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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 001-31825

THE FIRST MARBLEHEAD CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of April 30, 2004, the registrant had 61,914,110 shares of Common Stock, $0.01 par value per share, outstanding.

THE FIRST MARBLEHEAD CORPORATION

Table of Contents

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PART I. FINANCIAL INFORMATION

Item 1—Financial Statements

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)   Nature of Business and Summary of Significant Accounting Policies

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of The First Marblehead Corporation (FMC, and together with its subsidiaries, the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Interim results are not necessarily indicative of results to be expected for the entire fiscal year. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2003 filed as Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2003. Certain prior period amounts have been reclassified to conform with current period presentation.

Student Loan Market Seasonality and Revenue Related to Securitization Transactions

        Origination of student loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach of tuition payment dates. In general, the Company processes the greatest application volume during the summer months, as students and their families seek to borrow money in order to pay tuition costs for the fall semester or the entire school year. The Company also tends to process increased volume of loan applications during November and December, as students and their families seek to borrow money to pay tuition costs for the spring semester. This seasonality of loan originations impacts the amount of processing fees from The Education Resources Institute, Inc. (TERI) that the Company earns in a particular quarter.

        Consistent with the Company's past practice of conducting securitization transactions in its second and fourth fiscal quarters, the Company did not conduct a securitization transaction during the first or third quarters of either fiscal 2004 or fiscal 2003. The securitization conducted in the second quarter of fiscal 2003 included an acquisition fund that allowed for the purchase of student loans during the third quarter of fiscal 2003, resulting in securitization revenues during the third quarter of fiscal 2003. The securitization conducted in the second quarter of fiscal 2004 did not include such an acquisition fund, and therefore, during the third quarter of fiscal 2004, the Company did not generate any structural advisory fees or residuals from new securitization transactions.

Initial Public Offering

        In September 2003, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission registering 14,375,000 shares of the Company's common stock, including:

•

6,875,000 shares offered by the Company;



•

5,625,000 shares offered by the Company's selling stockholders;



•

1,031,250 shares that the underwriters had the option to purchase from the Company to cover over-allotments; and

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•

843,750 shares that the underwriters had the option to purchase from certain selling stockholders to cover over-allotments.

        All of the 14,375,000 shares were sold on November 5, 2003 at a price to the public of $16.00 per share. Net proceeds of the initial public offering to the Company, after underwriting discounts and offering expenses, were approximately $115.1 million. The Company did not receive any of the proceeds of the sale of the shares sold by the selling stockholders.

Concentrations

TERI

        In its role as guarantor in the private education lending market, TERI agrees to reimburse lenders for unpaid principal and interest on defaulted loans. TERI is the exclusive provider of borrower default guarantees for our clients' private student loans, with limited exceptions. As of March 31, 2004, TERI had a Baa3 counterparty rating from Moody's Investors Service, which is the lowest investment grade rating, and an insurer financial strength rating of A+ from Fitch Ratings. If these ratings are lowered, the Company's clients may not wish to enter into guarantee arrangements with TERI. In addition, the Company may receive lower structural advisory fees because the costs of credit enhancement for the asset-backed securitizations that the Company structures could increase.

PHEAA

        There are currently seven loan servicers for newly generated TERI-guaranteed loans, with three of these servicers servicing a majority of the loans we facilitate. Most of our clients enter into a servicing agreement with Pennsylvania Higher Education Assistance Agency (PHEAA) that governs the servicing of their loans prior to securitization. These arrangements allow the Company to increase the volume of loans in its clients' loan programs without incurring the overhead investment in servicing operations. As with any external service provider, there are risks associated with inadequate or untimely services. In addition, if the Company's relationship with PHEAA terminates, the Company would either need to expand or develop a relationship with another TERI-approved loan servicer, which could be time-consuming and costly.

Significant Customers

        During the three and nine month periods ended March 31, 2004, processing fees from TERI represented approximately 71% and 23%, respectively, of total service revenue. Over the nine month period ended March 31, 2004, securitization fees from the December 2003 securitization through The National Collegiate Student Loan Trust 2003-1 (NCSLT 2003) represented approximately 70% of total service revenue. See Note 3—Service Receivables. The Company did not recognize more than 10% of total service revenue from any other customer.

Critical Accounting Policies and Estimates

        The preparation of the Company's financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors, and actual results may differ from these estimates under varying assumptions or conditions.

        On an ongoing basis, the Company evaluates its estimates and judgments, particularly as they relate to accounting policies that the Company believes are most important to the portrayal of the

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Company's financial condition and results of operations. The Company regards an accounting estimate or assumption underlying its 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 its financial condition or operating performance is material.

