FIRST MARBLEHEAD CORP - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - FIRST MARBLEHEAD CORP	a2196355zex-31_1.htm
EX-32.1 - EXHIBIT 32.1 - FIRST MARBLEHEAD CORP	a2196355zex-32_1.htm
EX-32.2 - EXHIBIT 32.2 - FIRST MARBLEHEAD CORP	a2196355zex-32_2.htm

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


(MARK ONE)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended December 31, 2009
OR
o		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 Incorporation or Organization)		04-3295311 (I.R.S. Employer Identification No.)
The Prudential Tower 800 Boylston Street, 34th Floor Boston, Massachusetts (Address of Principal Executive Offices)		02199-8157 (Zip Code)

Registrant's telephone number, including area code: (800) 895-4283

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 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 o No o

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. (Check one):


Large accelerated filer o		Accelerated filer ý		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of February 8, 2010, the registrant had 99,247,675 shares of Common Stock, $0.01 par value per share, outstanding.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

Table of Contents


Part I. Financial Information
	Item 1	—	Financial Statements
			Condensed Consolidated Balance Sheets as of December 31, 2009 and June 30, 2009	1
			Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2009 and 2008	2
			Condensed Consolidated Statements of Changes in Stockholders' Equity for the six months ended December 31, 2009 and 2008	3
			Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008	4
			Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2	—	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3	—	Quantitative and Qualitative Disclosures About Market Risk	54
	Item 4	—	Controls and Procedures	56
Part II. Other Information
	Item 1	—	Legal Proceedings	57
	Item 1A	—	Risk Factors	57
	Item 2	—	Unregistered Sales of Equity Securities and Use of Proceeds	81
	Item 4	—	Submission of Matters to a Vote of Security Holders	82
	Item 6	—	Exhibits	82
SIGNATURES				83
EXHIBIT INDEX				84

Table of Contents

Part I. Financial Information

Item 1—Financial Statements

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars and shares in thousands, except per share amounts)

			December 31, 2009			June 30, 2009

ASSETS
Cash and cash equivalents			$	399,016		$	158,770
Federal funds sold				162			14,326
Short-term investments, at cost				50,000			—
Investments held for sale				6,784			8,450
Education loans held for sale				99,089			350,960
Service receivables:
	Additional structural advisory fees			55,724			55,130
	Asset servicing fees			6,627			2,385
	Residuals			12,237			9,960

		Total service receivables		74,588			67,475
Property and equipment, net				13,504			19,929
Intangible assets, net				1,544			1,931
Other prepaid expenses				4,046			3,571
Mortgage loans held to maturity, net				8,446			9,515
Education loans held to maturity, net				3,848			—
Income taxes receivable				366			166,410
Net deferred tax asset				41,020			13,124
Other assets				5,571			6,869

		Total assets	$	707,984		$	821,330

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
	Deposits		$	144,953		$	154,462
	Education loan warehouse facility			228,900			230,137
	Accounts payable and accrued expenses			24,657			21,512
	Other liabilities			7,670			9,754

		Total liabilities		406,180			415,865
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01 per share; 20,000 shares authorized at December 31, 2009 and June 30, 2009; 133 shares issued and outstanding at December 31, 2009 and June 30, 2009				1			1
Common stock, par value $0.01 per share; 250,000 shares authorized at December 31, 2009 and June 30, 2009; 106,891 and 106,768 shares issued at December 31, 2009 and June 30, 2009, respectively; 99,248 and 99,125 shares outstanding at December 31, 2009 and June 30, 2009, respectively				1,069			1,068
Additional paid-in capital				433,516			431,461
Retained earnings				51,128			156,913
Treasury stock, 7,643 shares held at December 31, 2009 and June 30, 2009, at cost				(184,246	)		(184,246	)
Accumulated other comprehensive income				336			268

		Total stockholders' equity		301,804			405,465

		Total liabilities and stockholders' equity	$	707,984		$	821,330

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)

(dollars and shares in thousands, except per share amounts)

				Three months ended December 31,						Six months ended December 31,

				2009			2008			2009			2008
Service revenues:
	Additional structural advisory fees—trust updates			$	278		$	(29,513	)	$	641		$	(47,403	)
	Asset servicing fees:
		Fee income			1,777			—			3,879			—
		Fee updates			203			—			363			—

			Total asset servicing fees		1,980			—			4,242			—
	Residuals—trust updates				1,453			(69,082	)		2,277			(149,238	)
	Administrative and other fees				4,932			5,026			10,529			11,030

		Total service revenues			8,643			(93,569	)		17,689			(185,611	)
	Net interest income				1,501			7,474			5,941			14,612

		Total revenues			10,144			(86,095	)		23,630			(170,999	)
Non-interest expenses:
	Compensation and benefits				8,206			10,295			16,343			25,552
	General and administrative expenses				12,355			19,540			30,494			43,987
	Unrealized loss on education loans held for sale				10,688			29,303			134,614			50,530

		Total non-interest expenses			31,249			59,138			181,451			120,069

Loss before income taxes					(21,105	)		(145,233	)		(157,821	)		(291,068	)
Income tax benefit					(9,386	)		(51,846	)		(52,036	)		(104,785	)

Net loss				$	(11,719	)	$	(93,387	)	$	(105,785	)	$	(186,283	)

Loss per share:
	Basic			$	(0.12	)	$	(0.94	)	$	(1.07	)	$	(1.88	)
	Diluted				(0.12	)		(0.94	)		(1.07	)		(1.88	)
Weighted average shares outstanding:
	Basic				99,247			99,116			99,224			99,040
	Diluted				99,247			99,116			99,224			99,040

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(unaudited)

(dollars and shares in thousands)

		Non-voting convertible preferred stock issued				Common stock

						Common stock																Accumulated other comprehensive income, net of tax
						Issued				In treasury
						Issued				In treasury						Additional paid-in capital			Retained earnings					Total stockholders' equity
		Shares		Amount		Shares		Amount		Shares			Amount			Additional paid-in capital			Retained earnings					Total stockholders' equity
Balance at June 30, 2008			—	$	—		106,456	$	1,065		(7,570	)	$	(183,993	)	$	300,498		$	519,933		$	109	$	637,612
Comprehensive loss
	Net loss		—		—		—		—		—			—			—			(186,283	)		—		(186,283	)
	Accumulated other comprehensive income, net		—		—		—		—		—			—			—			—			86		86

Total comprehensive loss			—		—		—		—		—			—			—			(186,283	)		86		(186,197	)
	Issuance of preferred stock		133		1		—		—		—			—			125,857			—			—		125,858
	Net stock issuance from vesting of restricted stock units		—		—		308		3		(73	)		(253	)		(3	)		—			—		(253	)
	Stock-based compensation		—		—		—		—		—			—			4,230			—			—		4,230
	Tax expense from stock-based compensation		—		—		—		—		—			—			(2,250	)		—			—		(2,250	)

Balance at December 31, 2008			133	$	1		106,764	$	1,068		(7,643	)	$	(184,246	)	$	428,332		$	333,650		$	195	$	579,000

Balance at June 30, 2009			133	$	1		106,768	$	1,068		(7,643	)	$	(184,246	)	$	431,461		$	156,913		$	268	$	405,465
Comprehensive loss
	Net loss		—		—		—		—		—			—			—			(105,785	)		—		(105,785	)
	Accumulated other comprehensive income, net		—		—		—		—		—			—			—			—			68		68

Total comprehensive loss			—		—		—		—		—			—			—			(105,785	)		68		(105,717	)
	Stock issuance from vesting of restricted stock units		—		—		123		1		—			—			(1	)		—			—		—
	Stock-based compensation		—		—		—		—		—			—			3,039			—			—		3,039
	Tax expense from stock-based compensation		—		—		—		—		—			—			(983	)		—			—		(983	)

Balance at December 31, 2009			133	$	1		106,891	$	1,069		(7,643	)	$	(184,246	)	$	433,516		$	51,128		$	336	$	301,804

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)

(dollars in thousands)

				Six months ended December 31,

				2009			2008
Cash flows from operating activities:
Net loss				$	(105,785	)	$	(186,283	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization				7,293			9,735
	Deferred income tax benefit				(27,896	)		(102,174	)
	Stock-based compensation				3,039			4,230
	Unrealized loss on education loans held for sale				134,614			50,530
	Proceeds from the sale of education loans				121,585			—
	Loss on disposal of property and equipment				—			1,401
	Additional structural advisory fee distributions				47			1,504
	Goodwill impairment				—			1,701
	Change in assets/liabilities:
		Education loans held for sale			(8,199	)		(14,193	)
		Additional structural advisory fees			(641	)		47,403
		Asset servicing fees			(4,242	)		—
		Residuals			(2,277	)		149,238
		Other prepaid expenses			(475	)		6,224
		Income taxes receivable			166,044			(6,772	)
		Other assets			1,298			2,408
		Accounts payable and accrued expenses and other liabilities			2,804			(32,916	)

			Net cash provided by (used in) operating activities		287,209			(67,964	)
Cash flows from investing activities:
	Net change in federal funds sold				14,164			56,795
	Purchases of short-term investments				(50,000	)		—
	Proceeds from maturities of investments held for sale				1,734			24,148
	Purchases of investments held for sale				—			(26,900	)
	Purchases of property and equipment				(481	)		(291	)
	Net change in mortgage loans held to maturity				1,069			923
	Net change in education loans held to maturity				23			—

			Net cash (used in) provided by investing activities		(33,491	)		54,675
Cash flows from financing activities:
	Decrease in deposits				(9,509	)		(106,146	)
	(Payments for) proceeds from education loan warehouse facility				(1,237	)		2,764
	Increase in other short-term borrowings				—			50,000
	Payments for capital lease obligations				(1,743	)		(1,861	)
	Tax expense from stock-based compensation				(983	)		(2,250	)
	Issuance of non-voting convertible preferred stock, net				—			125,858
	Repurchase of common stock				—			(253	)

			Net cash (used in) provided by financing activities		(13,472	)		68,112

Net increase in cash and cash equivalents					240,246			54,823
Cash and cash equivalents, beginning of period					158,770			70,280

Cash and cash equivalents, end of period				$	399,016		$	125,103

Supplemental disclosures of cash flow information:
	Interest paid			$	4,512		$	10,189
	Income taxes paid				109			37,686
	Reclassification of education loans from held for sale to held to maturity				3,871			—

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

(dollars and shares in thousands, except per share amounts)

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

Nature of Business

Unless otherwise indicated or unless the context of the discussion requires otherwise, all references in these Notes to Unaudited Condensed Consolidated Financial Statements to "we", "us", "our" or similar references mean The First Marblehead Corporation (FMC) and its subsidiaries on a consolidated basis. These unaudited financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2009 included in our annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 3, 2009.

We offer outsourcing services to national and regional financial institutions and educational institutions for designing and implementing private education loan programs. In addition, we provide administrative and other services to securitization trusts that we have facilitated, asset servicing to the third-party owner of certain of those securitization trusts (NCSLT Trusts) and portfolio management services to a limited number of clients. Our subsidiary, Union Federal Savings Bank (Union Federal), is a federally chartered thrift that, prior to fiscal 2009, offered private education loans directly to consumers and continues to offer residential and commercial mortgage loans, and retail savings, money market and time deposit products. As a result of our ownership of Union Federal, we are a savings and loan holding company subject to regulation, supervision and examination by the U.S. Office of Thrift Supervision (OTS). Substantially all of our financial results have been derived from these activities, which are considered to be in a single industry segment for financial reporting purposes.

Prior to fiscal 2009, we structured and facilitated the securitization of private education loans generated by our clients through a series of bankruptcy remote, special purpose statutory trusts. Through the securitization process, the trusts obtained education loans from the originating lenders or their assignees, which relinquished to the trust their ownership interest in the loans. The debt instruments issued by the trusts to finance the purchase of these private education loans are obligations of the trusts, not obligations of us or the originating lenders or their assignees. For our past securitization services, we are entitled to receive additional structural advisory fees from the trusts over time. Effective March 31, 2009, we sold the trust certificate (Trust Certificate) of our subsidiary NC Residuals Owners Trust, formerly known as GATE Holdings, Inc., a statutory trust that owned certain certificates of beneficial ownership interests of the NCSLT Trusts. The NCSLT Trusts held substantially all of the private education loans previously securitized by us and guaranteed by The Education Resources Institute, Inc. (TERI), a not-for-profit organization. As a result of the sale, we are no longer entitled to receive residual cash flows, also known as residuals, from the NCSLT Trusts. However, we continue to be entitled to receive residuals from other trusts, and we are entitled to receive asset servicing fees for our services that support the purchasers' ownership of the Trust Certificate. In addition, during fiscal 2009, we began to receive service fees for stand-alone services for loan origination, default prevention and collections services.

Servicing Concentration

As of December 31, 2009, there were seven loan servicers providing services to trusts that we have facilitated, including processing deferment and forbearance requests, sending out account statements and accrual notices, responding to borrower inquiries, and collecting and crediting payments received from borrowers. As of December 31, 2009, Pennsylvania Higher Education Assistance Agency

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

(PHEAA) serviced a significant majority of the loans for which we facilitated origination. PHEAA also operates under the name American Education Services.

Business Trends, Uncertainties and Outlook

Asset-backed securitizations have historically been our sole source of permanent financing for clients' private education loan programs. Conditions of the debt capital markets generally, and the asset-backed securities (ABS) market specifically, rapidly deteriorated during the second quarter of fiscal 2008, and disruptions persisted, to a lesser extent, through February 9, 2010. Our business has been and continues to be materially adversely impacted by these market dynamics, including an inability to access the securitization market. We did not complete a securitization transaction during fiscal 2009 or the first six months of fiscal 2010, and we expect the structure and pricing terms in future financing transactions, if any, to be substantially less favorable than in the past. We have developed a new product offering that is designed to generate loan portfolios that originating lenders can choose to hold on their balance sheets indefinitely or for some limited period of time.

In addition, credit performance of consumer-related loans generally, and the private education loans held by us and the various securitization trusts we have facilitated, have been adversely affected by general economic conditions in the United States, including increasing unemployment rates. The loan portfolios held for sale and held by the NCSLT Trusts have experienced a higher level of defaults than we originally projected. We increased the projected weighted-average gross default rates for the NCSLT Trusts by 451 basis points between December 31, 2008 and 2009. Credit rating agencies have taken negative rating actions with respect to certain securitizations that we previously facilitated, including ratings downgrades announced by Standard & Poor's on December 30, 2009 with respect to subordinate ABS issued by four securitization trusts. The interest rate, economic and credit environments may continue to have a material negative effect on the estimated fair value of our service receivables and the education loans held for sale.

Our lender clients previously had the opportunity to mitigate their credit risk through a loan repayment guaranty by TERI. TERI guaranteed the education loans held by the NCSLT Trusts, and we historically received reimbursement from TERI for outsourced loan processing services we performed on TERI's behalf. In April 2008, TERI filed a voluntary petition for relief (TERI Reorganization) under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code). The TERI Reorganization has had, and will likely continue to have, a material negative effect on securitization trusts' ability to realize guaranty obligations of TERI, our client relationships, our facilitated loan volumes, the value of our service receivables, and our ability to realize fully the cost reimbursement obligations of TERI. See Note 6, "Commitments and Contingencies—TERI Reorganization—Challenge to Security Interests," for more information on the TERI Reorganization and its impact on our operations.

During fiscal 2009, we implemented a plan to adjust our business model and address some of the uncertainties facing us. We made major changes in senior management, significantly reduced our operating expenses and sold the Trust Certificate. The sale of the Trust Certificate, coupled with operating losses for fiscal 2009, generated a refund in October 2009 from the Internal Revenue Service for income taxes previously paid of $176,636 and is expected to eliminate certain future tax liabilities,

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

which would have had a material negative effect on our financial condition and liquidity. See Note 12, "Income Taxes," for additional information.

We significantly refined our product offerings and added fee-for-service offerings such as portfolio management and asset servicing during fiscal 2009. Our new Monogram product has been designed to provide prospective lenders with flexible product features intended to meet their desired risk control and return objectives, while also providing borrowers with some ability to configure the terms of their private education loans. The Monogram product, which was completed in August 2009 and had not been fully deployed to any clients as of February 9, 2010, also incorporates refinements to our origination process, including an enhanced application interface, an expanded credit decisioning model and additional disbursement and reporting capabilities. It has been designed to reduce our dependence on the securitization market in order to generate revenue, as well as our dependence on third-party credit enhancements. The success of the new product will be critical to growing and diversifying our revenues and client base.

During the second quarter of fiscal 2010, Union Federal sold approximately 88% of its portfolio of private education loans held directly for sale, which excludes loans held by Union Federal's subsidiary, UFSB Private Loan SPV, LLC (UFSB-SPV), for gross proceeds of $121,585. As a result of the sale, Union Federal achieved the loan concentration reduction imposed by the OTS in July 2009, and FMC was refunded a deposit in the amount of $30,000 that FMC had been required to maintain at Union Federal until such reduction had been achieved. In addition, during the second quarter, we announced that we had begun examining strategic alternatives for Union Federal, including a potential sale.

Our near term financial performance and future growth depend, in large part, on our ability to successfully market our new product and transition to more fee-based revenues. We are uncertain whether the market will accept the new product offering, particularly in the current economic environment where there has been a reluctance by many lenders to focus on their education lending business. As of February 9, 2010, Union Federal was not expected to participate as a program lender during fiscal 2010 in light of regulatory constraints. See Note 14, "Union Federal Regulatory Matters—Supervisory Agreement and Order to Cease and Desist," for additional details.

Summary of Significant Accounting Policies

Our accompanying unaudited condensed consolidated financial statements 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 these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the reported disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors. 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. Material

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

estimates that are particularly susceptible to change relate to the recognition of service revenues and the valuation of our service receivables and portfolio of private education loans held for sale. Interim results are not necessarily indicative of results to be expected for the entire fiscal year.

(a) Cash and Cash Equivalents; Short-term Investments

All highly liquid debt instruments with original maturities of three months or less on the date of purchase, and all funds invested in money market funds, are considered cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.

Investments with original maturities greater than three months and remaining maturities of less than one year are classified as short-term investments.

(b) Education Loans Held for Sale

Education loans held for sale and the related interest receivable are carried at the lower of cost or fair value. Fair value is evaluated on a quarterly basis. When available, the fair value is based on quoted market values. In the absence of readily determined market values, fair value is estimated by management based on the present value of expected future cash flows from the education loans held for sale. These estimates are based on historical and third-party data and our industry experience with the assumptions for, among other things, default rates, recovery rates on defaulted loans, prepayment rates, the proportion of buyer's equity to financing and the corresponding weighted-average cost of capital commensurate with the risks involved. During the second quarter of fiscal 2010, we retained an independent third party to assess the fair value of a portfolio of non-current private education loans held by Union Federal. We incorporated the estimates received from the third party and the sales price received by Union Federal for the sale of its portfolio of current loans in October 2009 in our estimate of the fair value of the private education loans held for sale at December 31, 2009. If readily determined market values became available, or if actual performance were to vary appreciably from management's estimates, the fair value of the education loans would need to be further adjusted, which could result in material differences from the recorded carrying amounts. We record changes in the carrying value of education loans held for sale and the related interest receivable, as well as the charge-off of interest income on loans greater than 90 days past due, in the statement of operations.

(c) Fair Value of Financial Instruments

The Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, of the Financial Accounting Standards Board (FASB) permits, but does not require, entities to measure many financial instruments and certain other items not specifically identified in other topics of the ASC, such as available-for-sale investments, at fair value. We have not elected to measure additional assets and liabilities at fair value.

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

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

valuation 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 1. Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges, as well as U.S. Treasury securities and U.S. Government and agency mortgage-backed securities that are actively traded in highly liquid over-the-counter markets.

Level 2. Model inputs are observable 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 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments, for which the model inputs are observable in the market or can be corroborated by market observable data. Examples in this category are certain variable and fixed rate non-agency mortgage-backed securities, corporate debt securities and derivative contracts.

Level 3. Inputs to the valuation methodology are unobservable but significant to the fair value measurement. Examples in this category include interests in certain securitized financial assets or certain private equity investments.

Fair value is applied to eligible assets based on quoted market prices, where available. For financial instruments for which quotes from recent exchange transactions are not available, fair value is based 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 used for current fair value calculations may not be indicative of net realizable value or reflective of future fair values. If readily determined 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. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or application of different assumptions to value certain financial instruments could result in a different estimate of fair value.

(d) Revenue Recognition

Additional Structural Advisory Fees. Additional structural advisory fees were earned for structuring and facilitating the securitization of the private education loans held by various securitization trusts, principally the NCSLT Trusts. We are entitled to receive these fees over time, based on the payment priorities established in the trusts' indentures. We generally become entitled to receive these additional fees, plus interest, once the parity ratio of trust assets to trust liabilities reaches a stipulated level, which ranges from 103.0% to 105.5%, or after all noteholders have been paid in full. The indentures relating to the securitization trusts specify certain circumstances (Trigger Events) upon the occurrence of which payments that would otherwise be due with respect to additional structural advisory fees and

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(dollars and shares in thousands, except per share amounts)

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

residuals would instead be directed to the holders of the notes issued by the trusts until the condition causing the Trigger Event ceases to exist or all notes, and related interest, are paid in full.

Additional structural advisory fees receivables are carried at fair value. In the absence of readily determined market values, we update our estimates of the fair value of additional structural advisory fees receivables on a quarterly basis, based on the present value of expected future cash flows. Our estimates reflect assumptions for discount rates commensurate with the risks involved and trust performance assumptions, including estimated operational expenses, the expected annual rate and timing of loan defaults and recoveries, TERI's obligation and ability to pay default claims and its use of recoveries to replenish the segregated reserve accounts pledged to the securitization trusts to secure its guaranty obligations (Pledged Accounts), the annual rate and timing of education loan prepayments, the trend of contractual and market interest rates over the life of the loan pool, including the forward London Interbank Offered Rate (LIBOR), the cost of funding outstanding auction rate notes, and the existence of Trigger Events. These assumptions are based on historical and third-party data, and our industry experience.

If readily determined 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. Changes to the value of these receivables are recorded in the statement of operations as additional structural advisory fees—trust updates. Our receipt of fees may be significantly delayed as a result of the TERI Reorganization and Trigger Events, thereby decreasing the estimated fair value of the receivables.

Asset Servicing Fees and Residuals. Until March 31, 2009, we had the right to receive a portion of the residuals, if any, generated by securitization trusts that we facilitated. This right was junior in priority to the rights of the holders of the ABS issued in the securitizations and additional structural advisory fees. As a result of the sale of the Trust Certificate in the third quarter of fiscal 2009, we are no longer entitled to residuals receivables from the NCSLT Trusts, but we continue to be entitled to receive residuals receivables from other trusts. We entered into an asset services agreement (Asset Services Agreement) with the third-party purchaser of the Trust Certificate in April 2009, pursuant to which we have agreed to provide certain services to the purchasers of the Trust Certificate to support their ownership of the NCSLT Trust residuals, including analysis and valuation optimization services and services relating to funding strategy. As compensation for our services, we are entitled to a monthly asset servicing fee based on the aggregate outstanding principal balance of the loans owned by the NCLST Trusts. Our receipt of the fees, however, is contingent upon distributions available to the third-party owner of the Trust Certificate. See Note 4, "Service Receivables and Related Revenues," for further detail regarding the sale of the Trust Certificate and related fees.

The fair values of asset servicing fees and residuals receivables were estimated by management using the same assumptions used for additional structural advisory fees receivables, with the exception of the discount rate which was adjusted to be commensurate with the risks involved. Asset servicing fees earned for the period are recorded as asset servicing fee income, on a net present value basis, in the statement of operations. Changes in the fair value of asset servicing fees and residuals receivables are recognized as asset servicing fee updates and residuals—trust updates, respectively, in the statement of operations.

