related to the TMS customer list and tradename, each of which we amortize on a straight-line basis over 15 years, and technology, which we amortize on a straight-line basis over six years. In connection with our acquisition of a substantial portion of the operating assets of Cology, Inc. and its affiliates, which we refer to as the Cology Sellers, we recorded an intangible asset related to the Cology Sellers customer list, which we amortize on a straight-line basis over 15 years. We record amortization expense in general and administrative expenses in our consolidated statements of operations.
Goodwill is not amortized, but is subject to an annual evaluation for impairment (or more frequently if indicators of impairment exist). Impairment of goodwill is deemed to exist if the carrying value of a reporting unit, including its allocation of goodwill and other intangible assets, exceeds its estimated fair value. Impairment of other intangible assets is deemed to exist if the balance of the other intangible assets exceeds the cumulative expected net cash inflows related to the asset over its remaining estimated useful life. If we determine that goodwill or other intangible assets are impaired based on our periodic reviews, we would write down the values of these assets through a charge included in general and administrative expenses.
(g) | Property and Equipment |
We record leasehold improvements, furniture and fixtures, computers, software and other equipment at cost less accumulated depreciation and amortization. We record depreciation and amortization in general and administrative expenses and calculate them using the straight-line method over the estimated useful life of the asset or the remaining terms of the lease, if shorter. We charge maintenance and repairs to general and administrative expenses as incurred, while we capitalize major leasehold improvements and amortize them over the lesser of their estimated useful life or the remaining term of the lease.
Costs related to internal-use software development projects are capitalized if the software is expected to yield long-term operational benefits, such as operational efficiencies and/or incremental revenue streams.
(h) | Investments |
We classify investments with original maturities greater than three months and remaining maturities of less than one year at the date of purchase as short-term investments and carry such short-term investments at cost, which approximates fair value.
83
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
We classify investments in marketable debt securities as available-for-sale, trading or held-to-maturity. Management determines the appropriate classification of securities at the time of purchase. We carry available-for-sale investments at fair value, with net unrealized gains and losses recorded in other comprehensive income, a component of stockholders equity. Trading securities are securities held in anticipation of short-term market movements and are carried at fair value with net unrealized gains and losses recorded in our consolidated statements of operations. We classify investments as held-to-maturity when we have both the ability and intent to hold the securities until maturity. We carry held-to-maturity investments at amortized cost. We currently do not own a held-to-maturity or trading securities portfolio. We hold an available-for-sale investment portfolio at Union Federal, classified within assets of discontinued operations on our consolidated balance sheet.
When the fair value of an investment security is less than its amortized cost basis, we assess whether the decline in value is other-than-temporary. Management considers various factors in making these determinations including the length of time and extent to which the fair value has been less than amortized cost, projected future cash flows, creditworthiness and near-term prospects of issuers. If we determine that a decline in fair value is other-than-temporary and it is more likely than not that we will sell or be required to sell the security before recovery of its amortized cost, the entire difference between the amortized cost and fair value of the security will be recognized in earnings. If we determine that a decline in fair value is other-than-temporary and that it is more likely than not that we will not sell or be required to sell the security before its recovery of the remaining amortized cost, the credit portion of the impairment loss is recorded in earnings and the noncredit portion is recognized in other comprehensive income.
(i) | Loans Held-for-Sale |
Once a decision has been made to sell loans that were not originated with the intent to sell, we transfer such loans into the held-for-sale classification at the lower of cost or fair value. Any reduction in the loans value is reflected as a write-down of the recorded investment resulting in a new cost basis. After a loan or group of loans is transferred to the held-for-sale account, the loans are revalued at each subsequent reporting date until sold and reported at the lower of cost or fair value. The amortization of any deferred loan origination fees or costs is discontinued and recognition is deferred until the loans are sold. Further, loans transferred to held-for-sale continue to be accorded the same past due and non-accrual treatment as other loans. We hold a held-for-sale education loan and mortgage loan portfolio at Union Federal, classified within assets of discontinued operations on our consolidated balance sheet.
When available, fair value of loans held-for-sale is based on quoted market values. In the absence of readily determined market values, fair value for education loans held-for-sale is estimated by discounting the scheduled cash flows through the estimated maturity of the loans. Such estimate includes assumptions for default rates, recovery rates, prepayment rates and a discount rate commensurate with the risks involved. In the absence of readily determined market values, fair value for mortgage loans held-for sale is estimated using matrix pricing with market inputs that include the Federal National Mortgage Association current delivery prices and yields. Education loans are valued on an aggregate portfolio basis and mortgage loans are valued on an individual loan basis. We record changes in the carrying value of loans held-for-sale in our consolidated statements of operations.
(j) | Loans Held-to-Maturity |
We classify loans as held-to-maturity when we have both the ability and intent to hold the loans until maturity. We carry loans held-to-maturity at amortized cost, less an allowance for loan losses, described below. Amortized cost includes principal outstanding plus net unamortized loan acquisition costs and origination fees.
84
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
Interest income is accrued on a level yield basis on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loan using the effective interest method. Education loans are placed on non-accrual status and interest recognition is suspended when the loan becomes 120 days past due. Mortgage loans are placed on non-accrual status and interest recognition is suspended when the loan becomes 90 days past due. We evaluate loans for which there have been concessions, such as a reduction of interest rates, other than normal market rate adjustments, or deferral of principal and interest payments that have been granted that have not otherwise been considered at the time of origination to determine if the loan constitutes a troubled debt restructuring (TDR). TDRs are included in the impaired loan category, and, as such, are individually reviewed and evaluated, and a specific reserve is assigned for the amount of the estimated credit loss. With the exception of a small portfolio of education loans held by FMD, we currently do not hold any held-to-maturity loan portfolios.
(k) | Allowance for Loan Losses |
We maintain an allowance for loan losses at an amount sufficient to absorb probable credit losses inherent in our portfolios of loans held-to-maturity at our consolidated balance sheet date. The allowance for loan losses is increased through charges to the provision for loan losses in our consolidated statements of operations, and reduced by net charge-offs of loans deemed uncollectible from the borrower and third party guarantors, if any. Inherent credit losses include losses for loans in default that have not been charged-off or foreclosed and loans that are probable of default, less any amounts expected to be recoverable from borrowers or third parties or, for mortgage loans, sale of the collateral.
Education Loans
We consider an education loan to be in default when it is 180 days past due as to either principal or interest, based on the timing of cash receipts from the borrower. We use projected cash flows to determine the allowance amount deemed necessary for education loans with a probability of default at our consolidated balance sheet date. We may also incorporate qualitative adjustments in determining our allowance for loan losses. We base our default estimates on a loss confirmation period of one year, which we believe to be the approximate amount of time that it would take a loss inherent in the education loan portfolio at our consolidated balance sheet date to ultimately default and be charged-off. The calculation of the allowance for education loan losses is subject to a number of estimates and assumptions, including default and recovery rates, the effects of basic forbearance and alternative payment plans available to borrowers and the appropriateness of assessing both quantitative and qualitative factors. These assumptions are based on the status of education loans at our consolidated balance sheet date, as well as our historical experience. If actual future loan performance were to differ significantly from the estimates and assumptions used, the impact on the allowance for loan losses and the related provision for loan losses for education loans recorded in our consolidated statements of operations could be material.
Mortgage Loans
We establish a general allowance for loan losses for mortgage loans that have similar risk profiles. The allowance allocation factor for the general reserve is based on the historical net charge-off rate, which is then adjusted for current qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience. Management considers the risk factors and assesses the impact of current issues and changes in those factors to the portfolio on an ongoing basis. In addition, we establish a specific allowance for loan losses when a loan is deemed to be impaired. Management estimates the credit loss by comparing the loans carrying value against either (1) the present value of the
85
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
expected future cash flows discounted at the loans effective interest rate, (2) the loans observable market price or (3) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the impaired loan for the amount of estimated credit loss. Impaired loans are charged off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
A mortgage loan for which we have foreclosed on the property is recorded at fair value less costs to sell (which becomes the cost basis of the asset) and is reclassified to other real estate owned, a component of other assets. After foreclosure, the foreclosed real estate asset is carried at the lower of fair value less costs to sell or the cost of the asset.
(l) | Fair Value of Financial Instruments |
Fair value is defined as the price that would be received in the sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-level hierarchy is used to qualify fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date:
| Level 1Quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument. |
| Level 3Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect our market assumptions. |
We apply quoted market prices, where available, to determine fair value of eligible assets. For financial instruments for which quotes from recent exchange transactions are not available, we base fair value on discounted cash flow analysis and comparison to similar instruments. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates.
The methods we use for current fair value estimates may not be indicative of net realizable value or reflective of future fair values. If readily determinable market values became available or if actual performance were to vary appreciably from assumptions used, we might need to adjust our assumptions, which could result in material differences from the recorded carrying amounts. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
(m) | Revenue Recognition |
Net Interest Income
We recognize interest income on education and mortgage loans as earned, using the effective interest method. Net interest income on education and mortgage loans was recorded in discontinued operations for all fiscal years presented.
We place education loans on non-accrual status when they become 120 days past due as to either principal or interest, or earlier when full collection of principal or interest is not considered probable. When we place an education loan on non-accrual status, we discontinue the accrual of interest, and previously recorded but unpaid
86
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
interest is reversed and charged against interest revenues. For education loans on non-accrual status but not yet charged-off, we recognize interest revenues on a cash basis. If a borrower makes payments sufficient to become current on principal and interest prior to being charged-off, or cures the education loan delinquency, we remove the loan from non-accrual status and recommence recognizing interest revenues. Once a loan has been charged-off, we apply any payments made by the borrower to outstanding principal, and we only record income on a cash basis when all principal has been recovered.
We place mortgage loans on non-accrual status when they become 90 days past due as to either principal or interest. Once a loan has been placed on non-accrual status, we do not resume recognition of interest until the borrower has become current on the loan as to both principal and interest for a consecutive period of 12 months. Income received on non-accrual loans is either recorded in income or applied to the principal balance of the loan, dependent on managements evaluation as to the collectability of principal.
Tuition Payment Processing Fees
Tuition payment processing fees include revenues generated by TMS, including program enrollment fees, late fees, convenience fees and tuition billing fees. Program enrollment fees are up-front nonrefundable fees, the recognition of which is deferred and amortized into revenue over the payment term which approximates when services are provided. Late fees and convenience fees are recognized in the period in which the transactions occur, typically monthly, and tuition billing fees are recognized in the period that the services are provided.
Administrative and Other Fees
Revenue recognition associated with our Monogram platform is subject to accounting guidance under ASU 2009-13, Revenue Recognition-Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which is effective prospectively for contracts entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU 2009-13 requires that revenue under a contract be allocated to separately-identifiable deliverables based on a fair value analysis and prohibits separate recognition for each element of a contract unless certain criteria are met. We have applied the guidance in ASU 2009-13 to our recognition of revenues related to our Monogram platform.
In addition, we provide other services on a stand-alone, fee-for-service basis that may be based on the volume of education loans disbursed, the number of applications processed or other contractual terms. Our recognition of such fees is based on these contractual terms.
Our consolidated statements of operations for fiscal 2012 and a portion of fiscal 2013 included special servicing fees due from certain securitization trusts that we previously facilitated, which represented compensation to us for managing the performance of default prevention and collections management services. Such fees were based, in part, upon the volume of assets under management, and, in part, upon the reimbursement of expenses. We recognized such fees as the services were performed or as the reimbursable expenses were incurred, as applicable.
Fair Value Changes to Service Revenue Receivables
We record changes in the fair value of additional structural advisory fee and residual receivables as revenues in our consolidated statements of operations. We record any change in the assumptions used to estimate fair value in our consolidated statements of operations in the period in which the change is made.
87
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
(n) | Income Taxes |
In determining a provision for income taxes, we base our estimated annual effective tax rate on expected annual income or loss, statutory tax rates, our ability to utilize net operating loss carryforwards and tax planning opportunities available to us in the various jurisdictions in which we operate. The estimated annual effective income tax rate also includes our best estimate of the ultimate outcome of income tax audits.
We use the asset and liability method of accounting for recognition of deferred income taxes. Under the asset and liability method, we recognize deferred tax assets and liabilities in connection with the tax effects of temporary differences between our financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carrybacks and carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income or loss in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities as tax expense (benefit) in the period that includes the enactment date. We establish a deferred tax asset valuation allowance if we consider it more likely than not that all or a portion of the deferred tax assets will not be realized. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We also record interest related to unrecognized tax benefits in income tax expense. Penalties would be recognized as a component of income tax expense in the period in which the minimum statutory threshold is exceeded.
(o) | Net Income (Loss) Per Share |
We compute basic net income or loss per share by dividing net income or loss by the weighted-average number of shares outstanding. We compute diluted net income or loss per share by dividing net income or loss by the sum of the weighted-average number of shares determined for the basic earnings per common share computation and the number of common stock equivalents that would have a dilutive effect. To the extent that there is a net loss, we assume all common stock equivalents to be anti-dilutive, and they are excluded from diluted weighted-average shares outstanding. We determine common stock equivalent shares outstanding in accordance with the treasury stock method. In those years in which we have both net income and participating securities, we compute basic net income per share utilizing the two-class method earnings allocation formula to determine earnings per share for each class of stock according to dividends and participation rights in undistributed earnings. Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding.
When we have a discontinued operation, we use income or loss from continuing operations as the control number in determining whether common stock equivalents are dilutive or anti-dilutive. That is, the same number of common stock equivalents used in computing the diluted per-share amount for income or loss from continuing operations is used in computing all other reported diluted per-share amounts even if those amounts will be anti-dilutive to their respective basic per-share amounts.
(p) | Stock-based Compensation |
We record compensation expense equal to the estimated fair value on the grant date of stock options granted to purchase common stock, on a straight-line basis over the options service period. We record compensation expense for equity-based awards other than options based on the timing of vesting and the grant date fair value.
88
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
We use the Black-Scholes option pricing model to determine the fair value of any option granted. The fair value of any equity-based award other than an option, such as a restricted stock unit (RSU), is based on the price of FMD common stock on the date of grant.
(q) | Comprehensive Income (Loss) |
Comprehensive income (loss) is defined as all changes in equity, except for those resulting from transactions with stockholders. Net income (loss) is a component of comprehensive income (loss), with all other components referred to in the aggregate as other comprehensive income (loss).
(r) | Cash Flows |
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds sold are on an overnight basis.
(s) | Discontinued Operations |
A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held-for-sale, and (1) whose operations and cash flows have been or will be eliminated from the ongoing operations of the entity in the disposal transaction and (2) whose operations will not have significant continuing involvement with the ongoing entity after the disposal transaction. The financial information of a discontinued operation is excluded from the respective captions in our consolidated financial statements and related notes for all fiscal years presented.
(t) | Recently Issued Accounting Pronouncements |
ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), is effective prospectively for annual reporting periods beginning after December 15, 2012 and interim periods within those years. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income or as a separate disclosure in the notes to the financial statements. Our only other accumulated comprehensive income component is net unrealized holding gains or losses on investments available-for-sale, which are held at Union Federal and classified as assets of discontinued operations. Pursuant to ASU 2013-02, we initially exclude these unrealized holding gains and losses from our net loss; however, they are later reported as reclassifications out of accumulated other comprehensive income (loss) when the securities are sold or other-than-temporary impairment is recognized. Such reclassification of realized gains and losses on investments available-for-sale are included in our consolidated statements of operations.
ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11), is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. We do not expect the adoption of ASU 2013-11 to have a material impact on our consolidated financial statements.
89
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(2) Summary of Significant Accounting Policies (Continued)
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held-for-sale) that have not been reported in the financial statements previously issued or available for issuance. ASU 2014-08 elevates the threshold for a disposal transaction to qualify as a discontinued operation. Under the new guidance, only those disposals of components of an entity that represent a strategic shift that has or will have a major effect on an entitys operations and financial results will be required to be reported as discontinued operations in the financial statements. Further, ASU 2014-08 expands disclosure requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose information about individually significant components that are disposed of or held-for-sale and do not qualify as discontinued operations. We have not early adopted ASU 2014-08 nor do we expect the adoption to have a material impact on our consolidated financial statements.
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board initiated a joint project to clarify the principles of recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. To meet those objectives, the FASB is amending the ASC and creating a new Topic 606, Revenue from Contracts with Customers. ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The impact of ASU 2014-09 on our consolidated financial statements is not yet known.
ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) (ASU 2014-15), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. ASU 2014-15 requires management to assess an entitys ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans and requires an express statement and other disclosures when substantial doubt is not alleviated. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated financial statements.
We do not expect any other recently issued, but not yet effective, accounting pronouncements to have a material impact on our consolidated financial statements.
(3) Discontinued Operations
Union Federal
On May 28, 2014, the Union Federal Board of Directors approved the dissolution of Union Federal and authorized Union Federal to prepare a plan of voluntary dissolution, which plan is subject to the approval of the Union Federal Board of Directors, the OCC and FMD, as the sole stockholder of Union Federal. Also on May 28, 2014, the FMD Board of Directors approved Union Federals plan to pursue the dissolution of Union Federal and to prepare the plan of voluntary dissolution, which plan is subject to the approval of FMD, as the sole stockholder of Union Federal. Following the dissolution of Union Federal, FMD will cease to offer banking services through Union Federal.
The voluntary dissolution plan will outline managements intention to sell the assets of Union Federal, consisting primarily of its education loan, mortgage loan and investment portfolios, and settling its customer
90
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(3) Discontinued Operations (Continued)
deposits at the earlier of maturity or the effectiveness of the dissolution. In addition to the exit costs discussed below, we expect to incur charges related to lease obligations, legal fees and contract termination provisions in connection with the voluntary dissolution plan. Furthermore, depending on the timing and extent of the dissolution process, FMD may purchase certain assets from Union Federal or advance funds to facilitate deposit redemptions on a temporary basis before the assets are ultimately liquidated. We expect the dissolution process to be complete by the end of fiscal 2015.
We evaluated the dissolution of Union Federal in accordance with ASC 205-20. Based on the evaluation performed, we concluded that Union Federal met each of the criterion required for classification as a discontinued operation. Specifically, we concluded that (1) Union Federal qualified as a component of an entity, as its operations and cash flows can clearly be distinguished from the rest of FMD, (2) the operations and cash flows of Union Federal would be eliminated from the ongoing operations of FMD subsequent to the dissolution and (3) there would be no continuing involvement of FMD in the operations of Union Federal subsequent to the dissolution.
As a result of the foregoing, we reported the operations and activities relating to Union Federal within discontinued operations for the fiscal 2014, fiscal 2013 and fiscal 2012. Assets and liabilities related to these operations have been segregated and reported as assets and liabilities from discontinued operations on our consolidated balance sheets.
Assets and Liabilities
The assets and liabilities of Union Federal classified as discontinued operations on our consolidated balance sheets, after the effect of elimination entries, are presented below:
June 30, 2014 | June 30, 2013 | |||||||
(dollars in thousands) | ||||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 86,394 | $ | 23,311 | ||||
Investments available-for-sale |
62,309 | 84,782 | ||||||
Education loans |
21,944 | 62,996 | ||||||
Mortgage loans |
16,371 | 12,629 | ||||||
Other assets |
1,788 | 3,358 | ||||||
|
|
|
|
|||||
Total assets |
$ | 188,806 | $ | 187,076 | ||||
|
|
|
|
|||||
Liabilities: |
||||||||
Deposits |
$ | 161,067 | $ | 163,977 | ||||
Other liabilities |
1,760 | 1,494 | ||||||
|
|
|
|
|||||
Total liabilities |
$ | 162,827 | $ | 165,471 | ||||
|
|
|
|
Investments available-for-sale Investments available-for-sale were principally comprised of mortgage-backed securities issued by government-sponsored enterprises and U.S. government agencies and were recorded at fair value. Union Federal utilizes a third-party pricing vendor to provide valuations on its investments available-for-sale. Fair values as provided by the vendor are generally determined based upon available direct market data (including trades, covers, bids and offers) along with market data for similar securities (including indices and market research). Prepayment/default projections based on historical statistics of the underlying
91
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(3) Discontinued Operations (Continued)
collateral and current market data are also used by the vendor in determining a price for the securities. As of June 30, 2014, the fair value and amortized cost of the portfolio totaled $62.3 million and $62.0 million, respectively.
Loans All loans have been classified as held-for-sale and recorded at the lower of cost or fair value as of June 30, 2014. For the fiscal year ended June 30, 2013, these loan portfolios were classified as held-to-maturity and carried at amortized cost, less an allowance for loan losses. The comparison of cost to fair value for the education loan portfolio as of June 30, 2014 resulted in a write-down of $194 thousand, beyond what had been provided for through the previously established allowance for loan losses. This write-down was recorded in discontinued operations for the fiscal year ended June 30, 2014. The comparison of cost to fair value for the mortgage loan portfolio resulted in the mortgage loans being transferred to the held-for-sale classification at cost as of June 30, 2014. See Note 2, Summary of Significant Accounting PoliciesLoans Held-for-Sale for information on the fair value methodologies.
Deposits Deposit liabilities were comprised of savings, checking and money market deposits with no stated maturities as well as time deposits which have fixed maturities. Deposits with no stated maturities were held at the amount payable on demand, which was equal to the fair value. Time deposits were held at fair value as of June 30, 2014, which was determined by discounting the scheduled cash flows using market rates offered for deposits with similar remaining maturities as of our consolidated balance sheet date. This fair value calculation yielded an additional liability of $198 thousand as of June 30, 2014. This adjustment was charged to interest expense and was recorded in discontinued operations for the fiscal year ended June 30, 2014.
Revenues and expenses
The revenues and expenses of the discontinued operations of Union Federal presented in our consolidated statements of operations for the fiscal years ended 2014, 2013 and 2012, after the effects of elimination entries, were as follows:
Fiscal Year Ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Total revenues |
$ | 4,443 | $ | 3,661 | $ | 1,648 | ||||||
Total expenses |
2,657 | 2,730 | 2,107 | |||||||||
Total other income |
962 | | | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) from discontinued operations, before income taxes |
2,748 | 931 | (459 | ) | ||||||||
Income tax expense |
250 | 1 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Discontinued operations, net of taxes |
$ | 2,498 | $ | 930 | $ | (460 | ) | |||||
|
|
|
|
|
|
Other income Other income of Union Federal for the fiscal year ended June 30, 2014 included $2.1 million in gains recognized on the sales of portfolios of education loans to RBS Citizens, N.A. (Citizens), partially offset by $1.1 million in losses reclassified out of accumulated other comprehensive income. The $1.1 million reclassification adjustment represented $132 thousand in net realized losses on securities sold during the year and the remaining $970 thousand represented other-than-temporary impairment losses as we no longer had the intent and ability to hold the securities to recovery. There was no tax benefit reclassified out of other comprehensive income (loss) as there was a full valuation allowance against the corresponding deferred tax asset.
92
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(3) Discontinued Operations (Continued)
Exit costs Total expenses for the fiscal year ended June 30, 2014 included severance costs of $246 thousand and retention costs of $24 thousand. Additional retention costs of $284 thousand are expected to be incurred in fiscal 2015.
Securitization Trusts and First Marblehead Data Services, Inc.
Upon our adoption of ASU 2009-16 and 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 (Trusts) were initially subject to a default repayment guaranty by The Education Resources Institute, Inc. (TERI), while the education loans purchased by other securitization trusts (NCT Trusts) were, with limited exceptions, not TERI-guaranteed. Of the 14 securitization trusts consolidated on July 1, 2010, 11 were Trusts and three were NCT Trusts. We refer to the consolidated Trusts as the NCSLT Trusts and the consolidated NCT Trusts as the GATE Trusts.
On November 14, 2011, we sold to a third party all of our interests in the structuring advisory agreements relating to the Trusts and the related asset services agreement for $13.0 million in cash. Our variable interests in the Trusts included our right to receive the additional structural advisory fees. As a result of this sale, we no longer held a variable interest in the NCSLT Trusts and were, therefore, no longer the primary beneficiary of the NCSLT Trusts. Accordingly, we deconsolidated $6.61 billion of assets and $7.85 billion of liabilities from our consolidated balance sheets and recognized a $1.24 billion non-cash gain in our consolidated statements of operations during the second quarter of fiscal 2012, representing the accumulated deficit in the NCSLT Trusts.
On March 2, 2012, FMD sold to a third party all of its outstanding capital stock in its subsidiary First Marblehead Data Services, Inc. (FMDS) for $13.7 million in cash. FMDS served as the trust administrator of the NCT Trusts. On March 30, 2012, the new third party owner of FMDS terminated the agreement, effective September 30, 2012, with FMDs subsidiary FMER for the special servicing of the NCT Trusts. With the termination of this agreement, we no longer had the power to direct the activities that most significantly impact the performance of the GATE Trusts and, therefore, we were no longer considered the primary beneficiary of these trusts. As a result, we deconsolidated the GATE Trusts effective March 31, 2012. We deconsolidated $258.4 million of assets and $260.1 million of liabilities from our consolidated balance sheets and recognized a $1.7 million non-cash gain in our consolidated statements of operations during the third quarter of fiscal 2012, representing the accumulated deficit in the GATE Trusts. In addition to the non-cash gain of $1.7 million, we also recorded an additional gain of $9.2 million representing the fair value of the residual interests and additional structural advisory fees related to these trusts that were previously eliminated through consolidation, resulting in a total non-cash gain of $10.9 million for the deconsolidation event.
On April 13, 2012, FMER provided its notice of resignation as special servicer of the Trusts. The resignation became effective June 21, 2012. Pursuant to the terms of the resignation, FMER assisted the new special servicer of the Trusts for a transition period that terminated on November 30, 2012.
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. Further, we concluded that this would occur within an appropriate assessment period for both the NCSLT Trusts and the GATE Trusts. As a result, we reported the operations and activities relating to the NCSLT Trusts, the GATE Trusts and FMDS within discontinued operations for fiscal 2012. The non-cash gains representing the accumulated deficit recognized upon deconsolidations of the NCSLT Trusts and the GATE Trusts, as discussed above, were included in discontinued operations. Further, the gain recognized as the result of the sale of FMDS, as well as the revenues and expenses of FMDS prior to the sale, were recorded in discontinued operations for fiscal 2012.
93
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(3) Discontinued Operations (Continued)
The revenues and expenses of these discontinued operations for fiscal 2012 were as follows:
Fiscal year ended June 30, 2012 |
||||
(dollars in thousands) | ||||
Total revenues |
$ | (100,737 | ) | |
Total expenses |
15,408 | |||
Other income |
1,258,564 | |||
|
|
|||
Income from discontinued operations, before income taxes |
1,142,419 | |||
Income tax expense |
6,598 | |||
|
|
|||
Discontinued operations, net of taxes |
$ | 1,135,821 | ||
|
|
The securitization trusts previously consolidated were considered pass-through entities for income tax purposes and, accordingly, the net income or loss of the trusts was included in the tax returns of the trust owners rather than the trust entities themselves. Income taxes allocated to discontinued operations were related to the sales and operations of FMDS.
(4) Asset Acquisition of Cology, Inc.
On October 19, 2012, FMDs subsidiary Cology LLC completed its acquisition of a substantial portion of the operating assets of the Cology Sellers for $4.7 million in cash and the assumption of certain liabilities. Cology LLC provides education loan processing and disbursement services to approximately 300 credit union and other lender clients. Cology LLC earns fees based primarily on the number of loan applications, loan certifications and disbursements it processes on behalf of its clients. Cology LLC does not originate education loans for its own account.
In connection with the transaction, we established a performance incentive plan that provides for payment of bonuses to eligible employees based on Cology LLCs achievement of certain profitability targets for the periods ending June 30, 2013, 2014 and 2015. We have not accrued any amounts under the performance incentive plan as of June 30, 2014.
(5) Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents:
June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Cash equivalents (money market funds) |
$ | 29,856 | $ | 33,032 | ||||
Interest-bearing deposits with banks |
2,793 | 24,558 | ||||||
Non-interest-bearing deposits with banks |
1,306 | 1,009 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
$ | 33,955 | $ | 58,599 | ||||
|
|
|
|
(6) Short-term Investments
Short-term investments of $40.1 million at June 30, 2014 and $55.2 at million June 30, 2013 included certificates of deposits with highly-rated financial institutions, carried at cost. These certificates of deposits have a range of maturities between 1.2 months to 4.7 months.
94
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(7) Education Loans Held-to-Maturity
FMD holds a small portfolio of education loans totaling $838 thousand at June 30, 2014 and $1.0 million at June 30, 2013, which were transferred by Union Federal to an indirect subsidiary of FMD in 2009, prior to the launch of our Monogram platform. These loans were fully reserved for at June 30, 2014 and June 30, 2013.
(8) Deposits for Participation Interest Accounts
In connection with certain of our lender clients Monogram-based loan programs, we have provided credit enhancements by funding participation accounts to serve as a first-loss reserve for defaulted program loans. We have made deposits toward our credit enhancement arrangements and agreed to provide periodic supplemental deposits, up to specified limits, during the disbursement periods under our loan program agreements based on the credit mix and volume of disbursed program loans and adjustments to default projections for program loans.
Participation accounts serve as a first-loss reserve to the originating lenders for defaults experienced in Monogram-based loan program portfolios. As defaults occur, our lender clients withdraw the outstanding balance of defaulted principal and interest from the participation account applicable to their respective programs. As amounts are recovered from borrowers, those amounts are deposited back into the applicable participation account, if applicable. Legal ownership of the defaulted education loan may be transferred to us or continue to be owned by the lender client, depending on the terms of the loan program agreement. Defaulted education loans transferred to us are immediately charged-off and the recoveries are deposited back to the applicable participation account regardless of our ownership of the education loan.
Cash balances in the participation accounts earn interest at market rates applicable to commercial interest-bearing deposit accounts at each program lender. In addition, participation account administration fees are deposited directly by our lender clients into the applicable participation accounts. These fees represent compensation to us for providing the credit enhancement, and are distributed from the participation accounts to us monthly and are not eligible to be used as credit enhancement. Interest and fees deposited into the participation accounts are not recognized as revenue in our consolidated statements of operations. Instead, accretion due to discounting and other changes in fair value are recognized in revenue.
To the extent that the credit enhancement balance in participation accounts is in excess of contractually required amounts, as a result of declining loan balances, or if actual loan volumes or default experience are less than our funded amounts, we are eligible to receive periodic releases of funds, in addition to the monthly participation account administration fee, pursuant to the terms of the applicable loan program agreement. The timing and amount of releases, if any, from the participation accounts are uncertain and vary among the loan programs.
We carry participation accounts at fair value on our consolidated balance sheet. Fair value is equal to the amount of cash on deposit in the participation account adjusted for unrealized gains or losses. Due to the lack of availability of market prices for financial instruments of this type, we estimate unrealized gains and unrealized losses related to the participation accounts based on the net present value of expected future cash flows into and out of the account related to education loans originated as of our consolidated balance sheet date, using an estimate of prepayments, defaults and recoveries, and the timing of the return of our capital, if any, at a discount rate commensurate with the risks and durations involved. We record changes in estimated fair value of participation accounts, if any, in revenues as part of administrative and other fees.
On May 30, 2014, FMD, FMER and SunTrust Bank entered into a thirteenth amendment to the loan program agreement, as amended, among FMD, FMER and SunTrust Bank. In connection with the thirteenth amendment, effective June 1, 2014, the amount of credit enhancement required to be provided for in the
95
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(8) Deposits for Participation Interest Accounts (Continued)
participation account was reduced. The refund, net of an additional deposit for new program year loan volume (defined as loans expected to be funded during the year subsequent to the thirteenth amendment effective date), was $7.4 million. This amount was contractually due back to FMD on June 30, 2014 and, as such, we reclassified the balance from deposits for participation accounts to cash and cash equivalents on our consolidated balance sheet as of June 30, 2014. We received the $7.4 million on July 25, 2014.
(9) Fair Value Measurements
(a) | Financial Instruments Recorded at Fair Value on our Consolidated Balance Sheets |
For financial instruments recorded at fair value on our consolidated balance sheets, we base that financial instruments categorization within the valuation hierarchy upon the lowest level of input that is significant to the fair value measurement. During fiscal 2014 and fiscal 2013, there were no transfers between the hierarchy levels.
The following is a description of the valuation methodologies used for financial instruments, from continuing operations, recorded at fair value on our consolidated balance sheets:
Deposits for Participation Interest Accounts
We recorded deposits for participation accounts at fair value using cash flow modeling techniques as they do not have available market prices. As such, we estimate fair value using the net present value of expected future cash flows. At both June 30, 2014 and June 30, 2013, the fair value of deposits for participation accounts was not materially different from the cash balance of the underlying interest-bearing deposits. These assets are classified within Level 3 of the valuation hierarchy. Our significant observable and unobservable inputs are discussed below.
Service Revenue Receivables
We recorded our service revenue receivables at fair value on our consolidated balance sheets. Our service revenue receivables consist of additional structural advisory fees and residual receivables and represent the estimated fair value of our service revenue receivables expected to be collected over the life of the various securitization trusts that have purchased education loans facilitated by us, with no further service obligations on our part. Changes in the estimated fair value of our service revenue receivables due, less any cash distributions received, are recorded in our consolidated statements of operations within fair value changes to service revenue receivables. In the absence of market-based transactions, we use cash flow modeling techniques to derive a Level 3 estimate of fair value for financial reporting purposes. Our significant observable and unobservable inputs are discussed below.
96
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(9) Fair Value Measurements (Continued)
The following table presents financial instruments, from continuing operations, carried at fair value on our consolidated balance sheets, in accordance with the valuation hierarchy described above, on a recurring basis:
June 30, | ||||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total carrying value |
Level 1 | Level 2 | Level 3 | Total carrying value |
|||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Deposits for participation interest accounts |
$ | | $ | | $ | 15,834 | $ | 15,834 | $ | | $ | | $ | 13,147 | $ | 13,147 | ||||||||||||||||
Service revenue receivables |
| | 13,979 | 13,979 | | | 14,817 | 14,817 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total assets |
$ | | $ | | $ | 29,813 | $ | 29,813 | $ | | $ | | $ | 27,964 | $ | 27,964 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents activity related to our financial assets, from continuing operations, categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for fiscal 2014 and fiscal 2013. All realized and unrealized gains and losses recorded during the years presented relate to assets still held at our consolidated balance sheet dates. There have been no transfers in or out of Level 3 of the hierarchy, or between Levels 1 and 2, for the years presented.
Fiscal years ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Deposits for participation interest accounts |
Service revenue receivables |
Deposits for participation interest accounts |
Service revenue receivables |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Fair value, beginning of year |
$ | 13,147 | $ | 14,817 | $ | 4,039 | $ | 16,341 | ||||||||
Realized and unrealized gains (losses) |
(455 | ) | 2,330 | (144 | ) | 2,068 | ||||||||||
Net contributions (distributions) |
3,142 | (3,168 | ) | 9,252 | (3,592 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Fair value, end of year |
$ | 15,834 | $ | 13,979 | $ | 13,147 | $ | 14,817 | ||||||||
|
|
|
|
|
|
|
|
97
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(9) Fair Value Measurements (Continued)
The following table presents additional quantitative information about the assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value at June 30, 2014:
Asset |
Fair Value | Valuation Techniques | Significant Unobservable Inputs | Range | ||||||||
(dollars in thousands) |
||||||||||||
Deposits for participation interest accounts |
$ | 15,834 | Discounted cash flows | Discount rate | 8-15 | % | ||||||
Annual prepayment rates | 5.75-11.5 | % | ||||||||||
Annual net recovery rates | 2.67 | % | ||||||||||
Annual default rates | 0-2.5 | % | ||||||||||
Service revenue receivables |
$ | 13,979 | Discounted cash flows | Discount rate | 10-16 | % | ||||||
Annual prepayment rates | 3-9 | % | ||||||||||
Annual net recovery rates | 2-2.5 | % | ||||||||||
Annual default rates | 1-10 | % |
(b) | Level 3 Inputs Used to Determine Fair Value |
The unobservable inputs used to determine the fair value of our service revenue receivables and participation accounts include, but are not limited to, discount rates, prepayment rates, recovery rates and default rates. The forward London Interbank Offered Rate (LIBOR) curve is a key observable input utilized in determining the fair value of expected future cash flows from these assets. There have been no significant changes in these inputs from June 30, 2013.
Sensitivity to Changes in Assumptions
The service revenue receivables recorded at June 30, 2014 and June 30, 2013 were related to certain of the securitization trusts we previously facilitated. Substantially all of the loans held by these securitization trusts have guarantees from schools, and, in some cases, from a third-party bank. These guarantees help to partially mitigate the overall impact of defaults and sensitivity to changes in default activity to the residual interest and additional structural advisory fee holders. In addition, the recoveries on guaranteed defaults are returned back to the schools or banks, as applicable, not the residual interest and additional structural advisory fee holders, therefore, limiting the impact and sensitivity of the holders to recoveries. Further, due to the seasoning of these trusts, many of the residual interests and additional structural advisory fees have relatively short weighted-average lives and are currently cash-flowing, and, as such, are not significantly impacted by other assumptions, such as discount rates.
The fair value of our participation accounts may be impacted by changes in prepayment rates, net default rates, the forward LIBOR curve and the timing of capital releases, if any.
(c) | Fair Values of Other Financial Instruments |
Fair value estimates for financial instruments not carried at fair value on our consolidated balance sheets are generally subjective in nature, and are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. The fair value estimates for the financial instruments disclosed below does not necessarily incorporate the exit price concept used to record financial instruments at fair value on our consolidated balance sheets.
98
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(9) Fair Value Measurements (Continued)
The following tables present the carrying amount, estimated fair value and placement in the fair value hierarchy for our financial instruments, from continuing operations, not measured at fair value on our consolidated balance sheets at June 30, 2014 and June 30, 2013. The carrying amount for these instruments approximates fair value principally due to their short maturities.
June 30, 2014 |
Carrying Amount |
Estimated Fair Value |
Fair Value Measurements | |||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 33,955 | $ | 33,955 | $ | 33,955 | $ | | $ | | ||||||||||
Short-term investments |
40,057 | 40,057 | 40,057 | | | |||||||||||||||
Restricted cash |
94,436 | 94,436 | 94,436 | | | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Restricted funds due to clients |
$ | 94,272 | $ | 94,272 | $ | 94,272 | | |
June 30, 2013 |
Carrying Amount |
Estimated Fair Value |
Fair Value Measurements | |||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 58,599 | $ | 58,599 | $ | 58,599 | $ | | $ | | ||||||||||
Short-term investments |
55,179 | 55,179 | 55,179 | | | |||||||||||||||
Restricted cash |
87,338 | 87,338 | 87,338 | | | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Restricted funds due to clients |
$ | 86,994 | $ | 86,994 | $ | 86,994 | | |
(10) Goodwill and Intangible Assets
(a) | Cology LLC |
Cology LLC completed its acquisition of a substantial portion of the operating assets of the Cology Sellers in the second quarter of fiscal 2013. We recorded a customer list intangible asset of $5.7 million for the approximately 250 credit union and other lender clients that the Cology Sellers did business with as of the acquisition date along with $518 thousand of goodwill. The customer list intangible asset is being amortized over a 15-year period on a straight-line basis. Amortization expense related to the Cology LLC intangible asset is approximately $377 thousand per year. We expect amortization of the intangible asset and goodwill to be fully deductible for income tax purposes over a 15-year period. We recorded no goodwill or intangible asset impairment through June 30, 2014.
(b) | TMS |
We completed our acquisition of TMS in fiscal 2011. We recorded goodwill of $22.2 million at the acquisition date. We also recorded intangible assets for the customer list acquired, certain technology necessary to support the customer relationships and the value of the TMS tradename. On June 30, 2011, TMS sold a portfolio of K-12 schools to Nelnet Business Solutions, Inc. in a transaction that eliminated $2.6 million of goodwill and decreased our customer list intangible asset by $4.1 million. As a result, $19.5 million of goodwill remained at June 30, 2014 and 2013 and the adjusted cost basis of our customer list intangible was $17.9 million. The technology and tradename have a cost basis of $3.7 million and $2.0 million, respectively. The intangible
99
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(10) Goodwill and Intangible Assets (Continued)
assets are being amortized over a 15-year period on a straight-line basis. Amortization expense related to the TMS intangible assets is approximately $1.9 million per year. We expect amortization of the intangible assets and goodwill to be fully deductible for income tax purposes over a 15-year period. We recorded no goodwill or intangible asset impairment through June 30, 2014.
(c) | Impairment Review of Goodwill |
In fiscal 2014 we evaluated our goodwill for impairment on May 31, 2014, which is our annual impairment testing date, and concluded that the fair market value of the TMS and Cology LLC reporting units were in excess of our recorded book value and, therefore, were not impaired as of that date. In determining whether impairment exists, we assess impairment at the level of the TMS and Cology LLC reporting units. There have been no indicators of impairment since that date.
(d) | Intangible Assets |
Intangible assets at June 30, 2014 include the following:
Amortization period |
Adjusted cost basis |
Accumulated amortization |
Net | |||||||||||||
(in years) | (dollars in thousands) | |||||||||||||||
Intangible assets: |
||||||||||||||||
Customer lists |
15 | $ | 23,600 | $ | (4,847 | ) | $ | 18,753 | ||||||||
Technology |
6 | 3,650 | (2,129 | ) | 1,521 | |||||||||||
Tradename |
15 | 1,950 | (455 | ) | 1,495 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total intangible assets at June 30, 2014 |
$ | 29,200 | $ | (7,431 | ) | $ | 21,769 | |||||||||
|
|
|
|
|
|
Amortization expense recorded for both fiscal 2014 and fiscal 2013 was $2.4 million.
Estimated annual amortization expense for each of the fiscal years subsequent to June 30, 2014 and thereafter is as follows:
Customer lists | Technology | Tradename | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Estimated amortization expense: |
||||||||||||||||
2015 |
$ | 1,573 | $ | 608 | $ | 130 | $ | 2,311 | ||||||||
2016 |
1,573 | 608 | 130 | 2,311 | ||||||||||||
2017 |
1,573 | 305 | 130 | 2,008 | ||||||||||||
2018 |
1,573 | | 130 | 1,703 | ||||||||||||
2019 |
1,573 | | 130 | 1,703 | ||||||||||||
Thereafter |
10,888 | | 845 | 11,733 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 18,753 | $ | 1,521 | $ | 1,495 | $ | 21,769 | ||||||||
|
|
|
|
|
|
|
|
100
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(11) Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation and amortization. We calculate depreciation and amortization for financial reporting purposes using the straight-line method over the estimated useful life of the asset.
June 30, | ||||||||||
2014 | 2013 | Useful life | ||||||||
(dollars in thousands) | ||||||||||
Equipment |
$ | 13,725 | $ | 13,285 | 3 - 5 years | |||||
Software |
41,557 | 39,531 | 3 years | |||||||
Software under development |
343 | 332 | ||||||||
Leasehold improvements |
11,840 | 11,840 | lesser of 5 years or lease term | |||||||
Capital leases (equipment, furniture and fixtures) |
17,463 | 17,463 | lesser of 3-5 years or lease term | |||||||
Furniture and fixtures |
2,706 | 2,710 | 5 years | |||||||
|
|
|
|
|||||||
87,634 | 85,161 | |||||||||
Less accumulated depreciation and amortization |
(81,815 | ) | (78,985 | ) | ||||||
|
|
|
|
|||||||
Total property and equipment, net |
$ | 5,819 | $ | 6,176 | ||||||
|
|
|
|
(12) Restricted Funds Due to Clients
As part of our operations, we have cash that is recorded as restricted cash on our consolidated balance sheets because it is deposited with third-party institutions and not available for our use. Included in restricted cash on our consolidated balance sheets are tuition payments due to schools, undisbursed loan origination proceeds and recoveries on defaulted education loans. We record a liability on our consolidated balance sheets representing tuition payments due to our TMS clients, loan origination proceeds due to our Cology LLC clients and recoveries on defaulted education loans and education loan proceeds due to schools.
(13) Commitments and Contingencies
(a) | Income Tax Matters |
Internal Revenue Service Audit
Effective March 31, 2009, we completed the sale of the trust certificate of NC Residuals Owners Trust (the Trust Certificate). In connection with the sale of the Trust Certificate, FMD entered into an asset services agreement (the Asset Services Agreement) pursuant to which FMD provided various consulting and advisory services to the purchaser of the Trust Certificate. As a result of the sale of the Trust Certificate, as well as our operating losses incurred in fiscal 2009, we recorded an income tax receivable for federal income taxes paid on taxable income in prior fiscal years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables. In April 2010, the Internal Revenue Service (IRS) commenced an audit of our tax returns for fiscal 2007 through fiscal 2009, including a review of the tax treatment of the sale of the Trust Certificate and the federal tax refund previously received in the amount of $176.6 million. Such audits are consistent with the practice of the Joint Committee of Taxation, which requires the IRS to perform additional procedures for a taxpayer who receives a tax refund in excess of $2.0 million, which may include an audit of such taxpayers tax return. The IRS is also auditing our fiscal 2010 tax return in light of the $45.1 million income tax refund that we received in October 2010.
101
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(13) Commitments and Contingencies (Continued)
We announced on August 15, 2013 that, as part of the audit process, we expected to receive a Notice of Proposed Adjustment (NOPA) from the IRS. On September 10, 2013 we received two NOPAs from the IRS that contain the proposed adjustments that we announced on August 15, 2013. In the NOPAs, the IRS asserts that our sale of the Trust Certificate should not be recognized for federal income tax purposes primarily because we retained the economic benefits and burdens of the Trust Certificate, including, among other things, retaining certain repurchase rights and data rights. The IRS further concludes that the transaction should be characterized as a financing instead of a sale and asserts that the sale of the Trust Certificate and the execution of the Asset Services Agreement had the impact of converting taxable income to the owner from an accrual basis to a cash basis. As a result, the NOPAs propose to disallow the loss that generated the tax refunds that we previously received as well as require us to include income from the Trust Certificate from the March 31, 2009 sale date through June 30, 2011 in our taxable income for such years. If the IRS positions are successful, the disallowance of the loss, coupled with the additional taxable income after the sale date through June 30, 2011, would create federal income tax adjustments that we estimate to be approximately $300.0 million, excluding interest until such matter is resolved and the assessment of penalties, if any. The NOPAs do not address tax years beyond June 30, 2011. The NOPAs are only initial IRS positions and not final determinations and, as a result, do not require any tax payment at this time.
The ongoing IRS audit or any other investigation, audit, appeals proceeding or suit relating to the sale of the Trust Certificate could result in substantial costs. A state taxing authority could also challenge our tax position in connection with the transactions, notwithstanding our receipt of any income tax refund.
The determination of whether or not to accrue a liability, if any, requires a significant amount of judgment and entails by necessity, the need to incorporate estimates. We have considered the requirements of ASC 740, Income Taxes, and the impact of the NOPAs, along with other information supporting our overall tax position, in our assessment of the ultimate outcome of this matter with the IRS, and based on our analysis, we did not record an accrual related to this matter in our consolidated financial statements at June 30, 2014. Such an accrual, if it becomes necessary, could be significant and material to our consolidated financial statements.
We are vigorously contesting the proposed adjustments with the IRS, and we continue to believe we have a strong position as it relates to this matter; however, we cannot predict the timing or the outcome of the IRS audit. The process of resolving this issue, which may include an appeals process with the IRS and litigation in the U.S. Tax Court and the U.S. Court of Appeals, may extend over multiple years depending on how it progresses through the IRS and, if necessary, the courts. Assuming this matter advances unresolved through the IRS administrative process and the courts, we are not required to make tax payments, if any, until the matter is fully resolved, which may be several years from now. However, if we receive an unfavorable outcome from the U.S. Tax Court and appeal, we must post a bond, which could have a significant cost and, depending on our financial condition, may not be obtainable, in order to prevent collection of the tax deficiency.
Massachusetts Appellate Tax Board Matters
We are involved in several matters relating to the Massachusetts tax treatment of GATE Holdings, Inc. (GATE), a former subsidiary of FMD. We took the position in proceedings before the Massachusetts Appellate Tax Board (ATB) that GATE was properly taxable as a financial institution and not as a business corporation and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue (Commissioner) took alternative positions: that GATE was properly taxable as a business corporation, or that GATE was taxable as a financial institution, but was not entitled to apportionment
102
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(13) Commitments and Contingencies (Continued)
or was subject to 100% Massachusetts apportionment. In September 2007, we filed a petition with the ATB seeking a refund of state taxes paid for our taxable year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of taxes, along with accrued interest, of approximately $11.9 million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. For the 2005 and 2006 taxable years, only one of the two assessments made by the Commissioner would ultimately be allowed. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE and us. In April 2011, the ATB held an evidentiary hearing on the foregoing, and the parties filed their final briefs in September 2011. On November 9, 2011, the ATB issued an order (ATB Order) regarding these proceedings. The ATB Order reflected the following rulings and findings:
| GATE was properly taxable as a financial institution, rather than a business corporation, for each of the tax years at issue; |
| GATE was entitled to apportion its income under applicable provisions of Massachusetts tax law for each of the tax years at issue; |
| GATE properly calculated one of the two applicable apportionment factors used to calculate GATEs financial institution excise tax; |
| GATE incorrectly calculated the other apportionment factor, which we refer to as the Property Factor, by excluding all income from trust-owned education loans outside of Massachusetts rather than including such income for the purposes of GATEs Massachusetts state tax returns; and |
| All penalties assessed to FMD and GATE were abated. |
In connection with the ATB Order, as well as the expiration of the statute of limitations applicable to GATEs taxable year ended June 30, 2007, we recognized an income tax benefit of $12.5 million during the second quarter of fiscal 2012. In the third quarter of fiscal 2012, we made a $5.1 million payment that satisfied our obligation to the Massachusetts Department of Revenue for GATEs taxable years ended June 30, 2004, 2005 and 2006.
On April 17, 2013, the ATB issued its opinion confirming the rulings and findings included in the ATB Order (the ATB Opinion). We had argued that the loan servicers activities, which were conducted outside of Massachusetts on behalf of the trusts, determined the location of the loans for purposes of the Property Factor. The ATB disagreed and determined that the loan servicers activities should not be attributed to GATE and further determined that, for purposes of the Property Factor, the trust-owned education loans were located in Massachusetts, GATEs commercial domicile, and, therefore, were subject to 100% Massachusetts apportionment.
On July 22, 2013, we filed an appeal of the ATBs findings with regard to the Property Factor in the Massachusetts Appeals Court. The Commissioner has decided not to appeal the ATBs other findings. On December 18, 2013, the Massachusetts Supreme Judicial Court (SJC) notified us that it had elected to hear our appeal of the ATBs findings and, as a result, our appeal will not be heard by the Massachusetts Appeals Court. The SJC has informed us that it expects to schedule oral arguments for early October 2014. If we are unsuccessful in an appeal of the ATB Order, we could be required to make additional tax payments, including interest, as discussed below, for GATEs taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position.
103
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(13) Commitments and Contingencies (Continued)
On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for our taxable years ended June 30, 2008 and 2009. This assessment included approximately $822 thousand of additional tax liability and an assessment for penalties of $4.1 million. We accrued for the additional tax liability, including interest, in fiscal 2013 but have not accrued for the penalties as we believe that it is more likely than not that the penalties will ultimately be abated, which is consistent with the Massachusetts Department of Revenues treatment of our taxable years ended June 30, 2004, 2005 and 2006. As of June 30, 2014, we had accrued a total income tax liability of $25.9 million, including interest, related to the 2008 and 2009 tax returns for GATE, which amount was included in income taxes payable on our consolidated balance sheet. On August 26, 2013, we filed an application to have the assessed amounts abated in full. On March 26, 2014, the Massachusetts Department of Revenue denied our application. While we have filed an appeal on this matter with the ATB, it is on hold pending resolution of our appeal of the ATB Order. We expect the outcome for the 2008 and 2009 tax years to be influenced by the SJCs decision on our appeal of the ATBs findings. We cannot predict the outcome of this matter or the timing of such payments, if any, at this time.
It is reasonably possible that our liability for this uncertain tax benefit may increase or decrease within the next 12 months if a decision is rendered by the SJC. However, we cannot reasonably estimate a range of potential changes in such benefit as the outcome of the appeal is subject to uncertainty.
(b) | Federal Class Action Lawsuits |
On August 28, 2013, a purported class action was filed in the United States District Court for the District of Massachusetts against FMD, Daniel Meyers, FMDs Chief Executive Officer and Chairman of the FMD Board of Directors, and Kenneth Klipper, FMDs former Chief Financial Officer and Managing Director. The action is entitled Smith v. The First Marblehead Corp. et al., Civ. A. No. 13-cv-12121-PBS (D. Mass.). The plaintiff alleges, among other things, that the defendants made false and misleading statements and failed to disclose material information in various filings with the Securities and Exchange Commission, press releases and other public statements concerning our corporate income tax filings. The complaint alleges various claims under the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint seeks, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and proper. In December 2013, the court appointed a lead plaintiff and lead counsel. On February 20, 2014, an amended complaint was filed by the lead plaintiff and contained similar allegations as the earlier complaint. On April 7, 2014, we filed a motion to dismiss the amended complaint. On May 22, 2014, the lead plaintiff filed its opposition to our motion to dismiss. On June 23, 2014, we filed a reply brief in support of our motion to dismiss the amended complaint. On June 30, 2014, the court heard arguments on the motion to dismiss. A class has not been certified in the action as of September 10, 2014.
On October 23, 2013, a different plaintiff filed a related derivative action in the same court against Daniel Meyers, Kenneth Klipper and current and former members of the FMD Board of Directors Peter Drotch, George Daly, William Hansen, Thomas Eddy, Dort Cameron III, Nancy Bekavac, Stephen Anbinder, Peter Tarr, William Berkley and Henry Cornell. The action is entitled Noel v. Daniel Meyers, et al., Civ. A. No. 13-cv-12683-PBS (D. Mass.). The plaintiff alleges, among other things, that the defendants breached their fiduciary duties to FMD by making, or not preventing, purported false and misleading statements concerning FMDs corporate income tax filings. The plaintiff also asserts claims for unjust enrichment and corporate waste. The complaint seeks, among other relief, a return of all damages purportedly sustained by FMD as well as changes to corporate governance policies and procedures. On January 23, 2014, this action was stayed pending the resolution and disposition of the Smith action.
104
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(13) Commitments and Contingencies (Continued)
The defendants in each action intend to vigorously defend themselves. There can be no assurance, however, that the defenses will be successful, and adverse developments and/or an adverse resolution of either lawsuit could have a material effect on our consolidated financial position and results of operations. In addition, the costs associated with the defenses will be incurred by FMD. We are not presently able to estimate potential losses, if any, related to the lawsuits and, although we carry insurance for these types of claims, a judgment significantly in excess of our insurance coverage could be material to our consolidated financial statements.
(c) | NC Residuals Owners Trust Litigation |
On April 2, 2014, FMD filed a complaint in the Delaware Court of Chancery against NC Residuals Owners Trust (NC Residuals) and The Wilmington Trust Company in its capacity as owner trustee (the Owner Trustee) of the GATE Trusts. The action is entitled The First Marblehead Corporation v. NC Residuals Owners Trust, et. al., C.A. No. 9500-VCN, and seeks declaratory relief and specific performance as described below.
GATE, a former subsidiary of FMD, was the owner of certain beneficial interests in the GATE Trusts as well as certain beneficial interests in the NCSLT Trusts. GATE assigned and transferred all of its interests in the GATE Trusts to FMD pursuant to a transfer and assignment agreement. As part of that agreement, GATE agreed to, among other things, execute and deliver all documents that might be necessary to transfer, assign and deliver to and vest in FMD ownership of the GATE Trusts on the records of the Owner Trustee. After the transfer of its interests in the GATE Trusts to FMD, GATEs remaining assets consisted of its interests in the NCSLT Trusts and it was statutorily converted into NC Residuals and, immediately thereafter, the Trust Certificate was sold.
As of July 2013, the Owner Trustee had not received documentation required to transfer ownership on the records of the Owner Trustee of the GATE Trusts to FMD and the Owner Trustees books and records still reflected that GATE was the beneficial owner of the GATE Trusts. FMD requested that NC Residuals, as successor to GATE, execute certain documents necessary to cause FMD to become properly reflected as the GATE Trusts registered owner in the Owner Trustees books and records, in accordance with NC Residuals obligations under the transfer and assignment agreement. NC Residuals has refused to comply with FMDs request and has claimed ownership of the GATE Trusts and has also demanded that FMD deliver to it trust certificates reflecting ownership of the GATE Trusts and all cash distributions received on or after March 31, 2009 related to the GATE Trusts.
From 2009 until late 2013, FMD received regular cash distributions as the beneficial owner of the GATE Trusts and has continually reflected the GATE Trusts on its consolidated balance sheets. As of June 30, 2014, the value of the GATE Trusts on our consolidated balance sheet was $12.0 million and, through June 30, 2014, the GATE Trusts had generated cash distributions of $5.2 million, of which $1.5 million are currently being withheld.
FMD and NC Residuals have agreed to submit this matter to non-binding mediation and, as such, NC Residuals has not yet answered FMDs complaint. The non-binding mediation is scheduled for September 22, 2014. We are vigorously pursuing all of our claims in this matter; however, we cannot predict the timing or outcome of the litigation.
(d) | IndemnificationsSale of FMDS |
In connection with the sale of our trust administrator, FMDS, in the third quarter of fiscal 2012, we agreed to indemnify the buyer for breaches of representations, warranties and covenants, subject to certain terms, conditions and exceptions.
105
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(13) Commitments and Contingencies (Continued)
As of June 30, 2014, the buyer had remaining rights to indemnification with respect to breaches of certain of our representations and warranties in the purchase agreement (the Fundamental Representations) that are subject to a cap equal to the purchase price. The Fundamental Representations include representations and warranties by FMD with regard to its organization, its authorization of the transaction, the absence of brokers fees and its ownership of the shares of capital stock of FMDS. The Fundamental Representations also include representations and warranties by FMD with regard to FMDS organization, qualification and corporate power, FMDS capitalization, the absence of brokers fees, the absence of subsidiaries and certain tax matters.
In addition, as of June 30, 2014, the buyer had remaining rights to indemnification for any breach or nonperformance by us of any of our covenants or obligations set forth in the purchase agreement, which rights are not subject to the purchase price cap. In addition, we have agreed to provide a separate, unconditional indemnity with regard to tax matters related to FMDS arising prior to the closing date, including the audit currently being conducted by the IRS, as discussed above. This special indemnity is also not subject to the purchase price cap. Finally, we have agreed to indemnify and defend the buyer from certain other specified matters. The buyers rights to such indemnification would be initially capped at the purchase price, and the applicable cap would then decrease over time. We believe that at our consolidated balance sheet dates, the likelihood of making any payment under these indemnifications was remote. As such, the fair value of any such liability for the indemnifications would, therefore, also be immaterial to our consolidated financial statements.