These accounting policies involve the recognition and valuation of the Company's service revenue related to the securitizations that it structures for its clients, as well as the valuation of goodwill and intangible assets. The Company also considers its policy with respect to the determination of whether or not to consolidate the securitization trusts that it facilitates to be a critical accounting policy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Estimates".

(2)   Stock Options

        The Company uses the intrinsic value method to account for stock options and provides pro forma net earnings disclosures as if the fair-value-based method had been applied.

        For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over the vesting period of the options. The Company's consolidated pro forma net income (loss) and net income (loss) per share for the three and nine month periods ended March 31, 2004 and 2003, had the Company elected to recognize compensation expense for the granting of options under

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Statement of Financial Accounting Standards (SFAS) No. 123 using the Black-Scholes option pricing model, are as follows:

        The fair value of the options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and nine month periods ended March 31, 2004 and 2003:

*

No options granted during this period.

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        The Company accounts for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

(3)   Service Receivables

        Structural advisory fees and residuals receivables represent the present value of additional structural advisory fees and residuals expected to be collected over the life of the student loan, net of prepayment, default and recovery estimates. The fees are paid to the Company from the various separate securitization trusts established by The National Collegiate Trust (NCT trusts), from The National Collegiate Master Student Loan Trust I (NCMSLT), and from NCSLT 2003. Processing fees receivable from TERI represents amounts due from TERI for expenses incurred by First Marblehead Education Resources, Inc. (FMER), a wholly owned subsidiary of FMC, on TERI's behalf.

        The Company did not conduct any securitization transactions in its first or third quarters of either fiscal 2004 or 2003. The Company does, on a quarterly basis, update its estimate of the present value of its structural advisory fees and residuals receivables, to reflect the passage of time, any change in discount rates used to estimate their present value, and any changes to the trust performance metrics that the Company considers in its present value estimates, such as default, recovery, prepayment and forward London Interbank Offered Rate (LIBOR) rates.

        For the NCT trusts and NCMSLT, the Company made no changes in its assumptions regarding default rates, prepayment rates and recovery rates in the first nine months of either fiscal 2004 or 2003. For the private label loans securitized in December 2003 in NCSLT 2003, the Company used a default rate assumption of 9.06%, a prepayment rate assumption of 7%, and a recovery rate assumption of 40%. The Company made no changes in its assumptions regarding these rates in the third quarter of fiscal 2004.

        The Company uses an implied forward one-month LIBOR curve to estimate trust cash flows. During the nine month period ended March 31, 2004, the rates along the implied forward one-month LIBOR curve decreased between 4 and 35 basis points over the next 20 months and increased up to 122 basis points thereafter. These increases in rates resulted in an increase in the average life of the underlying trust assets, thereby having an effect of increasing the fair market value of the structural advisory fees and residuals receivables during the period. The impact of changing LIBOR rates in the nine month period ended March 31, 2003 did not have a material impact on the fair market value of these receivables during that period.

        The Company bases the discount rate that it uses to calculate the present value of its additional structural advisory fees on the 10-year U.S. Treasury rate plus 200 basis points. From July 1, 2003 to March 31, 2004, the discount rate used increased by 51 basis points from 5.33% to 5.84%. From July 1, 2002 to March 31, 2003, the discount rate used decreased by 103 basis points from 6.86% to 5.83%. A decrease in the 10-year U.S. Treasury rate has the effect of increasing the fair market value of the Company's structural advisory fees receivable, while an increase in the rate has the opposite effect on the Company's estimate of their fair market value. In determining an appropriate discount rate for valuing residuals, the Company reviews the rates used by student loan securitizers, as well as rates used in the much broader commercial mortgage-backed securities, or CMBS, market. The Company believes that CMBS residuals are valued at 800 to 1200 basis points over comparable maturity U.S. Treasury Notes, with 15-year maturity asset pools valued toward the lower discount rate and 30-year maturity asset pools valued more toward the higher discount rate. The Company believes that the 12% discount rate it uses is appropriate given the maximum 24-year life of the trust assets and residuals.

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        The following table summarizes the changes in the structural advisory fees receivable for the nine month periods ended March 31, 2004 and 2003:

        The following table summarizes the changes in the residuals receivable for the nine month periods ended March 31, 2004 and 2003:

        The principal balance of loans facilitated and available to the Company for later securitization at March 31, 2004 and June 30, 2003 totaled $731.6 million and $160.4 million, respectively.

        The effect on the fair market value of the structural advisory fees and residuals receivables (excluding the $8.5 million up-front structural advisory fee receivable that the Company expects to receive in July 2004) based on variations of 10% or 20%, except for the forward LIBOR rates, which are based on variations of 1% and 2% from the forward LIBOR rates at March 31, 2004, from the assumed levels for each key assumption are as follows: