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

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FORM 10-Q

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Commission File Number 001-31825

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The First Marblehead Corporation
(Exact Name of Registrant as Specified in Its Charter)

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

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        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):

        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 May 7, 2010, the registrant had 100,116,764 shares of Common Stock, $0.01 par value per share, outstanding.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

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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)

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)

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)

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)

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 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 offers 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. During the second quarter of fiscal 2010, we announced that we had begun exploring strategic alternatives for Union Federal, including a potential sale.

        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. We are also entitled to receive administrative and other fees associated with these trusts as well as asset servicing fees and residuals associated with certain trusts. 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 March 31, 2010, 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 March 31, 2010, Pennsylvania Higher Education Assistance Agency (PHEAA) serviced a significant majority of the loans for which we facilitated origination. PHEAA also operates under the name American Education Services.

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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)

Business Trends, Uncertainties and Outlook

        During fiscal 2009, we implemented a plan to adjust our business model and address some of the uncertainties facing us as a result of dislocations in the capital markets and the private education lending industry. We made major changes in senior management, significantly reduced our operating expenses and the risk on our balance sheet through the sale of private education loans and 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 interest 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. The sale of the Trust Certificate, coupled with operating losses for fiscal 2009, generated a refund in October 2009 from the Internal Revenue Service (IRS) for income taxes previously paid of $176,636 and is expected to eliminate certain future tax liabilities, which would have had a material negative effect on our financial condition and liquidity. See Note 12, "Income Taxes," for additional information.

        In addition, during the second quarter of fiscal 2010, Union Federal sold approximately 88% of its portfolio of private education loans held for sale, which excluded loans held by Union Federal's subsidiary at that time, 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. During the third quarter of fiscal 2010, we announced that the OTS had terminated its enforcement actions against us and Union Federal. See Note 14, "Union Federal Regulatory Matters—Supervisory Agreement and Order to Cease and Desist," for additional details. In April 2010, we restructured the terms of the debt owed by UFSB-SPV under its education loan warehouse facility. See Note 15, "Subsequent Events—Restructuring of Education Loan Warehouse Facility," for additional details. We believe that the restructuring will prove attractive to potential purchasers as we consider our strategic alternatives with respect to Union Federal.

        Historically, asset-backed securitizations had 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 the ability to finance private education loans through securitization continued to be significantly constrained through May 10, 2010. Our business has been and continues to be materially adversely impacted by these market dynamics, as we did not complete a securitization transaction during fiscal 2009 or through the first nine months of fiscal 2010. Further, we expect the structure and pricing terms in future financing transactions, if any, to be less favorable than in the past.

        In addition, credit performance of consumer-related loans generally, as well as 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. Our education loan portfolios and those held by the NCSLT Trusts have experienced higher levels of defaults than we originally projected. As a result, we have significantly adjusted our projected performance assumptions associated with the NCSLT Trusts during fiscal 2009 and through the first nine months of fiscal 2010, including significant increases in our assumed default rates. Credit rating

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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)

agencies have taken negative rating actions with respect to certain securitizations that we previously facilitated, including ratings downgrades announced by Standard & Poor's on March 31, 2010 with respect to ABS issued by 20 NCSLT Trusts and on May 5, 2010 with respect to ABS issued by one NCSLT Trust. The interest rate, economic and credit environments may continue to have a material negative effect on the estimated fair value of our service receivables associated with the various securitization trusts that we have facilitated, as well as the private education loan portfolios held by us.

        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 continue to have, a material negative effect on the NCSLT Trusts' ability to realize guaranty obligations of TERI, 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. On April 28, 2010, the United States Bankruptcy Court for the District of Massachusetts (Bankruptcy Court) held a hearing to consider confirmation of the fourth amended and restated plan of reorganization (Plan of Reorganization) jointly proposed by TERI and its official committee of unsecured creditors (Creditors Committee). The Bankruptcy Court made findings that the Plan of Reorganization meets the requirements for confirmation under the Bankruptcy Code, although an order confirming the Plan of Reorganization had not been entered by the Bankruptcy Court as of May 7, 2010. Following entry of such an order, the Plan of Reorganization would become effective following satisfaction of the conditions specified in the Plan of Reorganization. See Note 15, "Subsequent Events—Status of TERI Plan of Reorganization," for more information.

        Since the beginning of fiscal 2009, we have significantly refined our product offerings and added fee-for-service offerings, such as portfolio management and asset servicing. In August 2009, we completed the design of our new Monogram product offering, which 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. In April 2010, we entered into our first agreement with a lender based on our Monogram product offering. The agreement specifies a number of conditions to effectiveness that must be satisfied or waived. If these conditions are not satisfied or waived prior to September 1, 2010, the agreement may be terminated by us or the lender. See Note 15, "Subsequent Events—SunTrust Loan Program Agreement," for additional details. The Monogram product incorporates refinements to our origination process, including an enhanced application interface, an expanded credit decisioning model and additional disbursement and reporting capabilities. We designed this product to reduce our dependence on the securitization market in order to generate revenue, as well as our dependence on third-party credit enhancements. Pursuant to our Monogram product offering, we may invest specified amounts of capital as a credit enhancement feature of various lenders' loan programs based on our Monogram product offering.

        Our near term financial performance and future growth depend, in large part, on our ability to successfully market our new Monogram product and transition to more fee-based revenues while

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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)

growing our client base. We are uncertain as to the degree of acceptance the new product offering will have, particularly in the current economic environment where many lenders continue to re-evaluate their education lending business models.

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, economic conditions 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 estimates that are particularly susceptible to change relate to the recognition of service revenues and the valuation of our service receivables and our portfolios 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 and are carried at cost, which approximates fair value.

(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 assumptions for, among other things, default rates, recovery rates on defaulted loans, prepayment rates and the corresponding weighted-average cost of capital commensurate with the risks involved. 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

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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)

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 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 less frequently traded 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 loans held for sale, 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 comparisons 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 of Level 2 and Level 3 assets and liabilities 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

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

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

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 certain of the securitization trusts specify circumstances (Trigger Events) upon the occurrence of which payments that would otherwise be due with respect to additional structural advisory fees and 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 fee 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 fee 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 education loan defaults and recoveries, macro-economic conditions, the annual rate and timing of education loan prepayments, the trend of contractual and market interest rates over the life of the loan pools, including the forward London Interbank Offered Rate (LIBOR), the cost of funding outstanding auction rate notes, the existence of Trigger Events, and TERI's obligation and ability to pay default claims and its use of recoveries to replenish the segregated reserve accounts pledged to the NCSLT Trusts to secure its guaranty obligations (Pledged Accounts). See Note 6, "Commitments and Contingencies—TERI Reorganization—Challenge to Security Interests," for more information regarding TERI's obligation to pay default claims. 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 fair value of these receivables are recorded in the statement of operations as additional structural advisory fees—trust updates.

        Residuals.    Residuals associated with any securitization trusts that we facilitated are typically junior in priority to the rights of the holders of the ABS issued in the securitizations and any additional structural advisory fees. As a result, residual interests are comparable to equity securities and, as such, are carried at fair value on the balance sheet. For those trusts in which we retain a residual interest, fair value is estimated by management using the same assumptions used for additional structural advisory fee receivables, with the exception of the discount rate, which is higher, commensurate with the risks involved. Changes in the fair value during the period are included in the statement of operations as residuals—trust updates.

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

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

        Asset Servicing Fees.    In connection with the sale of the Trust Certificate, we entered into an asset services agreement (Asset Services Agreement) with the third-party purchaser of the Trust Certificate in April 2009. Pursuant to the terms of the Asset Services Agreement, we are entitled to asset servicing fees from the third-party purchaser for services provided to support its ownership of residual interests in the NCSLT Trusts. The services we provide include analysis and valuation optimization and services related to funding strategy, among others. 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 fees, however, is contingent upon distributions available to the third-party purchaser of the Trust Certificate. Under no circumstance will we receive cash for our asset servicing fees until residual cash flows are distributed from the NCSLT Trusts.

        If the third-party purchaser terminates the Asset Services Agreement without cause prior to 2019, it is required to pay a termination fee in addition to the receivables recorded as of the date of termination. The amount of the termination fee varies based on the year of termination, however, in all cases, the termination fee exceeds the receivables balance currently recorded. After December 31, 2019, we would not be entitled to a termination fee. In addition, if the third-party purchaser sells the Trust Certificate, the Asset Services Agreement is required to be transferred to the new owner. As such, we believe that receipt of our fees will come from either the residual distributions themselves or, in the case of termination, from the termination fee and, therefore, it is appropriate to record such receivable and recognize the related revenues.

        In determining the appropriate accounting for our asset servicing fees, we relied on the revenue recognition guidance in ASC 605-10-25-1, Revenue Recognition—Revenue and Gains, which provides that revenue is recognizable when goods or services have been exchanged for cash or claims to cash, and an entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. In addition, we considered the criteria enumerated in Staff Accounting Bulletin No. 104, Revenue Recognition, in our determination of revenue recognition:

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An arrangement exists between the third-party purchaser and us, as evidenced by the contract;



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Services have been provided in accordance with the arrangement;



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The asset servicing fees are fixed and determinable as a percentage of the aggregate outstanding principal balance of the education loans owned by the NCSLT Trusts; and



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Collectability is reasonably assured through the residual cash flows of the NCSLT Trusts or the termination fee under the Asset Services Agreement, as described above.

        The amount of revenue recognized as fee income is equal to the estimated net present value of the receivable generated from services performed during the period. We discount the value of the asset servicing fees using a discount rate commensurate with similar receivables. In accordance with ASC 835-30-05, Interest—Imputation of Interest, we have presumed that a portion of the asset servicing fees received will represent interest compensation until cash distributions are actually received. Changes in the net present value of asset servicing fee receivables are recognized as fee updates in the statement of operations.

        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

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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 pools 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 or as the applications are processed, in accordance with contractual terms.

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

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(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 March 31, 2010 and 2009, 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.

        Effective beginning with our financial statements for the quarter ending September 30, 2010, we will adopt Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets (ASU 2009-16), and ASU 2009-17, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17). Prior to their codification, ASU 2009-16 was referred to as Financial Accounting Standard 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement 140, and ASU 2009-17 was referred to as Financial Accounting Standard 167, Amendments to FASB Interpretation No. 46(R).

        ASU 2009-16 removes the concept of a QSPE from ASC 860-40 and removes the exemption from consolidation for QSPEs from ASC 810-10, Consolidation (ASC 810-10). ASU 2009-17 updates ASC 810-10 to require that certain types of enterprises perform analyses to determine if they are the primary beneficiary of a variable interest entity. A primary beneficiary of a variable interest entity is the enterprise that has both of the following characteristics:

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The power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance; and



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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, ASU 2009-17 requires us to continuously reassess whether consolidation of variable interest entities is appropriate upon the occurrence of reconsideration events, as opposed to the one-time assessment allowed under previous guidance.

        As of May 10, 2010, we expect to consolidate certain of these securitization trusts. The final impact is expected to be material to the balance sheet and statement of operations, but the amounts are still uncertain. We do not own the residuals of the NCSLT Trusts and the deficits of these trusts, if consolidated, are expected to be allocated to non-controlling interests.

        Assets and liabilities of the entities to be consolidated as a result of our analysis will be measured at the same amounts that such assets and liabilities would have been measured if they had been consolidated at the time we became the primary beneficiary. All intercompany transactions will be

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

eliminated. Profits and losses of the consolidated variable interest entities will be allocated to non-controlling interests based on voting interests, before the effect of intercompany elimination entries. ASU 2009-17 may be applied retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption or the opening balance of retained earnings for the first year presented. We expect to present a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption.

        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 March 31, 2010, the aggregate outstanding liabilities of the NCSLT Trusts were approximately $12,200,000 and total assets were approximately $10,800,000. The principal underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans. The aggregate outstanding assets and liabilities of other trusts for which we own residual interests were each less than $1,000,000.

(h) New Accounting Pronouncements

        ASU 2009-16 and ASU 2009-17, as described in "Consolidation" above, are the only new accounting pronouncements issued, but not yet effective, that we expect will have a material impact to our financial statements when adopted. No recently effective accounting pronouncements have had a material impact on our financial statements.

(2) Cash and Cash Equivalents

        The following table summarizes our cash and cash equivalents:

        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 from the money market fund. Members of the immediate family of one of FMC's directors owned approximately 65% of Milestone Group Partners as of March 31, 2010, making MCM a related party. At March 31, 2010 and June 30, 2009, approximately $49,988 and $59,983 of our holdings in money market funds, respectively, were invested in funds managed by MCM.

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

(3) Education Loans Held for Sale

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

        We recorded losses on education loans held for sale in the statement of operations of $4,180 and $47,584 for the three months ended March 31, 2010 and 2009, respectively, and $138,794 and $98,114 for the nine months ended March 31, 2010 and 2009, respectively.

        At March 31, 2010, education loans held for sale primarily consisted of a private education loan portfolio held by UFSB-SPV. UFSB-SPV has pledged the private education loans as collateral to the indenture trustee, for the benefit of the conduit lender, pursuant to the indenture relating to the education loan warehouse facility. Loans used to secure the 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 April 2010, we restructured certain of the terms of this facility. See Note 15, "Subsequent Events—Restructuring of Education Loan Warehouse Facility," for additional information.

        At June 30, 2009, education loans held for sale included private education loan portfolios held by Union Federal and UFSB-SPV. 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. 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. This sale did not include loans held by UFSB-SPV.

        In November 2009, following receipt of approval from the OTS, Union Federal sold the remainder of its portfolio of private education loans held 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 assess the fair value of the portfolio, which served as the basis for the sale price for the transaction. Union Federal received proceeds of $3,871 from the sale. At the transfer date, we determined that we had the ability and the intent to hold these loans to maturity and classified them as held to maturity at December 31, 2009.

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

(3) Education Loans Held for Sale (Continued)

        During the third quarter of fiscal 2010, we entered into negotiations to restructure UFSB-SPV's education loan warehouse facility. On April 16, 2010, in connection with the restructuring of the facility, we contributed loans with a fair value of $3,084 from our held-to-maturity portfolio to UFSB-SPV. Once held by UFSB-SPV, these loans serve as collateral for the debt outstanding under the facility, and we no longer have the ability to hold the loans to maturity. Accordingly, during the third quarter of fiscal 2010, the loans contributed to UFSB-SPV were reclassified as held for sale.

        Held-to-maturity loans are carried on the balance sheet at amortized cost less an allowance for loan losses, while held-for-sale loans are carried on the balance sheet at the lower of cost or fair value. See Note 5, "Loans Held to Maturity," for additional information, and Note 15, "Subsequent Events—Restructuring of Education Loan Warehouse Facility," for additional information about the restructuring.

(4) Service Receivables and Related Revenues

        Additional structural advisory fees, asset servicing fees and residual 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 following table summarizes changes in the estimated fair value of our additional structural advisory fee receivables:

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(4) Service Receivables and Related Revenues (Continued)

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

        Performance Assumption Overview.    During the third quarter of fiscal 2010, we completed initial enhancements to the financial models that we use to estimate the fair value of our service receivables. The enhancements provide for the inclusion of certain prospective macro-economic factors in our performance assumptions for those private education loans securitized in the NCSLT Trusts. As a result of the enhancements, we are able to provide performance information on a segmented basis rather than merely on a weighted-average basis. As our risk models continue to evolve, we anticipate additional future enhancements.

        Risk Segments.    Using our proprietary risk score modeling developed for our new Monogram product, loans in the NCSLT Trusts were retroactively scored using origination data as well as additional credit bureau data made available following origination. We then divided loans into three risk segments, with loans in Segment 1 expected to perform better than loans in Segment 2, and loans in Segment 2 expected to perform better than loans in Segment 3. The table below identifies

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performance assumptions for each segment, as well as the percentage of the NCSLT Trust portfolios in each segment.

        Default and Recovery Rates.    During the first quarter of fiscal 2010, we reduced the carrying value of additional structural advisory fee receivables by $4,692 for potential deviations in the performance of securitized loans and did not adjust this reserve during the second quarter of fiscal 2010. The higher projected default rate assumptions derived using our enhanced modeling eliminated the need for this reserve, which lessened the negative impact of the higher default rates. Additional structural advisory fee receivables decreased on a net basis by $34,452 during the third quarter of fiscal 2010 and by $42,616 for the first nine months of fiscal 2010.

        As a result of the change in our default assumptions, the projected timing of our receipt of asset servicing fees has been delayed by almost two years from our previous cash flow projections. We reduced asset servicing fee receivables by $2,635 during the third quarter of fiscal 2010, resulting in a net decrease of $2,272 for the first nine months of fiscal 2010. The decrease is attributable to the change in timing of our cash receipts. Our residual interests were less affected by the change in default rates, in light of our sale of the Trust Certificate. Residual receivables decreased by $353 during the third quarter and first nine months of fiscal 2010 as a result of the increase in the projected default rates.

        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

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structural advisory fee receivables of $2,634 and $8,798 during the third quarter and first nine months of fiscal 2009, respectively.

        Due to the sale of the Trust Certificate at March 31, 2009, no decrease in residual receivables was allocated to changes in default rates for the third quarter of fiscal 2009 because the residuals of the NCSLT Trusts were reduced to zero in that quarter as a result of the sale. During the first and second quarters of fiscal 2009, residual recei vables decreased by $50,108 due to increases in the default rates.

        We did not adjust our assumptions regarding recovery rates during the fiscal 2010 or fiscal 2009 periods.

        Prepayment Rates.    In general, prepayment rates have been in decline since March 2008. Over the past year, in response to a historically low prepayment rate, the interest rate environment and limited availability of consumer credit, we adjusted our prepayment assumption by extending the period during which decreased prepayments were expected to persist. Our financial model enhancements now allow prepayment assumptions to be segmented and incorporate certain prospective macro-economic factors. As a result of our enhanced model, prepayments are expected to be lower and slower than previously projected and we increased the value of our structural advisory fee receivables by $25,338 during the third quarter and for the first nine months of fiscal 2010.

        During the third quarter of fiscal 2009, we decreased our assumed prepayment rate by 11 basis points, which resulted in an increase to additional structural advisory fee receivables of $769, for a total increase in the first nine months of fiscal 2009 of $3,127.

        Discount Rate—Additional Structural Advisory Fees.    Until the third quarter of fiscal 2010, the discount rate that we used to estimate the fair value of our additional structural advisory fees was based on the 10-year U.S. Treasury Bond rate plus a risk premium. In determining the risk premium, we considered factors such as yields on B-rated instruments, the level of available cash flows from residual interests that support the additional structural advisory fees, as well as the weighted-average life of the additional structural advisory fee receivables.

        For the quarter ended March 31, 2010, we utilized a discount rate of 14% in determining the fair value of the additional structural advisory fee receivables. The change from an index-based discount rate to a rate of 14% reflects our financial model enhancements and resulting adjustments to our cash flow assumptions that had the effect of lengthening the weighted-average life of the additional structural advisory fee receivables. As a result, the amount of residual interest cash flows available to support the cash flows available for additional structural advisory fees was significantly reduced. In addition, the projected timing of receipt of additional structural advisory fees was delayed. The combination of these factors led us to determine that additional structural advisory fee receivables are more analogous to longer-term financial instruments than 10-year debt instruments and, therefore, a higher discount rate is appropriate. The 14% discount rate used for the additional structural advisory fees reflects 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 and is 200 basis points less than the 16% used for residual receivables, reflecting the seniority of the additional structural advisory fees in the cash waterfall of the securitization trusts.

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(4) Service Receivables and Related Revenues (Continued)

        The increase in the discount rate resulted in a $14,727 decrease in the value of additional structural advisory fee receivables for the third quarter, for a net decrease of $11,029 for the first nine months of fiscal 2010.

        During the third quarter of fiscal 2009, we used a spread of 1,000 basis points over the 10-year U.S. Treasury Bond rate, resulting in a discount rate of 12.7%. The spread was flat from the prior quarter, but up 425 basis points for the first nine months of fiscal 2009. During the third quarter of fiscal 2009, the 10-year U.S. Treasury Bond rate increased by 45 basis points, and we recorded a decrease of $2,925 in additional structural advisory fees for the period. For the nine months ended March 31, 2009, the 425 basis point increase in the spread net of the 131 basis point decrease in the 10-year U.S. Treasury Bond rate resulted in a net decrease of $23,114 in the value of additional structural advisory fee receivables.

        Discount Rate—Asset Servicing Fees and Residuals.    In determining an appropriate discount rate for purposes of estimating the fair value of our asset servicing fee and residual 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 evaluated yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals.

        We maintained a discount rate of 16% during the third quarter of fiscal 2010, flat from the prior quarter but a decrease of 100 basis points, from 17%, at the prior year-end. As a result, there was no change in the residual receivables during the third quarter and an increase in residual receivables of $1,176 during the first nine months of fiscal 2010 due to changes in the discount rate.

        During fiscal 2009, no decrease in residual receivables was allocated to changes in discount rates for the third quarter as a result of the sale of the Trust Certificate on March 31, 2009. The increases in the discount rate for the first six months of fiscal 2009 resulted in decreases in the estimated fair value of our residual receivables of $83,634 prior to the sale.

        Forward LIBOR Curve.    Fluctuations in interest rates, specifically the LIBOR rate which is the underlying rate for most of the trusts' assets and liabilities, can have a significant impact on the cash flows generated by each trust. The forward LIBOR curve is a market observable input obtained from an independent third party. Changes in the forward LIBOR curve can have a significant impact on the principal balances of the education loans (especially early in a loan's life when interest is capitalizing while in deferment), which affects the overall net interest margin the trust can generate, and can impact our additional structural advisory fee receivables as accrued but unpaid fees bear interest at LIBOR plus 150 basis points. 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-rate tranche, which, in turn, decreases the estimated fair value of our service receivables.

        For the quarter ended March 31, 2010, the forward LIBOR curve shifted slightly upward in the first five years, and then slightly downward in the longer-term. Overall, the net result was an increase to the value of the additional structural advisory fee receivables of $175 and an increase to the value of residual receivables of $49.

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(4) Service Receivables and Related Revenues (Continued)

        During the third quarter of fiscal 2009, there was an upward shift in the forward LIBOR curve which resulted in increases to our additional structural advisory fee and residual receivables of $2,590 and $14, respectively, for the third quarter; however, over the first nine months of fiscal 2009, the forward LIBOR curve shifted downward from the prior year end, and we recorded net decreases of $16,941 and $22,099, for additional structural advisory fee and residual receivables, respectively.