(e) | Performance Guaranty |
In connection with Union Federals sale of an education loan portfolio in October 2009, FMD delivered a performance guaranty pursuant to which FMD guarantees the performance by Union Federal of its obligations and agreements, including its indemnification and loan repurchase obligations, under the loan purchase and sale agreement relating to the transaction. We were not aware of any contingencies existing at our consolidated balance sheet dates that were both probable and estimable for which we would record a reserve, nor can we estimate a range of possible losses at this time.
(f) | IndemnificationsUnion Federal |
In April 2010, FMD and certain of its subsidiaries entered into agreements relating to the restructuring of the education loan warehouse facility of FMDs indirect subsidiary, UFSB-SPV. In connection with the restructuring, FMD agreed, among other things, to provide a separate indemnity for third-party claims by or on behalf of borrowers against the third-party conduit lender based on loan origination errors under the facility. We were not aware of any contingencies existing at our consolidated balance sheet dates that were both probable and estimable for which we would record a reserve, nor can we estimate a range of possible losses at this time.
(g) | IndemnificationsCitizens Loan Sales |
On January 23, 2014, FMD and Union Federal entered into a loan purchase and sale agreement with Citizens. Pursuant to the loan purchase and sale agreement, on March 28, 2014, Union Federal sold to Citizens a portfolio of education loans with an aggregate outstanding principal balance of approximately $39.8 million. Union Federal received $43.1 million in sale proceeds, which was equal to 103.5% of the aggregate outstanding principal balance plus all accrued but unpaid interest of the purchased loans as of the calendar day immediately preceding the purchase date.
On June 25, 2014, FMD and Union Federal entered into a new loan purchase and sale agreement with Citizens. Pursuant to the loan purchase and sale agreement, on June 25, 2014, Union Federal sold to Citizens a
106
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(13) Commitments and Contingencies (Continued)
portfolio of education loans with an aggregate outstanding principal balance of approximately $19.2 million. Union Federal received $20.3 million in sale proceeds, which was equal to which was equal to 103.5% of the aggregate outstanding principal balance plus all accrued but unpaid interest of the purchased loans as of the calendar day immediately preceding the purchase date.
Subject to certain exceptions, Union Federal has agreed to repurchase, following receipt of notice from Citizens, any education loan for which a representation or warranty made by Union Federal about such loan proves to have been false, misleading or incorrect as of the applicable effective dates of the loan purchase and sale agreements or as of the applicable closing date. Union Federal has also agreed to repurchase any education loan that becomes subject to a formal judicial proceeding that is based upon the acts or omissions of Union Federal or its agents or affiliates arising prior to the applicable closing date and, under certain circumstances, any education loan where a claim has been made that the education loan is unenforceable because of the lack of contractual capacity of a minor. These repurchase obligations do not expire and are in addition to FMDs indemnification obligations discussed below.
In addition, FMD agreed to guarantee to Citizens the full and prompt performance by Union Federal of its obligations and agreements, including its loan repurchase obligations discussed above, under the loan purchase and sale agreements. FMD also agreed to indemnify Citizens against losses sustained as a result of any breach of Union Federals representations, warranties and covenants or any act or omission of Union Federal prior to the applicable closing date for each sale.
We were not aware of any contingencies existing at our consolidated balance sheet dates that were both probable and estimable for which we would record a reserve, nor can we estimate a range of possible losses at this time.
(h) | Operating Leases |
We lease office space and equipment, related to our continuing operations, under non-cancelable operating leases expiring at various times through March 2017. Rent expense under operating leases from continuing operations for fiscal 2014, fiscal 2013 and fiscal 2012 was approximately $4.2 million, $4.2 million and $3.2 million, respectively.
The future minimum office space lease payments required under operating leases related to continuing operations for each of the five fiscal years subsequent to June 30, 2014 and thereafter are as follows:
Fiscal years ending June 30, |
Lease obligations | |||
(dollars in thousands) | ||||
2015 |
$ | 3,691 | ||
2016 |
2,218 | |||
2017 |
1,609 | |||
2018 and thereafter |
| |||
|
|
|||
Total minimum lease payments |
$ | 7,518 | ||
|
|
We are entitled to receive approximately $130 thousand under non-cancelable subleases of office space through fiscal 2017.
107
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(14) Net Interest Income
The following table reflects the components of net interest income from continuing operations, presented within other income on our consolidated statements of operations:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Interest income: |
||||||||||||
Cash and cash equivalents |
$ | 37 | $ | 98 | $ | 178 | ||||||
Short-term investments |
176 | 337 | 290 | |||||||||
Restricted cash |
14 | 38 | 482 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income |
227 | 473 | 950 | |||||||||
Interest expense: |
||||||||||||
Lease obligations |
25 | 124 | 251 | |||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
25 | 124 | 251 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | 202 | $ | 349 | $ | 699 | ||||||
|
|
|
|
|
|
(15) Other Income
The following table presents the components of other income, excluding net interest income, from continuing operations recorded in our consolidated statements of operations for the fiscal years ended June 30, 2014, 2013 and 2012.
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Gain from deconsolidation of trusts |
$ | | $ | | $ | 9,514 | ||||||
Other income |
582 | 2,112 | 2,475 | |||||||||
|
|
|
|
|
|
|||||||
Total other income |
$ | 582 | $ | 2,112 | $ | 11,989 | ||||||
|
|
|
|
|
|
During fiscal 2014, we recorded other income of $582 thousand, consisting of $281 thousand in proceeds from the TERI settlement, discussed below, $225 thousand related to the sale of Cology LLCs loan servicing business and $76 thousand in cash recoveries on previously defaulted education loans held by FMD.
TERI was a private, not-for-profit Massachusetts organization. In its role as guarantor in the education lending market, TERI previously agreed to reimburse many of the securitization trusts we facilitated for unpaid principal and interest on defaulted education loans. In April 2008, TERI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code (the TERI Reorganization). As a result of the TERI Reorganization, the securitization trusts facilitated by us have not been able to fully realize TERIs guarantee obligations. Under TERIs confirmed plan of reorganization, which became effective in November 2010, general unsecured creditors of TERI, including us, are entitled to receive a pro rata share of cash and future recoveries or other proceeds in respect of a portfolio of defaulted education loans held by a liquidating trust. In addition, FMD and certain subsidiaries entered into a stipulation with TERI and the Official Committee of Unsecured Creditors of TERI that became effective in October 2010 that resolved all claims and controversies among the parties to the agreement. The proceeds from the TERI settlement represented cash distributions from the liquidating trust under TERIs confirmed plan of reorganization.
108
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(15) Other Income (Continued)
During fiscal 2013, we recorded other income of $2.1 million, consisting of $702 thousand in proceeds from the TERI settlement, $946 thousand related to the sale of a defaulted education loan portfolio, which was transferred by Union Federal to an indirect subsidiary of FMD in 2009, and $464 thousand in cash recoveries on previously defaulted education loans held by FMD.
During fiscal 2012, we recorded income of $9.5 million related to the deconsolidation of the securitization trusts previously consolidated, largely relating to the fair value of the residual interests that were previously eliminated upon our adoption of ASU 2009-17 on July 1, 2010. The additional $2.5 million in other income consisted of $1.6 million in proceeds from the TERI settlement and $790 thousand in cash recoveries on previously defaulted education loans held by FMD.
(16) General and Administrative Expenses
The following table reflects the components of general and administrative expenses from continuing operations:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
General and administrative expenses: |
||||||||||||
Third-party services |
$ | 14,689 | $ | 14,651 | $ | 15,907 | ||||||
Depreciation and amortization |
5,288 | 4,347 | 4,615 | |||||||||
Marketing |
1,799 | 5,123 | 8,470 | |||||||||
Occupancy and equipment |
10,856 | 11,379 | 10,913 | |||||||||
Servicer fees |
278 | 650 | 696 | |||||||||
Merchant fees |
7,773 | 6,663 | 6,467 | |||||||||
Trust related special servicing expenses |
| 1,639 | 5,920 | |||||||||
Other |
6,946 | 7,498 | 6,913 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 47,629 | $ | 51,950 | $ | 59,901 | ||||||
|
|
|
|
|
|
The largest component of general and administrative expenses was third-party services, which primarily consisted of legal fees in support of ongoing litigation as well as outside consultant and temporary employment costs. Included in other expenses in fiscal 2014, fiscal 2013 and fiscal 2012 were fees of $1.1 million, $1.2 million and $1.3 million, respectively, paid to Sextant Holdings, LLC (Sextant) under a time-sharing agreement for business-related use of a private aircraft. Under the time sharing agreement, the fees may not exceed the actual expense of each specific flight as authorized by federal aviation regulations. In addition to the time sharing agreement, the FMD Board of Directors approved 75 hours of flight time for personal flight reimbursement each fiscal year. The reimbursement for personal travel time was $522 thousand for fiscal 2014, $400 thousand for fiscal 2013 and $507 thousand for fiscal 2012. The reimbursements for personal travel were included in compensation and benefits. The sole manager and member of Sextant is Daniel Meyers, FMDs Chief Executive Officer and Chairman of the Board.
(17) Income Taxes
We are subject to federal income tax, as well as income tax in multiple U.S. state and local jurisdictions. Our effective income tax rate is calculated on a consolidated basis. The IRS is auditing our tax returns for fiscal
109
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(17) Income Taxes (Continued)
2007 through fiscal 2010. We also remain subject to federal income tax examinations for fiscal 2011 through fiscal 2013. In addition, we are involved in several matters relating to the Massachusetts tax treatment of GATE, a former subsidiary of FMD. See Note 13, Commitments and ContingenciesIncome Tax Matters, for additional information regarding these matters.
Our state income tax returns in jurisdictions other than Massachusetts remain subject to examination for various fiscal years ended between June 30, 2010 and June 30, 2014.
The following table reflects components of income tax expense (benefit) attributable to loss from continuing operations before income taxes:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | | $ | | $ | (5,527 | ) | |||||
State |
659 | 1,967 | (12,459 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total current tax expense (benefit) |
659 | 1,967 | (17,986 | ) | ||||||||
Deferred: |
||||||||||||
Federal |
361 | 431 | 922 | |||||||||
State |
105 | (103 | ) | (892 | ) | |||||||
|
|
|
|
|
|
|||||||
Total deferred tax expense |
466 | 328 | 30 | |||||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) from continuing operations |
$ | 1,125 | $ | 2,295 | $ | (17,956 | ) | |||||
|
|
|
|
|
|
The following table reconciles the expected federal income tax expense (benefit) from continuing operations (computed by applying the federal statutory tax rate to income (loss) before taxes) to recorded income tax expense (benefit) from continuing operations:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Computed federal tax benefit |
$ | (13,629 | ) | $ | (17,091 | ) | $ | (17,881 | ) | |||
State tax, net of federal benefit |
496 | 1,212 | (8,678 | ) | ||||||||
Federal valuation allowance |
13,022 | 17,393 | 7,547 | |||||||||
Non-deductible compensation |
1,134 | 661 | 919 | |||||||||
Other, net |
102 | 120 | 137 | |||||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) from continuing operations |
$ | 1,125 | $ | 2,295 | $ | (17,956 | ) | |||||
|
|
|
|
|
|
110
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(17) Income Taxes (Continued)
The following table reflects the tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases that give rise to significant deferred tax assets and deferred tax liabilities:
June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 58,106 | $ | 44,970 | ||||
Federal benefit of unrecognized tax benefits |
9,062 | 8,833 | ||||||
Depreciation and amortization |
3,294 | 4,440 | ||||||
Allowance for loan losses |
5,966 | 5,631 | ||||||
Amortization of deferred costs |
2,720 | 3,058 | ||||||
Other, net |
9,058 | 7,435 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
88,206 | 74,367 | ||||||
Valuation allowance |
(79,911 | ) | (66,363 | ) | ||||
|
|
|
|
|||||
Total net deferred tax asset |
8,295 | 8,004 | ||||||
Deferred tax liabilities: |
||||||||
Additional structural advisory fees |
(774 | ) | (833 | ) | ||||
Residual fees |
(6,063 | ) | (5,230 | ) | ||||
Other, net |
(3,113 | ) | (3,130 | ) | ||||
|
|
|
|
|||||
Total deferred tax liability |
(9,950 | ) | (9,193 | ) | ||||
|
|
|
|
|||||
Net deferred tax liability |
$ | (1,655 | ) | $ | (1,189 | ) | ||
|
|
|
|
Under current law, we do not have remaining taxes paid within available net operating loss carryback periods, and it is more likely than not that our deferred tax assets will not be fully realized through future reversals of existing temporary differences or available tax planning strategies. Accordingly, we have determined that a valuation allowance was necessary for all of our deferred tax assets not scheduled to reverse against existing deferred tax liabilities as of June 30, 2014 and June 30, 2013. We will continue to review the recognition of deferred tax assets on a quarterly basis.
111
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(17) Income Taxes (Continued)
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars in thousands) | ||||||||||||
Beginning unrecognized tax benefits |
$ | 20,452 | $ | 19,630 | $ | 30,936 | ||||||
Reduction as a result of ATB Order and expiration of statute of limitations |
| | (11,306 | ) | ||||||||
Additional state tax liability recognized for the 2008 and 2009 tax years |
| 822 | | |||||||||
|
|
|
|
|
|
|||||||
Ending unrecognized tax benefits |
$ | 20,452 | $ | 20,452 | $ | 19,630 | ||||||
|
|
|
|
|
|
|||||||
Beginning accrued interest |
$ | 4,787 | $ | 3,451 | $ | 8,375 | ||||||
Reduction as a result of ATB Order and expiration of statute of limitations |
| | (6,281 | ) | ||||||||
Interest expense recognized |
654 | 1,336 | 1,357 | |||||||||
|
|
|
|
|
|
|||||||
Ending accrued interest |
$ | 5,441 | $ | 4,787 | $ | 3,451 | ||||||
|
|
|
|
|
|
The ending balance at June 30, 2014, 2013, and 2012 if recognized would favorably affect our effective income tax rate. We recognize interest and penalties in income tax expense when incurred.
112
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(18) Net (Loss) Income per Share
The following table sets forth the computation of basic and diluted net (loss) income per share of common stock:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(dollars and shares in thousands, except per share amounts) |
||||||||||||
Loss from continuing operations |
$ | (40,065 | ) | $ | (51,127 | ) | $ | (33,133 | ) | |||
Less: Loss allocated to participating securities |
| | (2,655 | ) | ||||||||
|
|
|
|
|
|
|||||||
Loss from continuing operations allocated to common shares outstanding |
$ | (40,065 | ) | $ | (51,127 | ) | $ | (30,478 | ) | |||
|
|
|
|
|
|
|||||||
Income from discontinued operations, net of taxes |
$ | 2,498 | $ | 930 | $ | 1,135,361 | ||||||
Less: Earnings allocated to participating securities |
| | 90,963 | |||||||||
|
|
|
|
|
|
|||||||
Income from discontinued operations allocated to common shares outstanding |
$ | 2,498 | $ | 930 | $ | 1,044,398 | ||||||
|
|
|
|
|
|
|||||||
Net (loss) income per basic common share: |
||||||||||||
From continuing operations |
$ | (3.55 | ) | $ | (4.77 | ) | $ | (3.00 | ) | |||
From discontinued operations |
0.22 | 0.09 | 102.82 | |||||||||
|
|
|
|
|
|
|||||||
Total basic net (loss) income per common share |
$ | (3.33 | ) | $ | (4.68 | ) | $ | 99.82 | ||||
|
|
|
|
|
|
|||||||
Net (loss) income per diluted common share: |
||||||||||||
From continuing operations |
$ | (3.55 | ) | $ | (4.77 | ) | $ | (2.99 | ) | |||
From discontinued operations |
0.22 | 0.09 | 102.59 | |||||||||
|
|
|
|
|
|
|||||||
Total diluted net (loss) income per common share |
$ | (3.33 | ) | $ | (4.68 | ) | $ | 99.60 | ||||
|
|
|
|
|
|
|||||||
Weighted-average common shares outstanding: |
||||||||||||
Basic |
11,270 | 10,735 | 10,157 | |||||||||
Diluted |
11,270 | 10,735 | 11,067 |
The following table presents the outstanding RSUs and stock options that were anti-dilutive, and, therefore, not included in the calculation of diluted earnings per common share:
Fiscal years ended June 30, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(in thousands) | ||||||||||||
RSUs |
377 | 316 | 217 | |||||||||
Stock options |
603 | 607 | 610 |
113
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(19) Stockholders Equity
(a) | Preferred Stock |
As of June 30, 2014 and June 30, 2013, we had 20,000,000 shares of preferred stock, at a par value of $0.01 per share, authorized with no shares issued or outstanding.
In December 2007, FMD entered into an investment agreement with GS Parthenon A, L.P. and GS Parthenon B, L.P., affiliates of GS Capital Partners (the Purchasers). Pursuant to the investment agreement, FMD issued 132,701 shares of Series B Non-Voting Convertible Preferred Stock, par value $0.01 per share (Series B Preferred Stock), at a purchase price of $1 thousand per share. The Series B Preferred Stock was automatically convertible into FMDs common stock upon the sale or transfer by any holder of the Series B Preferred Stock to any party other than an affiliate of such holder. The number of common shares issuable upon conversion was equal to the initial purchase price of the Series B Preferred Stock, divided by the conversion price of $150.00 per share. On November 30, 2012, the Purchasers entered into a purchase agreement with a third party to sell, in a private transaction, all 132,701 shares of Series B Preferred Stock then outstanding. On December 4, 2012, the transaction was settled and the Series B Preferred Stock was converted into 884,673 shares of FMDs common stock and was issued to the third-party purchaser. Following this transaction, there are no longer any shares of Series B Preferred Stock outstanding.
(b) | 2003 Employee Stock Purchase Plan |
In 2003, the FMD Board of Directors and stockholders approved the 2003 employee stock purchase plan (ESPP). A total of 60,000 shares of common stock were authorized for issuance under the ESPP. The ESPP permitted eligible employees to purchase shares of FMDs common stock at the lower of 85% of its fair market value at the beginning or at the end of each offering period. Participation was voluntary. In April 2008, the FMD Board of Directors, which administers the ESPP, terminated the offering period that began on January 1, 2008 and indefinitely suspended the ESPP. As a result, no shares were issued under the ESPP in fiscal 2014, fiscal 2013 or fiscal 2012. At June 30, 2014, 40,555 shares were available for future purchase under the ESPP.
(c) | Treasury Stock |
Treasury stock was $187.9 million (960,000 shares) and $187.2 million (896,545 shares) at June 30, 2014 and June 30, 2013, respectively. The increase in shares was a result of common stock withheld from employees to satisfy statutory minimum withholding obligations as equity compensation awards vest.
(20) Stock-Based Compensation
Stock-based compensation expense was $4.4 million, $4.2 million and $4.6 million for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. As of June 30, 2014, there was $5.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of approximately two years.
(a) | Stockholder Approved Plans |
We have stock awards outstanding under three stock-based incentive compensation plans, each approved by both the FMD Board of Directors and stockholders in 2002 (2002 Plan), 2003 (2003 Plan) and 2011 (2011 Plan).
Under the 2002 Plan, we granted non-statutory stock options to non-employee members of the FMD Board of Directors. In 2006, the FMD Board of Directors suspended new awards under the 2002 Plan. As of June 30, 2014, 3,000 shares of common stock were issuable upon exercise of awards granted under the 2002 Plan.
114
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(20) Stock-Based Compensation (Continued)
Under the 2003 Plan, we granted stock based awards to employees, directors and consultants. No further awards may be granted under the 2003 Plan following the stockholder approval of the 2011 Plan in November 2011; however, 39,277 shares of common stock were issuable upon the vesting of awards granted under the 2003 Plan as of June 30, 2014.
Under the 2011 Plan, the FMD Board of Directors, or one or more sub-committees of the FMD Board of Directors, may grant options, restricted stock, RSUs, other stock based awards or performance awards to employees, directors, consultants or advisors. As of June 30, 2014, 964,834 shares were available for future grant under the 2011 Plan and 352,912 shares of common stock were issuable upon the vesting of awards granted under the 2011 Plan. We typically issue new shares of common stock as opposed to using treasury shares.
(b) | Stock Options |
The following table summarizes information about stock options outstanding at June 30, 2014:
Exercise prices |
Number outstanding |
Weighted-average remaining contractual term |
Weighted-average exercise price |
Number exercisable |
||||||||||||
(shares in thousands) | ||||||||||||||||
$60.00(1) |
200 | 4.06 | $ | 60.00 | 200 | |||||||||||
$120.00(1) |
200 | 4.06 | 120.00 | 200 | ||||||||||||
$160.00(1) |
200 | 4.06 | 160.00 | 200 | ||||||||||||
$190.40 |
1 | 1.22 | 190.40 | 1 | ||||||||||||
$329.70 |
2 | 0.22 | 329.70 | 2 | ||||||||||||
|
|
|
|
|||||||||||||
$60.00 - $329.70 |
603 | 4.04 | 114.13 | 603 | ||||||||||||
|
|
|
|
(1) | These options were not issued under any of our existing stockholder-approved incentive plans. The FMD Board of Directors elected Daniel Meyers as President and Chief Executive Officer and as a member of the FMD Board of Directors, effective September 1, 2008. In connection with the election, the FMD Board of Directors and a subcommittee of the Compensation Committee of the FMD Board of Directors approved the grant in August 2008 (Grant Date) of stock options to Mr. Meyers to purchase (a) 200,000 shares of FMD common stock, at an exercise price of $60.00 per share, that vested and became exercisable in full on August 18, 2012; (b) 200,000 shares of FMD common stock, at an exercise price of $120.00 per share, that vested and became exercisable in full on November 30, 2008 and (c) 200,000 shares of FMD common stock, at an exercise price of $160.00 per share, that vested and became exercisable in full on November 30, 2008. Each of the stock options will expire ten years from the Grant Date. |
The options exercisable at June 30, 2014 have no intrinsic value as the exercise prices are above market price. The weighted-average remaining contractual term of options exercisable is approximately four years. Options expire at a maximum of ten years from the grant date.
115
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(20) Stock-Based Compensation (Continued)
The following table presents stock option activity for fiscal 2014, fiscal 2013 and fiscal 2012:
Number of options |
Weighted- average exercise price per share |
|||||||
(shares in thousands) | ||||||||
Outstanding options at June 30, 2011 |
610 | 114.32 | ||||||
Exercised |
| | ||||||
|
|
|||||||
Outstanding options at June 30, 2012 |
610 | 114.32 | ||||||
Forfeited |
(1 | ) | 200.37 | |||||
Expired |
(2 | ) | 33.30 | |||||
|
|
|||||||
Outstanding options at June 30, 2013 |
607 | 114.31 | ||||||
Forfeited |
(1 | ) | 260.05 | |||||
Expired |
(3 | ) | 85.75 | |||||
|
|
|||||||
Outstanding options at June 30, 2014 |
603 | 114.13 | ||||||
|
|
(c) | Stock Units |
Each stock unit, including both RSUs and director stock units, represents a contingent right to receive one share of FMD common stock upon vesting. Shares in respect of vested stock units are issued as soon as practicable after each vesting date.
Pursuant to a directors compensation program formerly under the 2003 Plan and now under the 2011 Plan, our non-employee directors are entitled to stock units for their service. Stock units granted to non-employee directors are fully vested upon grant. In May 2010, the director compensation program was amended to provide for the grant of 1,000 stock units upon initial election to the FMD Board of Directors and an annual grant of 1,000 stock units on September 20 of each year, if the non-employee director has then served on the FMD Board of Directors for at least 180 days. During fiscal 2014, fiscal 2013 and fiscal 2012, 6,000 stock units, 6,000 stock units and 7,000 stock units were granted to non-employee directors, respectively.
RSUs may be granted to employees and outside consultants. During fiscal 2014, approximately 305,400 RSUs were granted to employees (other than Daniel Meyers), including executive officers, all of which were due to vest over the next four years and an additional 110,000 RSUs were granted to Daniel Meyers, all of which vested immediately. During fiscal 2013, approximately 223,700 RSUs were granted to employees, including executive officers, all of which vest over four years from the grant date. During fiscal 2012, approximately 101,300 RSUs were granted to employees, including executive officers, all of which vest over four years from the grant date.
116
THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2014, 2013 and 2012
(20) Stock-Based Compensation (Continued)
The following table presents stock unit activity, including both RSUs and director stock units, for fiscal 2014, fiscal 2013 and fiscal 2012:
Number of stock units |
Weighted- average grant date fair value per share |
|||||||
(shares in thousands) | ||||||||
Outstanding stock units at June 30, 2011 |
247 | 32.83 | ||||||
Granted |
108 | 13.87 | ||||||
Vested and issued |
(95 | ) | 32.28 | |||||
Forfeited |
(77 | ) | 21.13 | |||||
|
|
|||||||
Outstanding stock units at June 30, 2012 |
183 | 26.84 | ||||||
Granted |
230 | 11.72 | ||||||
Vested and issued |
(100 | ) | 25.46 | |||||
Forfeited |
(14 | ) | 12.64 | |||||
|
|
|||||||
Outstanding stock units at June 30, 2013 |
299 | 16.36 | ||||||
Granted |
421 | 9.88 | ||||||
Vested and issued |
(208 | ) | 12.40 | |||||
Forfeited |
(120 | ) | 11.32 | |||||
|
|
|||||||
Outstanding stock units at June 30, 2014 |
392 | 12.44 | ||||||
|
|
(21) Defined Contribution Plans
We sponsor a 401(k) retirement savings plan for the benefit of all full time employees. Eligible employees can join the plan after three months of employment. Investment decisions are made by individual employees. At our option, we can contribute to the plan for the benefit of employees. Employee and employer contributions vest immediately. We made contributions of approximately $800 thousand for each of the fiscal years ended June 30, 2014 and June 30, 2013 and approximately $900 thousand for the fiscal year ended June 30, 2012.
117
SUPPLEMENTARY DATA
UNAUDITED QUARTERLY INFORMATION
The table below summarizes unaudited quarterly information for each of the three month periods in fiscal 2014 and fiscal 2013:
Three months ended | ||||||||||||||||
September 30, 2013 |
December 31, 2013 |
March 31, 2014 |
June 30, 2014 |
|||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Revenues |
$ | 12,696 | $ | 10,639 | $ | 13,283 | $ | 7,538 | ||||||||
Expenses |
24,466 | 19,422 | 19,912 | 20,080 | ||||||||||||
Other income |
72 | 360 | 71 | 281 | ||||||||||||
Income tax expense |
275 | 258 | 334 | 258 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from continuing operations |
(11,973 | ) | (8,681 | ) | (6,892 | ) | (12,519 | ) | ||||||||
Discontinued operations, net of taxes |
419 | 1,033 | 1,779 | (733 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (11,554 | ) | $ | (7,648 | ) | $ | (5,113 | ) | $ | (13,252 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income per basic and diluted common share: |
||||||||||||||||
From continuing operations |
$ | (1.07 | ) | $ | (0.77 | ) | $ | (0.61 | ) | $ | (1.11 | ) | ||||
From discontinued operations |
0.04 | 0.09 | 0.16 | (0.06 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total basic and diluted net loss per common share |
$ | (1.03 | ) | $ | (0.68 | ) | $ | (0.45 | ) | $ | (1.17 | ) | ||||
|
|
|
|
|
|
|
|
Three months ended | ||||||||||||||||
September 30, 2012 |
December 31, 2012 |
March 31, 2013 |
June 30, 2013 |
|||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Revenues |
$ | 11,589 | $ | 10,059 | $ | 11,624 | $ | 6,702 | ||||||||
Expenses |
25,576 | 22,560 | 21,048 | 22,083 | ||||||||||||
Other income |
304 | 546 | 567 | 1,044 | ||||||||||||
Income tax expense |
395 | 331 | 351 | 1,218 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from continuing operations |
(14,078 | ) | (12,286 | ) | (9,208 | ) | (15,555 | ) | ||||||||
Discontinued operations, net of taxes |
146 | 3 | 419 | 362 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (13,932 | ) | $ | (12,283 | ) | $ | (8,789 | ) | $ | (15,193 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income per basic and diluted common share: |
||||||||||||||||
From continuing operations |
$ | (1.38 | ) | $ | (1.17 | ) | $ | (0.83 | ) | $ | (1.39 | ) | ||||
From discontinued operations |
0.01 | | 0.04 | 0.03 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total basic and diluted net loss per common share |
$ | (1.37 | ) | $ | (1.17 | ) | $ | (0.79 | ) | $ | (1.36 | ) | ||||
|
|
|
|
|
|
|
|
118
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of FMDs Chief Executive Officer and Chief Financial Officer (FMDs principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, FMDs Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
119
Managements Annual Report on Internal Control Over Financial Reporting
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of The First Marblehead Corporation and subsidiaries (Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the companys principal executive and principal financial officers and effected by the companys board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of June 30, 2014. In making this assessment, the Companys management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework (1992).
Based on our assessment, management concluded that, as of June 30, 2014, the Companys internal control over financial reporting is effective based on those criteria.
The Companys independent auditors have issued an attestation report on the Companys internal control over financial reporting. That report appears on page 121 of this annual report.
/S/ DANIEL MEYERS |
Chief Executive Officer and Chairman of the Board of Directors |
/s/ ALAN BREITMAN |
Managing Director and Chief Financial Officer |
120
Attestation Report of our Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The First Marblehead Corporation:
We have audited The First Marblehead Corporations (the Company) internal control over financial reporting as of June 30, 2014, based on criteria established in Internal ControlIntegrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on criteria established in Internal ControlIntegrated Framework (1992) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The First Marblehead Corporation and subsidiaries as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 2014, and our report dated September 10, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Boston, Massachusetts
September 10, 2014
121
Change in Internal Control Over Financial Reporting
No change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. | Other Information |
Not applicable.
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, information required by Part III (Items 10, 11, 12, 13 and 14) is being incorporated by reference herein from our definitive proxy statement to be filed with the SEC within 120 days of the end of the fiscal year ended June 30, 2014 in connection with our 2014 annual meeting of stockholders, which we refer to below as our 2014 Proxy Statement.
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item with respect to our executive officers and code of ethics is included in Item 1, Business, of this annual report.
The information required by this item with respect to directors will be contained in our 2014 Proxy Statement under the caption Discussion of ProposalsProposal One: Election of Directors and is incorporated in this annual report by reference.
The information required by this item with regard to Section 16(a) beneficial ownership reporting compliance will be contained in our 2014 Proxy Statement under the caption Other InformationSection 16(a) Beneficial Ownership Reporting Compliance and is incorporated in this annual report by reference.
The information required by this item with respect to corporate governance matters will be contained in our 2014 Proxy Statement under the caption Information About Corporate GovernanceBoard Committees and is incorporated in this annual report by reference. Complete copies of the Audit Committee charter, as well as FMDs corporate governance guidelines and the charters of the Compensation Committee and Nominating and Corporate Governance Committee, are available on our website at www.firstmarblehead.com. Alternatively, paper copies of these documents may be obtained free of charge by writing to Investor Relations, The First Marblehead Corporation, The Prudential Tower, 800 Boylston Street, 34th Floor, Boston, Massachusetts 02199 or e-mailing Investor Relations at info@fmd.com.
Item 11. | Executive Compensation |
The information required by this item will be contained in our 2014 Proxy Statement under the captions Information About Corporate Governance and Information About Our Executive Officers and is incorporated in this annual report by this reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item with regard to security ownership of certain beneficial owners and management will be contained in our 2014 Proxy Statement under the caption Other InformationPrincipal Stockholders and is incorporated in this annual report by reference.
The information required by this item with regard to securities authorized for issuance under equity compensation plans will be contained in our 2014 Proxy Statement under the caption Information About Corporate Governance and is incorporated in this annual report by reference.
122
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item with regard to certain relationships and related-person transactions will be contained in our 2014 Proxy Statement under the caption Information About Our Executive Officers and is incorporated in this annual report by reference.
The information required by this item with regard to director independence will be contained in our 2014 Proxy Statement under the caption Information About Corporate Governance and is incorporated in this annual report by reference.
Item 14. | Principal Accountant Fees and Services |
The information required by this item will be contained in our 2014 Proxy Statement under the caption Discussion of ProposalsProposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm and is incorporated in this annual report by reference.
Item 15. | Exhibits and Financial Statement Schedules |
(a) | The following documents are filed as part of this annual report: |
(1) | Financial Statements. |
Our consolidated financial statements are included as Item 8, Financial Statements and Supplementary Data, herein and are filed as part of this annual report. Our consolidated financial statements include the reports made in Item 9A, Controls and Procedures, herein.
(2) | Financial Statement Schedules. |
None.
(3) | Exhibits. |
The exhibits set forth on the Exhibit Index following this annual report are filed as part of this annual report. This list of exhibits identifies each management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report.
123
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FIRST MARBLEHEAD CORPORATION | ||
By: | /S/ DANIEL MEYERS | |
Daniel Meyers | ||
Chief Executive Officer and Chairman of the Board of Directors | ||
Date: | September 10, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature |
Title(s) |
Date | ||
/S/ DANIEL MEYERS Daniel Meyers |
Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | September 10, 2014 | ||
/S/ ALAN BREITMAN Alan Breitman |
Managing Director and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | September 10, 2014 | ||
/S/ NANCY Y. BEKAVAC Nancy Y. Bekavac |
Director | September 10, 2014 | ||
/S/ DORT A. CAMERON III Dort A. Cameron III |
Director | September 10, 2014 | ||
/S/ PETER S. DROTCH Peter S. Drotch |
Director | September 10, 2014 | ||
/S/ THOMAS P. EDDY Thomas P. Eddy |
Director | September 10, 2014 | ||
/S/ SETH GELBER Seth Gelber |
Director | September 10, 2014 | ||
/S/ WILLIAM D. HANSEN William D. Hansen |
Director | September 10, 2014 |
124
EXHIBIT INDEX
Number |
Description | |
2.1(1) |
Loan Purchase and Sale Agreement, dated January 23, 2014, by and among Union Federal Savings Bank, RBS Citizens, N.A. and the Registrant | |
2.2 |
Loan Purchase and Sale Agreement, dated June 25, 2014, by and among Union Federal Savings Bank, RBS Citizens, N.A. and the Registrant | |
3.1(2) |
Restated Certificate of Incorporation of the Registrant, as amended | |
3.2(3) |
Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, dated December 2, 2013 | |
3.3(4) |
Amended and Restated By-laws of the Registrant | |
4.1(5) |
Indenture, dated July 18, 2007, among UFSB Private Loan SPV, LLC, CIESCO, LLC, Citicorp North America, Inc., U.S. Bank National Association and Union Federal Savings Bank, as amended by Amendment No. 1 to Indenture, Limited Waiver and Acknowledgement dated April 15, 2009, among UFSB Private Loan SPV, LLC, CIESCO, LLC, Citicorp North America, Inc., U.S. Bank National Association and Union Federal Savings Bank, as amended by Amendment No. 2 to Indenture dated April 16, 2010, among UFSB Private Loan SPV, LLC, CIESCO, LLC, Citicorp North America, Inc., U.S. Bank National Association, the Registrant and Union Federal Savings Bank | |
4.2(5) |
Settlement Agreement and Release, dated April 16, 2010, among UFSB Private Loan SPV, LLC, CIESCO, LLC, Citicorp North America, Inc., U.S. Bank National Association, the Registrant, The National Collegiate Funding II, LLC, The National Collegiate Student Loan Trust 2009-1 and Union Federal Savings Bank | |
10.1(4)# |
2002 Director Stock Plan | |
10.2(4)# |
2003 Employee Stock Purchase Plan | |
10.3(6)# |
2003 Stock Incentive Plan, as amended and restated | |
10.4(7)# |
2011 Stock Incentive Plan, as amended | |
10.5(2)# |
Executive Incentive Compensation Plan | |
10.6# |
Summary of non-employee director compensation arrangements | |
10.7(8)# |
Form of Nonstatutory Stock Option Agreement evidencing grants under the 2002 Director Stock Plan | |
10.8(9)# |
Forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement evidencing grants under the 2003 Stock Incentive Plan | |
10.9(10)# |
Form of Restricted Stock Unit Agreement evidencing grants under the 2003 Stock Incentive Plan | |
10.10(11)# |
Form of Restricted Stock Unit Agreement evidencing grants under the 2011 Stock Incentive Plan | |
10.11(10)# |
Form of Invention, Non-disclosure, Non-competition and Non-solicitation Agreement | |
10.12(12)# |
Employment Agreement, dated as of August 18, 2008, between the Registrant and Daniel Meyers | |
10.13(13)# |
First Amendment to Employment Agreement, dated as of May 17, 2010, between the Registrant and Daniel Meyers | |
10.14(12)# |
Indemnification Agreement, dated August 18, 2008, between the Registrant and Daniel Meyers | |
10.15(13)# |
First Amendment to Indemnification Agreement, dated as of July 22, 2010, between the Registrant and Daniel Meyers |
125
Number |
Description | |
10.16(14)# |
Non-Statutory Stock Option Agreement for $60.00 stock options between the Registrant and Daniel Meyers | |
10.17(14)# |
Non-Statutory Stock Option Agreement for $120.00 stock options between the Registrant and Daniel Meyers | |
10.18(14)# |
Non-Statutory Stock Option Agreement for $160.00 stock options between the Registrant and Daniel Meyers | |
10.19(13)# |
Letter Agreement, dated February 25, 2005, between the Registrant and Kenneth Klipper, as supplemented | |
10.20(13)# |
Letter Agreement, dated September 22, 2008, between the Registrant and Seth Gelber, as supplemented | |
10.21(15)# |
Letter Agreement, dated June 7, 2004, between the Registrant and William P. Baumer, as supplemented | |
10.22(15)# |
Letter Agreement, dated January 11, 2011, between the Registrant and Barry Heneghan | |
10.23(16)# |
Letter Agreement, dated June 20, 2014, between the Registrant and Alan Breitman | |
10.24# |
Letter Agreement, dated May 29, 2014, between the Registrant and Richard Neely | |
10.25(17) |
Time Sharing Agreement, dated February 4, 2009, between the Registrant and Sextant Holdings, LLC | |
10.26(14) |
Indenture of Lease, dated September 5, 2003, between the Registrant and BP Prucenter Acquisition LLC, as amended | |
10.27(18) |
Fourth Amendment to Indenture of Lease, dated March 28, 2014, between the Registrant and BP Prucenter Acquisition LLC | |
10.28(14) |
Commercial Lease, dated August 13, 2004, between the Registrant and Cabot Road Partners, LLC, as amended | |
10.29(19) |
Second Amendment to Lease, dated as of November 3, 2010, between the Registrant and Cabot Road OwnerVEF VI, LLC | |
10.30(10) |
Third Amendment to Lease, dated as of July 1, 2011, between the Registrant and Cabot Road OwnerVEF VI, LLC | |
10.31(20) |
Purchase Agreement, dated as of March 31, 2009, among the Registrant, VCG Owners Trust and VCG Securities LLC | |
10.32(20) |
Letter Agreement, dated as of March 31, 2009, delivered by Vanquish Advisors LLC to the Registrant | |
10.33(20) |
Asset Services Agreement, dated as of March 31, 2009, among the Registrant, First Marblehead Education Resources, Inc., VCG Owners Trust and VCG Securities LLC | |
10.34(20) |
Data Sharing and License Agreement, dated as of March 31, 2009, between the Registrant and VCG Owners Trust | |
10.35(20) |
Indemnification Agreement, dated as of March 31, 2009, between the Registrant, VCG Owners Trust and VCG Securities LLC | |
10.36(21) |
Loan Purchase and Sale Agreement, dated October 13, 2009, between Union Federal Savings Bank and Wells Fargo Bank, N.A. | |
10.37(21) |
Performance Guarantee, dated October 16, 2009, delivered by the Registrant to Wells Fargo Bank, N.A. |
126
Number |
Description | |
10.38(22) |
Amended and Restated Private Student Loan Servicing Agreement, dated as of September 28, 2006, between the Registrant and Pennsylvania Higher Education Assistance Agency | |
10.39(14) |
Amendments to Amended and Restated Private Student Loan Servicing Agreement, dated as of September 28, 2006, between the Registrant and Pennsylvania Higher Education Assistance Agency | |
10.40(23) |
Private Student Loan Monogram Program Agreement, dated as of February 5, 2010, between the Registrant and Pennsylvania Higher Education Assistance Agency | |
10.41(23) |
Loan Program Agreement, dated as of April 20, 2010, among the Registrant, First Marblehead Education Resources, Inc. and SunTrust Bank | |
10.42(23) |
Certificate of Satisfaction and First Amendment to Loan Program Agreement, dated as of July 15, 2010, among the Registrant, First Marblehead Education Resources, Inc. and SunTrust Bank | |
10.43(24) |
Fifth Amendment to Loan Program Agreement dated November 14, 2011, among the Registrant, First Marblehead Education Resources, Inc. and SunTrust Bank | |
10.44(25) |
Twelfth Amendment to Loan Program Agreement dated as of April 30, 2014, among the Registrant, First Marblehead Education Resources, Inc. and SunTrust Bank | |
10.45 |
Thirteenth Amendment to Loan Program Agreement dated as of May 30, 2014, among the Registrant, First Marblehead Education Resources, Inc. and SunTrust Bank | |
10.46(26) |
Loan Program Agreement, dated as of August 2, 2012, among the Registrant, First Marblehead Education Resources, Inc., and SunTrust Bank | |
10.47(10) |
Loan Program Agreement, dated as of June 30, 2011, among the Registrant, First Marblehead Education Resources, Inc. and Union Federal Savings Bank | |
10.48(27) |
Stipulation Resolving Claims of First Marblehead Education Resources, Inc., the Registrant, and First Marblehead Data Services, Inc. dated as of October 7, 2010 | |
10.49(28) |
Asset Purchase Agreement among FM Systems LLC, KeyBank National Association and, for solely purposes of Sections 7.1.6 and 7.12, the Registrant, dated November 21, 2010 | |
10.50(29) |
Purchase and Assignment Agreement dated November 14, 2011, among the Registrant, First Marblehead Education Resources, Inc. and VCG Special Opportunities Master Fund Limited | |
10.51(29) |
Inducement Agreement dated November 14, 2011, among the Registrant, First Marblehead Education Resources, Inc., VCG Owners Trust and VCG Securities LLC | |
21.1 |
List of Subsidiaries | |
23.1 |
Consent of Independent Registered Public Accounting Firm | |
31.1 |
Chief Executive OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 |
Chief Financial OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 |
Chief Executive OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 |
Chief Financial OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
127
Number |
Description | |
101.INS |
Instance Document | |
101.SCH |
Taxonomy Extension Schema Document | |
101.CAL |
Taxonomy Calculation Linkbase Document | |
101.LAB |
Taxonomy Label Linkbase Document | |
101.PRE |
Taxonomy Presentation Linkbase Document | |
101.DEF |
Taxonomy Extension Definition Linkbase Document |
(1) | Incorporated by reference to the exhibits to the Registrants quarterly report on Form 10-Q filed with the SEC on February 10, 2014. |
(2) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on August 29, 2008. |
(3) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on December 2, 2013. |
(4) | Incorporated by reference to the exhibits to the Registrants registration statement on Form S-1 (File No. 333-108531). |
(5) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on April 20, 2010. |
(6) | Incorporated by reference to the exhibits to the Registrants registration statement on Form S-8 (File No. 333-163141). |
(7) | Incorporated by reference to Annex A to the Registrants definitive proxy statement on Schedule 14A filed with the SEC on October 2, 2013. |
(8) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on September 15, 2004. |
(9) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on September 7, 2005. |
(10) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on September 8, 2011. |
(11) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on January 31, 2012. |
(12) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on August 18, 2008. |
(13) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on September 2, 2010. |
(14) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on September 3, 2009. |
(15) | Incorporated by reference to the exhibits to the Registrants annual report on Form 10-K filed with the SEC on September 13, 2013. |
(16) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on July 2, 2014. |
(17) | Incorporated by reference to the exhibits to the Registrants quarterly report on Form 10-Q filed with the SEC on February 9, 2009. |
128
(18) | Incorporated by reference to the exhibits to the Registrants quarterly report on Form 10-Q filed with the SEC on May 8, 2014. |
(19) | Incorporated by reference to the exhibit to the Registrants current report on Form 8-K filed with the SEC on November 5, 2010. |
(20) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on April 6, 2009. |
(21) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on October 16, 2009. |
(22) | Incorporated by reference to the exhibits to the Registrants quarterly report on Form 10-Q filed with the SEC on November 8, 2006. |
(23) | Incorporated by reference to the exhibits to the Registrants Amendment No. 1 to annual report on Form 10-K filed with the SEC on November 18, 2010. |
(24) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on November 15, 2011. |
(25) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on May 6, 2014. |
(26) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on August 2, 2012. |
(27) | Incorporated by reference to the exhibit to the Registrants current report on Form 8-K filed with the SEC on October 14, 2010. |
(28) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on November 22, 2010. |
(29) | Incorporated by reference to the exhibits to the Registrants current report on Form 8-K filed with the SEC on November 14, 2011. |
| Confidential treatment has been granted or requested for certain provisions of this Exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. |
# | This Exhibit is a management contract or compensatory plan or arrangement. |
129
Exhibit 2.2
CITIZENS BANK, N.A.
UNION FEDERAL SAVINGS BANK
Loan Purchase and Sale Agreement
This Loan Purchase and Sale Agreement (this Agreement), by and among UNION FEDERAL SAVINGS BANK, a federal savings bank organized under the laws of the United States having a principal place of business at 1565 Mineral Spring Avenue, North Providence, Rhode Island 02904 (Seller), and CITIZENS BANK, N.A., a national banking association having a principal place of business at One Citizens Plaza, Providence, Rhode Island 02903 (Purchaser), and THE FIRST MARBLEHEAD CORPORATION, a Delaware corporation having a principal place of business at 800 Boylston Street, 34th Floor, Boston, Massachusetts 02199 (Guarantor), is made as of June 25, 2014 (the Execution Date).
W I T N E S S E T H:
WHEREAS, Seller has made private student loans under the Loan Programs (as defined in Section 1);
WHEREAS, Purchaser previously purchased certain private student loans from Seller pursuant to a Loan Purchase and Sale Agreement executed January 23, 2014 (the January 2014 Agreement);
WHEREAS, pursuant to the January 2014 Agreement, the Parties agreed that Purchaser would purchase at a later date certain private student loans after they had become fully disbursed (Disbursement Status Loans);
WHEREAS, Purchaser desires to purchase, and Seller desires to sell, such Disbursement Status Loans pursuant to this Agreement and the terms and conditions set forth herein;
WHEREAS, Purchaser desires to Purchase from Seller certain private student loans excluded from the prior purchase consummated pursuant to the January 2014 Agreement;
WHEREAS, Purchaser further desires to purchase from Seller certain additional private student loans; and
WHEREAS, in exchange for the Loan Sale Consideration (as defined in Section 1), Seller has agreed to sell the Loans (as defined in Section 1) to Purchaser.
NOW, THEREFORE, in consideration of these presents and the covenants contained herein, the parties hereto hereby agree as follows:
I. Definitions. Capitalized terms used herein without definition have the meanings set forth in the applicable Program Guidelines.
Accrued Interest shall mean, with respect to any Loan, accrued but unpaid interest on the Loan (to the extent not previously capitalized).
AAA Advantage Student Loan Program means the private student loan program funded by Seller and marketed by AAA Southern New England Bank.
Action shall have the meaning set forth in Section 8.03(a).
Affiliate shall mean, as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or to cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract or otherwise.
Agreement shall have the meaning set forth in the preamble.
Applicable Laws shall mean all local, state, and federal statutes, laws, ordinances, regulations, orders, writs, injunctions or decrees, as amended, applicable to the advertising, marketing, origination, disbursing, disclosing, holding, servicing, recordkeeping, transferring, assigning, accounting, reporting and collecting of the Loans as in effect prior to and on the Purchase Date, including without limitation the Truth-in-Lending Act, Regulation Z, Equal Credit Opportunity Act, Regulation B, Regulation AA, the Federal Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the DoddFrank Wall Street Reform and Consumer Protection Act, the Electronic Signatures in Global and National Commerce Act, Title V of the Federal Gramm-Leach-Bliley Act, Pub. L. 106-102 (including all implementing regulations promulgated thereunder), Section 326 and Section 352 of the U.S. Patriot Act, the Office of Foreign Assets Control requirements, the CAN-SPAM Act of 2003, and all other applicable state and federal nondiscrimination, truth-in-lending, usury, consumer credit, consumer protection, equal credit opportunity, credit practices and consumer privacy laws, rules, regulations and requirements.
Application and Solicitation Disclosure means the disclosure required by 12 C.F.R. § 226.47(a) and Section 128(e)(1) of the federal Truth-in-Lending Act.
Approval Disclosure means the disclosure required by 12 C.F.R. § 226.47(b) and Section 128(e)(2) of the federal Truth-in-Lending Act.
Borrower means the student who is the obligor on the Loan and does not include a cosigner.
Business Day shall mean any day other than: (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of Rhode Island are required or authorized by law or executive order to be closed.
Claim Notice shall have the meaning set forth in Section 8.03(a).
Customer Information shall mean all data, information, records, correspondence, reports or other documentation relating to and identified with Eligible Borrowers of Loans, including without limitation, Loan Documents, other than information obtained from lists of publicly available data or lawfully purchased or obtained from any third party.
Cut-off Date shall mean the calendar day immediately preceding the Purchase Date.
Credit Agreement shall mean the credit agreement or other form of consumer debt instrument, evidencing a Loan.
Debtor Relief Laws shall mean any and all applicable liquidation, conservatorship, bankruptcy, insolvency, rearrangement, moratorium, reorganization, or similar debtor relief laws and usual principles of equity affecting the rights of creditors generally from time to time in effect in any state or under the laws of the United States.
Disbursement Status Loans shall have the meaning set forth in the recitals.
2
Disclosing Party shall mean the party disclosing Proprietary Information, together with its Affiliates and their respective directors, officers, employees, attorneys, accountants, agents or advisors.
Eligible Borrower shall mean any obligor or cosigner, and Eligible Borrowers means all obligors and cosigners, on a Loan who was/were eligible under the Program Guidelines and Applicable Laws to be an obligor or cosigner of the Loan at the time the Final Disclosure related to such Loan was issued.
Execution Date shall have the meaning set forth in the preamble.
Final Disclosure means the disclosure required by 12 C.F.R. § 226.47(c) and Section 128(e)(4) of the federal Truth-in-Lending Act.
Fraud Affidavit shall have the meaning set forth in Section 5.01(a).
GLB Act shall have the meaning set forth in Section 9.03(c).
Guarantor shall have the meaning set forth in the preamble.
Guarantor Indemnified Person and Guarantor Indemnified Persons shall each have the meaning set forth in Section 8.01.
Indemnified Person shall have the meaning set forth in Section 8.03(a).
January 2014 Agreement shall have the meaning set forth in the recitals.
Letter of Intent means the non-binding letter of intent between Purchaser and Guarantor dated as of October 24, 2013.
Loan shall mean any loan set forth on Schedule I (Roster of New Loans), Schedule II (Roster of Disbursement Status Loans) or Schedule III (Roster of Loans Subject to Schedule V) hereto (each as of the Cut-off Date). Loans shall mean all loans set forth on Schedules I, II and III hereto.
Loan Data Report shall have the meaning set forth in Section 2.02.
Loan Documents shall mean, with respect to a Loan, all Loan-specific documents and records, including without limitation the Original Credit Agreement, the original of any addenda to such Original Credit Agreement, the Approval Disclosure, the Final Disclosure, and all other documentation relating to the payment history of the Loan prior to the sale hereunder.
Loan Programs shall mean the Union Federal® Private Student Loan Program, the AAA Advantage Student Loan Program and the Union Federal Savings Bank Stern International Loan Program, each as described in the Program Guidelines.
Loan Repurchase Consideration shall mean for any Loan, an amount equal to (a) 1.035 times the Principal Balance of such Loan on the date of such repurchase plus, (b) accrued and unpaid interest on the date of such repurchase, plus (c) any reasonable costs, fees and expenses incurred by Purchaser as a result of the basis for repurchase and/or relating to the repurchase of such Loan by Seller, including, without limitation, deconversion, record return and similar Servicer fees and expenses.
Loan Sale Consideration shall mean an amount equal to (a) 1.035 times the aggregate Principal Balance, as of the Cut-Off Date, of the Loans, plus (b) the Accrued Interest as of the Cut-Off Date.
3
Loss shall have the meaning set forth in Section 8.01.
NYU Guaranty Agreement shall have the meaning set forth in Section 3.01(a)(iv).
Original Credit Agreement means a Credit Agreement bearing an unaltered original Eligible Borrower signature in ink or an electronic record of a facsimile or scanned signature, or an electronic record of a Credit Agreement signed digitally or electronically following the procedures and standards set forth in the Program Guidelines.
Participating Institution shall mean an educational institution approved by Seller for receipt of Loan funds.
Parties shall mean the Seller, Purchaser, and Guarantor, collectively.
Person shall mean any individual, corporation, partnership, limited liability company, joint venture, estate, trust, unincorporated association, or any federal, state, county or municipal government or any political subdivision thereof.
PHEAA shall mean the Pennsylvania Higher Education Assistance Agency, a public corporation and government instrumentality organized under the laws of the Commonwealth of Pennsylvania, and having an address at 1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
Principal Balance shall mean, with respect to any Loan, the principal balance of such Loan, including capitalized interest.
Program Guidelines shall mean the program guidelines of the Loan Programs, as adopted on June 30, 2011 (Union Federal Private Student Loan Program), November 9, 2011 (AAA Advantage Student Loan Program) and January 12, 2012 (Stern International Loan Program), as further amended and supplemented through December 12, 2013, certified copies of which were provided by Seller to Purchaser on the Cut-off Date.
Proprietary Information shall mean Customer Information and all information, knowledge or data, in any form or media, including without limitation forecasts, records, Loan Program parameters, Loan data, marketing data, default and recovery statistics, risk management strategies, recovery strategies, financial information and projections, strategic insights or plans, statistical models, proposals, plans, procedures, proprietary programs or initiatives, methods of operation and such other trade secrets or information as has been, or may be, supplied by or on behalf of the respective Parties hereto (whether by written, oral or electronic transmission) which is not generally ascertainable from public or published information, including without limitation any of the same relating to any Affiliate of such Parties, except for information, knowledge or data which:
(a) is generally known to the public at the time of disclosure;
(b) is in the Receiving Partys possession at the time of disclosure otherwise than as a result of the Receiving Partys breach of any legal obligation;
(c) becomes known to the Receiving Party through disclosure by a source other than the Disclosing Party, provided that such source was not, to the knowledge of the Receiving Party, breaching any confidentiality obligation; or
4
(d) is developed independently by the Receiving Party without reference to Proprietary Information received from the Disclosing Party, which the Receiving Party can show by contemporaneous records.
Purchase Date shall mean the Execution Date, provided that all of the conditions specified in Section 3.01of this Agreement have been satisfied, or such other date as Seller and Purchaser shall mutually agree.
Purchaser shall have the meaning set forth in the preamble.
Purchaser Indemnified Person and Purchaser Indemnified Persons shall each have the meaning set forth in Section 8.02.
Receiving Party shall mean the party receiving Proprietary Information, together with its Affiliates and their respective directors, officers, employees, attorneys, accountants, agents or advisors.
Seller shall have the meaning set forth in the preamble.
Servicer shall mean and refer to the entity performing post-disbursement loan servicing, which, as of the date of this Agreement, is PHEAA.
Servicing Agreement shall refer to the Servicing Agreement between Servicer and Seller, dated June 30, 2011, with respect to servicing of each of the Loans, as previously amended.
Stern International Loans means Loans made in the Union Federal Savings Bank Stern International Loan Program described in the Program Guidelines, which such Loans are set forth on Schedule IV hereto (as of the Cut-off Date).
UCC shall mean the Uniform Commercial Code, as amended from time to time, as in effect in the applicable jurisdiction.
Union Federal® Private Student Loan Program means the private student loan program funded by Seller and marketed by Guarantor as a service provider to Seller.
Union Federal Savings Bank Stern International Loan Program means the private student loan program funded by Seller for international students attending the Stern Graduate School of Business at New York University.
II. Agreement for Purchase and Sale of Loans.
2.01. Purchase and Sale. Seller and Purchaser hereby agree on the date hereof that Seller shall sell the Loans to Purchaser, and Purchaser shall purchase the Loans from Seller, on the Purchase Date upon and subject to the terms and conditions of this Agreement.
2.02. Loan Information. Seller will cause Servicer to provide to Purchaser the information with respect to the Loans contained in PHEAAs Loan Sale Report available on PageCenter on the Purchase Date, which report shall be provided in electronic media in Servicers standard format (the Loan Data Report).
2.03. Consideration. On the Purchase Date, Seller shall sell, assign and convey the Loans to Purchaser, in consideration of the payment of an amount equal to the Loan Sale Consideration from Purchaser to
5
Seller, which payment shall be made no later than 12:00 p.m. Eastern Time on the Purchase Date, by wire transfer of immediately available funds to an account designated by Seller.
III. Procedures and Conditions for Transfer; Closing.
3.01. Conveyances of Loans; Conditions to Purchase.
(a) | On the Purchase Date, Seller shall, pursuant to the terms hereof, sell, transfer, assign, set over and otherwise convey to Purchaser, without recourse, all right, title and interest of Seller in and to: |
(i) The Loans, including the underlying Credit Agreements and Loan Documents; provided, however, that Seller shall be entitled to retain copies of all Loan Documents and Customer Information for any purpose specified in, and subject to the requirements and restrictions of, Section 9.03 of this Agreement and any duly adopted document retention policy of Seller or its Affiliates; provided further that, except to the extent required under Applicable Laws, nothing in this Agreement shall require Seller to destroy or delete copies of any Loan Documents, Customer Information or any computer models, databases, electronic files or other electronic material prepared by Seller or its Affiliates based in whole or in part on any Loan Documents or Customer Information;
(ii) All payments due or to become due on the Loans from and after the Purchase Date;
(iii) Any claims Seller may have against Servicer with respect to servicing of the Loans prior to the Purchase Date;
(iv) All rights of Seller under the Loan Program Agreement among First Marblehead Education Resources, Inc., Guarantor, Seller and New York University dated as of January 12, 2012, as amended May 30, 2014 (the NYU Guaranty Agreement), as applicable to the Stern International Loans; and
(v) The proceeds of any and all of the foregoing received after the Purchase Date.