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(dollars and shares in thousands, except per share amounts)

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

Administrative and Other Fees. Administrative fees are received from the securitization trusts for services performed in administering them, including their daily management, coordination of loan servicers and reporting information to the parties related to the securitizations. The fees are based upon a percentage of the outstanding principal balance of the loan principal of each of the trusts. The fees vary with each separate securitization and are recognized in service revenue when earned, as administrative services are provided.

During the fourth quarter of fiscal 2009, we began receiving fees from certain securitization trusts under a special servicing agreement. These fees are paid by the securitization trusts for the performance by us of default prevention services and management of private education loan collections. Such fees are based, in part, upon the reimbursement of expenses, and are recognized as the expenses are incurred.

Other fees are earned on a stand-alone fee-for-service basis and are considered earned in the period in which the service was provided, or in the case of loan originations, at the time the funds are disbursed.

Net Interest Income. Interest income and expense is recognized using the effective interest method.

(e) Income Taxes

In determining a quarterly provision for income taxes, the estimated annual effective tax rate is based on expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. The estimated annual effective tax rate also includes our best estimate of the ultimate outcome of tax audits.

The asset and liability method of accounting is utilized for recognition of income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized in connection with the tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry backs and carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as tax expense (benefit) in the period that includes the enactment date. A deferred tax asset valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.

(f) Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the basic weighted-average number of shares of common stock outstanding for the periods presented. Diluted net loss per share is computed by dividing net loss by the basic weighted-average shares and common stock equivalent shares outstanding during the period, if common stock equivalent shares are dilutive. To the extent income available to shareholders is a loss, all common stock equivalents are assumed to be anti-dilutive, and are excluded from diluted weighted average shares outstanding. Common stock equivalent shares outstanding have been determined in accordance with the treasury stock method. Common stock

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(dollars and shares in thousands, except per share amounts)

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

equivalents consist of shares issuable upon the exercise of outstanding stock options, conversion of preferred stock to common stock and the vesting of restricted stock units.

(g) Consolidation

Our consolidated financial statements include the accounts of FMC and its subsidiaries, after eliminating inter-company accounts and transactions. We have not consolidated the financial results of the securitization trusts purchasing loans that we have facilitated.

At December 31, 2009 and 2008, each of the securitization trusts created after January 31, 2003, has met the criteria to be a qualified special-purpose entity (QSPE) as defined by ASC 860-40, Transfers and Servicing-Transfers to Qualifying Special Purpose Entities (ASC 860-40). Accordingly, we did not consolidate these existing securitization trusts in our financial statements. In addition, the securitization trusts created prior to January 31, 2003 in which we hold a variable interest that could result in our being considered the primary beneficiary of such trusts, have been amended in order for them to be considered QSPEs.

In June 2009, FASB issued Financial Accounting Standard 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement 140 (FAS 166) and Financial Accounting Standard 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). Both statements are effective beginning with our financial statements for the first quarter of fiscal 2011, ending on September 30, 2010. FAS 166 removes the concept of a QSPE from ASC 860-40 and removes the exception from consolidation for qualifying special-purpose entities from ASC 810-10, Consolidation (ASC 810-10).

FAS 167 amends ASC 810-10 to require an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests gives it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

•: The power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance; and
•: The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

In addition, we will be required to reassess whether consolidation of variable interest entities is appropriate at each report date, as opposed to the one-time assessment allowed under existing guidance.

We are evaluating the impact that the adoption of these statements will have on our consolidated financial condition and results of operations, particularly as they relate to the securitization trusts holding loans we previously facilitated. At December 31, 2009, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $12,389,660 and the principal and interest of the education loans outstanding was $11,056,348. The underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans. The aggregate outstanding principal balance of the debt issued by the other trusts, for which we own residual interests, was $561,070 and the principal and interest of the education loans outstanding was $535,443. As of February 9, 2010, the impact of these

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

accounting pronouncements on our financial condition and results of operations was still uncertain. These new accounting rules would also be applied to new transactions entered into from July 1, 2010 forward.

(h) Subsequent Events

We have evaluated events subsequent to the balance sheet date through February 9, 2010, for purposes of disclosure.

(2) Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:

	December 31, 2009		June 30, 2009

Cash equivalents (money market funds)	$	262,287	$	142,723
Interest-bearing deposits with the Federal Reserve Bank		118,837		—
Interest-bearing deposits with other banks		13,698		11,550
Non-interest-bearing deposits with banks		4,194		4,497

Total cash and cash equivalents	$	399,016	$	158,770

Included in cash equivalents is an investment in a money market fund for which the investment advisor is the institutional money management firm, Milestone Capital Management, LLC (MCM), a wholly-owned subsidiary of Milestone Group Partners. MCM receives fees for services it performs for the money market fund. Members of the immediate family of one of FMC's directors owned approximately 65% of Milestone Group Partners as of December 31, 2009, making MCM a related party. At December 31, 2009, and June 30, 2009, approximately $71,782 and $59,983 of our holdings in money market funds, respectively, were invested in funds managed by MCM.

(3) Education Loans Held for Sale

The following table reflects the carrying value of private education loans held for sale:

		December 31, 2009			June 30, 2009

Principal and interest		$	264,952		$	526,542
Fair value adjustment			(165,863	)		(175,582	)

Net carrying value		$	99,089		$	350,960

Principal and interest:
	Delinquent or in default (>90 days past due)	$	42,142		$	32,441
	Pledged as collateral under education loan warehouse facility		264,952			261,923

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(dollars and shares in thousands, except per share amounts)

(3) Education Loans Held for Sale (Continued)

We recorded unrealized losses on education loans held for sale in the statement of operations of $10,688 and $29,303 for the three months ended December 31, 2009 and 2008, respectively, and $134,614 and $50,530 for the six months ended December 31, 2009 and 2008, respectively.

At December 31, 2009, education loans held for sale consisted of a private education loan portfolio held by UFSB-SPV. UFSB-SPV has pledged the private education loans as collateral to a third-party conduit lender pursuant to an education loan warehouse facility. Loans used to secure the education loan warehouse facility are subject to call provisions by the third-party lender; therefore, we do not have the ability to hold those loans to maturity, and they are classified as held for sale. The facility was structured so that the conduit lender's recourse to us is limited to the private education loans pledged as collateral.

In October 2009, following receipt of approval from the OTS, Union Federal completed a private sale of all private education loans that it directly held and that were less than 31 days delinquent. This sale did not include the loans held by UFSB-SPV. These loans had an aggregate outstanding principal and accrued interest balance of approximately $233,832 and represented 88% of the private education loans directly held by Union Federal. The sale resulted in proceeds of $121,585 to Union Federal. The carrying value of the loans on the sale date was equal to the sale price, therefore, no gain or loss on sale was recorded in the second quarter of fiscal 2010. Following the sale, the purchaser bears the risk of future performance of the loans, including risk of future default, except as otherwise set forth in the loan purchase and sale agreement.

In connection with the sale, FMC delivered a performance guaranty (Performance Guaranty) pursuant to which FMC guarantees the performance by Union Federal of its obligations and agreements under the loan purchase and sale agreement relating to the transaction. The Performance Guaranty provides that FMC will be released from its obligations, without any action of the purchaser, upon (1) any merger or consolidation of Union Federal into another entity as a result of which a majority of the capital stock of Union Federal is converted into or exchanged for the right to receive cash, securities or other property or (2) a sale of all or substantially all of the assets of Union Federal, in either case after which transaction Union Federal is no longer a subsidiary of FMC.

In November 2009, following receipt of approval from the OTS, Union Federal sold the remainder of its portfolio of private education loans directly held by it for sale, excluding loans held by UFSB-SPV, to a newly formed statutory trust owned by a subsidiary of FMC. We retained an independent third party to provide a fair value estimate for the portfolio, which served as the basis for the sale price for the transaction. Union Federal received proceeds of $3,871 from the sale. Upon purchase of the loans by the special purpose entity, the loans were reclassified from held for sale to held to maturity. See Note 5, "Loans Held to Maturity," for additional information. As such, these loans will be carried at amortized cost less an allowance for loan losses, and will not be marked to fair value going forward. For the remaining education loans held for sale by UFSB-SPV, we incorporated the estimates we received from the independent third party and the sale price received by Union Federal for the sale of its portfolio of current loans as the basis for their fair value at December 31, 2009.

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(dollars and shares in thousands, except per share amounts)

(4) Service Receivables and Related Revenues

Additional structural advisory fees, asset servicing fees and residuals receivables represent the estimated fair value of service receivables expected to be collected over the life of the various separate securitization trusts that have purchased private education loans facilitated by us. The fees are expected to be paid directly from the various securitization trusts.

Effective March 31, 2009, we entered into a purchase agreement with VCG Owners Trust and VCG Securities, LLC, pursuant to which we transferred to the purchasers our sole ownership of the Trust Certificate. As a result, we are no longer entitled to the residual cash flows of the NCSLT Trusts, although we continue to be entitled to receive residuals from other trusts. In consideration for the sale of the Trust Certificate, the purchasers agreed to bear all future federal and state tax liabilities associated with the NCSLT Trust residuals.

The following table summarizes changes in the estimated fair value of our additional structural advisory fees receivables:

				Three months ended December 31,						Six months ended December 31,

				2009			2008			2009			2008
Fair value at beginning of period				$	55,469		$	94,475		$	55,130		$	113,842
	Cash received from trust distributions				(23	)		(27	)		(47	)		(1,504	)
	Trust updates:
		Passage of time—fair value accretion			1,583			2,641			3,329			5,430
		Increase (decrease) in forward LIBOR curve			3,611			(15,396	)		1,563			(19,531	)
		(Increase) decrease in discount rate assumption			(3,755	)		(6,123	)		3,698			(20,189	)
		Increase in timing and average default rate			(1,743	)		(3,031	)		(3,472	)		(6,164	)
		Increase in auction rate notes spread			—			(13,087	)		—			(13,087	)
		Decrease in average prepayment rate			—			2,358			—			2,358
		Other factors, net			582			3,125			(4,477	)		3,780

			Net change from trust updates		278			(29,513	)		641			(47,403	)

Fair value at end of period				$	55,724		$	64,935		$	55,724		$	64,935

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(dollars and shares in thousands, except per share amounts)

(4) Service Receivables and Related Revenues (Continued)

The following table summarizes the changes in the estimated fair value of our residuals receivables:

				Three months ended December 31,					Six months ended December 31,

				2009		2008			2009		2008
Fair value at beginning of period				$	10,784	$	213,099		$	9,960	$	293,255
	Trust updates:
		Passage of time—fair value accretion			433		8,821			859		19,752
		Increase (decrease) in forward LIBOR curve			112		(16,129	)		134		(22,113	)
		(Increase) decrease in discount rate assumption			—		(39,991	)		1,176		(83,634	)
		Increase in timing and average default rate			—		(9,380	)		—		(50,108	)
		Increase in auction rate notes spread			—		(31,779	)		—		(31,779	)
		Decrease in average prepayment rate			—		11,336			—		11,336
		Other factors, net			908		8,040			108		7,308

			Net change from trust updates		1,453		(69,082	)		2,277		(149,238	)

Fair value at end of period				$	12,237	$	144,017		$	12,237	$	144,017

Changes to our assumptions for the estimated fair value of our asset servicing fees receivables did not have a material impact during the three or six months ended December 31, 2009.

The following table shows the approximate weighted average assumptions for loan performance and discount rates of the NCSLT Trusts and changes made to our assumptions during the quarter and year-to-date periods:

	December 31,

	2009									2008
	Rate			Rate Change for the Quarter			Rate Change for the Six Month Period			Rate			Rate Change for the Quarter			Rate Change for the Six Month Period
Discount rate—additional structural advisory fees		11.84	%		0.54	%		(0.69	)%		12.21	%		1.14	%		2.49	%
Discount rate—asset servicing fees and residuals		16.00			—			(1.00	)		18.40			2.05			3.52
Gross default rate		21.09			0.98			2.09			16.58			0.62			1.75
Net default rate		12.65			0.58			1.25			8.62			0.32			0.91
Recovery rate		40.00			—			—			48.00			—			—
Prepayment rate		8.01			—			—			8.12			(0.28	)		(0.28	)

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(4) Service Receivables and Related Revenues (Continued)

addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus 150 basis points to the extent such fees are accrued but unpaid by the trusts.

During the second quarter of fiscal 2010, the forward LIBOR curve experienced an upward shift of approximately 75 to 100 basis points, resulting in an increase in the estimated fair value of our structural advisory fees of $3,611. This shift more than offset the tightening of the curve experienced during the first quarter of fiscal 2010 and resulted in a net increase in the estimated fair value of our structural advisory fees of $1,563 for the first six months of fiscal 2010.

During the first six months of fiscal 2009, there was a tightening in the forward LIBOR curve which resulted in decreases to our additional structural advisory fees and residuals receivables of $15,396 and $16,129, respectively, for the second quarter, and $19,531 and $22,113, respectively, for the first six months of fiscal 2009.

We maintained a spread of 800 basis points during the second quarter of fiscal 2010, flat from the prior quarter. During the same period, the 10-year U.S. Treasury Bond rate increased by 54 basis points to 3.84% at December 31, 2009. As a result, we applied a discount rate of 11.84% at December 31, 2009, resulting in a decrease of the fair value of additional structural advisory fees of $3,755 during the second quarter. For the first six months of fiscal 2010, we decreased the spread over the 10-year U.S. Treasury Bond rate by 100 basis points from the prior year-end. During the same period, the 10-year U.S. Treasury Bond rate increased by 31 basis points for a net decrease in the applied discount rate of 69 basis points. The lower discount rate resulted in an increase in the value of the additional structural advisory fees receivables of $3,698 during the first six months of fiscal 2010.

During fiscal 2009, we increased the spread by 275 basis points in the second quarter, for a total increase of 425 basis points for the first six months, to 1,000 basis points, due to the dislocation in the capital markets and the private education loan securities sector over these time periods. The 10-year U.S. Treasury Bond rate decreased by 161 basis points during the second quarter and by 176 basis points for the first six months of fiscal 2009, to 2.21% at December 31, 2008. As a result, we applied a discount rate of 12.21% for purposes of estimating the fair value of the additional structural advisory fees, which resulted in net decreases of $6,123 and $20,189 during the second quarter and first six months of fiscal 2009, respectively.

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(4) Service Receivables and Related Revenues (Continued)

and private education loans, as well as rates used in the much broader ABS market. We also evaluate yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals.

We maintained a discount rate of 16.00% during the second quarter of fiscal 2010, flat from the first quarter but a decrease of 100 basis points, from 17.00%, at the prior year-end. As a result, there was no change in the residuals receivables during the second quarter and an increase in residuals receivables of $1,176 during the first six months of fiscal 2010 due to changes in the discount rate.

During fiscal 2009, due to widening credit spreads in the debt capital markets, we increased our weighted-average discount rate by 205 basis points during the second quarter for a total increase of 352 basis points for the first six months, to 18.40% at December 31, 2008. The increase in the discount rate resulted in decreases in the estimated fair value of our residuals receivables of $39,991 and $83,634 during the second quarter and first six months of fiscal 2009, respectively.

Default and Recovery Rates. During the second quarter of fiscal 2010, we increased the weighted-average gross default rate assumptions used to estimate the fair value of our service receivables by 98 basis points, for a total increase of 209 basis points for the first six months, to 21.09% at December 31, 2009. The increase reflects actual default experience in excess of projections and resulted in an increase in the assumed weighted-average net default rate to 12.65%, with no changes made to the assumptions for recovery rates.

The increase in the net default rate resulted in decreases in the estimated fair value of our additional structural advisory fees receivable of $1,743 and $3,472 during the second quarter and first six months of fiscal 2010, respectively. Changes to the net default rate did not have a material impact on the estimated fair value of our asset servicing fees or residuals receivables. In addition, during the first quarter of fiscal 2010, we recorded a decrease of $4,692 in the estimated fair value of additional structural advisory fees for potential deviations in the collateral performance of securitized loans. We did not make a similar adjustment during the second quarter of fiscal 2010.

During fiscal 2009, the net default rate was increased to reflect higher default rates experienced in the trusts. The higher net default rate resulted in decreases in the estimated fair value of our additional structural advisory fees receivable of $3,031 and $6,164 during the second quarter and first six months of fiscal 2009, respectively. At December 31, 2008, we had not sold the Trust Certificate, and the increase in the net default rate resulted in decreases in the estimated fair value of our residuals receivables of $9,380 and $50,108 for the second quarter and first six months of fiscal 2009, respectively.

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(4) Service Receivables and Related Revenues (Continued)

maximum spread over one-month LIBOR as specified in the indentures, based on the ratings then assigned to the notes. Increases in the interest expense of the trusts reduced the estimated fair value of our additional structural advisory fees and residuals receivables and delayed the timing of receipt of additional structural advisory fees. As a result, we decreased the estimated fair value of our additional structural advisory fees by $13,087 and our residuals receivables by $31,779 during the second quarter of fiscal 2009. During fiscal 2010, we have assumed that the notes would continue to bear interest at the contractual maximum spread.

Prepayment Rates. In response to a historically low prepayment rate, the current interest rate environment and limited availability of consumer credit, we adjusted our prepayment assumption during the first six months of fiscal 2010 by extending the period during which decreased prepayments were expected to persist. As of December 31, 2009, we assumed that the current prepayment rate will persist until December 31, 2010, and then eventually revert to historical norms during the ensuing 12 months. These changes did not have a material impact on the estimated fair value of our service receivables for fiscal 2010.

During the second quarter of fiscal 2009, we decreased our assumed prepayment rate by 28 basis points, which resulted in an increase to additional structural advisory fee receivables of $2,358 and residuals receivables of $11,336.

TERI's Obligation to Pay Claims. We did not adjust our assumptions regarding TERI's obligation to pay claims during the first six months of fiscal 2010 or 2009, including our assumption that all future recoveries on defaulted TERI-guaranteed loans would be available to replenish the trusts' Pledged Accounts. See Note 6, "Commitments and Contingencies—TERI Reorganization—Challenges to Security Interests," for additional details.

(5) Loans Held to Maturity

We hold portfolios of education loans and mortgage loans to maturity.

		December 31, 2009			June 30, 2009

Education loans held to maturity:
Principal and interest		$	32,811		$	—
Allowance for loan losses and unamortized discount			(28,963	)		—

Net carrying value		$	3,848		$	—

Mortgage loans held to maturity:
	Principal and interest	$	8,703		$	10,085
	Allowance for loan losses		(257	)		(570	)

Net carrying value		$	8,446		$	9,515

Principal and interest of held-to-maturity loans delinquent or in default (>90 days past due):
	Education loans	$	25,082		$	—
	Mortgage loans		792			1,418

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(dollars and shares in thousands, except per share amounts)

(6) Commitments and Contingencies

(a) Agreements with Lender Clients

Under the terms of purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of the client's TERI-guaranteed private education loans during a specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. Under the terms of certain of our purchase agreements, if we fail to facilitate a purchase in breach of our obligations, our liability would be limited to liquidated damages of one percent of the total principal amount of the loans as to which the loan purchase period had expired. Those purchase agreements that limit our liability to liquidated damages generally provide that our obligation to close a securitization is subject to the condition that no "market disruption event" has occurred. Under certain of these purchase agreements, the TERI Reorganization constitutes a "market disruption event," suspending our contractual obligation to close a securitization. Any liquidated damages would be due at expiration of the relevant loan purchase period, which would not occur for a period of time after the market disruption event ceases. In general, the termination of the TERI guaranty in the TERI Reorganization would terminate our purchase obligations under the purchase agreements. Therefore, our potential liability under our loan purchase agreements is dependent, in part, upon the outcome of the TERI Reorganization and is not determinable at this time. No amounts have been accrued in the financial statements with respect to the potential liability.

(b) TERI Reorganization—Challenge to Security Interests

TERI is a private, not-for-profit Massachusetts organization as described under section 501(c)(3) of the Internal Revenue Code. In its role as guarantor in the private education lending market, TERI agreed to reimburse lenders or securitization trusts for unpaid principal and interest on defaulted loans. Historically, TERI was the exclusive third-party provider of borrower default guarantees for our clients' private education loans.

On April 7, 2008, TERI filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. The TERI Reorganization has had, and will likely continue to have, a material negative effect on the securitization trusts' ability to realize guaranty obligations of TERI, our client relationships, facilitated loan volumes, the value of our service receivables and our ability to realize fully TERI's cost reimbursement obligations. In connection with the TERI Reorganization, our master agreements with TERI have been terminated, including our master servicing agreement, our database sale and supplementation agreement and our master loan guaranty agreement. We entered into a transition services agreement with TERI pursuant to which we agreed to provide certain services to TERI through September 2008, and TERI affirmed both our rights to certain data and certain data restrictions applicable to TERI. In addition, Union Federal entered into stipulations in the context of the TERI Reorganization relating to the termination of its agreements with TERI and the settlement of related claims. We have filed a general unsecured claim with regard to $16,000 of processing fees from TERI that were due pursuant to the master servicing agreement, but unpaid, prior to the filing of TERI's bankruptcy petition.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(6) Commitments and Contingencies (Continued)

motion by TERI to purchase defaulted loans from the securitization trusts using cash in the Pledged Accounts. Beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using cash in the Pledged Account established for the benefit of the specific trust that owned the defaulted loan. As of February 9, 2010, TERI was not permitted to satisfy its guaranty obligations using funds from TERI's general reserves. Funds in the Pledged Accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim against TERI.

The Bankruptcy Court's June 2008 order also granted parties rights to challenge the trusts' security interests in the collateral other than funds in the Pledged Accounts. In January 2009, the official committee of unsecured creditors of TERI (Creditors Committee) filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of 17 securitization trusts, and against our subsidiary First Marblehead Data Services, Inc. (FMDS) as administrator of such trusts. The complaint generally alleges that the security interests granted by TERI to the trusts, excluding the security interests in the Pledged Accounts, are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance of more than $610,000 as of December 31, 2009, or in amounts owed or transferred by TERI to Pledged Accounts after the filing of TERI's petition for reorganization totaling more than $14,000 as of December 31, 2009. In February 2009, pending resolution of the issues raised in the Creditors Committee's complaint, the trusts generally suspended the transfer of defaulted loans to TERI and generally suspended requests for default claim payments from amounts in the Pledged Accounts.

In March 2009, FMDS and the owner trustee filed a motion to dismiss the Creditors Committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the arguments made in the motion filed by FMDS and the owner trustee. The Creditors Committee filed an opposition to the motions to dismiss in April 2009, together with an amended complaint naming the trusts themselves as defendants. FMDS filed a response to the opposition and amended complaint in May 2009. In September 2009, the Bankruptcy Court denied the motions to dismiss. In October 2009, the Bankruptcy Court also denied motions for leave to commence an interlocutory appeal. We have not adjusted our accounting assumptions as of December 31, 2009 in response to the adversary proceeding. We continued to assume that the trusts have valid and enforceable security interests in, among other collateral, future recoveries on defaulted loans owned by TERI and that such recoveries would eventually be available to replenish the trusts' Pledged Accounts.

If the Creditors Committee or any other party is successful in challenging the trusts' security interests, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease materially. As a result, the trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have historically been used to replenish a particular trust's Pledged Account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims in accordance with the priorities established by the Bankruptcy Code. Recoveries from defaulted loans not transferred to TERI, however, would remain available to the trusts. The settlement of the adversary complaint, in the context of a plan of reorganization or otherwise, could also result in a material decrease in the amount

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(6) Commitments and Contingencies (Continued)

of pledged collateral available exclusively to a particular securitization trust. A successful challenge to the security interests could decrease materially the value of our additional structural advisory fees or our asset servicing fees by decreasing the pledged collateral available exclusively to the NCSLT Trusts.

In September 2009, a Joint Plan of Reorganization of TERI and the Creditors Committee was filed in the Bankruptcy Court. In October 2009, a First Amended Joint Plan of Reorganization of TERI and the Creditors Committee and an accompanying Disclosure Statement were filed. In February 2010, a Second Amended Joint Plan of Reorganization of TERI and the Creditors Committee and an accompanying Disclosure Statement were filed. The plan includes a proposed settlement of the adversary complaint and includes other provisions that would affect the claims of the NCSLT Trusts. Approval of the plan of reorganization may not be solicited until the disclosure statement has been approved by the Bankruptcy Court.

(7) Stockholders' Equity

Series B Non-Voting Convertible Preferred Stock

In December 2007, FMC entered into an investment agreement (Investment Agreement) with GS Parthenon A, L.P. and GS Parthenon B, L.P., affiliates of GS Capital Partners. Pursuant to the Investment Agreement, we agreed to sell, after receipt of applicable regulatory approvals and determinations and satisfaction of other closing conditions, shares of newly-created Series B Non-Voting Convertible Preferred Stock, $0.01 par value per share (Series B Preferred Stock). In August 2008, FMC issued 133 shares of newly designated Series B Preferred Stock at a purchase price of $1,000 per share. The Series B Preferred Stock is convertible, at the option of the holders, into 8,847 shares of common stock, at a conversion price of $15.00 per share. Dividends would be paid on the Series B Preferred Stock when, as and if, and in the same amounts (on an as-converted basis), declared on common stock. Upon liquidation, dissolution or winding up of FMC, holders of Series B Preferred Stock would have the right to receive an amount equal to $0.01 per share of Series B Preferred Stock, plus the amount of any declared but unpaid dividends thereon. After payment of this amount, holders of the Series B Preferred Stock would be entitled to participate (on an as-converted basis) with common stock in the distribution of remaining assets.

(8) Fair Value of Financial Instruments

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Cash equivalents consist of money market funds with available quoted market prices on active markets that we classify as Level 1 of the valuation hierarchy.

We believe that the carrying values of short-term investments, federal funds sold and deposits approximate fair value due to their short duration.

Investments held for sale are mortgage-backed agency securities that are marked to market using pricing from an independent third party and are classified as Level 2 in the hierarchy.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(8) Fair Value of Financial Instruments (Continued)

Market prices are not available for additional structural advisory fees receivables, asset servicing fees receivables, residuals receivables, or education loans held for sale. During the second quarter of fiscal 2010, we retained an independent third party to assess the fair market value of Union Federal's portfolio of non-current private education loans held for sale. We incorporated the estimate received by the third party and the sale price received by Union Federal in October 2009 for the sale of its portfolio of current loans in our estimate of fair value of private education loans held for sale by UFSB-SPV as of December 31, 2009. In the absence of market prices, we estimate fair value utilizing internally-developed discounted cash flow models which include assumptions regarding prepayment rates, net default rates, the LIBOR forward interest rate curve, operational expenses and auction rate note interest rates. These assets are classified within Level 3 of the valuation hierarchy.

The following table presents financial instruments carried at fair value as of December 31, 2009 and June 30, 2009, by consolidated balance sheet caption, in accordance with the valuation hierarchy described above on a recurring and nonrecurring basis:

	December 31, 2009								June 30, 2009

	Level 1		Level 2		Level 3		Total carrying value		Level 1		Level 2		Level 3		Total carrying value
Assets:
Recurring:
Cash equivalents	$	262,287	$	—	$	—	$	262,287	$	142,723	$	—	$	—	$	142,723
Investments held for sale		—		6,784		—		6,784		—		8,450		—		8,450
Additional structural advisory fees		—		—		55,724		55,724		—		—		55,130		55,130
Asset servicing fees		—		—		6,627		6,627		—		—		2,385		2,385
Residuals		—		—		12,237		12,237		—		—		9,960		9,960
Non-recurring:
Education loans held for sale		—		—		99,089		99,089		—		—		350,960		350,960

Total assets:	$	262,287	$	6,784	$	173,677	$	442,748	$	142,723	$	8,450	$	418,435	$	569,608

UFSB-SPV's liability under the education loan warehouse facility of $228,900 at December 31, 2009, is recorded in our balance sheet at the value of outstanding principal and interest. We have elected not to apply the fair value provisions available under ASC 820-10, Fair Value Measurements and Disclosures, to this liability. We believe that the fair value of the education loan warehouse facility is limited to the fair value of eligible assets used as collateral, in light of the structure of the facility. The estimated fair value of such assets was $100,655 at December 31, 2009.

Please see Note 3, "Education Loans Held for Sale," for information with respect to education loans held for sale and Note 4, "Service Receivables and Related Revenues," for a roll forward of the additional structural advisory fees and residuals receivables.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(9) Net Interest Income

The following table reflects the components of net interest income:

		Three months ended December 31,				Six months ended December 31,

		2009		2008		2009		2008
Interest income
	Cash and cash equivalents	$	167	$	182	$	289	$	647
	Federal funds sold		1		40		3		462
	Short-term investments		50		—		50		—
	Investments held for sale		90		562		194		1,140
	Education loans held for sale		4,851		11,352		12,976		21,837
	Mortgage loans held to maturity		175		134		304		285
	Education loans held to maturity		120		—		120		—

	Total interest income		5,454		12,270		13,936		24,371
Interest expense
	Time and savings account deposits		385		1,073		856		2,762
	Money market account deposits		199		453		427		829
	Warehouse line of credit		3,191		3,041		6,391		5,737
	Other short-term borrowings		—		38		—		38
	Other interest-bearing liabilities		178		191		321		393

	Total interest expense		3,953		4,796		7,995		9,759

Net interest income		$	1,501	$	7,474	$	5,941	$	14,612

(10) Stock-Based Compensation

2008 Meyers' Option Plan

The Board of Directors elected Daniel Meyers as President and Chief Executive Officer and as a member of the Board of Directors, effective September 1, 2008. In connection with the election, the Board of Directors and a subcommittee of the Compensation Committee of the Board of Directors approved the grant in August 2008 (Grant Date) of stock options to Mr. Meyers to purchase (a) 2,000 shares of common stock, at an exercise price of $6.00 per share, 25% of which vested and became exercisable in August 2009, with the remainder to vest and become exercisable in three equal installments on each of the second, third and fourth anniversaries of the Grant Date ($6.00 Stock Options); (b) 2,000 shares of common stock, at an exercise price of $12.00 per share, that vested and became exercisable in full on November 30, 2008; and (c) 2,000 shares of common stock, at an exercise price of $16.00 per share, that vested and became exercisable in full on November 30, 2008. Any unvested stock options will vest and become exercisable in full (a) if the closing sale price of the common stock is at least 150% of the exercise price of the applicable option for a period of five consecutive trading days (assuming the trading on each day is not less than 90% of the average daily trading volume for the prior three months prior to such five day period), (b) in the event of Mr. Meyers's death or disability, as defined in his employment agreement, or (c) in the event that Mr. Meyers' employment is terminated by us without Cause, as defined in his employment agreement,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(10) Stock-Based Compensation (Continued)

or by Mr. Meyers with Good Reason, as defined in his employment agreement. In addition, subject to certain conditions set forth in his employment agreement, the $6.00 Stock Options may be exercised beginning 90 days after the Grant Date prior to vesting, provided that the unvested shares issued will be held in escrow by us and will be subject to a repurchase option by us. Each of the stock options will expire ten years from the Grant Date. The stock options were not granted under any of our existing stockholder-approved incentive plans.

(11) General and Administrative Expenses

The following table reflects components of general and administrative expenses:

		Three months ended December 31,				Six months ended December 31,

		2009		2008		2009		2008
General and administrative expenses:
	Depreciation and amortization	$	3,600	$	4,680	$	7,293	$	9,735
	Third-party services		3,744		6,784		9,834		14,331
	Occupancy and equipment		3,351		3,610		9,687		8,570
	Marketing coordination		21		122		35		3,550
	Other		1,639		4,344		3,645		7,801

Total		$	12,355	$	19,540	$	30,494	$	43,987

(12) Income Taxes

Income tax benefit for the second quarter of fiscal 2010 was $9,386, for a total benefit of $52,036 for the first six months of fiscal 2010. The income tax benefit for fiscal 2009 was $51,846 for the second quarter and $104,785 for the first six months. The lower overall benefit in fiscal 2010 is a result of lower pre-tax losses during fiscal 2010 and a lower effective tax rate. During the first six months of fiscal 2010, our effective tax rate, or the income tax benefit as a percentage of pre-tax loss, decreased to 33.0% from an effective tax rate of 36.0% for the first six months of fiscal 2009. The decrease in our effective tax rate was primarily due to certain permanent differences and expense accruals related to unrecognized tax benefits.

In November 2009, the Worker, Homeownership and Business Assistance Act of 2009 (WHBAA) was signed into law. As part of the WHBAA, we will be allowed to carry back the taxable losses from either fiscal 2009 or 2010 for five years, instead of two years. We have not yet determined which year would be more advantageous to carry back, and as such, have not yet determined whether or not to file an amended fiscal 2009 tax return. We have estimated that taxable income in previous years will be sufficient to cover the taxable losses of both fiscal 2009 and 2010 regardless of which fiscal year is carried back. As a result of the WHBAA and pre-existing net operating loss carryback rules, we have recorded a $24,086 income tax receivable at December 31, 2009.

We have determined that a valuation allowance is not necessary for certain deferred tax assets, as it is more likely than not that these assets will be realized through future reversals of existing

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(12) Income Taxes (Continued)

temporary differences or available tax planning strategies. We will continue to review the recognition of deferred tax assets on a regular basis.

Net unrecognized tax benefits were $20,108 at December 31, 2009. At December 31, 2009, we had approximately $2,904 accrued for interest and no amount accrued for the payment of penalties.

As a result of the sale of the Trust Certificate effective March 31, 2009, as well as our operating losses for fiscal 2009, we recorded an income tax receivable for federal income taxes paid on prior taxable income. In the first six months of fiscal 2010, we received a total of $189,310 in federal and state income tax refunds related to our income tax receivables.

(13) Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share of common stock:

		Three months ended December 31,						Six months ended December 31,

		2009			2008			2009			2008
Net loss		$	(11,719	)	$	(93,387	)	$	(105,785	)	$	(186,283	)

Loss per share:
	Basic	$	(0.12	)	$	(0.94	)	$	(1.07	)	$	(1.88	)
	Diluted		(0.12	)		(0.94	)		(1.07	)		(1.88	)
Weighted average shares used in computing net loss per common share:
	Basic		99,247			99,116			99,224			99,040
	Diluted		99,247			99,116			99,224			99,040
Anti-dilutive common stock equivalents			8,878			9,303			8,879			7,172

As a result of the net loss reported, common stock equivalents are anti-dilutive, and are therefore excluded from diluted weighted-average shares outstanding. Common stock equivalents include restricted stock units, Series B Preferred Stock and stock options. The conversion or exercise price exceeds fair market value at the report date for the majority of stock options outstanding.

(14) Union Federal Regulatory Matters

(a) Regulatory Capital Requirements

Union Federal is subject to various regulatory capital requirements administered by certain federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial condition. 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 Federal's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(14) Union Federal Regulatory Matters (Continued)

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 (as defined in the regulations) to risk-weighted assets (as defined in the regulations).

		Regulatory Guidelines

		Minimum			Well Capitalized			December 31, 2009			June 30, 2009
Risk-based capital ratios:
	Tier 1 capital		4	%		6	%		121.14	%		37.86	%
	Total capital		8			10			121.45			37.91
Tier 1 (core) capital ratio			4			5			23.02			34.51

Union Federal's equity capital was $45,667 at December 31, 2009, down from $84,286 at June 30, 2009, primarily as a result of the dispositions of Union Federal's education loans held for sale.

As of December 31, 2009 and June 30, 2009, Union Federal was well capitalized under the regulatory framework for prompt corrective action. In July 2009, FMC and Union Federal agreed to comply with certain requirements imposed by the OTS that could adversely affect our operations and financial condition. See "—Supervisory Agreement and Order to Cease and Desist" below for additional details.

(b) Supervisory Agreement and Order to Cease and Desist

In July 2009, FMC entered into a supervisory agreement (Supervisory Agreement) with the OTS and Union Federal entered into a stipulation consenting to the issuance by the OTS of an order to cease and desist (Order).

The Supervisory Agreement requires FMC to, among other things:

•: maintain Union Federal's regulatory capital ratios at the greater of: (i) the capital ratios specified in Union Federal's business plan approved by the OTS in November 2006, (ii) the capital ratios projected in a business plan found acceptable to the OTS or (iii) the minimum regulatory capital requirements;
•: maintain a deposit at Union Federal in the amount of $30,000 until the earlier to occur of the (i) sale of Union Federal or (ii) reduction of Union Federal's private education loan concentration ratio to 50% of Union Federal's Tier 1 capital plus allowance for loan losses;
•: obtain prior approval of the OTS before (i) engaging in any transaction with Union Federal or (ii) paying any cash dividends, repurchasing or redeeming any shares of its stock, incurring any debt exceeding $5,000 or accepting any dividend or other payment representing a reduction in capital from Union Federal; and
•: obtain prior approval of the OTS in connection with any "golden parachute payment" and comply with notice requirements for certain changes in directors and senior executive officers.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(14) Union Federal Regulatory Matters (Continued)

Pursuant to the requirements of the Order, Union Federal took the following actions during the six months ended December 31, 2009:

•: submitted to the OTS for review and final approval by the Regional Director of the OTS, a new business plan covering fiscal years 2010, 2011 and 2012, reflecting Union Federal's proposed strategy, business activities and quarterly financial projections;
•: developed, initiated implementation and submitted to the OTS for review and final approval, a liquidity plan that contains strategies for ensuring that Union Federal maintains adequate short-term and long-term liquidity;
•: developed, submitted to the OTS for review and final approval, and executed a concentration reduction plan to reduce the balances of private education loans held by Union Federal;
•: sold its entire portfolio of private education loans pursuant to its concentration reduction plan, other than loans held by UFSB-SPV and pledged to a third party conduit lender; and
•: implemented a detailed compliance monitoring program that provides for frequent Board level reporting and quarterly progress reports to the OTS on actions taken by Union Federal to comply with the Order.

The Order further requires Union Federal to, among other things:

•: obtain prior approval of the OTS before increasing the dollar amount of brokered deposits;
•: provide the OTS with prior notice before (i) engaging in any transaction with an affiliate or (ii) entering into, renewing, extending or revising any contractual arrangement relating to compensation or benefits for any senior executive officer or director; and
•: obtain prior approval of the OTS in connection with any "golden parachute payment" and comply with notice requirements for certain changes in directors and senior executive officers.

The terms of the Order required Union Federal to adopt a concentration reduction plan that: (i) prevented Union Federal from originating private education loans until Union Federal reduced the concentration of private education loans to Tier 1 capital plus allowances for loan losses below 50% and (ii) required Union Federal to achieve such a reduction by December 31, 2009. During the second quarter of fiscal 2010, Union Federal sold its entire portfolio of directly held private education loans, which excluded loans held by UFSB-SPV. As a result, Union Federal achieved the reduction required by the concentration reduction plan. In November 2009, FMC was refunded a deposit in the amount of $30,000 that FMC had been required to maintain at Union Federal until such reduction had been achieved. See Note 3, "Education Loans Held for Sale," for additional information.

The terms of the Supervisory Agreement and the Order will remain in effect until terminated, modified or suspended by the OTS.

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Item 2. Management's 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 unaudited condensed consolidated financial statements and accompanying notes included in this quarterly report.

We use the terms "First Marblehead," "we," "us" and "our" in this quarterly report to refer to the business of The First Marblehead Corporation, or "FMC," and its subsidiaries on a consolidated basis.

Factors That May Affect Future Results

In addition to historical information, this quarterly 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. For this purpose, any statements contained herein regarding our strategy, future operations and products, financial performance, future funding transactions, projected costs, future market position, prospects, plans and outlook of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "observe," "plans," "projects," "will," "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, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors include our "critical accounting estimates" set forth under "—Executive Summary—Application of Critical Accounting Policies and Estimates" and factors including, but not limited to, those set forth under the caption "Risk Factors" in Part II, Item 1A of this quarterly 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 February 9, 2010.

Executive Summary

Overview

We offer outsourcing services to national and regional financial institutions and educational institutions for designing and implementing private education loan programs. These private education loan programs are designed to be marketed to prospective student borrowers and their families directly or through educational institutions and to generate portfolios intended to be held by the originating lender or financed in the capital markets. In addition, we provide administrative and other services to securitization trusts that we have facilitated, asset servicing to the third-party owner of certain securitization trusts and portfolio management services to a limited number of clients.

We offer prospective clients the opportunity to outsource key components of their private education loan programs to us by providing a fully integrated suite of services, including our new Monogram product offering. Our new product offering is designed to generate loan portfolios that originating lenders can choose to hold on their balance sheets indefinitely or for some limited period of time. In addition, we offer the following services on a stand-alone, fee-for-service basis:

•: Loan origination—We can provide loan processing services to schools and lenders, from application intake through loan disbursement. We are able to customize our services to meet the specific branding, pricing and underwriting requirements of our clients.
•: Portfolio management—We manage private education loan portfolios on behalf of their owners by employing risk analytics to monitor and manage the performance of the portfolio over time.

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As part of this service offering, we monitor portfolio performance metrics, work with our clients to manage the performance of third-party vendors and interface with rating agencies. Our infrastructure provides us with data that enables robust analytics, and we are able to customize collections strategies as needed to optimize loan performance.

•: Trust administration—As administrator for securitization trusts that we facilitated, we monitor the performance of the loan servicers and third-party collection agencies, including ensuring compliance with servicing guidelines and review of default prevention and collections activities. In this capacity, we are responsible for reconciliation of funds among the third parties and the trusts. We also provide regular reporting to investors in the asset-backed securities, or ABS, issued by the trusts and other parties related to the trusts.
•: Asset Servicing—Our experience enables us to offer asset servicing such as residual analysis and valuation optimization services and strategies relating to asset funding to holders of a residual interest in education loan securitizations.

We also provide banking services such as residential and commercial mortgage loans and retail savings, money market and time deposit products through our subsidiary, Union Federal Savings Bank, or Union Federal, which is a federally chartered thrift regulated by the Office of Thrift Supervision, or OTS. In the past, Union Federal has also offered private education loans directly to consumers.

Substantially all of our financial results have been derived from these activities, which are considered to be in a single industry segment for financial reporting purposes.

Our new Monogram product offering encompasses some or all of our service offerings and enables a lender to customize its loan program to meet its risk control and return objectives. Specifically, the lender can customize the range of loan terms offered to its qualified applicants, such as borrower repayment options, loan limits and borrower pricing. The Monogram product is based on our proprietary origination risk score model, which uses borrower and cosigner attributes, as well as distribution channel variables, to assign a specific level of credit risk to the application at the time of initial credit decisioning. A score is assigned to each application and governs the loan terms offered to applicants who pass the credit review. For example, higher risk applicants may not be eligible to defer principal and interest while in school. Our on-line application also provides a qualified applicant with some ability to configure loan terms, showing the financial effects of the choices using a real-time repayment calculator. The product can be structured to offer lenders either a "make and hold" or "make and sell" loan program. In "make and hold" loan programs, lenders finance the loans on their balance sheet and generally intend to continue to hold the loans through the scheduled repayment, prepayment or default. In "make and sell" loan programs, lenders intend to hold the loans on their balance sheet for some limited period of time before disposing of the loans in a capital markets transaction. We believe that the loans generated through the Monogram loan product will generally have shorter repayment periods, and an increased percentage of borrowers making payments while in school, compared to loan products we previously facilitated, as well as a high cosigner participation rate. The success of the new product, which had not been fully deployed to any client as of February 9, 2010, will be the key driver of our future financial results and will be critical to growing and diversifying our revenues and client base. In light of regulatory constraints, Union Federal is not expected to participate as a program lender during fiscal 2010.

Historically, the driver of our results of operations and financial condition has been the volume of private education loans for which we provided outsourcing services from loan origination through securitization. In addition, asset-backed securitizations were our sole source of permanent financing for our clients' private education loan programs, and substantially all of our income was derived from such securitizations. Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues bonds backed by those loans to investors. In the past, we offered our clients a fully integrated suite of outsourcing services, but we did

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not charge separate fees for many of those services. Although we provided those various services without charging a separate fee, or at "cost" in the case of loan processing services, we generally entered into agreements with the lender clients giving us the exclusive right to securitize the private education loans that they did not intend to hold. For our past securitization services, we are entitled to receive from the trusts additional structural advisory fees over time and, in the case of certain trusts, residual cash flows.

We have been unable to access the securitization market since September 2007 as a result of market disruptions that began in the second quarter of fiscal 2008, accelerated during the third quarter of fiscal 2008 and, to a lesser extent, persisted as of February 9, 2010. In addition, our lender clients previously had the opportunity to mitigate their credit risk through a loan repayment guaranty by The Education Resources Institute, Inc., or TERI, and we historically received reimbursement from TERI for outsourced loan processing services we performed on TERI's behalf. In April 2008, TERI filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, or Bankruptcy Code. We refer in this quarterly report to TERI's bankruptcy proceedings as the TERI Reorganization. The TERI Reorganization, together with capital markets dislocations, has had, and will likely continue to have, a material negative effect on the securitization trusts' ability to realize guaranty obligations of TERI, our client relationships, our facilitated loan volumes, the value of our service receivables and our ability to realize fully the cost reimbursement obligations of TERI.

As a result, we took several measures in fiscal 2009 to adjust our business model. We have changed our fee structure with respect to our services and developed additional services that are designed to provide us with fee-based income as our services are provided. Our new Monogram product offering has also been designed to reduce our dependence on the securitization market in order to generate revenue, as well as our dependence on third party credit enhancement. We expect to earn fees for our origination and marketing services, as well as a share of the portfolio income over the life of the loans for our role as administrator and provider of a credit enhancement feature. The credit enhancement feature will require us to put limited amounts of capital at risk to cover potential defaults in the portfolios. In addition, in August 2008, we received $132.7 million in gross proceeds from an equity financing, and we greatly reduced our annual cash expenditure requirements through reductions in headcount, consolidation of office space and other cost saving initiatives that began in fiscal 2008. Finally, as of March 31, 2009, we sold the trust certificate of NC Residuals Owners Trust, which represented our residual interests in trusts holding substantially all of the TERI-guaranteed private education loans that we previously securitized. We refer to this trust certificate in this quarterly report as the Trust Certificate, and to these trusts as the NCSLT Trusts. We remain focused on preserving capital and maximizing liquidity in these challenging market conditions.

Recent Developments

We have summarized below certain recent developments affecting our business since the beginning of fiscal 2010:

•: In July 2009, we entered into a supervisory agreement with the OTS that requires us, among other things, to maintain Union Federal's regulatory capital ratios at specified levels. We refer to the agreement in this quarterly report as the Supervisory Agreement. Union Federal entered into a stipulation in July 2009 consenting to the issuance by the OTS of an order to cease and desist, which we refer to in this quarterly report as the Order. See "Risks Relating to Regulatory Matters" in Part II, Item 1A of this quarterly report for additional details. We have taken substantial steps to address all of the matters identified by the OTS in the Supervisory Agreement and the Order and the requirements imposed on Union Federal and us by the OTS.