        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 the credit enhancement provider 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 residual receivables and delayed the timing of receipt of additional structural advisory fees. As a result, during the second quarter of fiscal 2009, we decreased the estimated fair value of our additional structural advisory fees by $13,087 and our residual receivables by $31,779. We did not make any further adjustments during the third quarter of fiscal 2009. During fiscal 2010, we have assumed that the notes would continue to bear interest at the contractual maximum spread.

        Decrease to Reflect Disposition.    Effective March 31, 2009, we entered into a purchase agreement with VCG Owners Trust and VCG Securities, LLC, pursuant to which we transferred our sole ownership of the Trust Certificate. As a result of the sale of the Trust Certificate, we are no longer entitled to receive residual cash flows from the NCSLT Trusts. The decrease to reflect disposition reflects the carrying value of all residual interests of the NCSLT Trusts included in the sale.

        TERI's Obligation to Pay Claims.    During the third quarter of fiscal 2010, we updated our assumptions regarding TERI's obligation to pay claims based on the Plan of Reorganization presented for creditor approval in April 2010. The updated assumptions did not have a material impact on our additional structural advisory fee or asset servicing fee receivables.

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

(5) Loans Held to Maturity

        We hold portfolios of education loans and mortgage loans to maturity. The following table provides information on the carrying values and credit quality of these portfolios:

(6) Commitments and Contingencies

(a) Agreements with Lender Clients

        Under the terms of loan purchase agreements entered into with lender clients prior to fiscal 2010, we generally had 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 varied by client and generally ranged from 195 days to 555 days following final loan disbursement. Under the terms of certain of our loan purchase agreements, if we failed 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 loan purchase agreements that limited our liability to liquidated damages generally provided that our obligation to close a securitization was subject to the condition that no "market disruption event" had occurred. Under certain of these loan purchase agreements, the TERI Reorganization constituted a "market disruption event," suspending our contractual obligation to close a securitization. Any liquidated damages would have been due at expiration of the relevant loan purchase period, which would not have occurred for a period of time after the market disruption event ceased. On April 28, 2010, the Bankruptcy Court held a hearing to consider confirmation of the Plan of Reorganization and made findings that the Plan of Reorganization meets the requirements for confirmation under the Bankruptcy Code. As of May 7, 2010, however, the Bankruptcy Court had not entered an order confirming the Plan of Reorganization. Following entry of such an order and upon effectiveness of the Plan of Reorganization, TERI will reject its remaining guaranty agreements. The rejection of TERI's guaranty agreements would terminate our purchase obligations under our outstanding loan purchase agreements. No amounts were accrued in the financial statements with respect to potential liabilities under these loan purchase agreements.

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(6) Commitments and Contingencies (Continued)

(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.

        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. Beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the NCLST Trusts, but only using cash in the Pledged Account established for the benefit of the specific trust that owned the defaulted loan. 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.

        In June 2008, the Bankruptcy Court granted parties rights to challenge the NCSLT Trusts' security interests in the collateral other than funds in 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 NCSLT Trusts, and against our subsidiary First Marblehead Data Services, Inc. (FMDS) as administrator of such trusts. The complaint generally alleged that the security interests granted by TERI to the NCSLT Trusts, excluding the security interests in the Pledged Accounts, were unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleged that the NCSLT Trusts did not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance of more than $591,000 as of March 31, 2010, or in amounts owed or transferred by TERI to Pledged Accounts after the filing of TERI's petition for reorganization totaling more than $43,000 as of March 31, 2010. In February 2009, pending resolution of the issues raised in the Creditors Committee's complaint, the NCSLT Trusts generally suspended the transfer of defaulted loans to TERI and generally suspended requests for default claim payments from amounts in the Pledged Accounts.

        The Plan of Reorganization includes a proposed settlement of the adversary complaint, as well as other provisions that would affect the claims of the NCSLT Trusts. As of the voting deadline for the Plan of Reorganization, all of the NCSLT Trusts voted or were deemed to vote in favor of the Plan of Reorganization, thereby electing to accept settlement of the adversary proceeding and their respective claims. As of May 7, 2010, however, the Bankruptcy Court had not entered an order confirming the Plan of Reorganization, the terms of which are summarized in Note 15, "Subsequent Events—Status of TERI Plan of Reorganization."

(c) Performance Guaranty

        In connection with the sale by Union Federal of an education loan portfolio in October 2009, 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

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(6) Commitments and Contingencies (Continued)

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.

(d) Assumption of Potential Contingent Liabilities of Union Federal

        On April 16, 2010, FMC and certain of its subsidiaries entered into agreements relating to the restructuring of the education loan warehouse facility (Facility) of UFSB-SPV. In connection with the restructuring, the conduit lender released any and all potential claims against Union Federal and UFSB-SPV pursuant to the indenture relating to the Facility based upon events arising prior to April 16, 2010, to the extent such claims would exceed $20,000 in the aggregate (Liability Cap). Neither Union Federal nor UFSB-SPV would have any liability until the conduit lender's aggregate losses exceeded $3,500 (Deductible), at which point Union Federal and UFSB-SPV would only be liable for amounts above the Deductible up to the Liability Cap. Neither the Liability Cap nor the Deductible would apply, however, in cases of fraud, willful misconduct, gross negligence or third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors. In addition, the release is not deemed a waiver of rights previously reserved but not exercised by the conduit lender, except as specifically released pursuant to a settlement agreement.

        FMC assumed any remaining contingent liability of Union Federal and its affiliates, other than UFSB-SPV, under the Facility arising prior to April 16, 2010, subject to the Liability Cap discussed above. In addition, FMC assumed any contingent liability of Union Federal under the Facility arising prior to April 16, 2010 based on fraud, willful misconduct, gross negligence, third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors or rights not otherwise released by the conduit lender. We are not aware of any contingencies existing at the balance sheet date that are both probable and estimable for which we would record a reserve.

(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

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(7) Stockholders' Equity (Continued)

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.

        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.

        Market prices are not available for education loans held for sale, additional structural advisory fee receivables, asset servicing fee receivables or residual receivables. See Note 4, "Service Receivables and Related Revenues," for a description of significant observable and unobservable inputs used to develop the estimated fair values of service revenue receivables. These assets are classified within Level 3 of the valuation hierarchy.

        The following table presents financial instruments carried at fair value as of March 31, 2010 and June 30, 2009, by consolidated balance sheet caption, in accordance with the valuation hierarchy described above on a recurring and nonrecurring basis:

        The following tables present activity related to our financial assets categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for the three and nine months ended March 31, 2010 and 2009. All losses recorded during the periods presented relate to assets still held at the balance sheet date, with the exception of residuals sold on March 31, 2009 that had a carrying value of

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(8) Fair Value of Financial Instruments (Continued)

$134,481 on the sale date. No cash was received from this sale. There have been no transfers in or out of Level 3 of the hierarchy, nor between Levels 1 and 2, for the periods presented.

 

        Fair value estimates for financial instruments not carried at fair value in our consolidated balance sheet are generally subjective in nature, and are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. We have elected not to apply the fair value provisions available under ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10), to these assets and liabilities. Disclosure of fair value estimates is not required for certain items, such as premises and equipment, intangible assets and income tax assets and liabilities.

        The short duration of many of our assets and liabilities result in a significant number of financial instruments for which fair value equals or closely approximates the value reported in our consolidated balance sheet. We believe that the carrying values of short-term investments, federal funds sold and deposits approximate fair value due to their short duration. The fair values of education and mortgage loans held to maturity are not materially different from their carrying values.