(b) | The obligation, if any, of Purchaser to purchase the Loans on the Purchase Date shall be subject to satisfaction of each of the following conditions precedent: |
(i) The representations, warranties and statements of Seller contained in this Agreement shall be true and correct and not misleading in any material respect, on and as of the date of this Agreement and on and as of the Purchase Date (unless any such representation and warranty is made only as of a specific date, in which event such representation or warranty shall be true and correct and not misleading in any material respect, only as of such specific date), and Seller shall have performed in all material respects all obligations and complied with all covenants required hereunder to be performed by it at or prior to the Purchase Date;
(ii) Seller will deliver to Purchaser a valid and binding assignment of the NYU Guaranty Agreement with regard to any applicable Stern International Loans, including a listing of the Stern International Loans. Such assignment shall be executed by an authorized representative of New York University and shall include an acknowledgement by New York University that the NYU Guaranty Agreement remains effective and is enforceable by Purchaser; and
6
(iii) Completion to the reasonable satisfaction of Purchaser of all procedures and provisions of, and delivery to Purchaser of all closing documents specified in, Section 3.08(b) of this Agreement.
(iv) Seller has delivered to Purchaser:
(1) Schedules I, II and III hereto as of the Cut-off Date.
(2) Schedule IV hereto as of the Cut-off Date.
(3) Schedule VI hereto identifying Loans, the Eligible Borrower on which was receiving benefits under the Service members Civil Relief Act as of the Cut-off Date.
(c) | The obligation, if any, of Seller to sell the Loans on the Purchase Date is subject to satisfaction of each of the following conditions precedent: |
(i) The representations and warranties of Purchaser contained in this Agreement shall be true and correct and not misleading in any material respect, on and as of the date of this Agreement and on and as of the Purchase Date (unless any such representation and warranty is made only as of a specific date, in which event such representation or warranty shall be true and correct and not misleading in any material respect, only as of such specific date), and Purchaser shall have performed in all material respects all obligations and complied with all covenants required hereunder to be performed by it at or prior to the Purchase Date;
(ii) Seller shall have received the Loan Sale Consideration; and
(iii) Completion to the reasonable satisfaction of Seller of all procedures and provisions of, and delivery to Seller of all closing documents specified in Section 3.08(a) of this Agreement.
3.02. Delivery of Documents. On the Purchase Date, Seller shall deliver to Servicer, as agent for Purchaser, the Loan Documents.
3.03. Rights and Risks Transferred. The transfer of the Loans pursuant to Section 2.03 hereof shall constitute a sale and assignment to Purchaser of the Loans. As purchaser of the Loans, Purchaser shall receive: (a) interest on the Loans from and after the Purchase Date, (b) any and all other payments, funds, collections, and recoveries of every type received by Servicer or Seller from the Eligible Borrower(s) of the Loans, or others pursuant to, or in respect of, the Loans from and after the Purchase Date, and (c) the servicing rights with respect to the Loans, and all proceeds of the foregoing. In addition, as purchaser of the Loans, Purchaser shall bear the risk of future performance of the Loans, including risk of future default, except as set forth in Articles V and VIII hereof.
3.04. Pending and Subsequent Receipts. Any amounts collected by the Servicer as of the Purchase Date that have been credited to the appropriate Loan balances prior to the Cut-off Date but not remitted to or received by Seller as of the Purchase Date shall thereafter be remitted from Servicer to Seller and retained by Seller, or, if remitted from Servicer to Purchaser in error, paid by Purchaser to Seller. Except for the foregoing, in the event that Seller shall receive, subsequent to the Purchase Date, any amounts whatsoever in respect to the Loans sold and assigned on the Purchase Date in the nature of those described in Section 3.03 above, such amounts shall belong to Purchaser and shall be held by Seller in trust for Purchaser. Seller
7
shall deliver or cause to be delivered within three (3) Business Days of receipt (a) such amounts by wire transfer of immediately available funds to an account designated by Purchaser and (b) to Purchaser, or if applicable its Servicer, sufficient information or documentation to permit Purchaser or its designated Servicer to properly apply such amounts at the Loan level.
3.05. Assignment of Loans and the Servicer.
(a) | On or prior to the Purchase Date, Seller shall have caused Servicer to deliver the Loan Data Report to Purchaser, as set forth in Section 2.02 hereof. |
(b) | Seller shall promptly transmit, or cause to be transmitted, to Purchaser, Purchasers Servicer or assignee, as directed by Purchaser, any communications received by Seller after the Purchase Date with respect to a Loan. Such communications shall include, but not be limited to, letters, changes in enrollment status, notices of death, disability, or bankruptcy filing and similar documents, and forms requesting deferment or forbearance of repayment, or loan cancellations. |
(c) | Seller agrees to cooperate with any reasonable request by Purchasers Servicer for any records, documents, or data related to Loans in the possession of Seller and not already in the possession of Purchasers Servicer. Seller shall promptly transmit such records, documents, or data to Purchasers Servicer upon request by such Servicer at Sellers expense. |
3.06. No Assumption of Liability to Fund Loans. By its purchase of the Loans, Purchaser shall not assume any liability, responsibility or obligation with respect to any disbursements or reimbursements that are due and owing, or which are, or may be alleged to be due and owing, by Seller or its Affiliates or agents or subcontractors to any Participating Institution or to any Eligible Borrower by reason of the Loans and evidenced by the Credit Agreements. Seller shall be solely responsible to fulfill its obligations under any agreements it may have with any Participating Institution regarding origination and funding of the Loans.
3.07. Servicing and Origination Costs. Seller shall be solely responsible for and shall pay all costs due to any third party from Seller (including, without limitation, amounts due to Servicer) with respect to origination of the Loans and with respect to servicing of the Loans incurred for services performed prior to the Purchase Date. Purchaser shall be solely responsible for and shall pay all costs due to any third party from Purchaser (including, without limitation, amounts due to Servicer) with respect to servicing of the Loans incurred upon or after the purchase of the Loans hereunder.
3.08. Closing. On the Purchase Date:
(a) | Purchaser shall execute and deliver to Seller on or before 11:00 a.m. Eastern Time an Officers Certificate substantially in the form of Exhibit A-1 hereto. |
(b) | Seller shall execute and deliver to Purchaser on or before 11:00 a.m. Eastern Time an Officers Certificate substantially in the form of Exhibit A-2 hereto. |
(c) | Guarantor shall execute and deliver to Purchaser on or before 11:00 a.m. Eastern Time an Officers Certificate substantially in the form of Exhibit A-3 hereto. |
(d) | Purchaser shall pay to Seller an amount equal to the Loan Sale Consideration, which payment shall be made no later than 12:00 p.m. Eastern Time, by wire transfer of immediately available funds to an account designated by Seller. |
8
(e) | Seller shall, no later than 1:00 p.m. Eastern Time, execute and deliver a Bill of Sale, with an attached General Endorsement, in substantially the form of Exhibit B hereto having annexed thereto loan schedules, in substantially the form of Schedules I, II and III attached hereto, containing a list of Loans sold to Purchaser on the Purchase Date. |
(f) | The Parties shall take any other action reasonably necessary for the consummation of the purchase and sale of the Loans. |
IV. Representations and Warranties.
4.01. Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller that as of the Execution Date and as of the Purchase Date:
(a) | Purchaser is duly organized, validly existing, and in good standing under the laws of the jurisdiction governing its creation and existence and is duly authorized and qualified to transact its business and is in good standing in each jurisdiction in which its business, properties or the business contemplated by this Agreement requires such authorization and qualification. |
(b) | Purchaser possesses all requisite legal authority, power, rights, approvals, consents, licenses, permits and franchises to conduct its business, and to execute, deliver, perform and comply with the terms of this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all action required by its governing documents. |
(c) | Purchasers execution, delivery, and performance of the terms of this Agreement and its ongoing compliance with the terms hereof does not and will not: (i) violate its certificate of incorporation and bylaws or other organizational or governing documents as applicable, (ii) violate the terms of any license held by it, (iii) violate any Applicable Laws that could have an adverse effect upon the validity, performance or enforceability of any of the Loans or the terms of this Agreement in any material respect, or (iv) violate or constitute a material default (or an event that, with notice or lapse of time or both, would constitute a material default) under, or result in the breach of, any contract, indenture, agreement or other instrument to which it is a party or which is binding upon any of its property, provided such contract, indenture, agreement or other instrument materially affects Purchasers ability to perform its obligations, or give its representations, warranties or certification under, this Agreement. Purchaser is not under any order of any governmental or quasi-governmental agency, state or federal, that would restrict, prohibit, or interfere with its performance of the terms of this Agreement, including without limitation the purchase of any of the Loans as contemplated by this Agreement. |
(d) | This Agreement and all documents and instruments contemplated hereby which are executed and delivered by Purchaser constitute valid, legal and binding obligations of it, its agents and successors, enforceable in accordance with their respective terms, except as the enforcement thereof may be limited by applicable Debtor Relief Laws, assuming due authorization, execution and delivery thereof by Seller. |
(e) | There are no actions or proceedings, and to the best of Purchasers knowledge there are no investigations, pending or threatened, against it before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over it or its properties: (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the |
9
consummation of any transactions contemplated by this Agreement, or (iii) seeking any determination or ruling that could reasonably be expected to have a material and adverse effect on (w) the execution or delivery of this Agreement, (x) the performance by it of its obligations hereunder, (y) the validity, performance or enforceability of any Loan or this Agreement, or (z) its condition (financial or other). |
4.02. Representations and Warranties of Seller. Seller represents and warrants to Purchaser that as of the Execution Date and as of the Purchase Date:
(a) | Seller is duly organized, validly existing, and in good standing under the laws of the jurisdiction governing its creation and existence and is duly authorized and qualified to transact its business and is in good standing in each jurisdiction in which its business, properties or the business contemplated by this Agreement requires such authorization and qualification. Seller was and is duly licensed and authorized to participate in the making, selling, transferring, servicing and assigning of the Loans pursuant to Applicable Laws. |
(b) | Seller possesses all requisite legal authority, power, rights, approvals, consents, licenses, permits and franchises to conduct its business, to execute, deliver, perform and comply with the terms of this Agreement, and specifically to make, sell, transfer, assign and convey the Loans hereunder and the rights relating thereto, to Purchaser, and to repurchase such Loans as required herein. The execution, delivery and performance of this Agreement have been duly authorized by all action required by its governing documents. |
(c) | Sellers execution, delivery, and performance of the terms of this Agreement and its ongoing compliance with the terms hereof does not and will not: (i) violate its certificate of incorporation and bylaws or other organizational or governing documents as applicable, (ii) violate the terms of any license held by it, (iii) violate any Applicable Laws that could have an adverse effect upon the validity, performance or enforceability of any of the Loans or the terms of this Agreement in any material respect, or (iv) violate or constitute a material default (or an event that, with notice or lapse of time or both, would constitute a material default) under, or result in the breach of, any contract, indenture, agreement or other instrument to which it is a party or which is binding upon any of its property, provided such contract, indenture, agreement or other instrument materially affects Sellers ability to perform its obligations, or give its representations, warranties or certification under, this Agreement. Seller is not under any order of any governmental or quasi-governmental agency, state or federal, that would restrict, prohibit, or interfere with its performance of the terms of this Agreement, including without limitation the sale of any of the Loans as contemplated by this Agreement. |
(d) | This Agreement and all documents and instruments contemplated hereby which are executed and delivered by Seller constitute valid, legal and binding obligations of it, its agents and successors, enforceable in accordance with their respective terms, except as the enforcement thereof may be limited by applicable Debtor Relief Laws, assuming due authorization, execution and delivery thereof by Purchaser. |
(e) | Any written or electronic information, certificate, statement or report furnished by Seller to Purchaser or its agents or designees in connection with this Agreement is or was at the time furnished, true, complete and correct in all material respects. |
(f) | Seller will not take any action or omit to take any action, nor cause, permit or suffer any designee or agent to take or omit to take any action which would cause the transfer of the |
10
Loans to Purchaser to be treated as anything other than a sale to Purchaser of all of Sellers right, title and interest in and to each Loan. |
(g) | There are no actions or proceedings, and to the best of Sellers knowledge there are no investigations, pending or threatened, against it before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over it or its properties: (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any transactions contemplated by this Agreement, or (iii) seeking any determination or ruling that could reasonably be expected to have a material and adverse effect on (w) the execution or delivery of this Agreement, (x) the performance by it of its obligations hereunder, (y) the validity, performance or enforceability of any Loan or this Agreement, or (z) its condition (financial or other). |
(h) | The transfer, assignment, and conveyance of the Loans by Seller pursuant to this Agreement, to the best of the knowledge of Seller, is not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. Seller is not transferring the Loans with an actual intent to hinder, delay, or defraud any of its creditors or any Person. Seller is solvent and will not be rendered insolvent by the sale of any of the Loans. |
(i) | Except as set forth on Schedule V hereto, Seller and Servicer have performed and observed the terms and conditions of the Servicing Agreement in all material respects and a default thereunder has not occurred. |
(j) | As of the Purchase Date: (i) Seller did not intend to incur or believe that it would incur debts that would be beyond Sellers ability to pay as such debts matured, and (ii) Seller was Well Capitalized, as such term is defined by the rules and regulations promulgated by the Office of the Comptroller of the Currency as of the Execution Date. |
(k) | The NYU Guaranty Agreement is valid, binding and enforceable and upon assignment to Purchaser shall be enforceable by Purchaser in accordance with its terms. No act or omission of Seller shall have nullified or otherwise adversely impacted the protection provided under the NYU Guaranty Agreement with respect to any of the Stern International Loans. |
4.03. Representations and Warranties Relating to the Loans. Seller represents and warrants to Purchaser that as of the Execution Date and as of the Purchase Date:
(a) | Characteristics of Loans. Each Loan: |
(i) was made to a Borrower who was an Eligible Borrower attending a Participating Institution, and a cosigner, if any, who was also an Eligible Borrower;
(ii) except for Stern International Loans, if made without a cosigner, was made to a Borrower who, as of the last available consumer report refresh provided by Seller to Purchaser with the May 2014 month-end data, had a TransUnion 2004 FICO score greater than or equal to 680;
(iii) except for Stern International Loans, if made with a cosigner, such cosigner at the time of the Loans credit decision, and as of the last available consumer report refresh provided by Seller to Purchaser with the May 2014 month-end data, had a TransUnion 2004 FICO score greater than or equal to 660;
11
(iv) except for Stern International Loans, if made with a cosigner, was made to a Borrower who, at the time of the Loans credit decision, and as of the last available consumer report refresh provided by Seller to Purchaser with the May 2014 month-end data, had a TransUnion 2004 FICO score greater than or equal to 620 or no FICO score;
(v) if a Stern International Loan, was made to a Borrower who, as of the time of the Loans credit decision, had a TransUnion 2004 FICO score greater than or equal to 630 or no FICO score;
(vi) was fully disbursed to and received by, or for the benefit of, the Eligible Borrower at or prior to the Cut-off Date;
(vii) was, as of the Execution Date and the Cut-off Date, in a period of in-school deferment (including any grace period under the Program Guidelines, and any period of deferment for re-enrollment following a period of principal and interest repayment) or in repayment of interest or principal and interest and not more than 29 days delinquent with respect to any payment of principal or interest, and not in a forbearance status;
(viii) as of the Execution Date and the Cut-off Date, never has, as of the end of any calendar month, been more than 29 days past due with respect to any payment contractually due;
(ix) was not otherwise in default at the Execution Date and the Cut-off Date and there has not been any bankruptcy filing or any death of any Eligible Borrower at the Execution Date and the Cut-off Date;
(x) accrues interest which is payable on a current basis by the Eligible Borrower(s), as applicable, or deferred subject to capitalization as permitted by Applicable Law;
(xi) accrues interest calculated and disclosed on a simple interest method and at the interest rate set forth in the Loan Documents;
(xii) is supported by Loan Documents;
(xiii) except for Stern International Loans, for Loans without a cosigner, at the time of application the Borrower was a United States citizen or permanent resident alien and a permanent resident of the District of Columbia or one of the 50 states of the United States (except for Utah or Wisconsin);
(xiv) except for Stern International Loans, for Loans with a cosigner, at the time of application the Borrower was not a permanent resident of Utah or Wisconsin;
(xv) except for Stern International Loans, for Loans with a cosigner, at the time of application the cosigner was a United States citizen or permanent resident alien and was a permanent resident of the District of Columbia or one of the 50 states of the United States other than Arizona or Utah;
(xvi) is not affected by or subject to any borrower benefit programs other than as set forth in the Program Guidelines;
(xvii) had a Principal Balance as of the Cut-Off Date of greater than Five Hundred Dollars ($500);
12
(xviii) if made to a Borrower or cosigner who was a permanent resident of Texas at the time the loan application was made, was in an original principal amount of Fifty Thousand Dollars ($50,000) or less; and
(xix) is a loan with respect to which Seller has no knowledge of a potential claim of identity theft, fraud or forgery.
(b) | Origination of Loans. Each Loan was originated in the United States of America by Seller in the ordinary course of its business. |
(c) | Payments on Loans. Each Loan provides or, when the payment schedule with respect thereto is determined, will provide for payments on a periodic basis that fully amortize the principal amount of such Loan by its maturity and yield interest at the rate applicable thereto, as such rate may be adjusted in accordance with the terms of the applicable Loan. Any payments received have been properly applied to principal and interest in accordance with the terms of the Loan Documents. |
(d) | Schedules of Loans. The information set forth in Schedules I, II and III to this Agreement is or was, as applicable, true and correct in all material respects as of the opening of business on the Execution Date and on the Cut-off Date, as applicable. The data file containing a Loan roster and corresponding performance history made available to Purchaser by Seller was true and correct in all respects as of the opening of business on the Cut-off Date. The Loan Data Report provided to Purchaser and its assigns on the Purchase Date was true and correct in all respects as of the Cut-off Date. |
(e) | Compliance with Law and Program Guidelines. Each Loan and the activities of Seller and its agents, representatives, or designees with respect thereto have at all times complied with, and does comply with, all Applicable Laws. Without limiting the foregoing, and for purposes of illustration only, (i) each Loan has been duly originated and serviced in accordance with the provisions of all Applicable Laws, (ii) all disclosures (including without limitation disclosures to cosigners) required by Applicable Laws have been provided in compliance with Applicable Laws, and (iii) the form of the underlying Credit Agreement and other Loan Documents have at all times complied with, and do comply with, all Applicable Laws. Except as set forth on Schedule V hereto, each Loan was originated and serviced in accordance with the Program Guidelines and was documented on forms set forth in the Program Guidelines. |
(f) | Binding Obligation. Subject to the completion of the conditions set forth in Section 5.01 for identity theft, fraud, or forgery discovered after the Purchase Date, and except as a result of the application of Debtor Relief Laws after the Purchase Date, each Loan represents the legal, valid and binding payment obligation of the Eligible Borrower(s), enforceable against such Eligible Borrower(s), by or on behalf of the holder thereof in accordance with its terms, and no Loan has been satisfied, subordinated or rescinded. |
(g) | Execution of Credit Agreement. Subject to the completion of the conditions set forth in Section 5.01 for identity theft, fraud, or forgery discovered after the Purchase Date, each underlying Credit Agreement of a Loan has been duly and properly executed by all parties to the Credit Agreement, and all signatures to each such Credit Agreement are genuine. Except for borrowers who were not at the age of majority at the time the Loan was made but were Eligible Borrowers with cosigners under the Program Guidelines, all parties to the underlying Credit Agreement had legal capacity at the time to enter into, execute and |
13
deliver such Credit Agreement. No Eligible Borrower has been released in whole or in part from any liability under the Credit Agreement. |
(h) | No Defenses. With respect to any Loan, and subject to the completion of the conditions set forth in Section 5.01 for identity theft, fraud, or forgery discovered after the Purchase Date, and except as a result of the application of Debtor Relief Laws after the Purchase Date, no counterclaim, offset, defense, right to cancel or right of rescission (including, without limitation, the defense of usury or payment) of any kind or description has been asserted or threatened or exists, which could be asserted and maintained or which, with notice, lapse of time, or the occurrence or failure to occur of any act or event, could be asserted and maintained, by the Eligible Borrower(s) or any other Person or entity against Purchaser. Nothing has been done, will be done, has been omitted or will be omitted to be done by Seller, or it agents, Affiliates or designees, which would create an offset, defense, or counterclaim with respect to such Loan, and in particular the obligation of the Eligible Borrower(s) to pay the full amount of unpaid principal of, and interest on, such Loan. Nor will the operation of any of the terms of the Loan Documents or the exercise of any right thereunder render the obligation of the Eligible Borrower(s) unenforceable, in whole or in part, or subject to any counterclaim, offset, defense, right to cancel or right of rescission. There is no action before any state or federal court, administrative or regulatory body, pending or threatened against Seller with respect to any Loan. With respect to the Stern International Loans, no act or omission of Seller, or its agents, Affiliates or designees shall have nullified or otherwise adversely impacted the protection that would otherwise be available to Purchaser under the NYU Guaranty Agreement. |
(i) | No Default. There is no default, breach, violation, event of acceleration or event of repurchase existing under the terms and covenants of the Loans, nor has any event occurred or does any condition exist which, upon the giving of notice or the passage of time, would constitute a default, breach, violation, event of acceleration or event of repurchase, nor has Seller, or it agents, Affiliates or designees, waived any of the foregoing. The Eligible Borrower(s) on each Loan was/were not party to any proceedings under Debtor Relief Laws as of the Cut-off Date. |
(j) | Title. Seller has good and marketable title to and is the sole owner and holder of one hundred percent (100%) of the legal and beneficial rights, title and interest to and in each Loan including the Credit Agreement and Loan Documents, and upon the sale of each Loan pursuant to this Agreement, Purchaser will receive Sellers full right, title and interest to and in such Loan, Credit Agreement and Loan Documents, free and clear of all pledges, liens, adverse claims, security interests and other charges or encumbrances of any nature or description with respect to the Loan, and no Loan is pledged or assigned for any purpose or to any Person as of the Purchase Date and no effective financing statements or like instruments will be on file in any jurisdiction with respect to Sellers rights in any Loan on the Purchase Date. There has not been any other sale, transfer or assignment of the Loans prior to the Execution Date and the Credit Agreements relating to the Loans, which shall be held in custody for Purchaser, are the only executed copies thereof. For each Loan that was executed electronically, Seller, directly or through sub-contractors or agents, has possession of the electronic records evidencing the Loan and on the Purchase Date Purchaser shall acquire full and entire legal and beneficial right, title, and interest to the original electronic records evidencing such Loans. |
(k) | UCC. Each Loan constitutes an instrument or payment intangible as defined in the UCC. |
14
(l) | No Waiver. Neither Seller, nor its agents, Affiliates or designees, has waived, altered, impaired or modified any of the terms, covenants or conditions of the Loans (or the related Credit Agreements) in any respect, other than in accordance with the Loan Documents, the Program Guidelines and Applicable Laws. Except for borrower benefits permitted under the Program Guidelines, no Eligible Borrower is entitled to any refund, rebate or reduction of any amounts paid or due under the Credit Agreement. |
(m) | Full Amount Owed. On the Purchase Date, the full amount of the unpaid Principal Balance of each Loan to be purchased will be owed by the Eligible Borrower(s) of such Loan. |
(n) | Purpose of Loan. Each Loan was made to or on behalf of a student attending a Participating Institution for the purpose of financing the students postsecondary educational expenses. |
(o) | Servicemembers Civil Relief Act. No Eligible Borrower other than the Loans listed on Schedule VIattached to this Agreement, as it shall be updated by Seller as of the Cut-off Date, provided to Purchaser prior to the Purchase Date, and which such updated Schedule VI shall supplement this Agreement, has notified Seller (or its servicer) that the Eligible Borrower is requesting relief under the Servicemembers Civil Relief Act. |
(p) | No Fraud. Neither Seller, nor its Affiliates, agents or Servicer has received notice of any allegation or claim of identity theft, fraud or forgery by the borrower or cosigner, if any. Without limiting the conditions to repurchase set forth in Section 5.01, no fraud or material misrepresentation has taken place with respect to any Loan on the part of any student applicant, borrower, obligor, maker, cosigner, Seller, or Sellers Affiliates, agents or Servicer. |
4.04. Exclusive Representations and Warranties. The representations and warranties made on the Execution Date and on the Purchase Date set forth in Section 4.02 and Section 4.03 above are the sole and exclusive representations and warranties made by Seller, its representatives, agents, officers, directors and other employees, with respect to this Agreement, any Loan, any obligor, and the sale of any Loan to Purchaser hereunder or otherwise. No representation or warranty is made by Seller or Purchaser on any date subsequent to the Purchase Date.
V. Repurchase
5.01. Remedy for Breach of Representations and Warranties.
(a) | In the event that (i) any representation or warranty made by Seller in Section 4.02 or Section 4.03 of this Agreement shall prove to have been false, misleading or incorrect on the date of this Agreement or on the Purchase Date, (ii) any Loan becomes subject to a formal judicial proceeding or lawsuit filed by a borrower and/or cosigner, if any, or a third party, with respect to such Loan if the proceeding or suit is based upon the acts or omissions of Seller or its agents or Affiliates arising prior to the Purchase Date or (iii) any Loan made to a borrower who was not of the age of majority at the time the Loan was made and who has not otherwise ratified the Loan after its disbursement, and with respect to which a request has been or is received to release a cosigner consistent with the Loan Program or Program Guidelines and a claim is made that the Loan is unenforceable because of the lack of contractual capacity of a minor, Seller shall, upon receipt of written notice from Purchaser (which notice shall identify the Loan(s) and the basis for repurchase), repurchase such Loan or Loans from Purchaser for a cash purchase price |
15
equal to the Loan Repurchase Consideration. Notwithstanding the foregoing, if the sole basis for repurchase is identity theft, fraud or forgery on the part of an Eligible Borrower, no representation or warranty made by Seller in Section 4.03 with respect to such Loan shall be deemed false, misleading or incorrect on the date of this Agreement or on the Purchase Date unless and until (A) for those Loans having a claim of identity theft, fraud or forgery being brought by an Eligible Borrower, Purchaser shall obtain and deliver to Seller an affidavit in substantially the form attached hereto as Exhibit C (the Fraud Affidavit) that has been duly completed and executed by an Eligible Borrower(s) of the Loan and (B) the Loan becomes more than 120 days past due. |
(b) | In the event that the basis for repurchase is correctable in the reasonable judgment of Seller, Seller shall notify Purchaser of its intent to attempt to correct the problem and shall have thirty (30) days from the date it receives notice pursuant to Section 5.01(a) to correct the problem to the reasonable satisfaction of Purchaser before it is obligated to repurchase the Loan. |
(c) | In the event of any litigation, claim, action, dispute, controversy, inquiry, complaint or review, citation or supervisory or enforcement action or investigation by any regulatory agency or governmental organization or agency or by any Eligible Borrower, arising in whole or in part from or otherwise related to the failure of Seller or its Servicer, as described on Schedule V hereto, to service the Loans set forth on Schedule III in accordance with Applicable Law, the Loan Documents, the Program Guidelines and/or the Servicing Agreement or Servicers remedy of such failure, Seller shall, upon receipt of written notice from Purchaser (which notice shall identify the Loan(s) and the basis for repurchase), repurchase such Loan or Loans from Purchaser for a cash purchase price equal to the Loan Repurchase Consideration. The Parties agree that Sellers opportunity to correct, as set forth in Section 5.01(b), shall not apply in the event of any such request by Purchaser under this Section 5.01(c). |
(d) | Subject to the foregoing, Seller shall remit by wire transfer the entire Loan Repurchase Consideration for the defective Loan(s) within three (3) Business Days of receiving the written notice provided in Section 5.01(a) or Section 5.01(c), as the case may be, or, if applicable, within three (3) Business Days of the expiration of the thirty (30) day cure period provided in Section 5.01(b) in each case and as reasonably instructed by Purchaser, with notice to Purchaser of the amount of such remittance and the Loan(s) concerned. |
5.02. No later than one (1) Business Day following receipt by Purchaser of the Loan Repurchase Consideration with respect to any Loan, Purchaser shall, or, if applicable, shall cause the related Servicer to, deliver the related Credit Agreement or Credit Agreements and other Loan Documents relating thereto to Seller, duly endorsed or assigned to Seller or to such Person as Seller may direct, in any such case, without recourse to Purchaser.
5.03. Seller agrees that its obligations under this Article V shall not be affected by any modification of the terms of any Loan, including without limitation, any extension of the time of payment under the Loan, the release of an Eligible Borrower on the Loan, any compromises made with regard to such Loan or any other dealings by Purchaser in connection with such Loan, whether or not notice thereof has been given to Seller; provided, that any such modification, extension, release or compromise by Purchaser does not materially and adversely affect the enforceability of the Loan against the Eligible Borrower(s).
16
VI. [RESERVED].
VII. Miscellaneous.
7.01. Successors and Assigns.
(a) | All representations, warranties, covenants, obligations, and agreements herein contained shall inure to the benefit of and be obligatory upon all successors of the respective Parties hereto, whether through merger, acquisition, or purchase of assets substantially equivalent to an acquisition, and shall survive the sale of any Loans hereunder. |
(b) | None of the Parties may assign, delegate, or otherwise transfer this Agreement, nor any of such partys rights, benefits, covenants, obligations and agreements hereunder, in whole or in part, without the other Parties prior written consent; provided, however, that Purchaser may at any time upon written notice to Seller but without Sellers prior written consent assign this Agreement, or any of Purchasers rights, benefits, covenants, obligations and agreements hereunder, in whole or in part, to one or more Affiliates of Purchaser. |
(c) | Notwithstanding Section 7.01(b), Purchaser shall have the right from time to time and at any time to assign or otherwise transfer a Loan or Loans purchased hereunder to others, whether the assignment or transfer is to an Affiliate or an unaffiliated company. In the event of such transfer or assignment, the rights of Purchaser under this Agreement pertaining to such assigned or transferred Loan, including Purchasers rights with regard to remedies in the event of a defect or breach of any other provision herein, shall similarly be assigned by Purchaser to the assignee or other transferee. |
(d) | No assignment shall relieve the assignor of liability hereunder. Any assignment in violation hereof shall be automatically null and void. |
7.02. Amendment. This Agreement may not be amended nor terms or provisions hereof waived unless such amendment or waiver is in writing and signed by all Parties hereto.