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•: In August 2009, we completed the development of our new Monogram product offering. As of February 9, 2010, we had not fully deployed the product to any clients, although we are engaged in discussions with national and regional lenders regarding the product offering.
•: In the first six months of fiscal 2010, we received $189.3 million in federal and state tax refunds on income taxes previously paid by us on prior taxable income. The refunds resulted from our loss from operations and the sale of the Trust Certificate.
•: We favorably resolved certain securities litigation, including dismissals of a consolidated class action lawsuit and state and federal shareholder derivative lawsuits. No compensation in any form passed directly or indirectly from any defendant to any plaintiffs or plaintiffs' attorneys in any of these actions. In November 2009, we recouped $1.0 million in legal expenses pursuant to our directors and officers liability insurance policy. See "Legal Proceedings," under Part II, Item 1 of this quarterly report for additional details.
•: In October 2009, Union Federal sold a portfolio of private education loans, excluding loans held by Union Federal's subsidiary, UFSB Private Loan SPV, LLC, which we refer to in this report as UFSB-SPV, with an aggregate outstanding principal and accrued interest balance of approximately $233.8 million. As a result of the sale, Union Federal achieved the reduction required by the Order in the level of private education loans held by Union Federal. During the second quarter of fiscal 2010, we announced that we had begun examining strategic alternatives for Union Federal, including a potential sale.
•: During the second quarter of fiscal 2010, we announced that we had entered negotiations for the acquisition of a loan servicer. We were subsequently unable to agree to terms, and negotiations with respect to the contemplated acquisition had been discontinued as of February 9, 2010. We continue to believe, however, that the ownership of a loan servicer would complement our overall strategy of diversifying our revenues away from dependence upon securitizations.

Business Trends and Uncertainties

Beginning in late 2007 and continuing through the date of this quarterly report, general economic conditions in the United States have deteriorated. Our business has been and continues to be materially adversely impacted by these conditions, and our inability to access the securitization markets as a result of market disruptions continued during the first six months of fiscal 2010. In addition, credit performance of consumer-related loans generally, and the loan portfolios held for sale and held by the various securitization trusts we have facilitated, continued to be adversely affected by general economic conditions, including increasing unemployment rates. The interest rate, economic and credit environments may continue to have a material negative effect on the estimated value of our service receivables and education loans held for sale, which consisted as of December 31, 2009 of a portfolio of private education loans held by UFSB-SPV and pledged to a third party conduit lender pursuant to an education loan warehouse facility.

The loan portfolios held by UFSB-SPV and the NCSLT Trusts have experienced higher levels of defaults than we originally projected. During the first six months of fiscal 2010, we increased the weighted-average gross default rate assumptions used to estimate the fair value of our additional structural advisory fees, asset servicing fees and residuals receivables by 209 basis points to 21.09%. Since June 30, 2006, we have increased the projected weighted-average gross default rates for the NCSLT Trusts by 1,187 basis points. Credit rating agencies have taken negative ratings actions with respect to certain securitizations that we previously facilitated. In December 2009, Standard & Poor's downgraded the ratings assigned to certain subordinate ABS issued by four securitization trusts, citing ongoing performance deterioration, higher than expected defaults and the expected reprioritization to senior noteholders of interest payable to holders of such subordinate ABS. In January 2010, Standard & Poor's further downgraded the ratings assigned to subordinate ABS issued by two of those trusts.

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Fitch Ratings also downgraded all ratings across 12 NCSLT Trusts in January 2010, citing trust-specific factors as well as a negative outlook for the private education loan sector in general.

During the first six months of fiscal 2010, prepayment rates, however, remained at a rate that is extremely low by historical standards.

During the first six months of fiscal 2010, we recorded an unrealized loss of $134.6 million in connection with write-downs of our education loans held for sale to their estimated fair value. We recorded aggregate losses during fiscal 2009 of $138.2 million in connection with similar write-downs. We may record a realized or unrealized loss in the future in connection with UFSB-SPV's portfolio of private education loans held for sale.

Changes in any of the following factors could materially affect our financial results:

•: market acceptance of our Monogram product offering and our fee-for-service offerings;
•: demand for private 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 the federal government's programs and legislation recently passed or under consideration as of February 9, 2010;
•: competition for providing private education financing and reluctance by lenders to participate in the private education loan market;
•: conditions in the private education loan securitization market, including the costs or availability of financing, rating agency assumptions or actions, and market receptivity to private education loan asset-backed securitizations;
•: regulatory requirements applicable to Union Federal and us, including the Supervisory Agreement and the Order;
•: valuation adjustments relating to the portfolio of private education loans held for sale by UFSB-SPV;
•: general interest rate and consumer credit environments, including their effect on our assumed discount, net default and prepayment rates, the forward London Interbank Offered Rate, or LIBOR, curve and the trusts' ability to recover principal and interest from borrowers;
•: our critical accounting policies and estimates;
•: challenges relating to the federal income tax treatment of the sale of the Trust Certificate or our asset services agreement with the purchasers of the Trust Certificate entered into in April 2009, which we refer to as the Asset Services Agreement, including proceedings relating to any tax refund previously received;
•: changes in generally accepted accounting principles, which could impact the carrying value of assets and liabilities, as well as require the consolidation of certain off-balance sheet entities;
•: applicable laws and regulations, which may affect the terms upon which lenders agree to make private education loans, recovery rates on defaulted education loans and the cost and complexity of our loan facilitation operations; and
•: developments in connection with the TERI Reorganization, including approval of the plan of reorganization proposed by TERI and the official committee of unsecured creditors, or Creditors Committee, in September 2009.

We believe that conditions in capital markets began to improve during the first six months of fiscal 2010. If we are able to facilitate the securitization of private education loans in the future, we expect the structure and economics of such a transaction to be substantially different from our past transactions. We expect lower revenues and additional cash requirements on our part.

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In July 2009, Union Federal agreed pursuant to the Order to submit to the OTS a new business plan for Union Federal covering fiscal years 2010, 2011 and 2012. We are uncertain whether the OTS will approve the new business plan that we proposed for Union Federal, including the extent to which Union Federal will be permitted to originate private education loans. See Note 14, "Union Federal Regulatory Matters—Supervisory Agreement and Order to Cease and Desist," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details. During the second quarter of fiscal 2010, we announced that we had begun examining strategic alternatives for Union Federal, including a potential sale.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the report date and the reported amounts of income and expenses during the reporting periods. We base our estimates, assumptions and judgments on historical experience 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 audited consolidated financial statements for the fiscal year ended June 30, 2009, which are included under Item 8 of our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on September 3, 2009. 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, such as those involving recognition of service revenues and the valuation of our service receivables and portfolio of private education loans held for sale. We regard an accounting estimate or assumption underlying our 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 our Board of Directors, and we believe that our estimates relating to the recognition and valuation of our securitization-related revenue and receivables and asset servicing revenue and receivables, as described below, fit the definition of critical accounting estimates. We also consider our policy with respect to the determination of whether or not to consolidate the financial results of the securitization trusts that we facilitate and the valuation of the portfolio of private education loans held for sale to be critical accounting policies.

Service Revenues and Receivables

We have historically structured and facilitated securitization transactions for our clients through a series of bankruptcy remote, special purpose statutory trusts. Through the securitization process, the trusts obtain private education loans from the originating lenders or their assignees, which relinquish to the trust their ownership interest in the loans. The debt instruments that the trusts issue to finance the purchase of these private education loans are obligations of the trusts, rather than our obligations or

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those of originating lenders or their assignees. We have received several types of fees in connection with our past securitization services:

•: Up-front structural advisory fees. We received a portion of the structural advisory fees at the time the securitization trust purchased the loans.
•: Additional structural advisory fees. We are entitled to receive a portion of the structural advisory fees over time, based on the amount of loans outstanding in the trust from time to time over the life of the trust.
•: Asset servicing fees. For the NCLST Trusts for which we were previously entitled to receive a portion of the residual interests, we are now entitled to receive asset servicing fees for services we are contractually obligated to perform on behalf of the new residual interest owners. Receipt of such fees is contingent upon distributions available to the owners of the residual interests of such trusts. See Note 4, "Service Receivables and Related Revenues," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details.
•: Residuals. We also have the right to receive a portion of the residual interests, if any, generated by various securitization trusts other than the NCSLT Trusts. This right is junior in priority to the rights of the holders of the debt sold in the securitizations and additional structural advisory fees.

As required under GAAP, we recognize the fair value of additional structural advisory fees and residuals as revenue at the time the securitization trust purchases the private education loans, as they are deemed to be earned at the time of the securitization but before we actually receive payment. These amounts are deemed earned because evidence of an arrangement exists, we have provided the services, the fee is fixed and determinable based upon a discounted cash flow analysis, and there are no future contingencies or obligations due on our part. We earn asset servicing fees as the services are performed; however, the receipt of the fees is contingent on distributions available to the owners of the residual interests of the trusts subject to these services. Under GAAP, we are required to estimate the fair value of the additional structural advisory fees, asset servicing fees and residuals receivables as if they are investments in securities classified as trading, similar to retained interests in securitizations. In subsequent periods, we re-evaluate the estimated fair value of these receivables and recognize the change in fair value as servicing revenue in the period in which the change in estimate occurs.

Because there are no quoted market prices for our additional structural advisory fees, asset servicing fees or residuals receivables, we use discounted cash flow modeling techniques and the following key assumptions to estimate their values:

•: expected annual rate and timing of loan defaults, and TERI's obligation to pay default claims, if applicable;
•: discount rate, which we use to calculate the present value of our future cash flows;
•: expected amount and timing of recoveries of defaulted loans, including use of recoveries to replenish trusts' segregated reserve accounts pledged to the securitization trusts by TERI to secure its guaranty obligations, which we refer to as Pledged Accounts;
•: trend of interest rates over the life of the loan pool, including the forward LIBOR curve and the spread between LIBOR and auction rates, if applicable;
•: annual rate and timing of private education loan prepayments; and
•: fees and expenses of the securitization trusts.

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We base our estimates on our proprietary historical data, publicly available third-party data and our industry experience, adjusting for specific product and borrower characteristics such as loan type and borrower creditworthiness. We also monitor trends in loan performance over time and make adjustments we believe are necessary to value properly our receivables balances at each balance sheet date.

At December 31, 2009 and 2008, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $12.4 billion and $13.3 billion, respectively. The underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans, of which approximately 26.2% were in deferment, 6.0% were in forbearance and 67.8% were in repayment status as of December 31, 2009. Approximately 88.2% of the loans in repayment status as of December 31, 2009 were current, 4.9% were between 31 and 90 days past due, 3.8% were between 91 and 180 days past due, and 3.1% were greater than 180 days past due. As of December 31, 2009, the cumulative gross default rate with regard to loans in, and loans that have previously been in, repayment status in the NCSLT Trusts was 12.8%. We have posted to our website, and filed as exhibit 99.1 to this quarterly report, static pool data as of December 31, 2009, including original pool characteristics and borrower payment status, delinquency, cumulative loss and prepayment data as of December 31, 2009 for certain securitization trusts that we have facilitated. We have also posted to our website, and filed as exhibit 99.2 to this quarterly report, a supplemental presentation of certain historical trust performance data, including parity ratios by trust, net recovery rates by year of default, six-month rolling prepayment rates and payment status by trust.

Because our fair value estimates rely on quantitative and qualitative factors, including historical data and macroeconomic indicators to predict prepayment, default and recovery rates, management's ability to determine which factors should be more heavily weighted in our estimates, and our ability to accurately incorporate those factors into our loan performance assumptions, are subjective and can have a material effect on our valuations.

Default and Recovery Rates. The net default rate is calculated as the weighted average for all of our private education loan securitization trusts of:

•: the estimated cumulative principal balance, including capitalized interest and fees, of defaulted private education loans over the life of a trust, which we refer to as the endpoint default, minus the estimated net cumulative amount of recoveries (reduced by costs of recovery) on defaulted loans over the life of the trust; divided by
•: the original principal balance of the loans.

A securitization trust may have a life of over 20 years, based on a lifecycle for private education loans that includes borrowers' in-school deferment, grace, repayment and forbearance periods. Higher levels of loan defaults are generally expected to occur in the early years of a trust, as loans enter repayment. Recoveries on defaulted loans are expected to lag defaults by months or years, with cumulative recoveries increasing gradually over an extended period of time later in the life of a trust. As a result, at a single point in time, particularly early in the life of a trust, a trust may experience an actual net default rate that is higher than the estimated endpoint net default rate for that trust. For the same reason, we assess the actual current net default rates against an expected default timing curve, which reflects the expected speed of defaults over the life of a trust. The shape of the default curve is based in part on our proprietary database of loan performance information, reflecting data through a variety of economic cycles, and influences the estimated endpoint defaults, which in turn influence the net default rate.

Prepayment Rates. We compute prepayments as the difference between the total amount of payments, both principal and interest, received from or on behalf of a borrower and the amount of principal and interest billed to the borrower during the same period. To convert this dollar amount into a rate, we divide these amounts by the dollar amounts that could possibly have been repaid during that

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period and annualize the result. This approach results in a rate that is expressed as a conditional prepayment rate, or CPR. The CPR is essentially an estimate of the likelihood that a loan will be prepaid during a period, given that it has not previously defaulted or been repaid in full. The prepayment rate can be significantly different at different points in time over the life of a trust, or any pool of loans, because the prepayment rate for a given cohort of loans will vary with their seasoning, credit quality, prevailing interest rates and availability of consumer credit.

Discount Rate—Additional Structural Advisory Fees. We base the discount rate that we use to estimate the fair value of our additional structural advisory fees on a spread over the 10-year U.S. Treasury Bond rate. The spread represents our estimate of the risk premium related to the additional structural advisory fees. In developing the spreads, we primarily consider yield curves for certain composite indices for subordinated corporate bonds with 15-year maturities, as well as yields, including indicative yields, in the broader ABS marketplace during the fiscal period.

Discount Rate—Asset Servicing Fees and Residuals. In determining an appropriate discount rate for valuing our asset servicing fees and residuals receivables, we consider a number of factors, including market data made available to us on spreads on federally guaranteed loans and private education loans, as well as rates used in the much broader ABS market. We also evaluate yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals.

Auction Rate Note Interest Rates. Prior to fiscal 2009, we facilitated five trusts that issued auction rate notes to finance, in whole or in part, the purchase of private education loans. Interest rates for the auction rate notes are determined from time to time at auction; however, during fiscal 2009 and fiscal 2010, failed auctions occurred or persisted with respect to auction rate notes issued by each of the five trusts. In the second quarter of fiscal 2009, the ratings assigned to the auction rate notes of these trusts were downgraded due to the failed auctions, deterioration in trust performance and the downgrade in the insurance financial strength ratings assigned to Ambac Assurance Corporation, which provides credit enhancement for certain auction rate notes. As a result, the auction rate notes bear interest at a maximum spread over one-month LIBOR as specified in the indentures, based on the ratings assigned to the notes. We assumed at December 31, 2009 that all auction rate notes would continue to bear interest at their current maximum spreads until their expected maturity dates.

Forward LIBOR Curve. LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on the cash flows generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus a spread to the extent such fees are accrued but unpaid by the trusts.

TERI's Obligation to Pay Claims. The indentures relating to the securitization trusts specify certain circumstances, which we refer to as Trigger Events, upon the occurrence of which payments that would otherwise be due in respect of additional structural advisory fees and residuals instead be directed to the holders of the notes issued by the trusts until the conditions causing the Trigger Event cease to exist or all notes and related interest are paid in full. Under the indentures, a Trigger Event generally occurs when the cumulative gross defaults of education loans held by such trust exceed a specified level. As a result of the TERI Reorganization, in the third quarter of fiscal 2008, we adjusted our assumptions to assume that amounts available to pay a trust's default claims will be limited to amounts available from the trust's Pledged Account, assuming that future recoveries on defaulted loans would replenish such Pledged Account. Previously, we assumed that TERI would pay default claims on

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a timely basis and that no default Trigger Event would occur. Although the overall expected cash flows generated by the trusts improved as a result of the higher priority of repayment of the notes, the expected timing of cash payments to us with respect to additional structural advisory fees and residuals was delayed, reducing their estimated fair value.

In January 2009, the Creditors Committee filed an adversary complaint in the United States Bankruptcy Court for the District of Massachusetts, or the Bankruptcy Court, alleging that certain security interests granted by TERI to the trusts are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance of more than $610 million as of December 31, 2009. In September 2009, the Creditors Committee and TERI filed a proposed joint plan of reorganization that included a proposed settlement of the adversary complaint. The proposed joint plan of reorganization, which was amended in October 2009 and February 2010, generally proposes that defaulted loans owned by TERI with an aggregate principal balance of more than $350 million, as well as rights to future recoveries on such loans, be transferred to the trusts and defaulted loans with an aggregate principal balance of more than $250 million, as well as rights to future recoveries on such loans, be transferred to a liquidating trust for the benefit of TERI's unsecured creditors, including the trusts. We are uncertain whether the terms of the proposed settlement will be further amended and whether the trusts will vote to approve the proposed plan of reorganization and thereby opt-in to the proposed settlement. We did not adjust our assumptions regarding the trusts' security interests as of December 31, 2009, and we continued to assume that the trusts had valid and enforceable security interests in, among other collateral, all future recoveries on defaulted loans owned by TERI and that such recoveries would be available to replenish the trusts' Pledged Accounts.

Education Loans Held for Sale

Education loans held for sale by UFSB-SPV have been pledged pursuant to an education loan warehouse facility provided by a third-party lender. The loans are subject to call provisions by the third-party lender, and therefore, we do not have the ability to hold the loans to maturity. Education loans held for sale are carried at the lower of cost or fair value. The fair value of education loans held for sale is evaluated on a quarterly basis.

When available, the fair value is based on quoted market values. In the absence of readily determined market values, fair value is estimated by management based on the present value of expected future cash flows from the education loans held for sale. These estimates are based on historical and third-party data and our industry experience with the assumptions for, among other things, default rates, recovery rates on defaulted loans, prepayment rates, the proportion of buyer's equity to financing and the corresponding weighted-average cost of capital commensurate with the risks involved. During the second quarter of fiscal 2010, we retained an independent third party to assess the fair value of a portfolio of non-current private education loans held by Union Federal. We incorporated the estimates received from the third party, and the sales price received by Union Federal in October 2009 for the sale of its portfolio of current loans, in our estimate of the fair value of the private education loans held for sale by UFSB-SPV at December 31, 2009. If readily determined market values became available, or if actual performance were to vary appreciably from management's estimates, the fair value of the loans would need to be further adjusted, which could result in material differences from the recorded carrying amounts. Changes in the carrying value of education loans held for sale are recorded as a separate component of non-interest expense.

In October 2009, Union Federal sold a portion of its portfolio of private education loans held for sale, which excludes loans held by UFSB-SPV, to an unaffiliated third party. In November 2009, Union Federal sold the remainder of its portfolio of private education loans held for sale to a newly formed statutory trust owned by a subsidiary of FMC. These loans were reclassified as held to maturity upon

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sale. See Note 3, "Education Loans Held for Sale," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional information.

Sensitivity Analysis

Increases in our estimates of defaults, prepayments and discount rates, as well as decreases in default recovery rates and the multi-year forward estimates of LIBOR, would have a negative effect on the value of our additional structural advisory fees, as well as our asset servicing fees receivable and our education loans held for sale. Private education loan prepayments include either full or partial payments by a borrower in advance of the maturity schedule specified in the credit agreement. If amounts in the Pledged Accounts were unavailable to pay the trusts' default claims or if recoveries on defaulted loans were not available in whole or in part to replenish such Pledged Accounts, as a result of a plan of reorganization or otherwise, or if net defaults increase beyond the level of expected third-party reimbursement assumptions, then these changes will have an additional negative effect on the value of these assets.

The following table shows our loan performance and discount rate assumptions and additional structural advisory fee balances at December 31, 2009 and estimated changes that would result from changes in our assumptions. The effect on the fair value of the structural advisory fees is 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 December 31, 2009.

The sensitivities presented below are hypothetical and should be used with caution. The effect of each change in assumption must be calculated independently, holding all other assumptions constant. Because the key assumptions may not in fact be independent, the net effect of simultaneous adverse changes in key assumptions may differ materially from the sum of the individual effects calculated below.

		Percentage change in assumptions						Management assumptions and receivables balance at December 31, 2009			Percentage change in assumptions

Structural advisory fees		Down 20%			Down 10%						Up 10%			Up 20%
		(dollars in thousands)
Default rate:
	Management assumption(1)		19.26	%		20.19	%		21.09	%		21.98	%		22.84	%
	Total structural advisory fees	$	57,467		$	56,607		$	55,724		$	54,820		$	53,904
	Change in receivables balance		3.13	%		1.58	%					(1.62	)%		(3.27	)%
Default recovery rate:
	Management assumption		32.00	%		36.00	%		40.00	%		44.00	%		48.00	%
	Total structural advisory fees	$	54,580		$	55,166		$	55,724		$	56,256		$	56,752
	Change in receivables balance		(2.05	)%		(1.00	)%					0.95	%		1.84	%
Annual prepayment rate:
	Management assumption		6.41	%		7.21	%		8.01	%		8.81	%		9.61	%
	Total structural advisory fees	$	56,907		$	56,302		$	55,724		$	55,174		$	54,642
	Change in receivables balance		2.12	%		1.04	%					(0.99	)%		(1.94	)%
Discount rate:
	Management assumption		9.47	%		10.65	%		11.84	%		13.02	%		14.20	%
	Total structural advisory fees	$	74,413		$	64,381		$	55,724		$	48,253		$	41,802
	Change in receivables balance		33.54	%		15.54	%					(13.41	)%		(24.98	)%

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		Change in assumption								Change in assumption

		Down 200 basis points			Down 100 basis points			Receivables balance		Up 100 basis points			Up 200 basis points
		(dollars in thousands)
Forward LIBOR rates:
	Total structural advisory fees	$	45,810		$	50,400		$	55,724	$	61,756		$	68,523
	Change in receivables balance		(17.79	)%		(9.55	)%				10.82	%		22.97	%

(1): The percentage change in assumptions applies to future projected defaults in the portfolio after taking into account actual defaults occurring in the portfolio through December 31, 2009. As a result, application of the nominal 10% or 20% variation results in a change in the management assumption that is less than 10% or 20% of 21.09%.

Consolidation

At December 31, 2009 and 2008, each of the securitization trusts created after January 31, 2003 has met the criteria to be a qualified special-purpose entity, or QSPE, as defined by Accounting Standards Codification, or ASC, 860-40, Transfers and Servicing—Transfers to Qualifying Special Purpose Entities, which we refer to as ASC 860-40. Accordingly, we did not consolidate these existing securitization trusts in our financial statements. In addition, the securitization trusts created prior to January 31, 2003 in which we hold a variable interest that could result in us being considered the primary beneficiary of such trust, have been amended in order for them to be considered QSPEs.

In June 2009, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standard 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement 140, which we refer to as FAS 166, and Financial Accounting Standard 167, Amendments to FASB Interpretation No. 46(R), which we refer to as FAS 167. Both statements are effective beginning with our financial statements for the first quarter of fiscal 2011, ending on September 30, 2010. FAS 166 removes the concept of a QSPE from ASC 860-40 and removes the exception from consolidation for qualifying special-purpose entities from ASC 810-10, Consolidation, which we refer to as ASC 810-10.

