First Marblehead Conference Call Report
Board: First Marblehead Corp.

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By Metal27
April 27, 2007

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I posted this earlier on the HG board, should have posted it here as well:

First, I have to apologize--there were several distractions before and during this call, and the quality of my reporting suffered. Please point out my errors!

The FMD crew consisted of Jack Kopnisky, John Hupalo and Ken Klipper and there were questions from at least seven analysts by my count, including Mr. Snowling. The FMD execs seemed more comfortable, more forthcoming about details, while the analysts also seemed more civil in their questions. I believe one or two actually complimented FMD on their quarter, something I don't remember having heard before.

Kopnisky reviewed the quarter and YTD amounts, focusing mostly on the latter--revenues up 63%, earnings up 78%, EPS up 81% YTD, he said. He then said they had changed two key assumptions in valuing their residuals. They increased the assumed prepayment rate from 7% to 8% and they went to a blended discount rate that resulted in a net reduction in the rate. The net effects of these two changes in assumptions in the third quarter were to reduce earnings by $16M, or $.11 per share. (Estimates consensus was $.83-.86, I believe, but they reported only $.75 after making these changes.)

Kopnisky reiterated they intend to repurchase 6.6M shares, representing the 10M additional just authorized, net of the remaining unpurchased under the prior authorization.

They added twelve new clients, un-named except for e-loan. They also "expanded eleven existing relationships", who doubled their marketing budgets w/FMD and extended their contracts. He said that while JPM/BAC revenues had increased, they now comprise only 44% of FMD volume, down from 65% in the prior year.

Hupalo followed, noted that once again their third quarter is their "second most active". He said the increase in the prepayment rate assumption resulted from the continuing inversion of the yield curve, which they do not see changing.

He then explained that they have decided the 12% discount rate used until this quarter is too conservative. They are now looking at each securitization to identify the portions that are "investment grade" (the BBB grade, I believe), which they now discount at LIBOR plus 175 basis points. The remainder are considered non-investment grade and are now discounted at 13%. Later he told a questioner all securitizations now start at 13%; as the pools mature and they identify the BBB portion, they apply the new logic to that portion.

Kopnisky then took over to comment on the SLM transaction, saying in effect that there will be no real change in the future, just as all the participants have already disclosed in SEC filings and their public comments. He also stressed FMD's very high overall growth rates since going public in 2003 and that they would continue. Their website shows this nicely if you go to the slide show accompanying the call.

Q & A:
Bear Sterns analyst Scott Korn asked for clarification about discount rate assumptions, was told they are evolving toward a market rate using 13% for new securitizations with "older trusts very much nearing payout" discounted using the LIBOR plus 175bp approach.

He asked about the pricing effect of Nelnet's new Code of Conduct, was told they have not seen much pricing pressure.

Korn wanted more on the prepayment rate changes, was told the "real driver is the inverted yield curve", for which they saw "no end in sight". They are developing/offering new products that they called "curve-driven". They said the effect of the change to an 8% assumption rate on earnings was "fairly nominal".

Snowling asked (what I think was his usual questions) about older pools, but I did not catch the whole thing, and the answer seemed to quiet him. He did also ask whether they were getting any "push-back" from banks starting to position themselves as "competitors instead of facilitators", was told they were not, that the opposite was happening. The "Ascribe" brand program was specifically mentioned as helping in this respect.

Other analysts asked:
Is the Grad Program having a negative impact on earnings? Answer was no.

Can they buy shares back from insiders? How many shares have they bought back, what is their plan for future buy-backs? Answer is yes they can buy back from insiders, but none have been bought from insiders. At this point Kopnisky (I think) took them on a tour of FMD's returns to shareholders from their IPO through the present, saying shares repurchased totaled $135M to date--$56M in 2005, $66M in 2006, $14M to date in 2007. Then he pointed out dividends to date have totaled $65M for a total to shareholders of $200M since 2003.

Michael Collum of Sequoia Investors asked about non-JPM/BAC growth, wanted some specifics. All they would say was they see growth of 20 to 30% annually, but that only 10% of students even know about student loans. They develop tailored multi-year marketing programs for all their clients, especially this group. They did say they want "no one group of clients to account for more than 25% of revenues" but weren't asked and didn't say when that might occur.

This analyst also asked why prepayments don't increase when short-term rates decline. They explained students only get "one bite at the student loan apple", can take advantage of forbearance and interest deferrals not offered elsewhere.

The last question, from another analyst, had to do with when the residuals would start producing cash. She was told that would start in the next two or three years. She also asked whether they might sell or resecuritize them. FMD said they might, or they might use them as a way to add to shareholder value (no specifics on that one).

That was it, except for a short wrap-up by Kopnisky, in which he reiterated that they will do a fourth securitization this quarter. I'm sure I mis-spelled some analysts' names and with all the racket going on where I was, probably missed more than just Snowling's question, but at least you get the flavor!


(MarketWatch reports the stock traded at $36 as I wrote this )
(with thanks to mpfd33)

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