7.03. No Waiver. No delay or failure by any party to exercise any right, power or remedy hereunder shall constitute a waiver thereof by such party, and no single or partial exercise by any party of any right, power or remedy shall preclude other or further exercise thereof or any exercise of any other rights, powers or remedies.
7.04. Entire Agreement. This Agreement and the schedules and exhibits thereto, including the Bill of Sale, embody the entire agreement and understanding among the Parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof.
7.05. Notices. All notices given by any party to the others under this Agreement shall be in writing delivered: (a) personally, (b) by facsimile transmission, (c) by overnight courier, prepaid or (d) by depositing the same in the United States mail, certified, return receipt requested, with postage prepaid, addressed to the party at the address set forth below. Any party may change the address to which notices are to be sent by notice of such change to each other party given as provided herein. Such notices shall be effective on the date received. Notices shall be given as follows:
If to Seller:
Union Federal Savings Bank
17
1565 Mineral Spring Avenue
North Providence, RI 02904
Attention: President
Facsimile No.: (401) 353-8938
With a copy to:
The First Marblehead Corporation
The Prudential Tower
800 Boylston Street, 34th Floor
Boston, MA 02199
Attention: General Counsel
Facsimile No.: (781) 658-9604
If to Purchaser:
Citizens Bank, N.A.
One Citizens Plaza
Providence, RI 02903
Attention: Brendan Coughlin
President, Education Finance
Facsimile No.: (800) 770-8864
With a copy to:
Citizens Bank, N.A.
One Citizens Plaza
Providence, RI 02903
Attention: General Counsel
Facsimile No.: (617) 725-5620
If to Guarantor:
The First Marblehead Corporation
The Prudential Tower
800 Boylston Street, 34th Floor
Boston, MA 02199
Attention: President
Facsimile No.: (781) 658-9604
With a copy to:
The First Marblehead Corporation
The Prudential Tower
800 Boylston Street, 34th Floor
Boston, MA 02199
Attention: General Counsel
Facsimile No.: (781) 658-9604
18
7.06. Attorneys Fees. In the event of a lawsuit or arbitration proceeding arising out of or relating to this Agreement, the prevailing party shall be entitled, at the discretion of the court or arbitrator, to recover costs and reasonable attorneys fees incurred in connection with the lawsuit or arbitration proceeding.
7.07. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, applicable to contracts made and to be performed entirely within such State, without giving effect to conflicts of law principles thereof.
7.08. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. A facsimile or scanned electronic transmission of a signature shall be deemed an original for purposes of this Agreement.
7.09. No Third Parties Benefited. This Agreement is made and entered into for the protection and legal benefit of the Parties, and their permitted successors and assigns, and each and every Indemnified Person (all of which shall be entitled to enforce the indemnity contained in Sections 8.01 and 8.02 hereof), and, except as otherwise provided in Section 7.01, no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement.
7.10. Permitted Filings. Purchaser and Seller and their respective Affiliates may file this Agreement with the appropriate federal regulators, including but not limited to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission, and as may be required by the rules of any stock exchange or trading system.
7.11. Notice of Certain Actions. Seller covenants and agrees promptly after learning thereof, to notify Purchaser of the submission of any claim or the initiation or threat of any legal process, litigation or administrative or judicial investigation, or disciplinary proceeding by or against Seller asserting the invalidity of this Agreement, seeking to prevent the consummation of any transactions contemplated by this Agreement, or seeking any determination or ruling that could reasonably be expected to have a material and adverse effect on the performance by Seller of any of its obligations and duties under, or the validity or enforceability of, the Loans or this Agreement; provided, however, that Seller shall have no obligation to provide any notice with respect to any rule-making or change in Applicable Laws.
7.12. Payment of Expenses. Except as set forth in Section 7.06, each party to this Agreement shall pay its own expenses incurred in connection with the preparation, execution and delivery of this Agreement and the transactions herein contemplated, including, but not limited to, the fees and disbursements of counsel.
7.13. Limitation on Liability of Directors, Officers, Employees, and Agents of a Party. No director, officer, employee, or agent of any party of this Agreement shall be individually liable to any other party for the taking of any action, or for refraining to take any action, in good faith pursuant to this Agreement. This Agreement is a corporate obligation and any liability arising hereunder shall be a corporate liability.
7.14. Limitation on Remedies. Except in cases of fraud, gross negligence, or willful misconduct, no party shall be responsible or liable to any other party for any indirect, consequential, special or punitive damages with respect to any matter whatsoever arising out of this Agreement.
7.15. Remedies Not Exclusive. No remedy by the terms of this Agreement conferred upon or reserved to any party hereto is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Agreement or existing at law or in equity (including, without limitation the right to such equitable relief by way of injunction) or by statute on or after the date of this Agreement, and all such rights and remedies shall be enforceable alternatively, successively
19
or concurrently. Notwithstanding the foregoing, in the event any court or governmental authority requires a party to pay such damages and such damages are subject to another partys indemnification obligation contained in this Agreement, such damages shall not be subject to the limitation on remedies contained in this Section 7.15.
7.16. Publicity. Except as otherwise provided in Section 7.10, neither party shall publish, use or distribute the name, logos, tradenames, trademarks, service marks, or content of the other party, or any other information which identifies the other, the terms of this Agreement or the fact of its existence, in sales, marketing, or publicity activities, including, but not limited to, any advertisement or marketing materials (in whatever form, including without limitation, telemarketing scripts and web site materials), consumer correspondence (other than any notice to the Eligible Borrower(s) that a sale of the Loan has occurred), product documents, press releases, interviews with representatives of any written publication, television station or network, or radio station or network, without the prior written consent of an authorized representative of the other party. Notwithstanding the foregoing, Seller and its Affiliates may issue a press release upon the sale of the Loans, the content of which shall be subject to the prior written approval of Purchaser.
7.17. Parent Guaranty. Guarantor hereby absolutely, unconditionally and irrevocably guarantees to Purchaser the full and prompt performance by Seller of any and all obligations of Seller under this Agreement. Guarantor agrees that its obligations pursuant to this Section 7.17 shall be a continuing, absolute and unconditional guaranty of the full and punctual performance by Seller of its obligations under this Agreement and is in no way conditioned upon any requirement that Purchaser first attempt to collect any of its obligations from Seller without regard to (a) the validity, regularity or enforceability of this Agreement; (b) the absence of any action to enforce the same; (c) any waiver or consent by Seller concerning any provisions hereof; (d) the rendering of any judgment against Seller or any action to enforce the same; (e) any defense, set-off, counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by Seller against Purchaser; or (f) any other circumstances that might otherwise constitute a legal or equitable discharge of a guarantor or a defense of a guarantor. Guarantor hereby guarantees that any payments Seller is obligated to make hereunder will be made to Purchaser without set-off or counterclaim. Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon Seller with respect to the obligations of Seller under this Agreement. This Section 7.17 shall continue to be effective if Seller merges or consolidates with or into another entity, loses its separate legal identity or ceases to exist. Notwithstanding anything in this Agreement to the contrary, Guarantors guaranty of Sellers obligations provided for in this Section 7.17 is subject to and is limited by any limitations on Sellers obligations contained in this Agreement.
VIII. Indemnification.
8.01. By Guarantor on Behalf of Seller. Guarantor shall pay for, and indemnify, defend, and hold harmless Purchaser (and its Affiliates and permitted assigns and transferees under Section 7.01 of this Agreement) and any officer, director, employee or agent of any of the foregoing (herein, individually referred to as a Guarantor Indemnified Person and collectively referred to as the Guarantor Indemnified Persons) against, any and all liabilities, losses, penalties, fines, forfeitures, costs, damages and expenses, including, without limitation, reasonable attorneys fees and legal expenses and sums paid, liabilities incurred or expenses paid or incurred in connection with defending or settling claims, demands, suits or judgments or obtaining or attempting to obtain release from liability under this Agreement, net of any recoveries from insurance policies (collectively, Loss), which such Guarantor Indemnified Person may sustain or incur by reason of any breach of any representation, warranty or covenant of Seller contained herein, any act or omission to act of Seller occurring prior to the Purchase Date or the failure of Seller or its Servicer, as described on Schedule V hereto, to service the loans set forth on Schedule III in accordance
20
with Applicable Law, the Loan Documents, the Program Guidelines and/or the Servicing Agreement and Servicers remedy of such failure. This Section 8.01 shall survive any termination of this Agreement.
8.02. By Purchaser. Purchaser shall pay for, and indemnify, defend, and hold harmless Seller (and its Affiliates and permitted assigns and transferees under Section 7.01 of this Agreement) and any officer, director, employee or agent of Seller (herein, individually referred to as a Purchaser Indemnified Person and collectively referred to as Purchaser Indemnified Persons) against, any and all Loss which such Purchaser Indemnified Person may sustain or incur by reason of any breach of any representation, warranty or covenant of Purchaser contained herein or any act or omission to act of Purchaser occurring prior to the Purchase Date. This Section 8.02 shall survive any termination of this Agreement.
8.03. Indemnity Procedures.
(a) | In the event that any claim or demand for which an indemnifying party may be liable to a Guarantor Indemnified Person or a Purchaser Indemnified Person (each, an Indemnified Person) is made by a third party (an Action), the Person receiving notice of such claim or demand shall promptly notify the indemnifying party and Indemnified Person, as applicable, in writing of such Action, specifying the nature of such claim or demand in reasonable detail and the amount or the estimated amount thereof to the extent feasible (which estimate the Parties agree shall not be conclusive of the final amount of such claims and demand) (the Claim Notice). The failure to provide the Claim Notice to the indemnifying party promptly will not relieve the indemnifying party of any liability it may have to the Indemnified Person giving the Claim Notice, except to the extent that the indemnifying party demonstrates that the defense of such action is actually and materially prejudiced by the Indemnified Persons failure to give such Claim Notice promptly. |
(b) | The indemnifying party shall assume defense of such Action with counsel reasonably satisfactory to the Indemnified Person by appropriate proceedings, which proceedings shall be promptly settled or prosecuted by the indemnifying party to a final conclusion in such a manner as to avoid any risk of the Indemnified Person becoming subject to liability for any other matter; provided, however, the indemnifying party shall not, without the prior written consent of the Indemnified Person, consent to the entry of any judgment against the Indemnified Person or enter into any settlement or compromise which (i) involves financial compensation by the Indemnified Person, and (ii) does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to the Indemnified Person of a release, in form and substance reasonably satisfactory to such Indemnified Person, as the case may be, from all liability with respect to such claim or litigation. The Indemnified Person shall also be permitted to participate in the defense of any Action at its sole cost and expense. In any event, the Indemnified Person and the indemnifying party shall provide reasonable cooperation and assistance to the other and its counsel in connection with the defense or settlement of any Action. |
(c) | If the indemnifying party fails to assume defense of the Indemnified Person against such Action within five (5) Business Days of receipt of the Claim Notice, then the Action may be defended by the Indemnified Person at the indemnifying partys cost and expense (without imposing any obligation on any Indemnified Person to defend any such claim or demand), in which case it may defend such Action in such a manner as it may deem appropriate (including settlement) and then that portion thereof as to which such defense is unsuccessful, in each case shall be deemed to be a liability of the indemnifying party hereunder. |
21
(d) | In the event an Indemnified Person should have a claim against the indemnifying party hereunder that does not involve a claim or demand being asserted against or sought to be collected from it by a third party, the Indemnified Person shall promptly send a Claim Notice with respect to such claim to the indemnifying party. If the indemnifying party disputes its liability with respect to such claim or demand, the Indemnified Person shall have the right to pursue all of its legal and equitable remedies against the indemnifying party for indemnity hereunder. |
8.04. Payment. Upon the determination of the liability under Section 8.03 hereof, the indemnifying party shall pay to the Indemnified Person within five (5) Business Days after such determination, the amount of any claim for indemnification made hereunder, subject to the limitations set forth herein. The Indemnified Person hereby covenants, undertakes and agrees that if it is ultimately determined (either by mutual agreement of the Parties or by final order, decree or judgment) that the Indemnified Person was not entitled to be indemnified by the indemnifying party, the Indemnified Person shall reimburse the indemnifying party, within five (5) Business Days of such agreement or final order, decree or judgment, for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys fees and legal expenses) incurred by the indemnifying party in defending the related claim or demand, from the date on which the indemnifying party began defending such claim or demand.
IX. Confidentiality.
9.01. Prior Agreement. The terms of any existing confidentiality agreement between the Parties hereto with respect to the sale of the Loans, including but not limited to the confidentiality provisions of the Letter of Intent, are hereby superseded and replaced with this Article IX as of the date of this Agreement.
9.02. Proprietary Information. All information which is disclosed by the Disclosing Party shall be presumed to be Proprietary Information and confidential unless otherwise specifically identified in writing by the Disclosing Party. Except as otherwise provided in this Agreement, the Receiving Party agrees to hold in confidence, and agrees not to disclose to any Person outside of its organization, any Proprietary Information disclosed to the Receiving Party by the Disclosing Party and agrees, in perpetuity, not to use Proprietary Information for any purpose other than performance of this Agreement or otherwise as permitted by Applicable Laws. The Receiving Party further agrees not to copy or disclose, directly or indirectly, to its Affiliates or any third parties any Proprietary Information of the Disclosing Party without the prior written consent of the Disclosing Party, except as permitted under this Agreement and in accordance with Applicable Laws and provided that (a) the Receiving Party remains responsible for any unauthorized use or disclosure of any Proprietary Information by any Person to whom it discloses Proprietary Information, and (b) the Receiving Party assures that each such Affiliate or third party conforms to the requirements of confidentiality and the restrictions on use, as well as the safeguarding rules set forth in this Agreement applicable to the Receiving Party hereunder, and (c) the Receiving Party has executed written agreements with such Affiliates and third parties providing for the same.
Nothing in this Agreement shall prohibit disclosure made pursuant to regulatory requirements, including without limitation the requirements of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation or the Securities and Exchange Commission.
9.03. Customer Information.
(a) | Upon purchase of Loans hereunder, Purchaser may use its Customer Information for any purpose, including, without limitation, for the marketing of any products and services. With respect to Sellers Customer Information (i.e., information that Seller possessed prior |
22
to the Purchase Date and that Seller has the right to retain pursuant to this Agreement), Seller and its Affiliates agree: |
(i) to hold in confidence, and not to sell nor directly or indirectly release, transfer or disclose in any manner to any Person other than its Affiliates, agents and representatives, such Customer Information, in perpetuity; provided, however, that Seller and its Affiliates shall be permitted to (A) share or disclose such information to subcontractors for the purpose of conducting serialization marketing (i.e., repeat borrower marketing), but, subject to Section 9.03(b) of this Agreement, not to market refinancings or consolidations of the Loans to Eligible Borrowers, and (B) directly or indirectly release, transfer or disclose Customer Information to their respective agents on a de-identified basis;
(ii) not to use, or suffer, permit or cause to be used, such Customer Information for any purpose other than performance of this Agreement, the marketing of the Loan Programs to Loan borrowers for the purpose of serialization (i.e., repeat borrower marketing); it being understood and agreed that notwithstanding the foregoing and subject to Section 9.03(b) of this Agreement, Seller and its Affiliates shall not at any time directly or indirectly market refinancings or consolidations of the Loans to Eligible Borrowers unless Seller or its Affiliates, as applicable, has first obtained Purchasers prior written approval;
(iii) not to copy or disclose, directly or indirectly, to any third party any such Customer Information without Purchasers prior written consent, except as necessary to fulfill obligations under this Agreement or in connection with the performance of activities permitted under Sections 9.03(a)(i) and 9.03(a)(ii). Seller may disclose such Customer Information to its Affiliates or third parties as necessary for the purposes permitted under Sections 9.03(a)(i) and 9.03(a)(ii), but only if Seller assures that each such Affiliate or third party conforms to the requirements of confidentiality, protection, and the restrictions on use set forth in this Article IX, Seller has executed written agreements with such Affiliates and third parties providing for the same, and Seller remains responsible for any unauthorized use or disclosure of any such Customer Information by any Person to whom it discloses such Customer Information; and
(iv) in the event of any known or suspected access, possession, use, knowledge, or disclosure of Customer Information by Seller or its Affiliates or a third party which had access to Sellers Customer Information, Seller shall immediately notify Purchaser and commence an investigation of the event or suspected event. Seller shall also take immediate action to mitigate the potential impact of such event or suspected event and to prevent future similar occurrences.
(b) | Notwithstanding anything in this Agreement to the contrary, it shall not be a breach of this Agreement for Seller or Guarantor to undertake marketing and solicitation activities for any product or service directed to the general public or based on marketing lists derived from generally available data (such as credit bureau reporting data excluding data used or obtained by Seller or Guarantor in connection with the Loans) or lawfully purchased or obtained from any third party, except that Eligible Borrowers will always be removed from marketing lists used to market refinancings or consolidations of student loans. Neither Seller nor Guarantor shall use any marketing list based on or derived from the Loans or the |
23
applications for the Loans or undertake marketing activities specifically or primarily targeted to Eligible Borrowers. |
(c) | In accordance with the provisions of Title V, Subtitle A of the Gramm-Leach-Bliley Act (the GLB Act), its implementing regulations, the guidelines issued pursuant to §501 of the GLB Act, and any similar and applicable federal and state law and regulation, as in effect from time to time, Seller and Purchaser agree to respect and protect the security and confidentiality of any Customer Information, including, without limitation, establishing and maintaining an information security program designed to meet the objectives of the foregoing laws, regulations, and guidelines. |
(d) | For purposes of Article IX: |
(i) information is de-identified when it does not identify an individual and there is no reasonable basis to believe that the information can be used to identify an individual. Information is considered de-identified if it does not contain any of the items in Section 9.03(d)(ii) below and if the remaining information could not be used alone, or in combination, to identify a subject of the information; and
(ii) de-identified information does not include (A) the name, street or mail address, email address, date of birth, telephone number, cell phone (or other wireless device) number, fax number, social security number, account number, financial and employment application data, vehicle identifiers and serial numbers, including license plate numbers, or any other personally identifying information, including without limitation, financial, medical, health-related or demographic-related information, about or relating to any current, prospective (i.e. applicant) or former borrower or cosigner, if any, of a Loan, or (B) any nonpublic personal information (within the meaning of Title V of the GLB Act and its implementing regulations, or any similar provision under any other applicable law) regarding Eligible Borrower(s) (other than the fact that such borrower or cosigner, if any, was a customer of Seller).
9.04. Legal Process Exception. Neither the Receiving Party nor the Disclosing Party shall be liable for the disclosure of Proprietary Information if such party is requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand, administrative proceedings or similar process, or by the rules or regulations of any regulatory or self-regulatory authority having jurisdiction over such party) to disclose such Proprietary Information; provided, however, that such party shall exercise the same efforts to protect the confidentiality of such information as it would for its own confidential information pursuant to legal process and shall (a) to the extent permitted by applicable law, provide the other party with prompt notice of such request or requirement (including a copy thereof) so that such other party may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Article IX, and (b) at the request of such other party, cooperate with such other party, at such other partys expense, to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Proprietary Information by such tribunal or other entity.
9.05. Safeguards. To secure the confidentiality attaching to the Proprietary Information (other than Customer Information that becomes the Proprietary Information of Purchaser upon purchase of the Loans hereunder), the Receiving Party shall:
(a) | Allow access to the Proprietary Information exclusively to those employees or agents of the Receiving Party who have reasonable need to see and use it for the purposes of its evaluation by the Receiving Party and shall inform each of said employees of the |
24
confidential nature of Proprietary Information and of the obligations of the Receiving Party in respect thereof; |
(b) | Inform each third party adviser having access to the Proprietary Information that it must maintain the same as confidential, and shall take such steps as may be reasonably necessary to enforce such obligations; and |
(c) | Make copies of the Proprietary Information only to the extent that the same is strictly required for the purposes of its evaluation by the Receiving Party. |
9.06. Information Security and Fraud Prevention. Seller shall immediately notify Purchaser upon learning that a Loan may be subject to a claim of identity theft, fraud or forgery, and such Loan will be subject to the provisions of this Agreement governing repurchase and indemnification. Seller and its Affiliates further agree that any data transferred to Purchaser shall be sent encrypted or in an otherwise secure manner approved in advance by Purchaser.
9.07 Patents; Copyright. In the event that any Proprietary Information is or becomes the subject of one or more patents, copyrights or applications therefor, the Receiving Party agrees and understands that the Disclosing Party will have all the rights and remedies available to it as a result of such patents, copyrights or applications.
9.08 Non-Disparagement. The Receiving Party shall not make any false, disparaging or derogatory statements to any media outlet, industry group, financial institution, competitor, customer, vendor or any other third party regarding the Disclosing Party or the Loans.
9.09 Remedies. The Parties agree that any breach or threatened breach of this Article IX by the Receiving Party would cause not only financial harm, but irreparable harm to the Disclosing Party and that money damages will not provide an adequate remedy. In the event of a breach or threatened breach of this Article IX by the Receiving Party, the Disclosing Party shall, in addition to any other rights and remedies it may have, be entitled to an injunction (without the necessity of posting any bond or surety) restraining the Receiving Party from disclosing or using, in whole or in part, any Customer Information (if it is the subject of the breach of this Agreement) or Proprietary Information except as necessary to perform its obligations under this Agreement. This provision with respect to injunctive relief will not, however, diminish the non-breaching partys right to seek other legal, contractual or equitable remedies, or to claim and recover damages.
X. Survival.
The representations and warranties contained herein, the repurchase provisions of Article V, the miscellaneous provisions of Article VII, the indemnifications and indemnification procedures of Article VIII and the confidentiality provisions of Article IX hereof shall survive until each Loan is paid in full.
[Remainder of page intentionally blank]
25
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
UNION FEDERAL SAVINGS BANK | ||
By: | /s/ William P. Baumer | |
Print Name: | William P. Baumer | |
Title: | Chief Executive Officer and Chief Risk Officer | |
CITIZENS BANK, N.A. | ||
By: | /s/ Kenneth E. Bilyeu, Jr. | |
Print Name: | Kenneth E. Bilyeu, Jr. | |
Title: | Senior Vice President, Education Finance | |
THE FIRST MARBLEHEAD CORPORATION | ||
By: | /s/ Seth Gelber | |
Print Name: | Seth Gelber | |
Title: | President and Chief Operating Officer |
26
Exhibit A-1
OFFICERS CERTIFICATE OF PURCHASER
I, , the of CITIZENS BANK, N.A. a national association organized under the laws of the United States and having a principal office located at One Citizens Plaza, Providence, RI 02903 (Purchaser), hereby certify that:
is the of said Purchaser and that said person has been duly authorized pursuant to duly adopted resolution(s) of Purchaser to execute that certain Loan Purchase and Sale Agreement (the Agreement) between Purchaser, UNION FEDERAL SAVINGS BANK, a federal savings bank organized under the laws of the United States and having a principal office located at 1565 Mineral Spring Avenue, North Providence, Rhode Island 02904 (the Seller), and THE FIRST MARBLEHEAD CORPORATION, a Delaware corporation having a principal place of business at 800 Boylston Street, 34th Floor, Boston, MA 02199, and dated June [ ], 2014, and said officer is also authorized all as more fully provided in the attached resolution(s) to execute all other documents or certificates necessary or desirable to be delivered pursuant to the Agreement, and Seller or its assignee may conclusively rely upon the authority of such officer to execute the Agreement and such documents or certificates until it shall receive a further certificate of a duly authorized officer of Purchaser canceling or amending this certificate and certifying specimen signatures of the officers named in such further certificate.
I further certify that except for such approvals already obtained, no other governmental approvals are necessary to permit Purchaser to enter into or carry out the Agreement;
I further certify that the resolution(s) authorizing said officer to sign the Agreement and other documents has not been amended or revoked and is still in full force and effect, and that no other corporate action by Purchaser is necessary to the carrying out of the Agreement or the transactions contemplated thereby;
I further certify that there is attached hereto a resolution of Purchaser authorizing me as an officer of Purchaser to execute this certificate on behalf of Purchaser;
I further certify that all representations, warranties and statements of Purchaser contained in the Agreement are true and correct, and not misleading in any material respect, on and as of the date of the Agreement and on and as of the Purchase Date (unless any such representation and warranty is made only as of a specific date, in which event such representation or warranty are true and correct, and not misleading in any material respect, only as of such specific date), and Purchaser has performed in all material respects all obligations and complied with all covenants required hereunder to be performed by it at or prior to the Purchase Date; and
I further certify that the signature set forth below of the person listed above is the true, proper and genuine signature of said person and that he is an officer of Purchaser as shown by the title listed below his name.
|
Name: |
Title: |
Executed by me as of this day of June [ ], 2014.
|
Name: |
Title: |
Exhibit A-2
OFFICERS CERTIFICATE OF SELLER
I, , the of UNION FEDERAL SAVINGS BANK. a federal savings bank organized under the laws of the United States and having a principal office located at 1565 Mineral Spring Avenue, North Providence, Rhode Island 02904 (Seller), hereby certify that:
is the of said Seller and that said person has been duly authorized pursuant to duly adopted resolution(s) of Seller to execute that certain Loan Purchase and Sale Agreement (the Agreement) between Seller, CITIZENS BANK, N.A. a national association organized under the laws of the United States and having a principal office located at One Citizens Plaza, Providence, RI 02903 (Purchaser), and THE FIRST MARBLEHEAD CORPORATION, a Delaware corporation having a principal place of business at 800 Boylston Street, 34th Floor, Boston, MA 02199, dated June [ ], 2014, and said officer is also authorized all as more fully provided in the attached resolution(s) to execute all other documents or certificates necessary or desirable to be delivered pursuant to the Agreement, and Purchaser or its assignee may conclusively rely upon the authority of such officer to execute the Agreement and such documents or certificates until it shall receive a further certificate of a duly authorized officer of Seller canceling or amending this certificate and certifying specimen signatures of the officers named in such further certificate.
I further certify that except for such approvals already obtained, no other governmental approvals are necessary to permit Seller to enter into or carry out the Agreement;
I further certify that the resolution(s) authorizing said officer to sign the Agreement and other documents has not been amended or revoked and is still in full force and effect, and that no other corporate action by Seller is necessary to the carrying out of the Agreement or the transactions contemplated thereby;
I further certify that there is attached hereto a resolution of Seller authorizing me as an officer of Seller to execute this certificate on behalf of Seller;
I further certify that all representations, warranties and statements of Seller contained in the Agreement are true and correct, and not misleading in any material respect, on and as of the date of the Agreement and on and as of the Purchase Date (unless any such representation and warranty is made only as of a specific date, in which event such representation or warranty are true and correct, and not misleading in any material respect, only as of such specific date), and Seller has performed in all material respects all obligations and complied with all covenants required hereunder to be performed by it at or prior to the Purchase Date; and
I further certify that the signature set forth below of the person listed above is the true, proper and genuine signature of said person and that he is an officer of Seller as shown by the title listed below his name.
|
Name: |
Title: |
Executed by me as of this day of June [ ], 2014.
|
Name: |
Title: |
Exhibit A-3
OFFICERS CERTIFICATE OF GUARANTOR
I, , the of THE FIRST MARBLEHEAD CORPORATION, a Delaware corporation having a principal place of business at 800 Boylston Street, 34th Floor, Boston, Massachusetts 02199 (Guarantor), hereby certify that:
is the of said Guarantor and that said person has been duly authorized pursuant to duly adopted resolution(s) of Guarantor to execute that certain Loan Purchase and Sale Agreement (the Agreement) between UNION FEDERAL SAVINGS BANK, a federal savings bank organized under the laws of the United States having a principal place of business at 1565 Mineral Spring Avenue, North Providence, Rhode Island 02904 (Seller), CITIZENS BANK, N.A. a national association organized under the laws of the United States and having a principal office located at One Citizens Plaza, Providence, RI 02903 (Purchaser), and Guarantor, dated June [ ], 2014, and said officer is also authorized all as more fully provided in the attached resolution(s) to execute all other documents or certificates necessary or desirable to be delivered pursuant to the Agreement, and Purchaser or its assignee may conclusively rely upon the authority of such officer to execute the Agreement and such documents or certificates until it shall receive a further certificate of a duly authorized officer of Guarantor canceling or amending this certificate and certifying specimen signatures of the officers named in such further certificate.