•: The power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance; and
•: The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

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We are evaluating the impact that the adoption of these statements will have on our consolidated financial condition and results of operations, particularly as they relate to the securitization trusts holding loans we previously facilitated. At December 31, 2009, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $12.4 billion and the principal and interest of the education loans outstanding was $11.1 billion. The underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans. The aggregate outstanding principal balance of the debt issued by the other trusts, for which we own residual interests, was $561.1 million and the principal and interest of the education loans outstanding was $535.4 million. As of February 9, 2010, the impact of these accounting pronouncements on our financial condition and results of operations was still uncertain.

These new accounting rules would also be applied to new transactions entered into from July 1, 2010 forward.

Results of Operations

Three and six months ended December 31, 2009 and 2008

Summary

The following table summarizes our results of operations:

	Three months ended December 31,						Change between periods			Six months ended December 31,						Change between periods

	2009			2008			2009-2008			2009			2008			2009-2008
	(in thousands, except per share data)
Service revenues	$	8,643		$	(93,569	)	$	102,212		$	17,689		$	(185,611	)	$	203,300
Net interest income		1,501			7,474			(5,973	)		5,941			14,612			(8,671	)

Total revenues		10,144			(86,095	)		96,239			23,630			(170,999	)		194,629
Non-interest expenses		31,249			59,138			(27,889	)		181,451			120,069			61,382

Loss before income taxes		(21,105	)		(145,233	)		124,128			(157,821	)		(291,068	)		133,247
Income tax benefit		(9,386	)		(51,846	)		42,460			(52,036	)		(104,785	)		52,749

Net loss	$	(11,719	)	$	(93,387	)	$	81,668		$	(105,785	)	$	(186,283	)	$	80,498

Net loss per share, diluted	$	(0.12	)	$	(0.94	)	$	0.82		$	(1.07	)	$	(1.88	)	$	0.81
Diluted weighted average shares outstanding		99,247			99,116			131			99,224			99,040			184

We reported a net loss of $11.7 million, or $0.12 per share, on a fully diluted basis, for the second quarter of fiscal 2010, compared with a net loss of $93.4 million, or $0.94 per share, for the second quarter of fiscal 2009. The improvement in earnings in fiscal 2010 reflects lower write-downs of service revenue receivables and lower operating expenses. We did not facilitate any new securitization transactions in the first six months of fiscal 2010 or 2009. Total revenues for the second quarter of fiscal 2010 increased by $96.2 million from the second quarter of fiscal 2009. Total non-interest expense decreased $27.9 million over the same period, reflecting lower compensation and benefits and general and administrative expenses.

Our net loss for the first six months of fiscal 2010 was $105.8 million, or $1.07 per share on a fully diluted basis, compared with a net loss of $186.3 million, or $1.88 per share, for the first six months of fiscal 2009. The improvement in earnings for the six month period is attributable to lower write-downs of service revenue receivables and lower compensation and benefits and general and administrative expenses, partially offset by higher unrealized losses on education loans held for sale, most of which was recorded in the first quarter of fiscal 2010.

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Service Revenues

The following table summarizes the changes in our service revenues:

			Three months ended December 31,					Change between periods			Six months ended December 31,					Change between periods

			2009		2008			2009-2008			2009		2008			2009-2008
			(in thousands)
Additional structural advisory fees—trust updates			$	278	$	(29,513	)	$	29,791		$	641	$	(47,403	)	$	48,044
Asset servicing fees:
	Fee income			1,777		—			1,777			3,879		—			3,879
	Fee updates			203		—			203			363		—			363

		Total asset servicing fees		1,980		—			1,980			4,242		—			4,242
Residuals—trust updates				1,453		(69,082	)		70,535			2,277		(149,238	)		151,515
Administrative and other fees				4,932		5,026			(94	)		10,529		11,030			(501	)

Total service revenues			$	8,643	$	(93,569	)	$	102,212		$	17,689	$	(185,611	)	$	203,300

Additional Structural Advisory Fees

We are entitled to receive additional structural advisory fees over time, based on payment priorities established in the trusts' indentures, with no further requirement for service on our part. In the case of the NCSLT Trusts, this fee accumulates monthly in each trust from the date of a securitization at a rate of 15 to 30 basis points per year plus accrued interest on earned but unpaid fee income. We generally become entitled to receive this additional portion, plus interest, once the ratio of trust assets to trust liabilities in the particular NCSLT Trust, which we refer to as the Parity Ratio, reaches a stipulated level, which ranges from 103.0% to 105.5%. The level applicable to a particular trust is determined at the time of securitization. Actual Parity Ratios at December 31, 2009 ranged from 89.98% to 97.09%. Please refer to exhibit 99.2 to this quarterly report for additional information on actual trust Parity Ratios as of December 31, 2009. The stipulated Parity Ratio levels may be raised if certain trust characteristics change.

We record the net present value of the future cash flows due to us from the trusts, or estimated fair value, of these fees as additional structural advisory fee receivables on the balance sheet. Additional structural advisory fees recognized in the income statement represent the change in fair value during the period in the structural advisory fee receivable, less cash received, if any. To estimate the amount and timing of the cash flows of these fees, we apply a discount rate to the estimated amount and timing of cash flows of each trust, taking into consideration the estimated operational expenses for the separate securitization trusts and trust performance assumptions, including the expected annual rate and timing of loan defaults, TERI's obligation to pay default claims, expected recoveries on defaulted loans, including use of recoveries to replenish the Pledged Accounts, the annual rate and timing of education loan prepayments, the trend of contractual and market interest rates over the life of the loan pool, the cost of funding outstanding auction rate notes, the existence of Trigger Events and the discount rate commensurate with the risk involved. These assumptions are based on historical and third-party data and our industry experience.

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On a quarterly basis, we update our estimate of the fair value of our additional structural advisory fee receivable. We expect, as of December 31, 2009, to begin to receive these fees approximately five to 22 years after the date of a particular securitization transaction. However, for many of the trusts, the bankruptcy filing of their loans' primary guarantor, TERI, or cumulative gross default rates have resulted in Trigger Events. These events may significantly delay the receipt of fees. We estimate the trend of interest rates over the life of the loan pool using an implied forward LIBOR curve, and an assumed spread between LIBOR and auction rates, to estimate trust cash flows.

For the second quarter and first six months of fiscal 2010, we recorded revenue from trust updates for additional structural advisory fees of $0.3 million and $0.6 million, respectively, compared to losses from trust updates of $29.5 million and $47.4 million for the comparable periods in fiscal 2009. During the first six months of fiscal 2009, we experienced a significant tightening of the forward LIBOR curve, increased costs related to interest on auction rate notes, higher default rates and increases in the discount rate. During the first six months of fiscal 2010, there has been less volatility in the financial markets, and as a result, more stability in discount rates and the forward LIBOR curve, although our assumed default rates have continued to increase based on actual experience. See "—Service Revenues Receivables Assumptions" that follows for a discussion of each assumption.

The following table summarizes changes in the estimated fair value of our additional structural advisory fees receivables:

				Three months ended December 31,						Six months ended December 31,

				2009			2008			2009			2008
				(in thousands)
Fair value at beginning of period				$	55,469		$	94,475		$	55,130		$	113,842
	Cash received from trust distributions				(23	)		(27	)		(47	)		(1,504	)
	Trust updates:
		Passage of time—fair value accretion			1,583			2,641			3,329			5,430
		Increase (decrease) in forward LIBOR curve			3,611			(15,396	)		1,563			(19,531	)
		(Increase) decrease in discount rate assumption			(3,755	)		(6,123	)		3,698			(20,189	)
		Increase in timing and average default rate			(1,743	)		(3,031	)		(3,472	)		(6,164	)
		Increase in auction rate notes spread			—			(13,087	)		—			(13,087	)
		Decrease in average prepayment rate			—			2,358			—			2,358
		Other factors, net			582			3,125			(4,477	)		3,780

			Net change from trust updates		278			(29,513	)		641			(47,403	)

Fair value at end of period				$	55,724		$	64,935		$	55,724		$	64,935

Residuals and the Sale of the Trust Certificate; Asset Servicing Fees

Historically, as we facilitated the securitizations of loan pools, we were entitled to receive a portion of the residual cash flows, if any, generated by the various securitization trusts that purchased the loans. We recorded the estimated fair value of these residual cash flows on our balance sheet as residuals receivables. Residual fees recognized in our statement of operations represent the change during the period in the estimated fair value of residuals receivable. The estimated fair value is based on the net present value of the future cash flows due to us from the trusts related to our residual interest ownerships.

NC Residuals Owners Trust, a statutory trust, directly or indirectly owned certain certificates of beneficial ownership interests of the NCSLT Trusts. As a result of our sale of the Trust Certificate, we are no longer entitled to the residual cash flows of the NCSLT Trusts, although we continue to be

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entitled to receive residuals from other trusts. The purchasers of the Trust Certificate agreed to bear all future federal and state tax liabilities associated with the NCSLT Trust residuals.

During the second quarter and first six months of fiscal 2010, we recorded revenue from residuals receivables of $1.5 million and $2.3 million, respectively, compared with losses of $69.1 million and $149.2 million for the comparable periods in fiscal 2009. Results for the first six months of fiscal 2009 include changes made to the estimated fair value of the residuals of the NCSLT Trusts, prior to our sale of the Trust Certificate. Residuals receivables for the first six months of fiscal 2010 relate only to residuals from trusts other than the NCSLT Trusts. Losses in the first six months of fiscal 2009 reflected a tightening of the forward LIBOR curve, higher interest payable on auction rate notes, higher assumed default rates and an increase in the assumed discount rate. See "—Service Revenues Receivables Assumptions" that follows for a discussion of each assumption.

The following table summarizes the changes in the estimated fair value of our residuals receivables:

				Three months ended December 31,					Six months ended December 31,

				2009		2008			2009		2008
				(in thousands)
Fair value at beginning of period				$	10,784	$	213,099		$	9,960	$	293,255
	Trust updates:
		Passage of time—fair value accretion			433		8,821			859		19,752
		Increase (decrease) in forward LIBOR curve			112		(16,129	)		134		(22,113	)
		(Increase) decrease in discount rate assumption			—		(39,991	)		1,176		(83,634	)
		Increase in timing and average default rate			—		(9,380	)		—		(50,108	)
		Increase in auction rate notes spread			—		(31,779	)		—		(31,779	)
		Decrease in average prepayment rate			—		11,336			—		11,336
		Other factors, net			908		8,040			108		7,308

			Net change from trust updates		1,453		(69,082	)		2,277		(149,238	)

Fair value at end of period				$	12,237	$	144,017		$	12,237	$	144,017

We entered into the Asset Services Agreement in April 2009, pursuant to which we have agreed to provide certain services to the purchasers of the Trust Certificate to support their ownership of the NCSLT Trust residuals, including analysis and valuation optimization services and services relating to funding strategy. As compensation for our services, we are entitled to an asset servicing fee, calculated as a percentage of the aggregate outstanding principal balance of loans outstanding in the NCSLT Trusts. Although this fee is earned monthly, we will not receive any asset servicing fees until the purchasers have begun to receive residual cash flows. We earned asset servicing fees of $2.0 million during the second quarter and $4.2 million for the first six months of fiscal 2010. Changes to our assumptions did not have a material impact on the estimated fair value of these receivables during the first six months of fiscal 2010.

Administrative and Other Fees

Administrative and other fees decreased slightly to $4.9 million and $10.5 million for the second quarter and first six months of fiscal 2010, respectively, down from $5.0 million and $11.0 million for the comparable periods in fiscal 2009. Administrative and other fees include trust administration fees generated from the daily management and information gathering and reporting services for parties related to securitization trusts, stand-alone fee-based loan origination, processing fees and loan portfolio default prevention services. During the first six months of fiscal 2010, lower marketing revenues were offset, in large part, by higher revenue from default prevention services.

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Service Revenues Receivables Assumptions

	Six months ended December 31,

	2009									2008
	Rate			Rate Change for the Quarter			Rate Change for the Six Months			Rate			Rate Change for the Quarter			Rate Change for the Six Months
Discount rate—additional structural advisory fees		11.84	%		0.54	%		(0.69	)%		12.21	%		1.14	%		2.49	%
Discount rate—asset servicing fees and residuals		16.00			—			(1.00	)		18.40			2.05			3.52
Gross default rate		21.09			0.98			2.09			16.58			0.62			1.75
Net default rate		12.65			0.58			1.25			8.62			0.32			0.91
Recovery rate		40.00			—			—			48.00			—			—
Prepayment rate		8.01			—			—			8.12			(0.28	)		(0.28	)

Forward LIBOR Curve. The forward LIBOR curve is a market observable input obtained from an independent third party. LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on the cash flows generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus 150 basis points to the extent such fees are accrued but unpaid by the trusts.

During the second quarter of fiscal 2010, the forward LIBOR curve experienced an upward shift of approximately 75 to 100 basis points, resulting in an increase in the estimated fair value of our structural advisory fees of $3.6 million. This shift more than offset the tightening of the curve experienced during the first quarter of fiscal 2010 and resulted in a net increase of $1.6 million for the first six months of fiscal 2010.

During the first six months of fiscal 2009, there was a tightening in the forward LIBOR curve which resulted in decreases to our additional structural advisory fees and residuals receivables of $15.4 million and $16.1 million, respectively, for the second quarter, and $19.5 million and $22.1 million, respectively, for the first six months of fiscal 2009.

Discount Rate—Additional Structural Advisory Fees. We base the discount rate that we use to estimate the fair value of our additional structural advisory fees on a spread over the 10-year U.S. Treasury Bond rate. In determining the spread for fiscal 2010, we considered, among other things, yield curves for certain composite indices for B-rated corporate bonds with 15-year maturities, as well as yields in the broader ABS marketplace. We maintained a spread of 800 basis points during the second quarter of fiscal 2010, flat from the prior quarter. During the same period, the 10-year U.S. Treasury Bond rate increased by 54 basis points to 3.84% at December 31, 2009.

As a result, we applied a discount rate of 11.84% at December 31, 2009, resulting in a decrease of the fair value of additional structural advisory fees of $3.8 million during the second quarter. For the first six months of fiscal 2010, we decreased the spread over the 10-year U.S. Treasury Bond rate by

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100 basis points from the prior year-end. During the same period, the 10-year U.S. Treasury Bond rate increased by 31 basis points for a net decrease in the applied discount rate of 69 basis points. The lower discount rate resulted in an increase in the value of the additional structural advisory fees receivables of $3.7 million during the first six months of fiscal 2010.

During fiscal 2009, we increased the spread by 275 basis points in the second quarter, for a total increase of 425 basis points for the first six months, to 1,000 basis points, due to the dislocation in the capital markets and the private education loan securities sector over these time periods. The 10-year U.S. Treasury Bond rate decreased by 161 basis points during the second quarter and by 176 basis points for the first six months of fiscal 2009, to 2.21% at December 31, 2008. As a result, we applied a discount rate of 12.21% for purposes of estimating the fair value of the additional structural advisory fees, which resulted in net decreases of $6.1 million and $20.2 million during the second quarter and first six months of fiscal 2009, respectively.

Discount Rate—Asset Servicing Fees and Residuals. In determining an appropriate discount rate for purposes of estimating the fair value of our asset servicing fees and residuals receivables, we consider a number of factors, including market data made available to us on spreads on federally guaranteed loans and private education loans, as well as rates used in the much broader ABS market. We also evaluate yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals.

We maintained a discount rate of 16.00% during the second quarter of fiscal 2010, flat from the first quarter but a decrease of 100 basis points, from 17.00%, at the prior fiscal year-end. As a result, there was no change in the residuals receivables during the second quarter and an increase in residuals receivables of $1.2 million during the first six months of fiscal 2010 due to changes in the discount rate.

During fiscal 2009, due to widening credit spreads in the debt capital markets, we increased our weighted-average discount rate by 205 basis points during the second quarter for a total increase of 352 basis points for the first six months, to 18.40% at December 31, 2008. The increase in the discount rate resulted in decreases in the estimated fair value of our residuals receivables of $40.0 million and $83.6 million during the second quarter and first six months of fiscal 2009, respectively.

The increase in the net default rate resulted in decreases in the estimated fair value of our additional structural advisory fees receivable of $1.7 million and $3.5 million during the second quarter and first six months of fiscal 2010, respectively. Changes to the net default rate did not have a material impact on the estimated fair value of our asset servicing fees or residuals receivables. In addition, during the first quarter of fiscal 2010, we recorded a decrease of $4.7 million in the estimated fair value of additional structural advisory fees for potential deviations in the collateral performance of securitized loans. We did not make a similar adjustment during the second quarter of fiscal 2010.

During fiscal 2009, the net default rate was increased to reflect higher default rates experienced in the trusts. The higher net default rate resulted in decreases in the estimated fair value of our additional structural advisory fees receivable of $3.0 million and $6.2 million during the second quarter and first six months of fiscal 2009, respectively. At December 31, 2008, we had not sold the Trust Certificate, and the increase in the net default rate resulted in decreases in the estimated fair value of our residuals receivables of $9.4 million and $50.1 million for the second quarter and first six months of fiscal 2009, respectively.

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Auction Rate Note Interest Rates. Prior to fiscal 2009, we facilitated five trusts that issued auction rate notes to finance, in whole or in part, the purchase of private education loans. Interest rates for the auction rate notes are determined from time to time at auction; however, during fiscal 2009 and fiscal 2010, failed auctions occurred or persisted with respect to auction rate notes issued by each of the five trusts. In the second quarter of fiscal 2009, the ratings assigned to the auction rate notes of these trusts were downgraded due to failed auctions, deterioration in trust performance and the downgrade of the insurance financial strength rating assigned to Ambac Assurance Corporation, which provides credit enhancement for certain auction rate notes. As a result, the auction rate notes bear interest at a maximum spread over one-month LIBOR as specified in the indentures, based on the ratings then assigned to the notes. Increases in the interest expense of the trusts reduced the estimated fair value of our additional structural advisory fees and residuals receivables and delayed the timing of receipt of additional structural advisory fees. As a result, we decreased the estimated fair value of our additional structural advisory fees by $13.1 million and our residuals receivables by $31.8 million during the second quarter of fiscal 2009. During fiscal 2010, we have assumed that the notes would continue to bear interest at the contractual maximum spread.

TERI's Obligation to Pay Claims. We did not adjust our assumptions regarding TERI's obligation to pay claims during the first six months of fiscal 2010 or fiscal 2009, including our assumption that all future recoveries on defaulted TERI-guaranteed loans would be available to replenish the trusts' Pledged Accounts. See Note 6, "Commitments and Contingencies—TERI Reorganization—Challenges to Security Interests," for additional details.

For a discussion of the sensitivity of the additional structural advisory fees to variations in our assumptions and estimates, see "Service Revenue and Receivables" and "Sensitivity Analysis" under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Application of Critical Accounting Policies and Estimates."

Net Interest Income

Net interest income decreased to $1.5 million in the second quarter of fiscal 2010, down from $7.5 million in the second quarter of fiscal 2009. Interest income was $5.5 million for the second quarter of fiscal 2010, down from $12.3 million for the same period in fiscal 2009. The decrease reflected lower rates earned on education loans held for sale coupled with a lower average balance due to the sale of loans with an aggregate principal amount of $233.8 million in October 2009. Funds received from the sale were invested in lower yielding cash equivalents. Interest expense was down slightly over the same periods due to lower time and savings deposit account volumes and rates.

Net interest income decreased to $5.9 million for the first six months of fiscal 2010, down from $14.6 million for the first six months of fiscal 2009. Interest income for the first six months of fiscal 2010 was $13.9 million, down from $24.4 million in fiscal 2009, and also reflected the decreases in rates earned and average volume outstanding of education loans held for sale. Interest expense of $8.0 million was down from $9.7 million due to lower volumes of time and savings account deposits,

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partially offset by an increase in the rate paid on borrowings under the education loan warehouse facility triggered by the events of termination that occurred in fiscal 2009.

The following tables reflect the rates earned on interest-earning assets and paid on interest-bearing liabilities:

Consolidated average balance sheet, interest and rates
(Taxable-equivalent rates(1))

	Three months ended December 31,

	2009								2008
	Average Daily Balance			Interest		Rate			Average Daily Balance			Interest		Rate
	(in thousands, except rates)
Assets
Cash and cash equivalents	$	394,269		$	167		0.17	%	$	127,699		$	182		0.57	%
Federal funds sold		11,749			1		0.04			42,449			40		0.38
Short-term investments		32,065			50		0.62			—			—		—
Investments held for sale		7,027			90		5.06			81,070			562		3.99
Education loans held for sale		315,910			4,851		6.09			509,491			11,352		8.84
Mortgage loans held to maturity		8,849			175		7.87			10,622			134		5.00
Education loans held to maturity		7,310			120		6.50			—			—		—

Total interest-earning assets		777,179			5,454		2.78			771,331			12,270		6.53
Cash and cash equivalents		2,415								806
Mark-to-market reserves		(203,018	)							(35,924	)
Other assets		144,624								405,791

Total assets	$	721,200							$	1,142,004

Liabilities
Time and savings accounts	$	99,759			385		1.53	%	$	135,089			1,073		3.15	%
Money market accounts		49,823			199		1.58			40,614			453		4.43
Education loan warehouse facility		229,075			3,191		5.53			245,074			3,041		4.92
Other short-term borrowings		—			—		—			16,957			38		0.89
Other interest-bearing liabilities		12,687			178		5.58			12,442			191		6.10

Total interest-bearing liabilities		391,344			3,953		4.01			450,176			4,796		4.23
Non-interest-bearing deposits		1,759								8,514
All other liabilities		22,252								37,646

Total liabilities		415,355								496,336

Stockholders' equity		305,845								645,668

Total liabilities and stockholders' equity	$	721,200							$	1,142,004

Interest-bearing assets	$	777,179							$	771,331

Net interest income				$	1,501							$	7,474

Net interest margin							0.76	%							3.84	%

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	Six months ended December 31,

	2009								2008
	Average Daily Balance			Interest		Rate			Average Daily Balance			Interest		Rate
	(in thousands, except rates)
Assets
Cash and cash equivalents	$	277,490		$	289		0.21	%	$	115,687		$	647		1.13	%
Federal funds sold		10,536			3		0.06			66,076			462		1.39
Short-term investments		16,033			50		0.62			—			—		—
Investments held for sale		7,545			194		5.10			81,316			1,140		4.03
Education loans held for sale		420,528			12,976		6.12			506,195			21,837		8.56
Mortgage loans held to maturity		9,212			304		6.56			10,769			285		5.26
Education loans held to maturity		3,655			120		6.50			—			—		—

Total interest-earning assets		744,999			13,936		3.71			780,043			24,371		6.42
Cash and cash equivalents		2,507								685
Mark-to-market reserves		(191,376	)							(23,687	)
Other assets		205,352								427,918

Total assets	$	761,482							$	1,184,959

Liabilities
Time and savings accounts	$	101,045			856		1.68	%	$	170,147			2,762		3.22	%
Money market accounts		49,636			427		1.71			42,125			829		3.90
Education loan warehouse facility		229,435			6,391		5.53			244,398			5,737		4.66
Other short-term borrowings		—			—		—			8,478			38		0.89
Other interest-bearing liabilities		12,017			321		5.30			13,290			393		5.86

Total interest-bearing liabilities		392,133			7,995		4.04			478,438			9,759		4.05
Non-interest-bearing deposits		1,447								4,851
All other liabilities		20,901								43,876

Total liabilities		414,481								527,165

Stockholders' equity		347,001								657,794

Total liabilities and stockholders' equity	$	761,482							$	1,184,959

Interest-bearing assets	$	744,999							$	780,043

Net interest income				$	5,941							$	14,612

Net interest margin							1.58	%							3.72	%

(1): Taxable-equivalent rate is a method of presentation in which the tax savings achieved by investing in tax-exempt securities are included in interest revenue for purposes of calculating the yield. This method facilitates the comparison of the performance of tax-exempt and taxable securities. The adjustment is computed using a federal income tax rate of 35%.