        UFSB-SPV's liability under the education loan warehouse facility of $227,894 at March 31, 2010, is recorded in our balance sheet at the value of outstanding principal and interest. We have elected not to

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apply the fair value provisions available under ASC 820-10 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 $100,031 at March 31, 2010.

(9) Net Interest Income

        The following table reflects the components of net interest income:

(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

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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)

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, 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:

(12) Income Taxes

        Income tax benefit for the third quarter of fiscal 2010 was $15,439, for a total benefit of $67,475 for the first nine months of fiscal 2010. The income tax benefit for fiscal 2009 was $64,934 for the third quarter and $169,718 for the first nine 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 nine months of fiscal 2010, our effective tax rate, or the income tax benefit as a percentage of pre-tax loss, decreased to 33.3% from an effective tax rate of 34.2% for the first nine 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 an income tax receivable of $27,977 at March 31, 2010.

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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)

(12) Income Taxes (Continued)

        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 $20,108 at March 31, 2010. At March 31, 2010, we had approximately $3,328 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 income tax receivables during fiscal 2009 for federal and state income taxes paid on prior taxable income. In the first nine months of fiscal 2010, we received a total of $189,323 in federal and state income tax refunds related to our income tax receivables.

        During April 2010, the IRS commenced an audit of our tax returns for fiscal years 2007, 2008 and 2009. We do not know what the outcome of the audit will be at this time. As of the date of this quarterly report, no adjustments have been proposed.

(13) Net Loss per Share

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

        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. For the majority of stock options outstanding, the conversion or exercise price exceeds fair market value at the report date.

(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

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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)

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.

        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).

        Union Federal's equity capital was $44,781 at March 31, 2010, 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 March 31, 2010 and June 30, 2009, Union Federal was well capitalized under the regulatory framework for prompt corrective action.

        The OTS regulates all capital distributions by Union Federal directly or indirectly to us, including dividend payments. Union Federal is required to file a notice with the OTS at least 30 days before the proposed declaration of a dividend or approval of a proposed capital distribution by Union Federal's board of directors. Union Federal must file an application to receive the approval of the OTS for a proposed capital distribution when, among other circumstances, the total amount of all capital distributions (including the proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years.

        A notice or application to make a capital distribution by Union Federal may be disapproved or denied by the OTS if it determines that, after making the capital distribution, Union Federal would fail to meet minimum required capital levels or if the capital distribution raises safety or soundness concerns or is otherwise restricted by statute, regulation or agreement between Union Federal and the OTS or the Federal Deposit Insurance Corporation (FDIC), or a condition imposed by an OTS agreement. Under the Federal Deposit Insurance Act (FDIA), an FDIC-insured depository institution such as Union Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the FDIA).

(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

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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)

(14) Union Federal Regulatory Matters (Continued)

cease and desist (Order). The OTS terminated the Order and the Supervisory Agreement, each in its entirety, on March 5, 2010 and March 10, 2010, respectively.

        In connection with the termination of the Supervisory Agreement, our Board of Directors adopted resolutions requiring us to support the implementation by Union Federal of its business plan, so long as Union Federal is owned or controlled by us, and to notify the OTS in advance of any distributions to our stockholders in excess of $1,000 per fiscal quarter and any incurrence or guarantee of debt in excess of $5,000. Following termination of the Supervisory Agreement and the Order, respectively, we remain subject to extensive regulation, supervision and examination by the OTS as a savings and loan holding company, and Union Federal remains subject to extensive regulation, supervision and examination by the OTS and the FDIC.

(15) Subsequent Events

(a) Restructuring of Education Loan Warehouse Facility

        On April 16, 2010, we entered into agreements relating to the restructuring of the education loan warehouse facility of UFSB-SPV. As a result of the restructuring:

•

FMC assumed certain potential contingent liabilities of Union Federal, subject to a dollar cap, under the indenture relating to the facility;



•

FMC replaced Union Federal as the master servicer under the indenture;



•

FMC indirectly contributed $6,500 in cash, and private education loans with an outstanding balance of approximately $6,900, and a fair value of approximately $3,084, to UFSB-SPV;



•

First Marblehead Education Resources, Inc. (FMER), a subsidiary of FMC, will act as a special servicer to the loans held by UFSB-SPV, administering and overseeing the activities of third-party collection agencies with respect to the collection of delinquent and defaulted loans held by UFSB-SPV;



•

The interest rate on outstanding advances under the facility decreased from prime plus 2.00% to (a) cost of funds (either commercial paper or bank funded) plus 0.50% until the first anniversary of the effective date and (b) cost of funds (either commercial paper or bank funded) plus 3.00% thereafter;



•

All program fees were eliminated; and



•

The conduit lenders released certain potential contingent liabilities of Union Federal and UFSB-SPV and permitted Union Federal to transfer the membership interests of UFSB to a non-bank subsidiary of FMC.

(b) SunTrust Loan Program Agreement

        On April 20, 2010, FMC and FMER entered into a loan program agreement (Program Agreement) with SunTrust Bank. The Program Agreement relates to a school-certified private education loan program (SunTrust Program) to be funded by SunTrust Bank upon the satisfaction of conditions set forth in the Program Agreement, as further described below.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(15) Subsequent Events (Continued)

        Services and Fees.    Upon effectiveness of the Program Agreement, FMC and FMER will perform loan processing services, program support and portfolio management services, program administration services and production support services pursuant to the Program Agreement. FMC will also manage the servicing of SunTrust Program loans by PHEAA. FMC and FMER will generally provide services on a fee-for-service basis, although FMC will also be entitled to a portion of the yield generated by the portfolio of SunTrust Program loans in connection with certain administration services and for providing the credit enhancement described below.

        Credit Enhancement.    FMC will provide credit enhancement in connection with the SunTrust Program by funding an account (Participation Account), up to a specified dollar limit (Participation Cap), to serve as a first-loss reserve for defaulted SunTrust Program loans. The SunTrust Program loans will not be guaranteed by a third-party guarantor. FMC will provide an initial deposit into the Participation Account prior to the commencement of its loan processing services, and supplementary deposits into such account on a quarterly basis during the term of the Program Agreement based on disbursed SunTrust Program loan volume and adjustments to default projections for SunTrust Program loans. FMC will not be required to provide any credit enhancement in excess of the Participation Cap.

        SunTrust Bank will withdraw on a monthly basis from the Participation Account, to the extent of available funds, the outstanding principal and accrued interest balance of each SunTrust Program loan that becomes more than 180 days past due (Charged Off Loan). SunTrust Bank will then assign the Charged Off Loan to FMC (or its affiliate designee) for collection activity. After the payment to SunTrust Bank with respect to any Charged Off Loan, and after SunTrust Bank's assignment of such loan to FMC (or its affiliate designee), recoveries on all assigned Charged Off Loans will be deposited into the Participation Account.

        FMC will be entitled to withdraw amounts from the Participation Account on a monthly basis beginning 48 months after the Effective Date (as defined below), to the extent that funds in the Participation Account as of the end of any month exceed a percentage specified in the Program Agreement of loan volume outstanding to SunTrust Bank as of the end of such month.

        Term and Termination.    The services to be provided by FMC and FMER will begin on the Effective Date (as defined below) and continue through the earlier of two years from the Effective Date or the date on which the Participation Cap is reached, unless earlier terminated for cause. Notwithstanding any expiration or termination of the Program Agreement, the program administration services and the program support services will generally be provided for the life of the SunTrust Program loan portfolio.