I further certify that except for such approvals already obtained, no other governmental approvals are necessary to permit Guarantor to enter into or carry out the Agreement;
I further certify that the resolution(s) authorizing said officer to sign the Agreement and other documents has not been amended or revoked and is still in full force and effect, and that no other corporate action by Guarantor is necessary to the carrying out of the Agreement or the transactions contemplated thereby;
I further certify that there is attached hereto a resolution of Guarantor authorizing me as an officer of Guarantor to execute this certificate on behalf of Guarantor;
I further certify that all representations, warranties and statements of Guarantor contained in the Agreement are true and correct, and not misleading in any material respect, on and as of the date of the Agreement and on and as of the Purchase Date (unless any such representation and warranty is made only as of a specific date, in which event such representation or warranty are true and correct, and not misleading in any material respect, only as of such specific date), and Guarantor has performed in all material respects all obligations and complied with all covenants required hereunder to be performed by it at or prior to the Purchase Date; and
I further certify that the signature set forth below of the person listed above is the true, proper and genuine signature of said person and that he is an officer of Guarantor as shown by the title listed below his name.
|
Name: |
Title: |
Executed by me as of this day of June [ ], 2014.
|
Name: |
Title: |
Exhibit B
BILL OF SALE
FOR VALUE RECEIVED, UNION FEDERAL SAVINGS BANK (the Seller), pursuant to the terms and conditions of that certain Loan Purchase and Sale Agreement dated June [ ], 2014 (the Agreement) between Seller, CITIZENS BANK, N.A. (the Purchaser), and THE FIRST MARBLEHEAD CORPORATION, does hereby grant, sell, assign, transfer and convey to Purchaser and its successors and assigns, all right, title and interest of Seller in and to the following: (1) Loans set forth in Schedules I, II and III attached hereto, (2) all Credit Agreements and Loan Documents, together with rights and remedies of Seller under all of the foregoing, including the right to enforce the same in the same manner and to the same extent as Seller might do but for the execution and delivery of this instrument; (3) any claims Seller may have against Servicer with respect to the servicing of the Loans prior to the Purchase Date; (4) all rights of Seller under the NYU Guaranty Agreement related to the Loans; and (5) all proceeds of the foregoing including, without limitation, all principal, interest and other payments made by the obligor(s) thereunder or with respect thereto, and all rights to receive such payments, but excluding any proceeds of the sale made hereby. All capitalized terms used and not otherwise defined herein shall have the meaning ascribed to them in the Agreement.
Seller represents and warrants that the Credit Agreements and Loan Documents evidencing all Loans have been duly endorsed to Purchaser by blanket endorsement, the form of which is attached hereto, which blanket endorsement shall be signed in Sellers name by the manual, scanned electronic transmission, or facsimile signature of a duly authorized person.
TO HAVE AND TO HOLD the same unto Purchaser, its successors and assigns, forever. This Bill of Sale is made pursuant to and is subject to the terms and provisions of the Agreement, and is without recourse, except as provided in the Agreement.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be executed by one of its officers duly authorized to be effective as of the day of June [ ], 2014.
UNION FEDERAL SAVINGS BANK | ||
By: |
|
Exhibit B (Continued)
BLANKET ENDORSEMENT OF
CREDIT AGREEMENTS
Pursuant to the LOAN PURCHASE AND SALE AGREEMENT dated June [ ], 2014 (the Agreement) the undersigned (Seller), by execution of this instrument, hereby endorses all Credit Agreements purchased by CITIZENS BANK, N.A., (the Purchaser) as described in the executed Bill of Sale. This endorsement is in blank, unrestricted form. Except as stated in the foregoing sentence, this endorsement is without recourse, except as provided under the terms of the Agreement. All right, title, and interest of Seller in and to the Credit Agreements and Loan Documents in connection with the Loans are transferred and assigned to Purchaser. All capitalized terms used and not otherwise defined herein shall have the meaning ascribed to them in the Agreement.
This endorsement may be further manifested by attaching this instrument or a facsimile or scanned electronic transmission hereof to each or any of the Credit Agreements and related documentation acquired by Purchaser from Seller, as Purchaser may require or deem necessary.
Dated this day of June [ ], 2014.
UNION FEDERAL SAVINGS BANK | ||
By: |
|
Exhibit C
Instructions for Completing the ID Theft Affidavit
Before a determination can be made that the debts you list on the Fraudulent Account Statement were incurred as a result of an alleged identity theft, you must prove that you did not create the debt, open the account which was created using your name or receive a benefit or money as a result of the events described in this report.
Please complete the enclosed affidavit as soon as possible. Delays on your part could slow the investigation. Print clearly and be as accurate and complete as possible as incorrect or incomplete information may slow the process of investigating your claim.
The information in this affidavit will enable us to conduct a timely investigation of the alleged fraud and determine the validity of your claim.
The affidavit has two parts:
Part One (ID Theft Affidavit) is where you report general information about yourself and the theft.
Part Two (Fraudulent Account Statement) is where you describe the fraudulent account(s) opened in your name.
When you return the affidavit, attach copies (NOT originals) of any supporting documents. Also, you must enclose a copy of your drivers license and a police report detailing the circumstances surrounding the alleged identity theft. Before submitting your affidavit, review the disputed account(s) with family members or friends who may have information about the account(s) or access to them.
When you have finished completing the affidavit, attach a copy of the Fraudulent Account Statement with your supporting documentation and mail them to the following address:
[CITIZENS BANK, N.A.]
Within 15 days of receiving your Identity Theft Report, which includes the completed affidavit, all supporting documents, a copy of the Fraudulent Account Statement and a police report, we will review the report for completeness and cease credit reporting of the disputed account(s) pending further investigation of your claim. Remember to keep a copy of everything you submit.
Once all necessary documentation is received, you may be required to submit to a verbal interview with one of our investigators. Upon completion of an interview, if required in our discretion, a decision will be made, in writing, within 30 days detailing the results of our investigation.
If you are unable to complete the affidavit, a legal guardian or someone with power of attorney may complete it for you. Except as noted, the information you provide will be used only by a party to the debt or applicable law enforcement agency involved in processing your affidavit, investigating the events you report, and helping to stop further fraud. If this affidavit is requested in a lawsuit, we may have to provide it to the requesting party. Completing this affidavit does not guarantee that the identity thief will be prosecuted or that the debt will be cleared.
ID Theft Affidavit
Victim Information
1) My full legal name is: |
| |
(First) (Middle) (Last) (Jr., Sr., III) |
2) (If different from above) When the events described in this affidavit took place, I was
known as: |
| |||
(First) (Middle) (Last) (Jr., Sr., III) |
3) My date of birth is (Month/Day/Year)
4) My Social Security number is
5) My drivers license or identification card state and number are
6) My current address is |
|
City |
|
State |
|
Zip Code |
|
7) I have lived at this address since (month/year)
8) (If different from above) When the events described in this affidavit took place, my
address was |
|
City |
|
State |
|
Zip Code |
|
9) I lived at the address in Item 8 from until (month/year)
10) My daytime telephone number is ( )
11) My evening telephone number is ( )
12) Name of bank(s) where you hold an account at the time the fraud
occurred |
|
13) Hand in which you write: ¨Right ¨Left
14) My current primary email address is
15) My primary email address at the time the fraud occurred was
16) All other email addresses I used at the time the fraud occurred:
How the Fraud Occurred
Check all that apply for items 14-20:
14) ¨ I did not authorize anyone to use my name or personal information to seek the money, credit or loans described in this report.
15) ¨ I did not sign any applications, loan note, credit agreement or loan check in connection with the fraudulent loan(s).
16) ¨ I did not receive any benefit, money as a result of the events described in this report.
17) ¨ My identification documents (for example, credit cards; birth certificate; drivers license; Social Security card; etc.) were
¨ stolen ¨ lost on or about (day/month/year)
18) ¨ To the best of my knowledge and belief, the following person(s) used my information (for example, my name, address, date of birth, existing account numbers, Social Security number, mothers maiden name, etc.) or identification documents to get money, credit, or loans without my knowledge or authorization:
Name:
Address:
Phone number(s):
19) ¨ I do NOT know who used my information or identification documents to get money, credit, or loans without my knowledge or authorization.
20) ¨ Additional comments: (For example, detailed description of the fraud, which documents or information was used or how the identity thief gained access to your information.)
(Attach Additional Pages As Necessary)
Victims Law Enforcement Actions
A police report is required in order for us to conduct a timely investigation into your claim of Identity Theft.
21) (check one) I ¨ am ¨ am not willing to assist in the prosecution of the person(s)who committed this fraud.
22) (check one) I ¨ am ¨ am not authorizing the release of this information to law enforcement for the purpose of assisting them in the investigation and prosecution of the person(s) who committed this fraud.
23) (check one) I ¨ am ¨ am not requesting copies of the Application/Credit Agreement
24) (check one) I ¨ am ¨ am not requesting copies of the disbursement check.
25) (check one) I ¨ am ¨ am not requesting a copies of additional documentation.
Please specify:
Documentation Checklist
You must include the following supporting documentation. Attach copies (NOT originals) to the affidavit before sending.
26) ¨ A copy of a valid government-issued photo-identification card (for example, your drivers license, state-issued ID card or your passport).
27) ¨ A copy of the report you filed with the police or sheriffs department*
Law enforcement agency name:
Law enforcement contact name:
Address, telephone and fax:
28) ¨ Five Notarized Signatures.
29) ¨ Five Supplemental examples of signatures. Two of the submitted signatures must be within one year of the alleged invalid signature. Examples of acceptable documents are a drivers license, cancelled check, or social security card.
30) ¨ Is the victim completing the affidavit? If not, who is?
(Please provide supporting documentation if you are not the victim)
* | Failure to enclose a copy of a police report will result in us taking no further action on your claim of Identity Theft. |
Signature
I certify that, to the best of my knowledge and belief, all the information on and attached to this affidavit is true, correct, and complete and made in good faith. I also understand that this affidavit or the information it contains may be made available to federal, state, and/or local law
enforcement agencies for such action within their jurisdiction as they deem appropriate. I understand that knowingly making any false or fraudulent statement or representation to the government may constitute a violation of 18 U.S.C. §1001 or other federal, state, or local criminal statutes, and may result in imposition of a fine or imprisonment or both.
|
| |||
(Signature) | (Date Signed) |
Notary Section
The individual listed above personally appeared before me, the subscriber, a Notary Public in and for State of and County of . Being duly sworn by me according to law, did dispose and say that the document, copy attached hereto, and that the purported signature in (his) (her) name is not (his) (her) handwriting and was not made by (him) (her) and was not done with (his) (her) consent.
Sworn to and subscribed before me
This day of , 20 , |
(Seal) |
My commission expires |
|
(Notary Public) |
Fraudulent Account Statement
Do you have any education loans that you are aware of?
If so, please provide the following information:
Servicer:
Lender:
Date Disbursed:
Amount of Loan:
Servicer:
Lender:
Date Disbursed:
Amount of Loan:
Servicer:
Lender:
Date Disbursed:
Amount of Loan:
If your personal information was used to apply for credit with other financial institutions and/or companies, please provide the following information:
Name of Institution:
Name of Investigator:
Telephone Number:
Name of Institution:
Name of Investigator:
Telephone Number:
Name of Institution:
Name of Investigator:
Telephone Number:
Name of Institution:
Name of Investigator:
Telephone Number:
Claimants Notarized Signatures
In the presence of a Notary Public, claimant must sign his/her signature a total of five times in the space provided below and attach with affidavit.
1) |
|
2) |
|
|||
3) |
|
|||
4) |
|
|||
5) |
|
Notary Section
The individual listed above personally appeared before me, the subscriber, a Notary Public in and for State of and County of .
Sworn to and subscribed before me
this day of , 20 , |
(Seal) |
My commission expires | ||
| ||
(Notary Public) |
Exhibit 10.6
Non-Employee Director Compensation
Each non-employee director of the Corporation shall receive:
| an annual fee of $80,000, payable in advance |
| on the date of his or her initial election to the Board of Directors, a grant of 1,000 stock units, each of which represents the right to receive one share of the Corporations common stock, under the Corporations 2011 Stock Incentive Plan, as amended (the 2011 Plan) |
| on September 20 of each year (if on such date the non-employee director has served on the Board of Directors for at least 180 days), 1,000 stock units, each of which represents the right to receive one share of the Corporations common stock, under the 2011 Plan |
| reimbursement of expenses incurred in connection with their service to the Corporation (including $1.00 per mile for private air travel) |
In addition:
| non-employee directors shall be eligible for grants of stock options and equity awards under the Corporations other equity plans |
| the Lead Director shall receive an additional annual fee of $50,000 |
| the Chairman of the Audit Committee of the Board of Directors shall receive an additional annual fee of $50,000 |
| the Chairman of the Compensation Committee of the Board of Directors shall receive an additional annual fee of $5,000 |
| the Chairman of the Nominating and Corporate Governance Committee of the Board of Directors shall receive an additional annual fee of $5,000 |
| each member of the Audit Committee of the Board of Directors shall receive a fee of $1,000 for each meeting attended |
| each member of the Compensation Committee of the Board of Directors shall receive a fee of $1,000 for each meeting attended |
Exhibit 10.24
May 29, 2014
Richard Neely
[address]
[address]
Dear Rick:
Id like to personally thank you for your valuable contributions to date with The First Marblehead Corporation (FMC). You have been identified as a key employee whom FMC would like to reward and retain to help the business move forward with its strategic initiatives. Toward that end, this letter (the Retention Bonus Letter) is to inform you that you have been deemed eligible to receive a one-time incentive Retention Bonus (as set forth below), subject to the terms herein.
In particular, you are potentially eligible for a Retention Bonus in an amount equal to $25,000, less lawful deductions (the Retention Bonus). The Retention Bonus will be paid on September 30, 2014 (the Payment Date) provided that you remain employed in good standing with FMC through the Payment Date and satisfactorily perform your job duties through the Payment Date.
If your employment is involuntarily terminated without cause prior to the Payment Date, you will still be eligible for the Retention Bonus. You will be ineligible for the Retention Bonus if you resign your employment or your employment is terminated for cause prior to the Payment Date. Likewise, you must be an employee in good standing (i.e., not subject to any written disciplinary action or written performance improvement plan) at the Payment Date to be eligible for the Retention Bonus.
For purposes of this Retention Bonus Letter, cause and/or good standing shall be determined in good faith by FMC in its sole discretion. A determination of cause and/or good standing by FMC shall be binding and conclusive upon all parties. You should understand that your employment remains at-will and nothing in this Retention Bonus Letter is a guarantee of employment for any defined period of time.
I would like to extend our appreciation to you for your past service and support and look forward to your continued involvement with us during this time and hopefully beyond.
Very truly, | ||
THE FIRST MARBLEHEAD CORPORATION | ||
By: | /s/ Jo-Ann Burnham | |
Jo-Ann Burnham | ||
Managing Director, Human Resources |
/s/ Richard Neely |
Richard Neely |
Dated: May 29, 2014 |
Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Double asterisks denote omissions. |
Exhibit 10.45
Execution Copy | |
THIRTEENTH AMENDMENT TO LOAN PROGRAM AGREEMENT
This Thirteenth Amendment to Loan Program Agreement (the Thirteenth Amendment) is entered into as of the 30th day of May, 2014 and shall be effective as of June 1, 2014 (the Thirteenth Amendment Effective Date), except as otherwise stated herein, by and among First Marblehead Education Resources, Inc., a Delaware corporation having its principal offices at One Cabot Road, Medford, Massachusetts 02155 (FMER), The First Marblehead Corporation, a Delaware corporation having its principal offices at 800 Boylston Street, 34th Floor, Boston, Massachusetts 02199 (FMC), and SunTrust Bank, a Georgia state-chartered banking corporation having an office located at 1001 Semmes Avenue, Richmond, Virginia 23224 (SunTrust). Capitalized terms used in this Thirteenth Amendment without definition have the meanings assigned to them in the Loan Program Agreement (as defined below).
WHEREAS, FMER, FMC, and SunTrust executed that certain Loan Program Agreement, by and among the Parties dated as of April 20, 2010 (the Loan Program Agreement), that certain Certificate of Satisfaction and First Amendment to Loan Program Agreement, by and among the Parties dated as of July 15, 2010, that certain Second Amendment to Loan Program Agreement, by and among the Parties dated as of January 28, 2011, that certain Third Amendment to Loan Program Agreement, by and among the Parties dated as of April 26, 2011, that certain Fourth Amendment to Loan Program Agreement, by and among the Parties dated as of June 3, 2011, that certain Fifth Amendment to Loan Program Agreement, by and among the Parties dated as of November 14, 2011, that certain Sixth Amendment to Loan Program Agreement, by and among the Parties dated as of January 1, 2012, that certain Seventh Amendment to Loan Program Agreement, by and among the Parties dated as of April 20, 2012, that certain Eighth Amendment to Loan Program Agreement, by and among the Parties dated as of April 3, 2013, that certain Ninth Amendment to Loan Program Agreement, by and among the Parties effective as of August 23, 2013, that certain Tenth Amendment to Loan Program Agreement, by and among the Parties dated as of January 27, 2014, that certain Eleventh Amendment to Loan Program Agreement by and among the Parties dated as of April 28, 2014, and that certain Twelfth Amendment to Loan Program Agreement, by and among the Parties effective as of May 1, 2014 (the Twelfth Amendment) (collectively, the Agreement); and
WHEREAS, the Parties desire to amend the Agreement.
NOW THEREFORE, in consideration of the promises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, as of the Thirteenth Amendment Effective Date unless otherwise specifically stated, the Parties agree as follows:
1. Definition Changes. The Parties hereby amend Section 1.1 of the Agreement by making the following changes to the Agreement:
a. | The definition of Cash is hereby added to the Agreement as follows: |
Cash has the meaning set forth in Section 18.2.9 of this Agreement.
b. | The definition of Cash Deficiency Period is hereby added to the Agreement as follows: |
Cash Deficiency Period has the meaning set forth in Section 18.2.9 of this Agreement.
c. | The definition of Expected Loan Volume is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
Expected Loan Volume means the total principal amount (including financed fees) of Loans expected to be funded by SunTrust for the related Pool during each 12-month period subsequent to the Thirteenth Amendment Effective Date.
d. | The definition of FMC Portfolio Yield is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
FMC Share of Portfolio Yield means, for any given month, the aggregate total for all Pricing Segments of the amount to be earned by FMC for the Loans in each Pricing Segment, calculated as (a) the amount of the margin earned by FMC for the Loans in each Pricing Segment as shown on the Compensation Schedule, divided by (b) the Borrower margin in each such Pricing Segment, multiplied by (c) the Monthly Accrued Interest less, with respect to Variable Rate Loans, interest accrued attributable to the LIBOR index; provided, however, that as of April 1, 2014, for each Loan in Loan Group I, the FMC Share of Portfolio Yield shall be calculated as (x) the amount of the margin earned by FMC for such Loan based on the applicable Pricing Segment as shown on the Compensation Schedule less [**]%, divided by (y) the Borrower margin in each such Pricing Segment, multiplied by (z) the Monthly Accrued Interest less, with respect to Variable Rate Loans, interest accrued attributable to the LIBOR index; provided further, that for each Loan in Loan Group I, the FMC Share of Portfolio Yield calculated between April 1, 2014 and the day immediately preceding the Thirteenth Amendment Effective Date will be recalculated as of the Thirteenth Amendment Effective Date to reflect the [**]% reduction, which such recalculated amount shall be reflected in the first invoice sent by FMC to SunTrust following the Thirteenth Amendment Effective Date.
e. | The definition of Loan Group I is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
Loan Group I shall mean and include all Loans, regardless of Disbursement Date, with an Application submitted for credit from July 15, 2010 up to and including the day immediately preceding the Thirteenth Amendment Effective Date.
f. | The definition of Loan Group I Reconciliation Date is hereby added to the Agreement as follows: |
Loan Group I Reconciliation Date has the meaning set forth in Section 7.1.1 of this Agreement.
g. | The definition of Loan Group II is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
Loan Group II shall mean and include all Loans, regardless of Disbursement Date, with an Application submitted for credit on or after the Thirteenth Amendment Effective Date.
h. | The definition of Participation Account Deposit is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
Participation Account Deposit has the meaning set forth in Section 7.1.3.
i. | The definition of Participation Account Payment is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
2
Participation Account Payment has the meaning set forth in Section 7.1.6 herein.
j. | The definition of Participation Interest is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
Participation Interest means the Participation Percentage multiplied by Expected Loan Volume. During the Term, the Participation Interest shall be modified quarterly as set forth in Section 7.1.3 of the Agreement to reflect the extent to which the distribution of the Disbursed Loan Amount among Borrower pricing tiers changes the Projected Default Rate for the Pool.
k. | The definition of Participation Percentage is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
Participation Percentage means an amount equal to [**] times the Projected Default Rate.
l. | The definition of Pool Reconciliation Percentage is hereby added to the Agreement as follows: |
Pool Reconciliation Percentage has the meaning set forth in Section 7.1.3 herein.
m. | The definition of Reporting and Servicer Oversight Services is hereby added to the Agreement as follows: |
Reporting and Servicer Oversight Services has the meaning set forth in Section 18.1.2 of this Agreement.
n. | The definition of Second Loan Group I Reconciliation Balance is hereby added to the Agreement as follows: |
Second Loan Group I Reconciliation Balance has the meaning set forth in Section 7.1.1 of this Agreement.
o. | The definition of Second Loan Group I Reconciliation Date is hereby added to the Agreement as follows: |
Second Loan Group I Reconciliation Date has the meaning set forth in Section 7.1.1 of this Agreement.
2. | Sales and Marketing. Section 2.2.1 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
2.2.1 FMC will perform all school sales activities and direct-to-consumer marketing in the School Sales Activity States set forth on Exhibit E1 to the Agreement as well as any other states as agreed by the Parties in writing from time to time. FMC shall dedicate at least four (4) sales representatives who will sell the Program and no other loan program in the SunTrust Footprint States, and who will develop and implement a strategy and plan to generate interest in the Program among Eligible Institutions in the School Sales Activity States and in any other states as agreed by the Parties in writing from time to time. Each of the Parties may solicit potential Applicants on behalf of SunTrust via direct mail, telephone solicitation, and the internet. To market the Custom Choice Program and Graduate Business School
3
Program collectively, FMC shall spend no less than [**] dollars ($[**]) annually from each January 1 to December 31 period during the Term, excluding the salaries and benefits of its and its Affiliates employees. In the event that the Agreement is terminated prior to the end of a calendar year and FMC has spent less than [**] dollars ($[**]), FMC shall not be in breach of this Agreement solely due to its failure to spend less than [**] dollars ($[**]) in accordance with this Section 2.2.1, and shall retain the difference between the [**] dollars ($[**]) allotted for the calendar year during which such termination occurs and the amount spent from January 1 of the applicable calendar year through the date of the termination. FMC shall interact with Eligible Institutions as set forth in the Production Support Plan.
Neither FMC, its Affiliates, including FMER, nor employees thereof, as applicable, shall (a) solicit schools in SunTrust Footprint States for preferred lender list placement for any private student loan products other than products covered by this Agreement, or (b) sell any loan program other than the Program to Eligible Institutions located in the SunTrust Footprint States through and including the earlier to occur of (i) termination of the Agreement, or (ii) September 30, 2017.
Notwithstanding the foregoing, each of the Parties may solicit potential Applicants with respect to the Program through the use of direct mail, telephone solicitation or internet to existing customers of such Party or an Affiliate as of the Execution Date regardless of where such customers of such Party or its Affiliates may be located. Except as specifically set forth herein, nothing in this Agreement shall be construed to restrict in any way any Partys marketing and sales of financial or educational loan products other than the Program.
FMC shall also:
(a) Where the SunTrust name is to be used in FMC Materials promoting the Program, consult with SunTrust on the preparation of such materials (including brochures, advertisements, mailings, announcements, and web site content) and comply with the provisions of Section 2.6 applicable to the approval of such materials by SunTrust and the preparation and use of such materials by FMC or any Advertising Agency, Vendor, or Subcontractor engaged by FMC;
(b) Submit a monthly status report that details FMCs progress at Eligible Institutions;
(c) Submit standardized request for proposals template language (and any changes to previously approved template language) to SunTrust for approval; and
(d) Provide daily processing support for SunTrust staff and Eligible Institution support staff via a toll-free telephone number generally from 9:00 am to 8:00 pm ET.
3. | No Exclusivity for Combination Program. Section 2.9 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
2.9 Reserved.
4. | Fee Payments. Section 6.2 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
6.2 General. All fees shall be paid by SunTrust within sixty (60) days after SunTrusts receipt of the invoice therefor, except fees subject to good faith dispute between the Parties. In the event any fees have been made for a cancelled disbursement, in accordance with the cancellation window described in the Servicing Guidelines, SunTrust shall offset future fees with any and all prior fees paid for such cancelled disbursement. Except as set forth in this Article 6, Section 18.1.2, Section 18.3.1, or as otherwise set forth in this Agreement, no fees will be paid after the termination of this Agreement, except for Applications which have already been submitted prior to the termination of this Agreement. In the event of any occurrence triggering SunTrusts right to terminate this Agreement under Section 18.2, if, despite Section 7.1.10, an action of the bankruptcy
4
court in a FMC bankruptcy proceeding causes a reduction in the funds available to SunTrust in the Participation Account, SunTrust may, if consistent with any orders of such bankruptcy court, withhold any amounts otherwise payable to FMC or FMER pursuant to this Article 6 to the extent that amounts remaining in the Participation Account are insufficient to fulfill the obligations of FMC under Article 7. Except pursuant to an indemnity obligation or as otherwise expressly stated in this Agreement, no other amounts shall be due or payable by SunTrust.
5. | Participation Account Deposits and Reconciliation. |
a. | Section 7.1.1 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
7.1.1 Participation Account Deposit Reconciliation For Loan Group I. On the last day of the month in which the Thirteenth Amendment Effective Date occurs (the Loan Group I Reconciliation Date), FMC shall be entitled to a payment from the Participation Account of the amount by which (a) the Participation Account balance for Loan Group I as of the Loan Group I Reconciliation Date, minus (b) fifty percent (50%) of the total interest earned by the Participation Account, solely with respect to Loan Group I from April 20, 2010 through the Loan Group I Reconciliation Date, exceeds (x) the Participation Percentage for Loan Group I, times(y) the Disbursed Loan Amount, including remaining scheduled Loan disbursements for Loan Group I minus cumulative Charged Off Loan payments made as of the day immediately preceding the Loan Group I Reconciliation Date. On the Loan Group I Reconciliation Date, FMC shall calculate and notify SunTrust of any amount due under the foregoing, and SunTrust shall promptly withdraw and pay such amount to FMC, by no later than fifteen (15) days after the Loan Group I Reconciliation Date.
On the last day of the month in which the date that is ninety days following the Loan Group I Reconciliation Date falls (such date, the Second Loan Group I Reconciliation Date), to the extent that (A) the Participation Percentage for Loan Group I, multiplied by (B) the Disbursed Loan Amount, including remaining scheduled Loan disbursements, for Loan Group I, minus cumulative Charged Off Loan payments made as of the day immediately preceding the Second Loan Group I Reconciliation Date (the Second Loan Group I Reconciliation Balance), plus (C) fifty percent (50%) of the interest earned by the Participation Account, solely with respect to Loan Group I from April 20, 2010 through the last day of the month in which the Thirteenth Amendment Effective Date occurs, is less than the Participation Account balance for Loan Group I as of the Second Loan Group I Reconciliation Date, FMC shall deposit into the Participation Account an amount equal to the amount of the difference between the Participation Account balance for Loan Group I as of the Second Loan Group I Reconciliation Date and the Second Loan Group I Reconciliation Balance; provided, however, that to the extent the Participation Account balance for Loan Group I as of the Second Loan Group I Reconciliation Date exceeds the Second Loan Group I Reconciliation Balance, FMC shall be entitled to payment from the Participation Account equal to such excess amount. On the Second Loan Group I Reconciliation Date, FMC shall perform this calculation and shall notify SunTrust of the amount due under the foregoing, and FMC shall make a deposit, or SunTrust shall promptly withdraw and pay such amount to FMC, as applicable no later than fifteen (15) days after the Second Loan Group I Reconciliation Date.
b. | Section 7.1.2 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
7.1.2 Reserved.
c. | Section 7.1.3 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof: |
5
6. | 7.1.3 Participation Account Deposits for Loan Group II; Reconciliation. With respect to the initial Pool for Loan Group II, subject to the Participation Cap, FMC shall deposit an Initial Participation Account Deposit in the Participation Account prior to the disbursement of the first Loan in such Pool. Not later than fifteen (15) days following the end of each calendar quarter during the Term, FMC shall calculate the average of (a) the Participation Interest on the Pools as of the end of such quarter, and (b) the Participation Percentage multiplied by the Disbursed Loan Amount as of the end of such quarter, in each case after giving effect to changes to the Projected Default Rate as of quarter-end. Not later than fifteen (15) days following the end of such calendar quarter, FMC shall deposit in the Participation Account the amount, if any, by which the foregoing average exceeds the cumulative previous deposits in the Participation Account as of the end of such quarter, minus amounts paid from the Participation Account pursuant to Section 7.1.1 (each, a Participation Account Deposit). Not later than two hundred seventy (270) days following the end of the then-current Term (to allow for all final disbursements and any cancellations thereof to be made), and subject to the Participation Cap, if the sum of previous deposits in the Participation Account as of the end of the then-current Term is less than an amount equal to the product of (x) the Participation Percentage, calculated as of the end of the then-current Term, for all Pools as of the end of the then-current Term, multiplied by (y) the sum of the Disbursed Loan Amount plus the amount of all remaining scheduled Loan disbursements, for all Pools as of the end of the then-current Term (such product, the Pool Reconciliation Percentage), then FMC shall deposit a final Participation Account Deposit into the Participation Account, not later than two hundred eighty-five (285) days after the end of the then-current Term, equal to the amount of such difference. If the sum of all Participation Account Deposits is greater than an amount equal to the Pool Reconciliation Percentage, then FMC shall be entitled to payments from the Participation Account of any amount by which the sum of Participation Account Deposits exceeds the Pool Reconciliation Percentage. SunTrust agrees to withdraw and pay to FMC such amounts subject to subsection (y) above, if any, no later than two hundred eighty-five (285) days after the end of the then-current Term. |
7. Participation Account Payments. Section 7.1.6 of the Agreement is hereby amended by deleting it in its entirety and inserting the following in replacement thereof:
7.1.6 Participation Account Payments. In addition to any payments set forth in Sections 7.1.1 and 7.1.3, payments shall be made to FMC monthly (each, a Participation Account Payment) as follows:
(a) with respect to Loan Group I, beginning the first full month after two (2) years from the date which immediately precedes the Thirteenth Amendment Effective Date, to the extent, as of the end of any month, that funds in the Participation Account deposited in connection with Loans in Loan Group I, as a percentage of outstanding Loans from Loan Group I, exceed two (2) times the Participation Percentage for Loan Group I, as calculated on the Second Loan Group I Reconciliation Date (such excess, the Participation Account Excess Percentage I). The Participation Account Payment for any month in which the Participation Account Excess Percentage I is positive shall equal the Participation Account Excess Percentage I multiplied by the Outstanding Loan Volume for Loan Group I at the end of such month. Notwithstanding the foregoing, in the event any Charged Off Loan in Loan Group II remains unpaid as of the end of any month in which a Participation Account Payment is due to FMC under this Section 7.1.6, the Participation Account Payment for such month shall be reduced by an amount equal to, and such amount shall be applied to, the cumulative balance of such Charged Off Loan(s); and
(b) with respect to Loan Group II, beginning with the first full month after September 30, 2019, to the extent, as of the end of any month, that funds in the Participation Account deposited in connection with Loans in Loan Group II, as a percentage of outstanding Loans from Loan Group II, exceed two (2) times the Participation Percentage for Loan Group II, as calculated after the last Loan
6
disbursement in Loan Group II has been funded (such excess, the Participation Account Excess Percentage II). The Participation Account Payment for any month in which the Participation Account Excess Percentage II is positive shall equal the Participation Account Excess Percentage II multiplied by the Outstanding Loan Volume for Loan Group II at the end of such month. Notwithstanding the foregoing, in the event any Charged Off Loan in Loan Group I remains unpaid as of the end of any month in which a payment is due to FMC under this Section 7.1.6, the Participation Account Payment for such month shall be reduced by the amount equal to, and such amount shall be applied to, the cumulative balance of such Charged Off Loan(s).