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Non-interest Expenses

Total non-interest expenses were $31.2 million for the second quarter of fiscal 2010, compared with $59.1 million for the comparable period in fiscal 2009. Non-interest expenses for the first six months of fiscal 2010 were $181.5 million, up from $120.1 million for the first six months of fiscal 2009. Excluding unrealized losses on education loans held for sale, non-interest expenses decreased by $22.7 million for the first six months of fiscal 2010 compared to the first six months of fiscal 2009. The following table reflects non-interest expenses:

						Change between periods							Change between periods

		Three months ended December 31,				Change between periods			Six months ended December 31,				Change between periods
		Three months ended December 31,				From 2008 to 2009			Six months ended December 31,				From 2008 to 2009
		2009		2008		From 2008 to 2009			2009		2008		From 2008 to 2009
		(in thousands, except employee data)
Compensation and benefits		$	8,206	$	10,295	$	(2,089	)	$	16,343	$	25,552	$	(9,209	)
General and administrative expenses:
	Depreciation and amortization		3,600		4,680		(1,080	)		7,293		9,735		(2,442	)
	Third-party services		3,744		6,784		(3,040	)		9,834		14,331		(4,497	)
	Occupancy and equipment		3,351		3,610		(259	)		9,687		8,570		1,117
	Marketing coordination		21		122		(101	)		35		3,550		(3,515	)
	Other		1,639		4,344		(2,705	)		3,645		7,801		(4,156	)

Subtotal—general and administrative expenses			12,355		19,540		(7,185	)		30,494		43,987		(13,493	)
Unrealized losses on education loans held for sale			10,688		29,303		(18,615	)		134,614		50,530		84,084

Total non-interest expenses		$	31,249	$	59,138	$	(27,889	)	$	181,451	$	120,069	$	61,382

Total number of employees at fiscal quarter-end			221		234		(13	)

Compensation and Benefits Expenses. Compensation and benefits expense decreased to $8.2 million for the second quarter of fiscal 2010, compared with $10.3 million for the second quarter of fiscal 2009. Compensation and benefits expense decreased to $16.3 million for the first six months of fiscal 2010, compared with $25.6 million for the first six months of fiscal 2009. The decreases between periods were primarily the result of decreases in severance accruals and the number of employees. We reduced headcount by 13 employees between December 31, 2008 and 2009.

General and Administrative Expenses. General and administrative expenses decreased to $12.4 million during the second quarter of fiscal 2010, compared with $19.5 million during the second quarter of fiscal 2009, reflecting lower depreciation due to the retirement of certain fixed assets, lower third-party service costs, including lower legal expenses and recoupment of $1.0 million in legal fees pursuant to our directors and officers liability insurance policy, and lower goodwill write-downs.

General and administrative expenses decreased to $30.5 million during the first six months of fiscal 2010 from $44.0 million during the first six months of fiscal 2009, reflecting lower depreciation, legal costs and goodwill write-downs, as well as the termination of a marketing coordination contract with a client.

Unrealized Losses on Education Loans Held for Sale. We recorded write-downs on education loans held for sale of $10.7 million during the second quarter, for a total of $134.6 million for the first six months of fiscal 2010. During fiscal 2009, we recorded write-downs of $29.3 million in the second quarter for a total of $50.5 million for the first six months.

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During the first quarter of fiscal 2010, we received a bid from an unaffiliated third party for the "current" education loans held for sale by our bank subsidiary, Union Federal. We recorded unrealized losses during the first quarter on all education loans held for sale based on that bid. In October 2009, Union Federal completed the sale of 88% of its portfolio of private education loans directly held by it for sale, excluding loans held by UFSB-SPV, to the third party for proceeds of $121.5 million.

During the second quarter of fiscal 2010, we retained an independent third party to assess the fair value of Union Federal's "non-current" education loans held directly for sale. In November 2009, Union Federal sold the remainder of its portfolio of private education loans held directly for sale to a newly formed statutory trust owned by a subsidiary of FMC. We reclassified the loans held by this trust as held to maturity. We continue to classify the portfolio held by Union Federal's subsidiary UFSB-SPV as held for sale. We incorporated the estimates received from the third party and the sales price received by Union Federal for the sale of its current portfolio in October 2009 in our estimate of the fair value of the private education loans held for sale by UFSB-SPV as of December 31, 2009.

Unrealized losses recorded for estimates of the fair value of education loans held for sale in fiscal 2009 reflected adjustments to our cash flow model, including higher assumptions for default rates, discount rates and the cost of funds, and lower recovery rates, based on then-current economic conditions.

Income Tax Benefit

Income tax benefit for the second quarter of fiscal 2010 was $9.4 million, for a total benefit of $52.0 million for the first six months of fiscal 2010. The income tax benefit for fiscal 2009 was $51.8 million for the second quarter and $104.8 million for the first six months. The lower overall benefit in fiscal 2010 is a result of lower pre-tax losses during fiscal 2010 and a lower effective tax rate. During the first six months of fiscal 2010, our effective tax rate, or the income tax benefit as a percentage of pre-tax loss, decreased to 33.0% from an effective tax rate of 36.0% for the first six months of fiscal 2009. The decrease in our effective tax rate was primarily due to certain permanent differences and expense accruals related to unrecognized tax benefits.

In November 2009, the Worker, Homeownership and Business Assistance Act of 2009, or WHBAA, was signed into law. As part of the WHBAA, we will be allowed to carry back the taxable losses from either fiscal 2009 or fiscal 2010 for five years, instead of two years. We have not yet determined which year would be more advantageous to carry back, and as such, have not yet determined whether or not to file an amended fiscal 2009 tax return. We have estimated that taxable income in previous years will be sufficient to cover the taxable losses of both fiscal 2009 and fiscal 2010 regardless of which fiscal year is carried back. As a result of the WHBAA and pre-existing net operating loss carryback rules, we recorded a $24.1 million income tax receivable at December 31, 2009.

We have determined that a valuation allowance is not necessary for certain deferred tax assets, as it is more likely than not that these assets will be realized through future reversals of existing temporary differences or available tax planning strategies. We will continue to review the recognition of deferred tax assets on a regular basis.

Net unrecognized tax benefits were $20.1 million at December 31, 2009. At December 31, 2009, we had approximately $2.9 million accrued for interest and no amount accrued for the payment of penalties.

As a result of the sale of the Trust Certificate effective March 31, 2009, as well as our operating losses for fiscal 2009, we recorded an income tax receivable for federal income taxes paid on prior taxable income. In the first six months of fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables.

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Financial Condition, Liquidity and Capital Resources

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 revenues from operations and issuances of common stock, promissory notes or other securities. 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 actual liquidity and capital funding requirements may depend on a number of factors, including:

•: the extent to which our services and products, including our new Monogram product offering, gain market acceptance and remain competitive at pricing favorable to us;
•: the extent to which we contribute amounts to clients in connection with our Monogram product;
•: the regulatory capital requirements applicable to Union Federal (see "—Support of Subsidiary Bank" below);
•: the amount and timing of receipt of additional structural advisory fees, asset servicing fees and residuals;
•: our operating and information systems needs;
•: 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; and
•: the extent to which we repurchase shares of our common stock or pay cash dividends to our stockholders, after the termination of the Order.

Liquidity is required for capital expenditures, working capital, business development expenses, costs associated with alternative financing transactions, general corporate expenses, and maintaining the regulatory capital of our bank subsidiary, Union Federal.

We had combined cash, cash equivalents, federal funds sold, short-term investments and investments held for sale of $456.0 million and $181.5 million, at December 31, 2009 and June 30, 2009, respectively. In the first six months of fiscal 2010, we received a total of $189.3 million in federal and state tax refunds for income taxes previously paid by us on prior taxable income, and Union Federal received $121.5 million from the sale of a portion of its private education loan portfolio to an unaffiliated third party. Net cash provided by operating activities was $287.2 million for the first six months of fiscal 2010, reflecting the receipt of the tax refunds and proceeds from the sale of the loans. Net cash used in operating activities was $68.0 million in the first six months of fiscal 2009, reflecting the funding of operations and payment of taxes.

Cash used in investing activities of $33.5 million for the first six months of fiscal 2010 was primarily due to $50.0 million of cash invested in short-term investments, partially offset by a net reduction in federal funds sold. Cash provided by investing activities of $54.7 million in the first six months of fiscal 2009 was primarily due to a net reduction in federal funds sold.

Cash used in financing activities in the first six months of fiscal 2010 of $13.5 million reflected decreases in the volume of deposits and payments under capital leases and borrowings under the

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education loan warehouse facility. Cash provided by financing activities for the first six months of fiscal 2009 of $68.1 million reflected the net issuance proceeds of series B non-voting convertible preferred stock of $125.9 million and proceeds from short-term borrowings, partially offset by decreases in deposits.

The following table summarizes our time deposits greater than $100,000 by maturity at December 31, 2009:

	(in thousands)

Within three months	$	9,020
Three to six months		22,337
Six months to one year		6,470
Over one year		740

	$	38,567

The maturities of these deposits are not directly indicative of future timing of cash needed for financing activities because they do not take into account the clients that will rollover their funds into new time deposits or into other types of deposit accounts.

Despite the uncertainties discussed above, we believe, based on our operating plan, that we have sufficient liquidity to fund our operations through the next twelve months.

Support of Subsidiary Bank

Union Federal is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements would initiate 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 Federal's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification, however, are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Union Federal's equity capital was $45.7 million at December 31, 2009, down from $84.3 million at June 30, 2009, due to dispositions of education loans held for sale during the six month period. 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). See Note 14, "Union Federal Regulatory Matters—Regulatory Capital Requirements," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for Union Federal quantitative measures. As of December 31, 2009 and June 30, 2009, Union Federal was well capitalized under the regulatory framework for prompt corrective action.

In July 2009, FMC entered into the Supervisory Agreement and Union Federal consented to the Order, pursuant to which FMC and Union Federal agreed to comply with certain requirements imposed by the OTS. The Order required Union Federal to, among other things, reduce its concentration of private education loans to Tier 1 capital plus allowances for loan losses below 50% by December 31, 2009. In October 2009, Union Federal sold approximately 88% of its portfolio of private education loans held for sale, excluding loans held by UFSB-SPV, for gross proceeds of approximately $121.5 million. As a result of the sale, Union Federal achieved the reduction required by its concentration reduction plan. In November 2009, FMC was refunded a deposit in the amount of $30.0 million that FMC had been required to maintain at Union Federal until such reduction had been achieved. See Note 14, "Union Federal Regulatory Matters—Supervisory Agreement and Order to

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Cease and Desist," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details on the Supervisory Agreement and Order, and Note 3, "Education Loans Held for Sale," for additional details on the sale of the loans.

The Supervisory Agreement requires us to, among other things, maintain Union Federal's regulatory capital ratios at the greater of: (1) the capital ratios specified in Union Federal's business plan approved by the OTS in November 2006, (2) the capital ratios projected in a business plan found acceptable to OTS or (3) the minimum regulatory capital requirements. The terms of the Supervisory Agreement and the Order will remain in effect until terminated, modified or suspended by the OTS. Union Federal's regulatory capital ratios were as follows as of the dates below:

		Regulatory Guidelines

		Minimum			Well Capitalized			December 31, 2009			June 30, 2009
Risk-based capital ratios:
	Tier 1 capital		4	%		6	%		121.14	%		37.86	%
	Total capital		8			10			121.45			37.91
Tier 1 (core) capital ratio			4			5			23.02			34.51

Contractual Obligations

As of December 31, 2009, our contractual obligations had not changed materially from those described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Contractual Obligations" in our annual report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2009.

Off-Balance Sheet Arrangements

We offer outsourcing services in connection with private education loan programs, from program design through securitization of the loans. We have structured and facilitated the securitization of private education loans for our clients through a series of bankruptcy remote, special purpose trusts.

The principal uses of these trusts have been to generate sources of liquidity for our clients' and Union Federal's assets sold into such trusts and make available more funds to students and colleges. See "—Executive Summary—Application of Critical Accounting Policies and Estimates—Consolidation" for a discussion of our determination to not consolidate these securitization trusts.

Inflation

Inflation was not a material factor in either revenue or operating expenses during the periods presented.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of business, we are subject to interest-rate risk and credit risk. Interest-rate risk applies to all of our interest-bearing assets and liabilities as well as service revenue receivables. Credit risk is primarily related to education loans, service revenue receivables, mortgage loans, cash equivalents and investments.

Interest-Rate Risk

The interest-rate characteristics of our interest-bearing assets are driven by the nature, volume and duration of our interest-bearing liabilities. Generally, our interest-bearing liabilities are either variable-rate instruments or are of a short duration and are subject to frequent repricing at maturity.

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Less than 5% of our customer deposits at Union Federal have fixed interest rates in excess of twelve months. Approximately 78% of the deposits have maturities of six months or less. Deposit pricing is subject to weekly examination by a committee of senior managers from Union Federal and our Finance and Risk and Compliance Departments. The committee considers competitors' pricing, inflows and outflows of deposit balances, and Union Federal's funding requirements to make pricing decisions on the desired volume of deposits in each given duration and product type.

Outstanding borrowings under the education loan warehouse facility carry interest at prime plus 2% and reprice daily.

The frequent repricing of our liabilities drives our investment decisions. All of our private education loans, and approximately 66% of our mortgage loans, have variable interest rates. Excess cash is primarily invested in money market funds, federal funds sold, time deposits with original maturities of less than one year, and U.S. federal agency mortgage-backed securities.

The matching of the interest-rate characteristics and duration of assets and liabilities mitigates interest-rate risk with respect to net interest revenue. However, we are still subject to interest-rate risk because as interest rates decline, the spreads between our assets and liabilities may narrow and net interest income may decline.

The fair value of private education loans held for sale and our service revenue receivables will fluctuate due to variance in prepayments and discount rates, as well as the multi-year forward estimates of the LIBOR index rate, which is the reference rate for the loan assets and assumed borrowings, and buyer's equity assumptions used in our cash flow model. We frequently monitor these assumptions and their effect on the estimated fair value of these assets. We believe that we have adequately addressed interest-rate risks in our cash flow models.

Credit Risk

We manage cash and investment assets conservatively. The primary objective of our investment policy is the preservation of capital. Therefore, cash, cash equivalents, short-term investments and investments held for sale are placed with the Federal Reserve, or invested in federal funds sold, money market funds, deposits at highly rated institutions and government agency mortgage-backed securities.

Union Federal offers conventional conforming and non-conforming fixed- and variable-rate first and second residential mortgage loans, as well as commercial real estate loans. We base our loan underwriting criteria primarily on credit score, consumer credit file information, and collateral characteristics. All mortgage loans are underwritten such that they are saleable to institutional investors. Union Federal does not offer high loan-to-value second mortgages, option adjustable rate mortgages, or sub-prime mortgage products.

Private education loans are not currently offered by Union Federal, and therefore, we are not adding newly originated loans to the existing portfolio. We use default prevention and early awareness procedures to mitigate credit risk on our held to maturity portfolio.

Our assumptions regarding defaults and recoveries of securitized loans and TERI's obligation to pay claims on defaulted loans affect the expected timing of cash payments to us in respect of additional structural advisory fees, asset servicing fees and residual cash flows, and our estimates of their fair value.

If recoveries with respect to a trust's defaulted education loans would be unavailable to replenish the trust's Pledged Account, the estimated value of our additional structural advisory fees would be reduced. In the context of the TERI Reorganization, the Creditors Committee has alleged that the NCSLT Trusts do not have enforceable rights to future recoveries on defaulted loans with an aggregate principal and accrued interest balance of more than $610 million as of December 31, 2009. The

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Creditors Committee's adversary proceeding may result in additional delay and expense, as well as a significant reduction in collateral available to the trusts. See "Risks Related to the TERI Reorganization" in Part II, Item 1A of this quarterly report for additional details. In addition, increases in our estimates of defaults, as well as decreases in default recovery rates would have a negative effect on the value of our additional structural advisory fees and asset servicing fees.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. 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 us in the reports that we file or submit 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 company's 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 December 31, 2009, our 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.

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 December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

In April and May 2008, seven purported class action lawsuits were filed by stockholders against us and certain of our current and former officers and certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs alleged, 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. The complaints alleged various claims under the Exchange Act and Rule 10b-5 promulgated thereunder. The complaints sought, among other relief, class certification, unspecified damages, fees and such other relief as the court deemed just and proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel. In November 2008, a consolidated amended complaint was filed by the lead plaintiffs that contained allegations similar to the earlier complaints. In August 2009, the court issued an order granting our motion to dismiss the plaintiffs' consolidated amended complaint. The court did not grant plaintiffs leave to re-plead, and the period during which the plaintiffs could appeal the dismissal has expired.

In addition, in May and June 2008, three federal derivative lawsuits were filed against certain of our current and former officers and directors and nominally against us in the United States District Court for the District of Massachusetts. The complaints were purportedly brought on our behalf to remedy alleged violations of federal and state law, including violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and May 2008 or June 2008, as applicable. The complaints sought a monetary judgment, injunctive relief, restitution, disgorgement and a variety of purported corporate governance reforms. In August, 2008, the court consolidated the federal derivative cases and stayed them pending resolution of the purported class actions described above. On October 6, 2009, the court entered an order approving a stipulation for dismissal of the consolidated case with prejudice. No compensation in any form passed directly or indirectly from any of the defendants to plaintiffs or any of plaintiffs' attorneys.

A state derivative action was also filed against certain of our current and former officers and directors and nominally against us in Massachusetts Superior Court in June 2008. The complaint was purportedly brought on our behalf to remedy alleged violations of federal and state law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and June 2008. The complaint sought a monetary judgment, injunctive relief, restitution, disgorgement, and costs and disbursements of the action. On October 1, 2009, the court entered an order approving a stipulation for dismissal of the case without prejudice. No compensation in any form passed directly or indirectly from any of the defendants to plaintiffs or any of plaintiffs' attorneys.

In November 2009, we recouped $1.0 million in legal expenses in connection with these lawsuits pursuant to our directors and officers liability insurance policy.

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 that would have a material adverse impact to our operations or financial condition.

Item 1A. Risk Factors

Investing in our 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 quarterly report. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall. Although we have grouped risk factors by category, the categories are not mutually exclusive. Risks described

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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.

We have updated certain of the following risk factors to reflect financial and operational information for the most recently completed fiscal quarter, including developments in the TERI Reorganization and actions taken pursuant to the OTS enforcement agreements. In addition, we have made material changes to the following risk factors as compared to the version disclosed in our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2009:

•: Capital markets dislocations, and the timing, size and structure of any future capital markets transactions, will greatly affect our quarterly financial results.
•: Failure to comply with recent OTS enforcement agreements could adversely affect our business, financial condition and operating results.
•: We may become subject to state registration or licensing requirements. If we determine that we are subject to the registration or licensing requirements of any jurisdiction, our compliance costs could increase significantly and other adverse consequences may result.
•: 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.
•: 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 have worked with in the past, the loans that we facilitate would be subject to individual state consumer protection laws.

We deleted the following risk factors, which appeared in our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2009:

•: Our assumptions regarding the future cost of funding of auction rate notes affect the valuation of our service receivables.
•: The TERI Reorganization has had, and will likely continue to have, a negative effect on our client relationships, which will adversely affect our revenue and results of operations.

Risks Related to Our Industry, Business and Operations

Challenges exist in implementing revisions to our business model.

During fiscal 2009, we took several measures to adjust our business in response to economic conditions. Most significantly, we refined our product offerings. In August 2009, we completed the development of our new Monogram product offering, which encompasses some or all of our service offerings, including program design and portfolio management, and incorporates refinements to our origination process.

We have limited experience with the new product offering, which is based on a new, proprietary origination risk score model and does not contemplate a third-party guaranty. We are uncertain whether the market will accept the new product offering, particularly because of the current economic environment where there has been a reluctance by many lenders to focus on their education lending business. As of February 9, 2010, we had not fully deployed the product to any clients. Successful sales of the Monogram loan product will be critical to growing and diversifying our revenues and client base in the future.

Commercial banks have historically served as the initial funding sources for loans we facilitate and have been our principal clients. In the absence of securitizations, we have not been able to provide these banks with the means of liquidity necessary to support long term funding of private education

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loans, and commercial banks are 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 education loan marketing and private education loan marketing have been reduced by both the compression of margins in the federal program and regulatory restrictions on cross marketing of federal and private education loans. In response to the these changes, as well as proposed legislation that would eliminate the Federal Family Education Loan Program, or FFELP, many lenders have re-evaluated their business strategies related to education lending. In light of general economic conditions, capital markets disruptions and the declining credit performance of consumer-related loans, the private education loan business may generally be less attractive to commercial banks than in the past.

In this environment, it is uncertain whether certain commercial banks will continue funding private education loans. Some of our former clients have exited the private education loan market completely. To the extent that commercial banks exit the private 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 the market opportunity in a manner that meets their desired risk control and return objectives. A related challenge is to finance successfully loans generated through our Monogram product offering through the capital markets.

The outsourcing services market for education lending is competitive, and if we are not able to compete effectively, our results of operations may be adversely affected.

We offer our clients and prospective clients, national and regional financial institutions and educational institutions, services in structuring and supporting their private education loan programs. The outsourcing services market in which we operate remains competitive with a number of active participants, some of which have greater financial, technical or other competitive resources, larger customer bases, greater name recognition and more established relationships with their clients than we have. As a result, our competitors or potential competitors may be better able than we are to overcome capital markets dislocations, adapt more quickly to new or emerging technologies and changes in customer preferences, compete for skilled professionals, build upon efficiencies based on a larger volume of loan transactions, fund internal growth and compete for market share generally.

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 Mae's program to market private education loans continues to grow, or if Sallie Mae or Nelnet, Inc., which currently provides fee-based services for non-federally guaranteed loans, seeks to market more aggressively to third parties the full range of services that we offer. Other private education loan originators include JPMorgan Chase Bank, N.A., Wells Fargo & Company, Discover Financial Services, and Student Loan Corporation, an 80% owned subsidiary of Citibank, N.A.

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, or decides to develop, a portfolio management or capital markets function may not choose to engage us for our services. 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 these loans, thereby significantly limiting the lenders' credit risk. The demand for our services could decline if lenders place additional emphasis on the private education loan market and offer the services we provide in response to recent legislative initiatives affecting the availability and profitability of federal loans, including the proposed elimination of the FFELP.

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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 exclusively on the market for private education loans, and substantially all 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, 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 United States Congress for programs under the Higher Education Act. Recent federal legislation expands federal grant and loan assistance, which could weaken the demand for private education loans. In addition, legislation such as the College Cost Reduction and Access Act of 2007 has significantly reduced the profit margins of traditional providers of federal education loans, which could result in increased competition in the market for private education loans. Increased competition could adversely affect the volume of private education loans and securitization transactions that we facilitate and impede the growth of our business.

In May 2008, the "Ensuring Continued Access to Student Loans Act of 2008" was signed into law and contains provisions which might adversely impact the demand for private education loans and outsourcing services provided by us, availability and flow of funds for private education loans, and our liquidity position. Among other things, the Act:

•: permits a parent borrower under the federal Parent Loan for Undergraduate Students, or PLUS, loan program to defer repayment of a PLUS loan until six months after the student ceases to carry at least one-half the normal full-time academic workload;
•: extends eligibility for a PLUS loan to an applicant who, during the period beginning January 1, 2007 and ending December 31, 2008, has not been delinquent for more than 180 days on mortgage loan payments or medical bill payments nor more than 89 days delinquent on the repayment of any other debt, in any case, during such period; and
•: increases the loan limits for unsubsidized Stafford loans for undergraduate students.