        Effective Date.    The effectiveness of the Program Agreement is conditioned upon, among other things, the following (Effectiveness Conditions):

•

Execution of a servicing agreement satisfactory to SunTrust Bank, FMC and PHEAA;



•

SunTrust Bank's written approval of the internet-based loan application system to be used by FMER, including processes for complying with applicable law;



•

The parties' final approval of the guidelines relating to the SunTrust Program;



•

The formation of an FMC-sponsored trust to hold Charged Off Loans;

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(15) Subsequent Events (Continued)

•

Execution of an account control agreement governing the administration of the Participation Account;



•

SunTrust Bank's written approval of the FMC-created and managed website relating to the SunTrust Program; and



•

Execution of an addendum to an agreement between SunTrust Bank and a consumer reporting agency relating to consumer reporting and ancillary services in connection with the SunTrust Program.

        Upon the satisfaction or waiver of every Effectiveness Condition, the parties will establish the effective date (Effective Date) of the Program Agreement in a writing signed by all parties. Until the Effective Date, no party will have any of the rights or obligations set forth in the Program Agreement, with specified exceptions relating to, among other things, confidentiality. If the Effectiveness Conditions are not satisfied or waived prior to September 1, 2010, the Program Agreement may be automatically terminated by any party on such date.

(c) Restricted Stock Unit Grants

        In April 2010, we granted an aggregate of 4,331 restricted stock units (RSUs) to our employees, including our executive officers. Each RSU represents a contingent right to receive one share of our common stock upon vesting. Shares in respect of vested RSUs will be issued as soon as practicable after each vesting date.

(d) Status of TERI Plan of Reorganization

        On April 28, 2010, following approval of the Plan of Reorganization by creditors of TERI in accordance with the Bankruptcy Code, the Bankruptcy Court held a hearing to consider confirmation of the Plan of Reorganization. The Bankruptcy Court made findings that the Plan of Reorganization meets the requirements for confirmation under the Bankruptcy Code, although an order confirming the Plan of Reorganization had not been entered by the Bankruptcy Court as of May 7, 2010. Following entry of such an order and upon satisfaction of the remaining conditions specified in the Plan of Reorganization, the Plan of Reorganization would become effective.

        The Plan of Reorganization generally provides for the following:

•

TERI will transfer the bulk of its assets to a liquidating trust to be distributed among TERI's unsecured creditors;



•

For any creditor that voted in favor of Plan of Reorganization, the Creditors Committee's model will be used for determining contingent guaranty claims based on future loan defaults. This methodology is generally more favorable to the creditor than TERI's model.



•

For any NCSLT Trust that voted in favor of the Plan of Reorganization, such trust's claims, and the adversary proceeding relating to such trust's security interests, will be settled, as further described below;



•

TERI will be entitled to keep up to $9,400 in cash, $6,000 of which is subject to restrictions limiting its use primarily to TERI's college access programs; and

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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)

(15) Subsequent Events (Continued)

•

TERI will be entitled to earn up to $2,000 over two years for its continued management of a defaulted loan portfolio that will be transferred by TERI to the liquidating trust.

        The Plan of Reorganization provides for the following in the case of the NCSLT Trusts, each of which voted or was deemed to vote in favor of the Plan of Reorganization:

•

Each such trust will receive all or a portion of any remaining balance in its respective Pledged Account (excluding the National Collegiate Trust 2002-CP1).



•

Certain defaulted loans purchased by TERI prior to April 7, 2008 (Petition Date) will be transferred to the indenture trustee for the benefit of the noteholders of the respective NCSLT Trust.



•

Defaulted loans purchased by TERI after the Petition Date using funds in the Pledged Accounts will be transferred to the liquidating trust as assets available for distribution among unsecured creditors.



•

Recoveries on defaulted loans, which have been deposited into escrow since July 2008, will be transferred back to the respective NCSLT Trust (excluding the National Collegiate Trust 2001-CP1 and the National Collegiate Trust 2002-CP1) to the extent that they relate to defaulted loans purchased by TERI prior to the Petition Date.



•

The claims estimation methodology developed by the Creditors Committee forms the basis for estimating the NCSLT Trusts' future default claims under the Plan of Reorganization. In most cases, those claims will exceed the collateral being returned by TERI, and the excess will be treated as unsecured claims against TERI's estate in amounts specified in the Plan of Reorganization.



•

TERI will release its claim against the NCSLT Trusts for payment of subsequent guaranty fees.



•

The litigation commenced by the Creditors Committee will be dismissed with prejudice against the indenture trustee, the NCSLT Trusts, and the administrator, FMDS, a subsidiary of FMC.

        Each of FMC and FMER abstained from voting on the Plan of Reorganization. FMC and FMER expect any objections to their respective unsecured claims against TERI to be resolved through litigation in the Bankruptcy Court unless a negotiated settlement is reached with the liquidating trust. In October 2008, we filed proofs of claim in the aggregate contingent amount of $87,000, including a general unsecured claim of $16,000 with regard to processing fees from TERI that were due but unpaid as of the Petition Date and claims for damages stemming from TERI's rejection of contracts with us.

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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 May 10, 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.

        Our subsidiary, Union Federal Savings Bank, or Union Federal, is a federally chartered thrift that offers residential and commercial mortgage loans, and retail savings, money market and time deposit products. Prior to 2009, Union Federal also offered private education loans directly to consumers; however, as of May 10, 2010, we do not expect Union Federal to offer private education loans during fiscal 2010. During the second quarter of fiscal 2010, we announced that we had begun exploring strategic alternatives for Union Federal, including a potential sale.

        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 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 May 10, 2010, will be a key driver of our future financial results and will be critical to growing and diversifying our revenues and client base.

        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

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investors. In the past, we offered our clients a fully integrated suite of outsourcing services, but we did 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 and, to a lesser extent, persisted as of May 10, 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 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 may require us to put amounts of capital, capped pursuant to the applicable agreement, at risk to cover potential default losses in the resulting loan portfolio. 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 the third quarter of fiscal 2010:

•

On April 28, 2010, the United States Bankruptcy Court for the District of Massachusetts, or Bankruptcy Court, held a hearing to consider confirmation of the fourth amended and restated plan of reorganization, which we refer to as the Plan of Reorganization, jointly proposed by TERI and its official committee of unsecured creditors, which we refer to as the Creditors Committee. The Bankruptcy Court made findings that the Plan of Reorganization meets the requirements for confirmation under the Bankruptcy Code, although an order confirming the Plan of Reorganization had not been entered by the Bankruptcy Court as of May 7, 2010. See Note 15, "Subsequent Events—Status of TERI Plan of Reorganization," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details.

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•

On April 20, 2010, we entered into a loan program agreement with SunTrust Bank relating to a school-certified private education loan program to be funded by SunTrust Bank. Upon the satisfaction of conditions set forth in the agreement, we will provide a range of services, including loan processing, production support, program support and portfolio management, and program administration. The loan program would be the first based on our Monogram product offering. The credit enhancement features included in the Monogram product offering may require us under certain circumstances to put specified amounts of capital at risk to cover potential defaults in the portfolios. See Note 15, "Subsequent Events—SunTrust Loan Program Agreement," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details.