8. | Term of Agreement. |
a. | The Parties hereby amend Section 18.1.1 of the Agreement by deleting it in its entirety and inserting the following in replacement thereof: |
18.1.1 Reserved.
b. | The Parties hereby amend Section 18.1.2 of the Agreement by deleting it in its entirety and inserting the following in replacement thereof: |
18.1.2 This Agreement and the Services contemplated hereby shall commence on the Effective Date and shall continue through the earlier of September 30, 2017 or on the date on which the Participation Cap is reached, unless earlier terminated pursuant to the provisions of this Article 18 (the Term); provided, however, that if (a) the Term expires due to the earlier to occur of (i) September 30, 2017, or (ii) the date on which the Participation Cap is reached, or (b) the Loan Processing Services are terminated during the Term pursuant to Sections 18.2.5, 18.2.7, 18.2.8, or 18.2.10, FMC and/or FMER, as applicable, shall continue to provide the Program Administration Services and Program Support Services set forth in Article 4, and the associated fees and compensation to FMC and/or FMER therefor shall continue to accrue and become payable for such Services, for all periods through the month following the month during which the principal and interest of each Loan have been fully paid and remitted to SunTrust (the Final Services Termination Period). If the Agreement is terminated pursuant to Section 18.2 during the Term, at the option of any Party and upon written notice to the other Parties, those Program Administration Services covered by Sections 4.1 and 4.2 of this Agreement (for the purposes of this Section 18.1.2, the Reporting and Servicer Oversight Services) and/or Program Support Services shall no longer be performed by FMC and FMER, and the Program Administration Services Fee and/or Program Support Services Fee, as applicable, shall no longer by paid by SunTrust to FMC. In addition, during the Final Services Termination Period, in connection with a breach that is not cured as permitted by Section 18.2.2, a Force Majeure Event pursuant to Section 18.2.3, the requirement(s) of a Governmental Authority as set forth in Section 18.2.5, a failure of audit remediation of the scope and for the applicable period described in Section 15.3.2, or a change to Requirements of Law, the Reporting and Servicer Oversight Services and/or Program Support Services may be terminated prior to the end of the Final Services Termination Period to the extent that such uncured breach, Force Majeure Event, requirement(s) of a Governmental Authority, audit remediation failure, or change to Requirements of Law, as applicable, is directly related to the Services that a Party seeks to terminate, and the Party seeking to terminate under such provisions timely gives the other Parties the written notice of termination specified in Sections 18.2.2, 18.2.3 or 18.2.6, as applicable. In the event of termination of Reporting and Servicer Oversight Services or the Program Support Services under the preceding sentence, the Program Administration Services Fee or Program Support Services Fee, as applicable, shall no longer be payable to FMC for any period beginning subsequent to the effectiveness of such termination. This Agreement may be extended for an additional term or terms upon the terms and conditions set forth in a mutual written agreement among the Parties.
7
c. | The Parties hereby amend Section 18.2 by deleting it in its entirety and inserting the following in replacement thereof: |
18.2 Termination for Cause. From and after the Effective Date, and subject to Sections 18.1.2 and 18.3, where applicable:
18.2.1 Insolvency or Reorganization. Any Party may terminate the Agreement upon written notice to the other Parties if:
(a) any non-terminating Party shall file a petition to take advantage of any applicable insolvency or reorganization statute;
(b) any non-terminating Party shall file a petition or answer seeking or shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to such Party or relating to all or substantially all of its property;
(c) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or the winding-up or liquidation of its affairs, shall have been entered against a non-terminating Party, which decree or order entered against such Party shall have remained in force undischarged or unstayed for a period of fifteen (15) days; or
(d) any non-terminating Party shall be insolvent, admit in writing its inability to pay its debts generally as they become due, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations.
18.2.2 Breach. Any Party may terminate the Agreement upon written notice to the other Parties if any non-terminating Party fails to perform any of its obligations (including the failure to pay fees for Services that are not the subject of a good faith dispute when due) in any material respect, or shall breach any of its representations, warranties, or covenants in this Agreement, in any material respect and such failure or breach continues unremedied after the expiration of thirty (30) days following written notice to such Party specifying the nature of such failure or breach and stating the intention of the terminating Party to terminate this Agreement absent a cure of such failure or breach in all material respects within such thirty (30) day period.
18.2.3 Force Majeure Event. In the event that a Force Majeure Event occurs, any Party may terminate this Agreement upon written notice to the other Parties if that Party or any other Party is prevented from performing, or its performance of its obligations under this Agreement is rendered impracticable, for a period of at least five (5) Business Days during any two week period after written notice of such event and inability to perform was provided to the non-terminating Party or Parties; provided, however, that if the Party previously unable to perform regains its ability to perform hereunder within five (5) days after written notice of the Force Majeure Event and inability to perform was provided to the other Party or Parties, then the terminating Party must deliver written notice of termination to the other Parties no later than thirty (30) days after the Party regains such ability to perform and notifies in writing the other Parties thereof.
18.2.4 Failure to Agree on Program Changes. If SunTrust and FMC cannot agree on Program changes (other than changes to the Pricing Schedule) following full compliance with the procedures set forth in Section 4.1.1, then any Party may terminate this Agreement on fifteen (15) days written notice to the other Parties; provided, however, that such notice of termination is delivered to the other Parties no later than thirty (30) days after the expiration of the thirty (30) day period described in Section 4.1.1 during which changes could not be agreed.
8
18.2.5 Governmental Authority. Any Party may terminate this Agreement, or any Service provided herein, as applicable, upon written notice to the other Parties if, to the extent required by Requirements of Law, a Governmental Authority with oversight of SunTrust requires, in writing, termination of this Agreement or any Service provided herein, because, among other things, SunTrust is considered a troubled institution, which termination shall be without penalty to SunTrust; provided, however, that termination under this Section 18.2.5 shall be effective only to the extent of those Services required by such Governmental Authority to be terminated.
18.2.6 Audit Remediation Failure. Any Party may terminate this Agreement upon written notice to the other Parties if, as set forth in Section 15.3.2, the Parties are unable to agree to a remediation plan within thirty (30) days of FMCs preparation and presentation of such plan to SunTrust pursuant to the first sentence of Section 15.3.2, or if FMC or FMER, as applicable, shall be unable to complete and install adequate modifications (as set forth in the plan of remediation) within the deadline set forth in any such plan of remediation; provided, however, that if (a) subsequent to such thirty (30) day period a remediation plan shall be agreed, or if subsequent to such other deadline set forth in any such plan of remediation, FMC or FMER, as applicable, is able to complete and install adequate modifications in accordance therewith, as applicable, and (b) the Agreement has not been effectively terminated prior to such agreement or completion of modifications, then no Party may deliver a notice of termination under this Section 18.2.6 thereafter in connection with such subsequently remedied failure described in this subsection or Section 15.3.2.
18.2.7 Change to Requirements of Law. Any Party may terminate this Agreement, or a Service provided hereunder, as applicable, upon written notice to the other Parties, if, following a publication by a Governmental Authority of a change to Requirements of Law, a Party is unable to comply with the change within a reasonable timeframe and in a manner reasonably agreeable to the other Parties; provided, however, that before any Party may terminate under this Section 18.2.7, the Parties shall cooperate in good faith to agree upon a reasonable timeframe in and methodology in and by which the affected Party or Parties is expected to come into compliance with the new Requirements of Law. Notwithstanding anything herein to the contrary, termination under this Section 18.2.7 shall be effective only to the extent of those Services affected by the change to Requirements of Law.
18.2.8 Discontinuation of Private Student Loan Origination. SunTrust may terminate the Loan Processing Services upon sixty (60) days written notice to the other Parties if it intends, in good faith, to discontinue all of its origination and funding of postsecondary private student loans; provided that (a) SunTrust shall cease marketing, originating, and funding private education loans, within thirty (30) days of the effective termination date except as required to fulfill its obligations under this and any other agreement between SunTrust, FMC, and FMER; and (b) SunTrust shall not market, originate, or fund any private education loan, except as required to fulfill its obligations under Section 18.3 of this Agreement and any similar provision of any other agreement between SunTrust, FMC, and FMER, until the earlier of (x) twenty-four (24) months from the effective termination date of this Agreement, or (y) September 30, 2017, unless otherwise agreed to by the Parties in writing. The provisions of this Section 18.2.8 shall survive termination of this Agreement. Nothing in this Section 18.2.8 shall prohibit SunTrust from providing a source of funds by means of a line of credit or other means to non-affiliated, commercial entities which may use such funds to make postsecondary private student loans, or from engaging in or participating in the acquisition or securitization of postsecondary private student loans. For the avoidance of doubt, this Section 18.2.8 does not apply in any manner whatsoever to private consolidation loans.
18.2.9 Cash Deficiency. SunTrust may terminate this Agreement if, following the Thirteenth Amendment Effective Date, (a) FMC files with the Securities and Exchange Commission two consecutive periodic reports on Form 10-Q or Form 10-K, as applicable, where the total dollar value of cash, cash equivalents, and short-term investments (collectively, Cash) reported on its consolidated balance sheet for the most recent three month period that is the subject of the report equals less than [**] dollars ($[**]),
9
and (b) SunTrust provides to the other Parties written notice of termination under this Section 18.2.9 within ninety (90) days of the date that the second consecutive periodic report was actually filed with the Securities and Exchange Commission (such ninety (90) day period, the Cash Deficiency Cure Period); provided, however, that if during the Cash Deficiency Cure Period FMC furnishes to SunTrust either: (i) a consolidated balance sheet for any month occurring during the Cash Deficiency Cure Period reflecting, as of such months end, a total dollar amount of Cash that is greater than or equal to [**] dollars ($[**]), (ii) a certification by FMCs Chief Financial Officer that, as of any month-end occurring during the Cash Deficiency Cure Period, FMCs total dollar amount of Cash was greater than or equal to [**] dollars ($[**]), or (iii) (1) either (A) a consolidated balance sheet for the month immediately following the last month of the most recent three month period that is the subject of the second consecutive report, or (B) a certification by FMCs Chief Financial Officer as the last day of such month, reflecting a month-end total dollar amount of Cash that was greater than or equal to [**] dollars ($[**]), and (2) a certification from FMCs Chief Financial Officer that FMCs total Cash on the date that the second consecutive report was actually filed totaled an amount greater than or equal to [**] dollars ($[**]), then any notice of termination provided by SunTrust shall be rendered ineffective, and SunTrust may no longer terminate the Agreement under this Section 18.2.9 for the applicable Cash Deficiency Cure Period. Except as otherwise provided herein, termination under this Section 18.2.9 shall be effective as of the day that immediately follows the final day of the applicable Cash Deficiency Cure Period. Notwithstanding any of the foregoing, if at any time during the Term, FMC files with the Securities and Exchange Commission a quarterly report on Form 10-Q or annual report on Form 10-K where the total dollar value of Cash reported on its consolidated balance sheet for the three period that is the subject of the report is less than [**] dollars ($[**]), SunTrust may terminate this Agreement upon written notice to the Parties within ninety (90) days of the date on which such report is actually filed without regard to any Cash Deficiency Cure Period set forth in this Section 18.2.9. Notwithstanding the public availability of such filings with the Securities and Exchange Commission, FMC shall provide notice of and copies of filings described in this Section 18.9 to SunTrust no later than three (3) Business Days after the start of any Cash Deficiency Cure Period.
18.2.10 Change of Control. If FMC or SunTrust undergoes a Change in Control, the other Party may elect to terminate Loan Processing Services upon sixty (60) Business Days prior written notice; provided, however, that prior to delivering such notice, the Party considering such termination shall meet with representatives of the successor entity and engage in good faith negotiations for the continuation of this Agreement upon mutually acceptable terms and conditions.
9. Compensation. The Compensation Schedule as previously set forth in the Twelfth Amendment is hereby amended by deleting Exhibit B to the Twelfth Amendment in its entirety and inserting the changes to the Compensation Schedule set forth in Exhibit A attached hereto in place thereof and substitution therefor.
10. Multiple Counterparts. This Thirteenth Amendment may be executed in multiple counterparts in wet signature of a Party, each of which shall be deemed an original for all purposes and all of which shall be deemed, collectively, one agreement. The Parties may exchange the signed documents electronically, and any reproduction of the transmitted documents meeting the requirements of the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. §1700 et. seq. (E-SIGN) will constitute an original and be deemed an Electronic Record as defined by E-SIGN. Notwithstanding any contrary provisions of state law, each Party agrees that the effectiveness, validity, and enforceability of the Electronic Records will be governed by E-SIGN.
11. GOVERNING LAW. THIS THIRTEENTH AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE
10
THAT WOULD CAUSE THE APPLICATION OF LAWS OF ANY JURISDICTION OTHER THAN TO THOSE OF THE STATE OF GEORGIA. EACH PARTY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS THIRTEENTH AMENDMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY SUCH RIGHTS OR OBLIGATIONS.
12. Permitted Filing. Each Party may file this Thirteenth Amendment (with redactions as permitted by Requirements of Law) with the appropriate state or federal regulators, including the Securities and Exchange Commission, as required by such regulators.
13. Transition. This Thirteenth Amendment shall be effective as of the Thirteenth Amendment Effective Date unless otherwise stated herein.
14. Full Force and Effect. Except as amended in this Thirteenth Amendment, the Agreement remains in full force and effect according to its terms.
[Remainder of page intentionally left blank]
11
Execution Copy
IN WITNESS WHEREOF, the Parties hereto have caused this Thirteenth Amendment to be executed by their respective officers, being first duly authorized, as of the day and year first above written.
SUNTRUST BANK | ||
By: | /s/ H. Darrall Loggins | |
Name: | H. Darrall Loggins | |
Title: | Group Vice President |
THE FIRST MARBLEHEAD CORPORATION | ||
By: | /s/ Seth Gelber | |
Name: | Seth Gelber | |
Title: | President and Chief Operating Officer |
FIRST MARBLEHEAD EDUCATION RESOURCES, INC. | ||
By: | /s/ Seth Gelber | |
Name: | Seth Gelber | |
Title: | President |
Execution Copy
EXHIBIT A
Compensation Schedule
VIII. | For Custom Choice Applications submitted for credit after 12:00 AM ET on December 13, 2013 through and including May 31, 2014, the following FMC Compensation Schedule shall be in effect for Custom Choice Fixed Rate Loans and Variable Rate Loans. For the avoidance of doubt, this FMC Compensation Schedule does not reflect the [**]% reduction to be applied on the Thirteenth Amendment Effective Date as set forth in the definition of FMC Share of Portfolio Yield herein: |
[**] |
[**] | [**] | ||||||||||||||||||||||||||||||||||
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] |
IX. | For Program Applications other than Graduate Business School Applications submitted for credit after 12:00 AM ET on June 1, 2014 through and including July 31, 2014, the following FMC Compensation Schedule shall be in effect for Fixed Rate Loans and Variable Rate Loans: |
[**] |
[**] | [**] | ||||||||||||||||||||||||||||||||||
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] |
A-1
X. | For Program Applications other than Graduate Business School Applications submitted for credit after 12:00 AM ET on August 1, 2014 and thereafter, the following FMC Compensation Schedule shall be in effect for Fixed Rate Loans and Variable Rate Loans: |
[**] |
[**] | [**] | ||||||||||||||||||||||||||||||||||
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | |||||||||||||||||||||||||||
[**] |
[**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] | [**] |
XI. | For Graduate Business School Program Applications submitted for credit on or after February 28, 2014 up to and including May 31, 2014, the following FMC Compensation Schedule shall be in effect for Variable Rate Loans and Fixed Rate Loans. For the avoidance of doubt, this FMC Compensation Schedule does not reflect the [**]% reduction to be applied on the Thirteenth Amendment Effective Date as set forth in the definition of FMC Share of Portfolio Yield herein: |
[**] |
[**] | [**] | ||||||||||||||
[**] | [**] | [**] | ||||||||||||||
[**] |
[**] | [**] | [**] | [**] | ||||||||||||
[**] |
[**] | [**] | [**] | [**] |
XII. | For Graduate Business School Program Applications submitted for credit on or after 12:00 AM ET on June 1, 2014, the following FMC Compensation Schedule shall be in effect for Variable Rate Loans and Fixed Rate Loans: |
[**] |
[**] | [**] | ||||||||||||||
[**] | [**] | [**] | ||||||||||||||
[**] |
[**] | [**] | [**] | [**] | ||||||||||||
[**] |
[**] | [**] | [**] | [**] |
A-2
Exhibit 21.1
THE FIRST MARBLEHEAD CORPORATION
The following is a list of the direct and indirect subsidiaries of The First Marblehead Corporation.
Name of Subsidiary |
Jurisdiction of Incorporation or Organization | |
First Marblehead Education Loan Services LLC (d/b/a Cology LLC) |
Delaware | |
First Marblehead Education Resources, Inc. |
Delaware | |
The National Collegiate Funding II, LLC |
Delaware | |
Union Federal Savings Bank |
United States | |
UFSB Private Loan SPV, LLC |
Delaware | |
FM Loan Origination Services, LLC |
Delaware | |
FM Systems LLC (d/b/a Tuition Management Systems LLC) |
Delaware |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The First Marblehead Corporation:
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-192410, 333-177935, 333-163141, 333-153245, 333-129674 and 333-110523) of The First Marblehead Corporation of our reports dated September 10, 2014, with respect to the consolidated balance sheets of The First Marblehead Corporation and subsidiaries as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders equity (deficit) and cash flows for each of the years in the three-year period ended June 30, 2014, and the effectiveness of internal control over financial reporting as of June 30, 2014, which reports appear in the June 30, 2014 annual report on Form 10-K of The First Marblehead Corporation.
/s/ KPMG LLP |
Boston, Massachusetts September 10, 2014
|
Exhibit 31.1
CERTIFICATION
I, Daniel Meyers, certify that:
1. | I have reviewed this Annual Report on Form 10-K of The First Marblehead Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: September 10, 2014 |
/s/ Daniel Meyers |
Daniel Meyers |
Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Alan Breitman, certify that:
1. | I have reviewed this Annual Report on Form 10-K of The First Marblehead Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: September 10, 2014 |
/s/ Alan Breitman |
Alan Breitman |
Managing Director and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of The First Marblehead Corporation (the Company) for the fiscal year ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Daniel Meyers, Chairman and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: September 10, 2014 | /s/ Daniel Meyers | |||
Daniel Meyers | ||||
Chairman and Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to The First Marblehead Corporation and will be retained by The First Marblehead Corporation and furnished to the SEC or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of The First Marblehead Corporation (the Company) for the fiscal year ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Alan Breitman, Managing Director and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: September 10, 2014 | /s/ Alan Breitman | |||
Alan Breitman | ||||
Managing Director and Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to The First Marblehead Corporation and will be retained by The First Marblehead Corporation and furnished to the SEC or its staff upon request.
!,;]'=F+GE#\*DJ1,B=0?!GIP9M+=E(UK@E,;G?3?[M"<6<,"E">2;
MKP\_AJLLAP&`P&`P&`P&`P&`P&`P&`P/_]+W\8#`8#`8#`8#`8#`8#`8#`8#
M`8&BW:=_6Y1S6-36+-$W!,5SQUW:+LO?%ZDI\;9)2]6()-7)4>:!-2IE?TSG
M*''1;B2M6M@2R`A,`0]-4=9QNHU2=4[)"22E2@5NR#K
M&[;&@\]J)H@;G:;9$9!3/0%I2TVJJJA]C3+0:V>^?4;">JCL^$E5I&M,VV2Y
M;/3HR1N!RG9!?IZ\N]8(CBN-<]>.ZR#5^=-HNTNTO>E;;VY0V3,AT;>'?H
MY"X&%N43JW=C&WM6VL2C02'9#U9J(W:E,@'M*%34B$I'W+,U_-;/9SM94>K%0*P)DRR>5Z@J
MN:OI[(T6%.H;&(U6L%;A*1R.QY0\MK,VHT>DCB M1I#+X\[1H;_9DV/E"0"9T\Q1R4"`8]ISC3-5+
MRA%QX* 9?[4*3P")
M9M,`TD1@KG:_1/KRPYQI08Q\(]BLR`I"4L`_64EYNK!E`(T1>O27(I9T:DFZ
M724L0C5`@,AWI%EB\-"'Y`"%;H!MON3I.-ITB^%4;R['(D[O"N--%BW?W'!&
M-$HDZ(H@2J.-D-@$,FA\GDB !JVD\@=&>J-3Y][UZ>@JBO_47\]BYT7GZBS#]!;8_G%&?O/BH]HZ]B]CZB
MS#]!;8_G%&?O/BH]HZ]B]CZBS#]!;8_G%&?O/BH]HZ]B]CZBS#]!;8_G%&?O
M/BH]HZ]B]CZBS#]!;8_G%&?O/BH]HZ]B]CZBS#]!;8_G%&?O/BH]HZ]B]CZB
MS#]!;8_G%&?O/BH]HZ]B]CZBS#]!;8_G%&?O/BH]HZ]B]CZBS#]!;8_G%&?O
M/BH]HZ]B]CZBS#]!;8_G%&?O/BH]HZ]B]CZBS#]!;8_G%&?O/BH]HZ]B]CZB
MS#]!;8_G%&?O/BH]HZ]B]EF%8]G?,!``4#8OROMF5"4&B>:4^,Z?M+4>D996
MM77[3X9MOV?LSQ#ZGJZ!X;\OCK%1[1?SV+F^&%Y^HLP_06V/YQ1G[SXJ/:.O
M8O8^HLP_06V/YQ1G[SXJ/:.O8O8^HLP_06V/YQ1G[SXJ/:.O8O8^HLP_06V/
MYQ1G[SXJ/:.O8O8^HLP_06V/YQ1G[SXJ/:.O8O8^HLP_06V/YQ1G[SXJ/:.O
M8O8^HLP_06V/YQ1G[SXJ/:.O8O8^HLP_06V/YQ1G[SXJ/:.O8O8^HLP_06V/
MYQ1G[SXJ/:.O8O8^HLP_06V/YQ1G[SXJ/:.O8O8^HLP_06V/YQ1G[SXJ/:.O
M8O8^HLP_06V/YQ1G[SXJ/:.O8O99E=CV=IZ9PH:!L44?$G=MOQBEYI3XH6J"
M%%\$TV:+NO2;9`Q;4>Y]0(M^&@>7P_-XJCVCKV+G1>?J+,/T%MC^<49^\^*C
MVCKV+V/J+,/T%MC^<49^\^*CVCKV+V/J+,/T%MC^<49^\^*CVCKV+V/J+,/T
M%MC^<49^\^*CVCKV+V/J+,/T%MC^<49^\^*CVCKV+V/J+,/T%MC^<49^\^*C
MVCKV+V/J+,/T%MC^<49^\^*CVCKV+V/J+,/T%MC^<49^\^*CVCKV+V/J+,/T
M%MC^<49^\^*CVCKV+V/J+,/T%MC^<49^\^*CVCKV+V/J+,/T%MC^<49^\^*C
MVCKV+V/J+,/T%MC^<49^\^*CVCKV+V?($WL-R>(VWH:=F$>;U3V`N2O ^JX
M W*U.DXF1X3^V9*_.$KWOW]U
MY#_KE'H'''0Z:5T+OYW:4*JCIB4,C+]TV-R
MP13([@VET0CVL'4IM*P78@EU1KK(1A;X[\966NWUP!P=DBP,U1P9QG9<6D[#
MYRT6G5%.8?"A29(G(":(+0=ZFQ#`6,S0K+5Y@[H=4D`99G(:X^+QU,V-T2?)
M8BE3>VN[GYI#7:<%R".R22HTR
M&!.#B2.,ORY[2SD(U"02257L;ZBL6N$81$#,#I.N(K.,IE!BO?X[T$:K>M!%O>"O
MICO+=U7'+9DWQ*Z3CTSW+JM5V8T(]0V+!A3P6T.L,;7J047:M9SVP8G.*A'\
M[H!I"G\U!+0$K$:DXH0%)R=`)B.2.*WORZ%,%GUJS%YLHYM;YNNBC,V.=>U:
MPU^,E3TBDK1M50Z1-1J^7/1J".$"*-TYEEZ,T>8;X>J$K88M1P9@Q]S/SE&G
M)X=*;;F%U=HW`)55;0=:`W0J9-<_GTGKU$1(!,]>K)&PO:)PBYB_;
Y
M:@YX<%+,_%':\"V],UN28P&_-M<`7Y,+ADA2JXS)5&-'L-9HX0O$`]Z\<(NV`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`
MP&`P&`P&`P&`P&`P&`P/_]#V),_V]>?FI-U"C/,LA^(ZPALLK:?"E%DRN3JX
MY74W85S+(H=7ZV0.#FHC;8J-=5*D`_$X\G?MTX1Z2(42<@MSA<)A]OSF:?S&
M43"91=_?]S.!NL$DD663"0%PEQT]U.;0[I,Q1I(L3(R;"54N>.,_%R]A/+:Q
M>4&@FZ":$7*>*3I*&4+$%<0AJB3.@7>3/TTD\FFLC9))Y&Z
MF#5N3FJ"442'?@`HE,0446`!980Z)Q0_VUQ+3??5-I:-O)5-$D+231DG91L$
M>T#`]_&V!`]-R$`USBROJ?:':=]/]0OT-"$+0=Z%KPWK98FLPZT^'OL9<6
`@B#OQT((M;\-ZW_'`US?.1>:WMT52`JGXG$I8M'ZJN_`('-UM2)/]R+DY9?X:"5,4PM[UH0A"%X[V+V/-VA%P[\Q?,U
MV!WL/YBC+/YI5)B=:%L?E),#U.E=U?AK6@AV:VE#%OQV(K7X:&$971UM:M/5
M9.IA(>4K897>,1U4M0OZ597MFUD-X\@"TPE`:XGRZWCF-.I.#LX9D50FF`#L
M(-!%O6]"(OF@2PN\IA6E?3F>R>T^<8XLA,)D4S35_;=4=!\X3*:&L#(J>TL2
MC2"]'6(.0Y')-)P)T99:!6=YSP#T08'\-Q:=J+#(X]*FTEYB[\S21G4?^KNK
M"Z(7AM/_`"`,_L5S>>H2F_V9@1?E%O\``6M_[=965YP&`P&`P&`P&`P&`P&`
MP&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P&`P/__1]_&`P&`P(GIC_![Q
M_FQ?7^N=BYK]@>C)'$9@PN\6E,>7RV#@0OLC;$.?I"6Y]*4S7-*2I"7MM
M]@PL%;%7*4U.L?\`,A$HT\+]74OVHVI&>3XI$_D`'^T\XO@E*JJ_;:FJ^MZK
M95JYR9ZS@4/K]I<73:?;DO;89'FZ.(5KCM(2G2[7*DK:`9WIE@+]06_*$.O#
M6B,]P&`P&`P&`P&`P&!H=T/P#6_0UF*K5<9[8\#D+G$HK''Q+"#H@G;WUVK0
M%HF5#+UJMXBCM)V]ZKAQN-]4%`;7)`F==&D$.):I,G`3LL33,IUR!'Y$^,4F
M@MC3VG'^(:24#2T"<8/[V>(!NPX2HIW!Y63`8#`8#`8#`__5]_&`
MP&`P&`P&`P&`P&`P&`P&`P&!C#O"HD_R&)2UZCC.Z2:!*'E7"WU*6:8E
MJC36$P0(^YBVT+@@3.90#E*(5%6["YW+Y!$6)$[Q^K)Y:+@J<$R,^+P1PK%O
M?6U,>C6*379:HLVQJZC1C>C.3`3F!3N*A5LY07LLD96C32B(;N^S)NV\B]`6
MBW1:7T]/(K1USR>/M4M/K]UDT;?HM!Y(XL#R:.#2RQ84H_OJ`E60`*]5KR>4
M)Y81>