In August 2008, the Higher Education Opportunity Act was signed into law, which adds:

•: significant restrictions to the marketing of federal and private education loans; and
•: significant compliance burdens to private education loan lenders by adding new Truth in Lending Act disclosures, procedures and rescission rights, as well as accompanying civil penalties.

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 the costs of post-secondary education. These vehicles include, among others:

•: home equity loans, under which families borrow money based on the value of their real estate;

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•: pre-paid tuition plans, which allow students to pay tuition at today's rates to cover tuition costs in the future;
•: 529 plans, which include both prepaid 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; and
•: direct loans from colleges and universities.

If demand for private education loans weakens, we could 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 private education loan industry.

As a result of capital market dislocations that began during the second quarter of fiscal 2008, as well as the TERI Reorganization, we have been unable to complete a securitization transaction since September 2007. In addition, rising unemployment rates and the unsteady financial sector have adversely affected many consumers and borrowers throughout the country. Current borrowers may experience more trouble in repaying credit obligations, which could increase loan delinquencies and defaults and negatively affect the value of our service receivables. 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, thus decreasing education loan application and funding volumes. Finally, many lending institutions have been reluctant to lend and several clients and potential clients have exited the private education loan business and may or 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 private education loans, our business will be adversely affected.

We have in the past relied on, and will continue in the future to rely on, our clients to market and fund private education loans to student borrowers. If our clients do not devote sufficient time and resources to their marketing efforts or are not successful in these efforts, then we may experience a reduction in the volume of loans that we facilitate, and our business will be adversely affected.

In addition, if loans were marketed by our clients in a manner that is unfair or deceptive, or if the marketing, origination or servicing violated any applicable law, state unfair and deceptive practices acts could impose liability on a securitization trust holding the loan or create defenses to the enforceability of the loan. Investigations by the New York Attorney General, the Attorneys General of other states, the United States Congress or others could have a negative impact on lenders' desire to market private education loans. The Higher Education Opportunity Act of 2008 creates significant additional restrictions on the marketing of private education loans.

If we fail to manage effectively our cost reductions, our business could be disrupted and our financial results could be adversely affected.

During fiscal 2008 and fiscal 2009, we reduced headcount by over 800 employees, including departures of our former Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer, Chief Information Officer and Chief Marketing Officer. Our cost reduction initiatives have placed and will continue to place a strain on our management, systems and resources at a critical point in our business and industry. We must continue to develop alternatives to the loan guaranty and origination services that TERI has historically provided to our clients, and we must refine our business development capabilities, our systems and processes and our access to financing sources. We must

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retain, train, supervise and manage our remaining employees during this period of change in our business.

Based on facilitated loan volumes, we may outsource some borrower services functions in an effort to reduce costs, take advantage of technologies and effectively manage the seasonality associated with education loan volume. We rely on our vendors to provide high levels of service and support. Our reliance on these external vendors subjects us to risks associated with inadequate or untimely service and could result in fewer loans than we would experience if we performed the service functions in-house.

We cannot assure you that we will be able to:

•: expand our systems effectively;
•: successfully develop new products or services;
•: allocate our human resources optimally;
•: identify, hire and retain qualified employees or vendors; or
•: incorporate effectively the components of any business that we may acquire in our effort to achieve growth.

We are dependent upon the retention and motivation of certain key employees and the loss of any such employees could adversely affect our business. In addition, our future performance will also depend upon our ability to attract skilled, new employees. If we are unable to manage our cost reductions, or if we lose key employees or are unable to attract new employees, our operations and our financial results could be adversely affected.

If competitors acquire or develop a private education loan database or advanced loan information processing systems, our business could be adversely affected.

We own a proprietary database of historical information on private education loan performance that we use to help us develop our proprietary origination risk score model, determine the terms of portfolio funding transactions and establish the changes in fair value of the additional structural advisory fees, asset servicing fees and residuals receivables that we recognize as revenue. We also have developed, and continued to develop as of February 9, 2010, a proprietary loan information processing system to enhance our application processing and loan origination capabilities. Our private education loan database and loan information processing system provide us with a competitive advantage in offering our services. Third parties could create or acquire databases and systems such as ours. For example, as lenders and other organizations in the private education loan market originate or service loans, they compile over time information for their own private education loan performance database. Our competitors and potential competitors may have originated or serviced a greater volume of private education loans than we have over the past two fiscal years, which may have provided them with comparatively greater borrower or loan data or insights, particularly during the most recent economic cycle. If a third party creates or acquires a private education loan database or develops a loan information processing system, our competitive positioning, ability to attract new clients and business could be adversely affected. As a result of the termination of our agreements with TERI in the context of the TERI Reorganization, we have lost access to continuing updates to the database of TERI-guaranteed loan performance data with regard to TERI-guaranteed loans that are neither held by securitization trusts facilitated by us nor Union Federal.

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If we are unable to protect the confidentiality of our proprietary database and information systems and processes, the value of our services and technology will be adversely affected.

We rely on trade secret laws and restrictions on disclosure to protect our proprietary database and information systems and processes. We have sought to limit TERI's rights to disclose its historical loan database in the context of the TERI Reorganization, and we have entered into confidentiality agreements with third parties and with some of our employees to maintain the confidentiality of our trade secrets and proprietary information. These methods may neither effectively prevent disclosure of our confidential information nor provide meaningful protection for our confidential 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 will be adversely affected.

The loan origination process is 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 in an automated, error-free manner. The volume of loan originations that we are able to process is based, in large part, on the systems and processes we have implemented and developed. The loan origination process is becoming increasingly dependent upon technological advancement such as the ability to process loans 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, we expect to reduce our investment in technology during fiscal 2010 compared to past fiscal years. If competitors 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 clients' origination requirements or properly administer the clients' credit agreement templates or required disclosures, 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.

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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 or timely services or if our relationship with PHEAA terminates.

As of December 31, 2009, the Pennsylvania Higher Education Assistance Agency, or PHEAA, serviced a substantial majority of education loans held by the securitization trusts that we administer. This arrangement allows us to avoid the overhead investment in servicing operations but requires us to rely on PHEAA to adequately service the trusts' education loans, including collecting payments, responding to borrower inquiries and communicating with borrowers whose loans have become delinquent. We periodically review the costs associated with establishing servicing operations to service loans. During the second quarter of fiscal 2010, we announced that we had entered into negotiations for the acquisition of a loan servicer. We were subsequently unable to agree to terms, and negotiations with respect to the contemplated acquisition had been discontinued as of February 9, 2010. We continue to believe, however, that ownership of a loan servicer would complement our overall strategy and reduce our reliance on an external service provider for loan servicing, which subjects us to risks associated with inadequate or untimely services, including notice of developments in prepayments, delinquencies and defaults. A substantial increase in these rates could adversely affect our ability to access profitably the securitization markets for our clients' loans and the value of our additional structural advisory fees, asset servicing fees and residuals receivables. In addition, if PHEAA were to fail to comply with TERI's servicing guidelines in servicing securitized TERI-guaranteed private education loans, TERI would not be obligated to make guaranty payments on such loans, in which case PHEAA would be obligated to cure the noncompliance or purchase the loans. Such an event could have a negative impact on the value of our asset servicing fees and additional structural advisory fee receivables. If our relationship with PHEAA terminates, we would either need to expand 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 third parties 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 and reduced efficiency in loan processing or servicing. 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 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 located in the Boston metropolitan area. 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 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

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addressed all of the potential events that could threaten or undermine our information systems. The occurrence of any failure, interruption or breach could significantly impair the reputation of our brand, diminish the attractiveness of our services and harm our business.

If we 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 affect our customer relationships and have a material adverse effect on our business. In addition, current 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 applicant and borrower information that we process in connection with loans. 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 were to experience a data security breach, or if we or the securitization trusts that we administer otherwise improperly disclose confidential customer or consumer information, such breach or other disclosure could generate negative publicity about us and could adversely affect our relationships with our clients, including the lenders and educational institutions with which we do business. This 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 client lenders and loss of business for us.

Risks Related to Our Financial Reporting and Liquidity

If the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary materially from those reflected in our financial statements.

As compensation for our past securitization activities, we received structural advisory fees and a portion of the residual interests in the trusts. We received up-front structural advisory fees when the securitization trusts purchased the loans, and we continue to be entitled to receive additional structural advisory fees over time, based on the amount of loans outstanding in the trust over the life of the trust. We sold our residual interests in the NCSLT Trusts, but continue to have residual interests in other trusts. As required under GAAP, we recognized the estimated fair value of up-front and additional structural advisory fees and residuals receivables as revenue when the securitization trusts purchased the loans because receipt of our fees is not contingent on any further service requirement by us. Quarterly, we update our estimate of the fair value of our receivables, and changes to the fair value, less cash distributions, if any, are recorded as revenue (trust updates) in the period in which the change is made. We are entitled to asset servicing fees for additional services that we are contractually obligated to perform relating to the residual interests in the NCSLT Trusts. We recognize the net present value of asset servicing fees as our services are performed. The receipt of the fees is contingent, however, on distributions available to the owners of the NCSLT Trusts residuals. Quarterly, we update our assumptions with respect to the amount and timing of receipt of these fees, and record the changes in our estimates as revenue (fee updates) in the period in which the change is made.

We have no further financial obligation with respect to our additional structural advisory fees or residuals in the securitizations we have facilitated. However, our fees are subordinate to securities issued to investors in such securitizations, and the trusts may fail to generate any cash flow for us if the securitized assets do not generate enough cash flow to pay debt holders in full or only generate enough cash flow to pay the debt holders. Our projected cash flows from service receivables from certain

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securitization trusts are expected to be eliminated entirely, and our projected cash flows from other securitization trusts could be delayed, impaired or eliminated, if default rates increase beyond our assumptions at December 31, 2009. As of December 31, 2009, we expected to receive additional structural advisory fees and residuals beginning five to 22 years after the date of a particular securitization transaction, consistent with our expectations at June 30, 2009.

Because there are no quoted market prices for our service revenue receivables, we use discounted cash flow modeling techniques and certain assumptions to estimate fair value. Our key assumptions to estimate fair value include: discount rates; 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; the expected annual rate and timing of loan defaults, and TERI's obligation to pay default claims; expected amount and timing of recoveries of defaulted loans, including the use of recoveries to replenish Pledged Accounts; the source and amount of guaranty payments made on defaulted loans; and the fees and expenses of the securitization trusts. Because our estimates rely on quantitative and qualitative factors, including historical data and macroeconomic indicators to predict prepayment, default and recovery rates, management's 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.

We adjusted our key accounting assumptions throughout fiscal 2009 and in the first six months of fiscal 2010:

•: During fiscal 2009, we adjusted our assumptions with regard to default rates, discount rates, the future cost of funding auction rate notes and recoveries used in estimating the value of our service receivables. As a result of these factors and the disposition of the Trust Certificate, we recorded a $340.5 million pre-tax decrease in the value of our service receivables during fiscal 2009. We increased the projected weighted average gross default rates for the NCSLT Trusts by 417 basis points over the same period.
•: During fiscal 2009, we recorded aggregate losses of $138.2 million in connection with write-downs of our education loans held for sale to their estimated fair value.
•: During the first six months of fiscal 2010, we further adjusted our key accounting assumptions, including our assumptions with regard to the rate and timing of defaults, discount rates and prepayment rates used in estimating the value of our service receivables. The net effect of these adjustments, together with fair value of accretion due to passage of time, was a net increase of $2.9 million in the value of our service receivables.
•: During the first six months of fiscal 2010, we recorded a loss of $134.6 million in connection with write-downs of education loans held for sale to their estimated fair value.

In general, our adjustments during fiscal 2009 were necessary because the securitization trusts and our portfolio of private education loans held for sale had performed below our range of expectations, including with regard to delinquencies and defaults. Other contributing factors included higher assumed discount rates, the uncertainty about TERI's obligation to pay claims as a result of the TERI Reorganization, and the estimated cost of funding auction rate notes issued by several securitization trusts which we now project to be higher than previous estimates. In fiscal 2010, we have continued to experience high delinquencies and defaults, and significant write-downs of the value of loan portfolios, but we have benefited from lower discount rates and an upward shift in the forward LIBOR curve. For a discussion of changes in assumptions for the first six months of fiscal 2010 and the sensitivity of the additional structural advisory fees to variations in our assumptions and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Application of Critical Accounting Policies and Estimates."

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If the actual performance of the education loan portfolio held for sale by UFSB-SPV or the portfolios held by some or all of the securitization trusts were to vary appreciably from the adjusted assumptions we use, we may need to adjust our key assumptions further. Such an adjustment could materially affect our earnings in the period in which our assumptions change, and the actual additional structural advisory fees and residuals that we receive from the trusts, and the actual asset servicing fees that we receive from the owner of the Trust Certificate, could be significantly less than reflected in our current financial statements. In particular, economic, regulatory, competitive and other factors affecting default and recovery rates on loan portfolios, could cause or contribute to differences between actual performance of the portfolios and our key assumptions. In addition, developments in the TERI Reorganization, including resolution of challenges to the trusts' security interests in collateral securing TERI's guaranty obligations or TERI's rejection of its guaranty agreements could cause us to adjust further our key assumptions. With regard to TERI, for purposes of estimating the fair value of our service receivables, we assumed at June 30, 2009 and December 31, 2009, that the application of collateral will occur in accordance with existing agreements, including the availability of future recoveries on defaulted education loans held by TERI to replenish the Pledged Accounts. The Creditors Committee is challenging the enforceability of certain trusts' security interests, which may result in a significant reduction of collateral available to the trusts. Finally, dislocations in the capital markets have generally resulted in increases in investors' yield requirements for ABS. If such conditions degrade, we may need to further adjust our key assumptions.

Education loans held for sale by UFSB-SPV are carried at the lower of cost or fair value. The fair value of education loans held for sale is evaluated on a periodic basis. In the absence of readily determined market values, the fair value is estimated by management based on the present value of expected future cash flow from the education loans held for sale. Under GAAP, we are required to reduce the carrying value of these private education loans held for sale if their fair value decreases below our cost. In such an event, we are required to write-down the carrying value of our private education loans held for sale, which would result in an increase in our non-interest expenses. We may be required to make additional valuation adjustments in the future.

Our liquidity could be adversely affected if the sale of the Trust Certificate does not result in the tax consequences that we expect.

Effective March 31, 2009, we completed the sale of the Trust Certificate, representing our ownership interest in NC Residuals Owners Trust, in a transaction intended to improve our financial condition and liquidity. The sale of the Trust Certificate generated a cash refund for income taxes previously paid, as we had been required to pay income taxes on the expected residual cash flows from the NCSLT Trusts in excess of what we actually received. In addition, the transaction is expected to eliminate future tax obligations relating to these residuals. We estimated that we would have been required to pay approximately $430 million in additional taxes over the remaining life of these residuals, with approximately $370 million to be paid prior to the residuals generating sufficient annual cash flows to offset the tax payments based on performance assumptions at that date. The U.S. federal and state income tax consequences of the sale of the Trust Certificate are complex and uncertain. The Internal Revenue Service or a state taxing authority could challenge our tax positions in connection with the transactions, notwithstanding our receipt of any tax refund. If such a challenge were successful, in whole or in part, we may not keep all or a portion of the refund for taxes previously paid, or we may not eliminate our tax obligations relating to the residuals. In either case, our near-term financial condition and liquidity would be materially adversely affected. In addition, any investigation, audit or suit relating to the sale, including any such proceeding brought by the Internal Revenue Service, could result in substantial costs.

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We have guaranteed the performance of Union Federal's obligations under a loan purchase and sale agreement.

In connection with Union Federal's sale of private education loans in October 2009, we delivered a performance guarantee to the purchaser of the loan portfolio. 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, we would be required to perform such obligation or agreement. As a result, we may incur substantial costs pursuant to the performance guarantee if Union Federal is unable to perform its obligations under the loan purchase and sale agreement.

Changes in interest rates could affect the value of our additional structural advisory fees, asset servicing fees and residuals receivables, as well as demand for private education loans and our services.

Private education loans typically carry floating interest rates tied to prevailing short-term interest rates. Higher interest rates would increase the cost of the loan to the borrower, which in turn, could cause an increase in default rates for outstanding education loans. In addition, higher interest rates, or the perception that interest rates could increase in the future, could cause an increase in prepayments, including full or partial prepayments. If the prepayment or default rates increase for the education loans held by us or the securitization trusts that we have previously facilitated, we may experience a decline in the value of our additional structural advisory fees, asset servicing fees and residuals receivables, which could cause a decline in the price of our common stock and could cause future portfolio funding transactions to be less profitable for us. In addition, an increase in interest rates could reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to decline.

LIBOR is the underlying rate for most of the trusts' assets and liabilities and changes in LIBOR can have a significant effect on the cash flows generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus a spread to the extent such fees are accrued but unpaid by the trusts.

If sufficient funds to finance our business, including Union Federal, are not available to us when needed or on acceptable terms, then we may be required to delay, scale back or alter our strategy.

We may require additional funds for our products, our operating expenses, the pursuit of regulatory approvals, acquisition opportunities and the expansion of our capabilities. Historically, we have satisfied our funding needs primarily through private education loan asset-backed securitizations. The securitization market has not been available to us and may not be available to us when needed in the future, and, if available, the terms may not be 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. We also cannot assure you that our capital resources as of December 31, 2009 will be sufficient to satisfy our liquidity needs or capital funding requirements for the succeeding twelve months, particularly in the event of a prolonged dislocation in the private education loan ABS market. Our short-term financing needs are subject to regulatory capital requirements related to Union Federal, including the requirement imposed by the Supervisory Agreement that FMC maintain Union Federal's regulatory capital ratios at specified levels. See Note 14, "Union Federal Regulatory Matters—Supervisory Agreement and Order to Cease and

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Desist," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details. Our short-term financing needs are also subject to amounts that we may determine to be necessary or appropriate to contribute to prospective clients related to new programs. Insufficient funds could require us to delay, scale back or eliminate certain of our products and further scale back our expenses.

Risks Related to Asset-Backed Securitizations and Other Portfolio Funding Sources

We have historically derived a significant portion of our revenue and substantially all of our income from structuring securitization transactions; our financial results and future growth may continue to be adversely affected if we are unable to structure securitizations or alternative financings.

In the past, we did not charge separate fees for many of our services, but generally entered into agreements with clients giving us the exclusive right to securitize the private education loans that they did not intend to hold. As a result, we have historically derived a significant portion of our revenue and substantially all of our income from structuring securitization transactions. We have not completed a securitization since the first quarter of fiscal 2008, contributing to our net losses for each subsequent quarter.

Although our new Monogram product offering has been designed to reduce our dependence on the securitization market in order to generate revenue, as well as our dependence on credit enhancement, we have limited experience with the new offering and had not fully deployed it to any clients as of February 9, 2010. In addition, our future financial results and growth may continue to be affected by our ability to structure securitizations or alternative financing transactions involving private education loans. If we are able to facilitate securitizations in the future, we expect the structure and economics of the transactions to be substantially different than our past transactions. We expect lower revenues and additional cash requirements on our part.

We will need to gain market acceptance of our Monogram loan product, new fee structure and additional services in order to improve our cash flow and reduce our dependence on third-party credit enhancement and the securitization markets. If we continue to be unable to access the ABS market, 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 and may continue to 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, and may continue to 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:

•: persistent and prolonged disruption or volatility in the capital markets generally or in the private education loan ABS sector specifically, which could continue to restrict or delay our access to the capital markets;
•: our inability to structure and gain market acceptance for new products or services to meet new demands of ABS investors;
•: continuing degradation of the credit quality or performance of the loan portfolios of the trusts we have previously structured, which could reduce or eliminate investor demand for future securitizations that we facilitate, particularly for subordinate classes of ABS, or result in material, adverse modifications in rating agency assumptions, ratings or conclusions with respect to the securitization trusts;

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•: rating agency action, including downgrades, of ABS that we have facilitated in the past or any occurrence of an event of default with respect to such securities, which could reduce demand for additional securitizations that we structure;
•: developments in connection with the TERI Reorganization, including the outcome of the challenges to the trusts' security interests;
•: unwillingness of investors to ascribe value to the Pledged Accounts or financial guarantees offered by other third parties;
•: the adequacy of the segregated reserves pledged to each securitization trust as collateral for TERI's guaranty obligations with respect to the education loans held by the trust, including the validity and perfection of the trust's security interests and the replenishment of the reserves from recoveries on defaulted loans;
•: material breach of our obligations to clients, including securitization trusts and former or current lender clients;
•: the timing and size of private 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 securitizations;
•: challenges to the enforceability of private education loans based on violations of federal or state consumer protection laws and related regulations, or imposition of penalties or liability on assignees of private education loans for violation of such laws and regulations; and
•: changes to bankruptcy laws that change the current non-dischargeable status of education-related loans, which could materially adversely affect recovery rates on defaulted loans.

We have actually experienced, or are at particular risk of experiencing in the near term, the first seven factors listed above.

Capital markets dislocations, and the timing, size and structure of any future capital markets transactions, will greatly affect our quarterly financial results.

Continuing dislocations in the capital markets, write-downs of our service receivables and the private education loans held by us and the size, structure or economic terms of our future capital markets transactions, if any, could increase the variability of our operating results on a quarterly basis. We are uncertain whether the fee structure that we have historically used will be used in any future capital markets transaction. We expect the structure and pricing terms in future transactions, if any, to be substantially less favorable than in the past.

We may need to pursue alternatives to securitizations, which may not be available or the terms of which may not be attractive.

We have been unsuccessful in obtaining alternatives to securitization to finance our clients' loans. Under the terms of our purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of a client's TERI-guaranteed loans during a specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. In general, the termination of the TERI guaranty in the TERI Reorganization would terminate our purchase obligations under the purchase agreements. Therefore, our potential liability under our loan purchase agreements is dependent, in part, upon the outcome of the TERI Reorganization and is not determinable at this time. If we do not honor our contractual obligations, our value proposition would be compromised and prospective clients may not be interested in entering into business arrangements with us. In addition, our financial results would be adversely affected if we were required to pay damages.

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In structuring and facilitating securitizations of our clients' loans, administering securitization trusts or as holders of rights to receive residual cash flows in non-NCSLT Trusts, we may incur liabilities to investors in the asset-backed securities those trusts issue.

We have facilitated and structured a number of different special purpose trusts that have been used in securitizations to finance private education loans that our clients originated, including 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 trusts have issued, we could be deemed responsible and could be liable to those investors for damages. If we failed to cause the trusts or other transaction parties to disclose adequately all material information regarding an investment in the ABS or if the trust made statements that were misleading in any material respect in information delivered to investors, it is possible that we could be held responsible for that information or omission. Recent investigations by state attorneys general, and 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 investors are successful in seeking to recover losses from those parties and the trusts are found to have made materially misleading statements or to have omitted material information.

If we are liable for losses investors incur in any of the securitizations that we facilitate or structure 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.

Risks Related to the TERI Reorganization

The Creditors Committee is challenging the enforceability of certain of the trusts' security interests, which may result in additional delay and expense, as well as a significant reduction in collateral available to the trusts.

As a result of the automatic stay under the Bankruptcy Code, TERI ceased purchasing defaulted loans, including defaulted loans from the NCSLT Trusts, in April 2008. In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to honor its guaranty agreement obligations using cash in Pledged Accounts established for the benefit of certain securitization trusts. Beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using cash in the Pledged Account established for the benefit of the specific trusts that owned the defaulted loan. As of February 9, 2010, TERI was not permitted to satisfy its guaranty obligations using funds from TERI's general reserves. Funds in the Pledged Accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim against TERI.