•

On April 16, 2010, we and certain of our subsidiaries entered into agreements relating to the restructuring of the education loan warehouse facility of UFSB Private Loan SPV, LLC, which we refer to as UFSB-SPV. The facility previously served as a source of interim financing for private education loan programs that had been funded by Union Federal. The restructuring involves the substitution of FMC for Union Federal as master servicer under the indenture, the assumption by FMC of certain potential contingent liabilities of Union Federal under the facility, subject to a cap, and the indirect contribution by FMC of $6.5 million in cash and current private education loans with an outstanding principal balance of approximately $6.9 million, and a fair value of approximately $3.1 million, to the facility. In exchange, the conduit lender released Union Federal and UFSB-SPV from certain potential contingent liabilities, permitted the transfer of the membership interests of UFSB-SPV from Union Federal to an affiliate of FMC and made certain concessions with respect to the interest rate and fees applicable to the facility. See Note 15, "Subsequent Events—Restructuring of Education Loan Warehouse Facility," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details.



•

In the first nine 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 losses from operations and the sale of the Trust Certificate. During the third quarter of fiscal 2010, the Internal Revenue Service, or IRS, began an audit of our federal tax returns for fiscal 2007, 2008 and 2009. The IRS or a state taxing authority could challenge our tax positions in connection with the transactions, notwithstanding our receipt of any tax refund. See Note 12, "Income Taxes," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details.



•

In July 2009, we entered into a supervisory agreement with the U.S. Office of Thrift Supervision, or OTS, that required 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. The OTS terminated the Order and the Supervisory Agreement, each in its entirety, on March 5, 2010 and March 10, 2010, respectively. 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.

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 and not fully recovered. 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 nine months of fiscal

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2010. In addition, credit performance of consumer-related loans generally, and our education loan portfolios and those held by the various securitization trusts we have facilitated, continued to be adversely affected by general economic conditions, including high 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 at March 31, 2010, primarily consisted of a portfolio of private education loans held by UFSB-SPV that is pledged to a third-party conduit lender pursuant to an education loan warehouse facility.

        Our education loan portfolios and those of the NCSLT Trusts have experienced higher levels of defaults than we originally projected. As a result, we have significantly adjusted our projected performance assumptions associated with the NCSLT Trusts during fiscal 2009 and through the first nine months of fiscal 2010, including significant increases in our assumed default rates. These adjustments have resulted in net reductions in the fair value of our additional structural advisory fees, asset servicing fees and residual receivables. Credit rating agencies have taken negative ratings actions with respect to certain securitizations that we previously facilitated. In March 2010, Standard & Poor's downgraded the ratings assigned to 120 classes of ABS issued by 20 NCSLT Trusts, citing higher than expected levels of delinquencies and defaults, declines in parity levels, and reductions in available credit support for the transactions. In May 2010, Standard & Poor's also downgraded the rating assigned to one class of ABS issued by one NCSLT Trust, citing an interest trigger event on the class notes that resulted in an interest shortfall to such class notes.

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

        During the first nine months of fiscal 2010, we recorded an unrealized loss of $138.8 million in connection with fair value adjustments to our education loans held for sale. We recorded aggregate losses during fiscal 2009 of $138.2 million in connection with similar fair value adjustments. 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 May 10, 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;



•

valuation adjustments relating to our portfolios of private education loans held for sale;



•

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;

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•

challenges relating to the federal income tax treatment of the sale of the Trust Certificate or our asset services agreement with the purchaser 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 accounting principles generally accepted in the United States of America, or GAAP, 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 the consummation of the Plan of Reorganization proposed by TERI and the Creditors Committee in September 2009.

        We believe that our loan program agreement with SunTrust Bank will provide us with an opportunity to structure, process and originate private education loans. We believe that the program agreement is a significant step in our return to the private education lending marketplace, and we hope to satisfy all conditions to the effectiveness of the program in advance of the September 1, 2010 date by which conditions are required to be met under the agreement.

        We also believe that conditions in capital markets generally continued to improve during the third quarter of fiscal 2010, potentially creating additional flexibility with regard to the financing of private education loans. We continue to believe, as of May 10, 2010, however, that the structure and economics of any financing transaction will be less favorable than our past securitizations. In particular, we expect lower revenues and additional cash requirements on our part.

        During the second quarter of fiscal 2010, we announced that we had begun examining strategic alternatives for Union Federal, including a potential sale. We believe that the termination of the Order and the Supervisory Agreement during the third quarter of fiscal 2010 and the elimination of Union Federal's ongoing duties and potential contingent liabilities related to UFSB-SPV's education loan warehouse facility will prove attractive to potential purchasers as we consider our strategic alternatives with respect to Union Federal.

Application of Critical Accounting Policies and Estimates

        Our consolidated financial statements have been prepared in accordance with 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, and in Note 1, "Nature of Business and Summary of Significant Accounting Policies," in the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this quarterly report. On an ongoing basis, we evaluate our estimates and judgments, particularly as they relate to accounting policies that we believe are most important to the portrayal of our financial condition and results of operations, such as those involving recognition of service revenues and the valuation of our service receivables and

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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 revenues 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 our portfolios 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 obtained private education loans from the originating lenders or their assignees, which relinquished to the trust their ownership interest in the loans. The debt instruments that the trusts issued to finance the purchase of these private education loans are obligations of the trusts, rather than our obligations or 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

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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 residual 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 residual 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 NCSLT 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.

        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 March 31, 2010 and 2009, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $12.2 billion and $13.0 billion, respectively. The principal underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans, of which approximately 26.6% were in deferment, 5.4% were in forbearance and 68.0% were in repayment status as of March 31, 2010. Approximately 89.5% of the loans in repayment status as of March 31, 2010 were current, 4.7% were between 31 and 90 days past due, 2.6% were between 91 and 180 days past due, and 3.2% were greater than 180 days past due. As of March 31, 2010, the cumulative gross default rate with regard to loans in, and loans that have previously been in, repayment status in the NCSLT Trusts was 14.3%. We have posted to our website, and filed as exhibit 99.1 to this quarterly report, static pool data as of March 31, 2010, including original pool characteristics and borrower payment status, delinquency, cumulative loss and prepayment data as of March 31, 2010 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 and default 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.

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        Default, Recovery and Prepayment Rates.    Default, recovery and prepayment rates are defined as follows:

•

Default rates are the estimated cumulative principal balance of defaulted loans over the life of a trust divided by the original principal balance of the loans;



•

Recovery rates are the estimated net cumulative amount of recoveries (reduced by costs of recovery) on defaulted loans over the life of the trust; and



•

Prepayments are 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.

        Prior to the third quarter of fiscal 2010, our assumptions for default, recovery and prepayment rates relied primarily on historical data, updated in the short-term for differences between projected results and actual results. During fiscal 2010, we engaged an independent consulting firm to assist us in assessing our modeling methodologies. As a result of this assessment, which concluded during the third quarter of fiscal 2010, we refined our models to include a prospective methodology that also applies macroeconomic factors in projecting future loan performance. Historical data was used to validate the enhanced methodology. We began applying the refinements to our methodology during the third quarter of fiscal 2010 to estimate default and prepayment rates for use in our discounted cash flow models.

        Discount Rates.    We apply discount rates to each of our financial instruments that we believe are commensurate with the tenure and risks involved. In determining an appropriate discount rate for valuing our asset servicing fees and residual 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 residual interests.

        Until the third quarter of fiscal 2010, the discount rate that we used to estimate the fair value of our additional structural advisory fees was based on the 10-year U.S. Treasury Bond rate plus a risk premium. In determining the risk premium, we considered factors such as yields on B-rated instruments, the level of available cash flows from residual interests that support the additional structural advisory fees, as well as the weighted-average life of the additional structural advisory fee receivables. For the quarter ended March 31, 2010, changes to cash flow assumptions had the effect of lengthening the weighted-average life of the additional structural advisory fee receivables, significantly reducing the amount of residual interest cash flows available to support the cash flows available for additional structural advisory fees and delaying the timing of receipt of additional structural advisory fees. The combination of all these factors led us to the determination that additional structural advisory fee receivables are more analogous to longer term financial instruments than 10-year debt instruments and a higher discount rate is appropriate. The 14% discount rate used for additional structural advisory fees reflects 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 and is 200 basis points less than the 16% used for residual receivables, reflecting the seniority of the additional structural advisory fees in the cash waterfall of the securitization trusts.