The Bankruptcy Court's June 2008 order granted parties rights to challenge the trusts' security interests in the collateral other than the Pledged Accounts. In January 2009, the Creditors Committee filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of 17 securitization trusts, and against our subsidiary First Marblehead Data Services, Inc., or FMDS, as administrator of such trusts. The complaint generally alleges that the security interests granted by TERI to the trusts, excluding the security interests in the Pledged Accounts, are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance of more than $610 million as of December 31, 2009, or in amounts owed or transferred by TERI to Pledged Accounts after the filing of TERI's petition for reorganization totaling more than $14 million as of December 31, 2009. In February 2009, pending resolution of the issues raised in the Creditors Committee's complaint, the trusts generally suspended

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the transfer of defaulted loans to TERI and generally suspended requests for default claim payments from amounts in the Pledged Accounts.

In March 2009, FMDS and the owner trustee filed a motion to dismiss the Creditors Committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the arguments made in the motion filed by FMDS and the owner trustee. The Creditors Committee filed an opposition to the motion to dismiss in April 2009, together with an amended complaint naming the trusts themselves as defendants. FMDS filed a response to the opposition and amended complaint in May 2009. In September 2009, the Bankruptcy Court denied the motions to dismiss. In October 2009, the Bankruptcy Court also denied motions for leave to commence an interlocutory appeal. We cannot at this time predict the timing, costs or outcome of the adversary proceeding, and did not adjust our accounting assumptions during the first six months of fiscal 2010 regarding TERI.

If the Creditors Committee or any other party is successful in challenging the trusts' security interests, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease materially. As a result, the trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have historically been used to replenish a particular trust's Pledged Account, would instead become an asset of TERI's bankruptcy estate and other holders of claims. The settlement of the adversary complaint, in the context of a plan of reorganization or otherwise, could also result in a material decrease in the amount of pledged collateral available exclusively to a particular securitization trust. A successful challenge to the security interests could decrease materially the value of our additional structural advisory fees or our asset servicing fees by decreasing the pledged collateral available exclusively to the NCSLT Trusts.

In September 2009, a Joint Plan of Reorganization of TERI and the Creditors Committee was filed in the Bankruptcy Court. In October 2009, a First Amended Joint Plan of Reorganization of TERI and the Creditors Committee and an accompanying Disclosure Statement were filed. In February 2010, a Second Amended Joint Plan of Reorganization of TERI and the Creditors Committee and an accompanying Disclosure Statement were filed. The plan of reorganization includes a proposed settlement of the adversary complaint and includes other provisions that would affect the claims of the NCSLT Trusts. Approval of the plan of reorganization may not be solicited until an accompanying disclosure statement has been approved by the Bankruptcy Court.

The TERI Reorganization will adversely affect our ability to facilitate the securitization of TERI-guaranteed loans, and could adversely affect our cash flows from the securitization trusts.

In its role as guarantor, TERI agreed to reimburse lenders for unpaid principal and interest on defaulted loans. TERI had historically been the exclusive provider of borrower default guarantees for our clients' private education loans. We expect the TERI Reorganization to adversely affect our ability to facilitate the securitization of TERI-guaranteed loans. In particular, we expect investors to ascribe little or no value to the TERI guaranty beyond a trust's Pledged Account. As a result, in structuring future securitizations of loans guaranteed or formerly guaranteed by TERI, if any, we will likely be required to reduce or eliminate our up-front structural advisory fee in order to increase the level of reserves available to the trust. In addition, it is likely that we would need to obtain additional credit enhancement for any future securitizations of such loans, the cost of which would also result in lower revenues.

To the extent the Pledged Account or other reserves available to a particular securitization trust were exhausted, or in the event that the security interests granted by TERI to the trusts are unperfected or otherwise unenforceable or compromised, and loan defaults continued to occur, that trust would have a claim as an unsecured creditor of TERI in the context of the TERI Reorganization. It is expected that TERI's general reserves will be insufficient to satisfy fully the claims of unsecured

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creditors, and therefore loan defaults would have a further adverse effect on the amount or timing of cash flows that would otherwise be expected to be generated by the trust, which would adversely affect the value of our service receivables, including our asset servicing fees.

We did not adjust our assumptions regarding TERI during the six months ended December 31, 2009, including our assumption that all future recoveries on defaulted TERI-guaranteed loans would be available to replenish trusts' Pledged Accounts. See Note 6, "Commitments and Contingencies—TERI Reorganization—Challenges to Security Interests," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional information.

Risks Relating to Regulatory Matters

We may become subject to new regulations which could increase our costs of compliance and alter our business practices.

Turbulence in the financial services industry beginning in the second quarter of fiscal 2008 has resulted in increased consumer and governmental scrutiny. In response, regulators have increased diligence and enforcement efforts and new laws and regulations are under consideration in Congress. In particular, the Obama Administration has proposed, and Congress is actively considering, legislation that would create a Consumer Financial Protection Agency and significantly weaken federal preemption of state regulations currently enjoyed by federal savings and loans and their operating subsidiaries, such as Union Federal and its operating subsidiary, FM Loan Origination Services, LLC, or FMLOS. As proposed and passed by the House of Representatives, the Consumer Financial Protection Agency would have broad powers to regulate consumer financial services products, including education loans and would have rulemaking authority for numerous federal laws including the Truth in Lending Act and Equal Credit Opportunity Act. The Agency is expected to also be vested with authority to examine certain banks and state licensed non-bank entities, including loan brokers and companies that provide certain outsourced consumer and education loan processing and origination services. In addition, regulators and enforcement officials are taking increasingly expansive positions with respect to whether certain products or product terms may run afoul of state and federal unfair or deceptive acts and practices laws. These and other regulatory changes could result in, among other things, increased compliance costs and alterations to our business practices, which could have a material adverse effect on our business operations and financial results.

We are subject to regulation as a savings and loan holding company, and Union Federal Savings Bank is regulated extensively.

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. The OTS has certain types of enforcement authority over us, including the ability in certain circumstances to review and approve changes in management and compensation arrangements, issue additional cease-and-desist orders, force divestiture of Union Federal and 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, Union Federal is subject to extensive regulation, supervision and examination by the OTS and the Federal Deposit Insurance Corporation. 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, the failure to meet minimum capital requirements could initiate certain mandatory and possibly additional

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discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on our operations and financial statements. We have in the past been required to make capital infusions to Union Federal to support the private education loan portfolio held by Union Federal, and regulatory authorities could require additional capital infusions or take other corrective measures in the future.

There is a risk that 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. 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 attract and retain qualified compliance personnel. Further reductions in staffing levels could make it difficult to retain experienced personnel to maintain adequate internal controls related to regulatory matters. If severe failures in internal controls occur, regulatory authorities could impose sanctions on Union Federal or us. We could in the future be subject to additional 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.

Failure to comply with recent OTS enforcement agreements could adversely affect our business, financial condition and operating results.

In July 2009, we entered into the Supervisory Agreement with the OTS and Union Federal entered into a stipulation consenting to the issuance by the OTS of the Order to cease and desist. The Supervisory Agreement requires us to, among other things:

•: maintain Union Federal's regulatory capital ratios at the greater of: (i) the capital ratios specified in Union Federal's business plan approved by the OTS in November 2006, (ii) the capital ratios projected in a business plan found acceptable to the OTS or (iii) the minimum regulatory capital requirements;
•: maintain a deposit at Union Federal in the amount of $30.0 million until the earlier to occur of the (i) sale of Union Federal or (ii) reduction of Union Federal's private education loan concentration ratio to 50% of Union Federal's Tier 1 capital plus allowance for loan losses;
•: obtain prior approval of the OTS before (i) engaging in any transaction with Union Federal or (ii) paying any cash dividends, repurchasing or redeeming any shares of its stock, incurring any debt exceeding $5.0 million or accepting any dividend or other payment representing a reduction in capital from Union Federal; and
•: obtain prior approval of the OTS in connection with any "golden parachute payment" and comply with notice requirements for certain changes in directors and senior executive officers.

Pursuant to the requirements of the Order, Union Federal took the following actions during the six months ended December 31, 2009:

•: submitted to the OTS for review and final approval by the Regional Director of the OTS, a new business plan covering fiscal years 2010, 2011 and 2012, reflecting Union Federal's proposed strategy, business activities and quarterly financial projections;
•: developed, initiated implementation and submitted to the OTS for review and final approval, a liquidity plan that contains strategies for ensuring that Union Federal maintains adequate short-term and long-term liquidity;
•: developed, submitted to the OTS for review and final approval, and executed a concentration reduction plan to reduce the balances of private education loans held by Union Federal;
•: sold its entire portfolio of private education loans pursuant to its concentration reduction plan, other than loans held by UFSB-SPV and pledged to a third party conduit lender; and

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•: implemented a detailed compliance monitoring program that provides for frequent Board level reporting and quarterly progress reports to the OTS on actions taken by Union Federal to comply with the Order.

The Order further requires Union Federal to, among other things:

•: obtain prior approval of the OTS before increasing the dollar amount of brokered deposits;
•: provide the OTS with prior notice before (i) engaging in any transaction with an affiliate or (ii) entering into, renewing, extending or revising any contractual arrangement relating to compensation or benefits for any senior executive officer or director; and
•: obtain prior approval of the OTS in connection with any "golden parachute payment" and comply with notice requirements for certain changes in directors and senior executive officers.

In addition, the Order required Union Federal to adopt a concentration reduction plan that: (i) prevented Union Federal from originating private education loans until Union Federal reduced the concentration of private education loans to Tier 1 capital plus allowances for loan losses below 50% and (ii) required Union Federal to achieve such a reduction by December 31, 2009. During the second quarter of fiscal 2010, Union Federal sold the entire portfolio of private education loans directly held by it for sale, excluding loans held by UFSB-SPV. As a result, Union Federal achieved the reduction required by the concentration reduction plan. In November 2009, FMC was refunded a deposit in the amount of $30.0 million that FMC had been required to maintain at Union Federal until such reduction had been achieved. See Note 3, "Education Loans Held for Sale," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional information.

The terms of the Supervisory Agreement and the Order will remain in effect until terminated, modified or suspended by the OTS. These terms require a significant commitment from us of capital and management attention, which could be otherwise deployed.

Although we and Union Federal each intend to take such actions as may be necessary to enable us to comply with our respective requirements, there can be no assurance that we will be able to comply fully with the provisions of the Supervisory Agreement or the Order, as applicable, or to do so within the timeframes required. Moreover, there can be no assurance that compliance with such requirements will not be more time consuming or more expensive than anticipated, or that efforts to comply with such requirements will not have adverse effects on the operations and financial condition of us or Union Federal. In addition, the limitations imposed on Union Federal's rates of private education loans to capital will preclude meaningful participation by Union Federal in our new product offering in the near term.

Failure to comply with the Supervisory Agreement or Order, or other supervisory directives, could subject us to further orders to cease and desist, significant civil monetary penalties, recovery of severance payments made to former employees, or other mandatory actions. Accordingly, any material failure to comply could have a material adverse effect on our business, financial condition and operating results.

We may become subject to state registration or licensing requirements. If we determine that we are subject to the registration or licensing requirements of any jurisdiction, our compliance costs could increase significantly and other adverse consequences may result.

Many states have statutes and regulations that require the licensure of small loan lenders, loan brokers, credit services organizations and loan arrangers. Some of these statutes are drafted or interpreted to cover a broad scope of activities. Although we believe that our prior consultations with regulatory counsel and, in some cases state regulators, have identified all material licensing, registration

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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 be 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 divest Union Federal, if we change our operations, if regulators reconsider their prior guidance or if federal or state laws or regulations are changed. Legislation being considered by Congress to create the Consumer Financial Protection Agency that, as passed by the House of Representatives, includes a provision repealing federal preemption available to operating subsidiaries of federal savings associations, such as FMLOS, and limiting the scope of preemption available to federal savings associations and national banks. 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.

All of our operations relating to education loan processing are located in Massachusetts. In 2001, we received determination letters from the Massachusetts Division of Banks confirming that the loan origination outsourcing services provided under contract to TERI by our subsidiary First Marblehead Education Resources, Inc., or FMER, were not subject to licensing under the Massachusetts Small Loan Act because FMER did not conduct a lending business with consumers in its own name and its processing centers were not generally open to the public. In May 2008, following the TERI Reorganization, we received an additional determination letter from the Massachusetts Division of Banks confirming that FMER's business of back office loan application processing, loan origination and loan underwriting functions on behalf of lenders was exempt from licensing under the Massachusetts Small Loan Act. The Massachusetts Small Loan Act requires any person that is engaged, for compensation, in the business of making small loans, or in aiding or assisting the borrower or the lender in procuring or making such loans, to obtain a license. Under the statute, the business of making small loans includes the making of loans of $6,000 or less with interest rates and expenses of more than 12% per year. The loans that we have facilitated include amounts as small as $1,000, and a portion of those loans have combined interest rates and fees exceeding 12%. We have historically provided outsourced private education loan origination services on a fee-for-service basis through FMER and Union Federal's subsidiary FMLOS, although we were not providing services through FMLOS as of February 9, 2010.

Absent a change in federal law, either by judicial interpretation or legislation, including as discussed above, to the extent that our services are conducted through Union Federal or FMLOS, we believe it is less likely that state regulatory requirements affecting loan brokers, small lenders, credit services organizations or loan arrangers will be asserted. However, we are examining a strategic alternatives for Union Federal, including a potential sale and, as noted above, Congress is actively considering legislation that could weaken preemption for federal savings associations and eliminate it for operating subsidiaries of federal savings associations, such as Union Federal and FMLOS. 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. We cannot assure you that we will be successful in obtaining state licenses or registrations and, if we are unsuccessful, we may be required to restructure our activities in a manner that will not subject us to such licensing or registration requirements, although we cannot assure you that such a restructuring will not have a material adverse effect on our business.

Compliance with state licensing requirements could involve additional costs, 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 processing of registration or a license application;

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•: administrative enforcement actions;
•: class action lawsuits;
•: assertion of legal defenses delaying or otherwise affecting the enforcement of loans; and
•: criminal as well as civil liability, each of which 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, non-bank loan marketers, as well as TERI, are subject to registration, licensing and extensive governmental regulations, including the Truth in Lending Act 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 small loans, loan brokers, credit services organizations and loan arrangers. 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 which 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.

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.

The federal government and state governments regulate extensively the financial institutions and other entities that originate loans in the private education loan market. These regulations include bankruptcy, tax, usury, disclosure, credit reporting, identity theft, privacy, fraud and abuse and other laws to protect borrowers. Changes in consumer protection laws or related regulations, or in the prevailing interpretations thereof, may expose us to litigation, result in greater compliance costs, 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 the 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.

The risk of noncompliance with regulatory requirements by our lender clients and their marketing partners has been highlighted by recent state and federal investigations into education loan marketing practices, particularly the payment of marketing fees directly to schools in exchange for loan referrals. None of our contracts with lenders or marketers involves the payment of fees to schools for loan volume. State and federal regulatory authorities have sought information from some of our former clients and us regarding the loan programs we coordinated, and it is possible that some marketing or underwriting practices associated with the programs we coordinated and assets we securitized will be challenged as a result of such investigations. In August 2007, we announced that, as part of the New York Attorney General's ongoing investigation of several lending, educational, and nonprofit institutions, we had received a subpoena for information regarding our role in the education loan industry. During fiscal 2008, we worked with the New York Attorney General's office regarding the investigation.

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The regulatory actions described above have also prompted state and federal legislation that will affect our operations. In August 2009, the Federal Reserve Board issued regulations to implement provisions of the Higher Education Opportunity Act of 2008. The regulations revise the number, timing, and content of disclosures required for private education loans by the Truth in Lending Act and the Federal Reserve Board's implementing regulation for the Truth in Lending Act, Regulation Z. Under the regulations, private education loan creditors will be required to provide disclosures about loan terms and features on or with the loan application and will also be required to disclose information about federal education loan programs that may offer less costly alternatives to private education loans. Additional disclosures must be provided when the loan is approved and after loan acceptance but prior to loan disbursement. The Federal Reserve Board has also proposed model disclosure forms that creditors could use to comply with the new disclosure requirements. Compliance with the new regulations will be mandatory as of February 14, 2010. In addition, in December 2009, the Federal Reserve Board and the Federal Trade Commission announced final rules to implement the risk-based pricing provisions of the Fair and Accurate Credit Transactions Act of 2003. The final rules will generally require that lenders provide disclosures to certain consumers if credit is offered to them on less favorable terms than those offered by the lender to other consumers. Compliance with the disclosure requirements is mandatory as of January 1, 2011.

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 negatively impair our ability to operate our business. In addition, the loan assets held by securitization trusts that we have structured could be adversely impacted by violation of tax or consumer protection laws. In such event, the value of our residual interests or asset servicing fees could also be adversely impacted. In some cases, such violations may render the loan assets unenforceable.

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 have worked with in the past, the loans that we facilitate would be subject to individual state consumer protection laws.

All of the lenders with which we work are federally-insured banks and credit unions and, therefore, in most cases, are able to charge the interest rates, fees and other charges available to the most favored lender in their home state. In addition, certain of our lender clients are chartered by the federal government and enjoy preemption from enforcement of state consumer protection laws. In providing our private education loan services to our clients, we do not act as a lender, guarantor or loan servicer, and the terms of the 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 and banks 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 lender's 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 Federal Trade Commission 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 has been coordinated by us, are distinguishable from the activities involved in these cases.

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Additional state consumer protection laws would be applicable to the loans we facilitate if we, or any third-party loan marketer engaged by us or a bank whose loans we facilitate, were re-characterized as a lender, and the 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 cost to us. To date, there have been no actions taken or threatened against us on the theory that we have engaged in unauthorized lending. However, such actions could have a material adverse effect on our business.

Risks Relating to Ownership of Our Common Stock

The price of our common stock may be volatile.

The trading price of our 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 our common stock. Those factors that could cause fluctuations include, but are not limited to, the following:

•: the success of Monogram, our new product offering, or our fee-for-service offerings;
•: announcement 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;
•: difficulties we may encounter in structuring securitizations or alternative financings, including continued disruptions in the private education loan ABS market or demand for securities offered by trusts that we facilitate, or the loss of opportunities to structure securitization transactions;
•: any variance between the actual performance of the securitization trusts and the key assumptions that we have used to estimate the fair value of our additional structural advisory fees, asset servicing fees, residuals receivables and education loans held for sale, including among others, discount, default and prepayment rates;
•: developments in the TERI Reorganization, including the terms of any plan of reorganization and resolution of the challenges to the trusts' security interests in collateral securing TERI's guaranty obligations;
•: negative publicity about the private education loan market generally or us specifically;
•: regulatory developments or sanctions directed at Union Federal or us;
•: adverse rating agency actions with respect to the securitization trusts that we have facilitated;
•: 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;
•: general economic conditions and trends, including economic pressure on consumer asset classes such as private education loans;

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•: legislative initiatives affecting federal or private education loans, including initiatives relating to bankruptcy dischargeability and the federal budget and final regulations implementing Title X of the Higher Education Opportunity Act of 2008 that revise disclosure and procedural requirements for private education loans;
•: changes in demand for our product and service offerings or in the education finance marketplace generally;
•: major catastrophic events;
•: purchases or sales of large blocks of our stock or other strategic investments involving us; or
•: departures or long-term unavailability of key personnel.

In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. We have in the past been the target of securities litigation. See Part II, Item 1 of this quarterly report, "Legal Proceedings," for additional detail. Any future litigation could result in substantial costs and divert management's attention and resources from our business.

Insiders have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors and executive officers, and entities affiliated with them, owned approximately 22% of the outstanding shares of our common stock as of December 31, 2009, excluding shares issuable upon vesting of restricted stock units, shares issuable upon exercise of outstanding stock options and shares of preferred stock held by affiliates of GS Capital Partners, or GSCP, convertible into 8,846,733 additional shares of our common stock. Affiliates of GSCP have agreed not to convert shares of preferred stock if, after giving effect to any such conversion, they and their affiliates would own more than 9.9% of our outstanding shares of common stock. Approximately 5,000,000 additional shares of common stock could be issued to affiliates of GSCP upon conversion of shares of preferred stock before they and their affiliates would own more that 9.9% of our outstanding shares of common stock. These stockholders, if acting together, could substantially influence matters requiring approval by our 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 our 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 our common stock.

Some provisions in our restated certificate of incorporation and amended and restated by-laws may deter third-parties from acquiring us.

Our 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 our Board of Directors, including the following:

•: only our Board of Directors, the Chairman of our Board of Directors or our President may call special meetings of our stockholders;
•: our stockholders may take action only at a meeting of our 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;

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•: our 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.

Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control that our 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 corporation's 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 our stockholders might consider to be in their best interests.

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

In April 2007, our Board of Directors authorized the repurchase of up to an aggregate of 10,000,000 shares of our common stock. The 10,000,000 shares authorized for repurchase included approximately 3,393,300 shares that remained available for repurchase under a previously authorized repurchase program. As of December 31, 2009, we had repurchased an aggregate of 1,169,100 shares under this program at an average price paid per share, excluding commissions, of $36.17.

We did not repurchase any shares of common stock during the six months ended December 31, 2009. Future repurchases pursuant to this program may require regulatory approval.

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Item 4—Submission of Matters to a Vote of Security Holders

On November 16, 2009, the following proposals were voted on at our 2009 annual meeting of stockholders:

Proposal				Abstentions	Broker Non-Votes

To elect the following nine persons to serve as directors until the next annual meeting of stockholders and until their successors are duly elected and qualified (subject to such director's earlier death, resignation or removal):
	Stephen E. Anbinder	78,152,242	10,962,120	N/A	N/A
	William R. Berkley	81,718,676	7,395,686	N/A	N/A
	Dort A. Cameron III	72,966,463	16,147,899	N/A	N/A
	Henry Cornell	78,091,454	11,022,908	N/A	N/A
	George G. Daly	85,367,420	3,746,942	N/A	N/A
	Peter S. Drotch	85,813,229	3,301,133	N/A	N/A
	William D. Hansen	85,503,983	3,610,379	N/A	N/A
	Daniel Meyers	79,094,512	10,019,850	N/A	N/A
	Peter B. Tarr	78,570,513	10,543,849	N/A	N/A
To approve the amendment and restatement of First Marblehead's 2003 stock incentive plan		64,407,016	4,239,922	295,280	20,172,144
To ratify the appointment of KPMG LLP as First Marblehead's independent registered public accounting firm for the fiscal year ending June 30, 2010		86,913,598	575,123	1,625,641	N/A

Item 6—Exhibits

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report which Exhibit Index is incorporated herein by this reference.

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SIGNATURES

Pursuant to the requirements 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
Date: February 9, 2010	By:	/s/ KENNETH KLIPPER Kenneth Klipper Managing Director, Chief Financial Officer, Treasurer and Chief Accounting Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number			Description

	10.1(1)		Loan Purchase and Sale Agreement, dated October 13, 2009, between Union Federal Savings Bank and Wells Fargo Bank, N.A.
	10.2(1)		Performance Guarantee, dated October 16, 2009, delivered by the Registrant to Wells Fargo Bank, N.A.
	31.1		Chief Executive Officer—Certification 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 Officer—Certification 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 Officer—Certification pursuant to Rule 13a-14(b) 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 Officer—Certification pursuant to Rule 13a-14(b) 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
	99.1(2)		Trust static pool data as of December 31, 2009
	99.2(2)		Supplemental presentation

(1): Incorporated by reference to exhibits to the registrant's current report on Form 8-K filed with the SEC on October 16, 2009
(2): Incorporated by reference to exhibits to the registrant's current report on Form 8-K filed with the SEC on January 29, 2010

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