        Auction Rate Note Interest Rates.    Five of the NCSLT Trusts issued auction rate notes to finance, in whole or in part, the purchase of private education loans. Failed auctions occurred and have persisted with respect to these five trusts. The failed auctions, deterioration in trust performance and the downgrade in the insurance financial strength ratings assigned to the credit enhancement provider for certain auction rate notes, have resulted in the auction rate notes bearing interest at a maximum spread over one-month LIBOR as specified in the indentures, based on the ratings assigned to the

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notes. We assume that all auction rate notes will continue to bear interest at their current maximum spreads until their expected maturity dates.

        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 fluctuations 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.

        TERI's Obligation to Pay Claims.    Prior to the third quarter of 2008, we assumed that TERI would pay default claims on a timely basis. The indentures relating to certain of the securitization trusts specify 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. As a result of the TERI Reorganization, cumulative gross defaults of education loans held by the NCSLT Trusts are projected to exceed a specified level per the indentures that would constitute a Trigger Event. Although the overall expected cash flows generated by the NCSLT 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 addition, as a result of the TERI Reorganization, we adjusted our assumptions during the third quarter of fiscal 2008 to assume that amounts available to pay an NCSLT Trust's default claims will be limited to amounts available from the NCSLT Trust's Pledged Account, and that future recoveries on defaulted loans would replenish such Pledged Account. During the third quarter of fiscal 2010, we further updated our assumptions to reflect the terms of the Plan of Reorganization, as follows:

•

With limited exceptions, each NCSLT Trust will receive from TERI the balance, if any, remaining in its respective Pledged Account;



•

Certain defaulted loans purchased by TERI prior to the TERI Reorganization will be assigned to the respective NCSLT Trust, and, with limited exceptions, all recoveries on such loans will benefit the respective NCSLT Trust;



•

Defaulted loans purchased by TERI subsequent to the TERI Reorganization using funds from a Pledged Account will not be assigned to the respective NCSLT Trust, but rather will be assigned to a liquidating trust. Recoveries on such loans will benefit unsecured creditors of TERI pro rata and will not replenish the Pledged Account of the respective NCSLT Trust; and



•

Each NCSLT Trust will receive a pro rata distribution of defaulted loan recoveries available to the general unsecured creditors of TERI based on each trust's unsecured claim. No other amounts have been assumed to benefit the trusts for their claims as general unsecured creditors.

        These assumptions did not have a material impact on our additional structural advisory fee or asset servicing fee receivables. See Note 6, "Commitments and Contingencies—TERI Reorganization—Challenge to Security Interests," in the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this quarterly report for additional details.

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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 and the corresponding weighted-average cost of capital commensurate with the risks involved. 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 the current portion of its portfolio of private education loans held for sale, excluding 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 sale. During the third quarter of fiscal 2010, a portion of the loans were reclassified back to held for sale as a result of our contribution of the loans to UFSB-SPV as part of the restructuring of UFSB-SPV's education loan warehouse facility. 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 about loans held for sale, and Note 15, "Subsequent Events—Restructuring of Education Loan Warehouse Facility," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details about the restructuring.

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 fee receivables 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 NCSLT 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 March 31, 2010 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 March 31, 2010.

        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

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changes in key assumptions may differ materially from the sum of the individual effects calculated below.

 

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.

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        At March 31, 2010 and 2009, 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.

        Effective beginning with our financial statements for the quarter ending September 30, 2010, we will adopt Accounting Standards Update, or ASU, 2009-16, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets, which we refer to as ASU 2009-16, and ASU 2009-17, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities, which we refer to as ASU 2009-17. Prior to their codification, ASU 2009-16 was referred to as Financial Accounting Standard 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement 140, and ASU 2009-17 was referred to as Financial Accounting Standard 167, Amendments to FASB Interpretation No. 46(R).

        ASU 2009-16 removes the concept of a QSPE from ASC 860-40 and removes the exemption from consolidation for QSPEs from ASC 810-10, Consolidation, which we refer to as ASC 810-10. ASU 2009-17 updates ASC 810-10 to require that certain types of enterprises perform analyses to determine if they are the primary beneficiary of a variable interest entity. A primary beneficiary of a variable interest entity is 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, ASU 2009-17 requires us to continuously reassess whether consolidation of variable interest entities is appropriate upon the occurrence of reconsideration events, as opposed to the one-time assessment allowed under previous guidance.

        As of May 10, 2010, we expect to consolidate certain of these securitization trusts. The final impact is expected to be material to the balance sheet and statement of operations, but the amounts are still uncertain. We do not own the residuals of the NCSLT Trusts and the deficits of these trusts, if consolidated, are expected to be allocated to non-controlling interests.

        Assets and liabilities of the entities to be consolidated as a result of our analysis will be measured at the same amounts that such assets and liabilities would have been measured if they had been consolidated at the time we became the primary beneficiary. All intercompany transactions will be eliminated. Profits and losses of the consolidated variable interest entities will be allocated to non-controlling interests based on voting interests, before the effect of intercompany elimination entries. ASU 2009-17 may be applied retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption or the opening balance of retained earnings for the first year presented. We expect to present a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption.

        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 March 31, 2010, the aggregate outstanding liabilities of the NCSLT Trusts were approximately $12.2 billion and total assets were $10.8 billion. The principal underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans. The aggregate

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outstanding assets and liabilities of other trusts, for which we own residual interests, were each less than $1.0 billion.

Results of Operations

Three and nine months ended March 31, 2010 and 2009

Summary

        The following table summarizes our results of operations:

        We reported a net loss of $29.4 million, or $0.30 per share, on a fully diluted basis, for the third quarter of fiscal 2010, compared with a net loss of $140.7 million, or $1.42 per share, for the third quarter of fiscal 2009. The improvement in earnings in fiscal 2010 reflects lower reductions of service receivables and lower non-interest expenses. Total revenues for the third quarter of fiscal 2010 increased by $113.8 million from the third quarter of fiscal 2009. In fiscal 2009, we reduced the carrying value of residual interests in the NCSLT Trusts by $134.5 million as a result of the sale of the Trust Certificate. We did not facilitate any new securitization transactions in the first nine months of fiscal 2010 or 2009. Total non-interest expense decreased $47.0 million over the same period, reflecting lower expenses across most categories of expense.

        Our net loss for the first nine months of fiscal 2010 was $135.2 million, or $1.36 per share on a fully diluted basis, compared with a net loss of $326.9 million, or $3.30 per share, for the first nine months of fiscal 2009. The improvement in earnings for the nine month period is attributable to lower reductions of service receivables and lower compensation and benefits and general and administrative expenses, partially offset by higher 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:

        Additional structural advisory fees, asset servicing fees and residual 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.

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 general, 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 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 March 31, 2010 ranged from 88.55% to 96.04%. Please refer to exhibit 99.2 to this quarterly report for additional information on actual trust Parity Ratios as of March 31, 2010. 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 commensurate with the risk involved 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 ability and obligation to pay default claims for the NCSLT Trusts, expected recoveries on defaulted loans, 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, and the existence of Trigger Events. These assumptions are based on historical and third-party data and our industry experience.

        On a quarterly basis, we update our estimate of the fair value of our additional structural advisory fee receivable. We expect, as of March 31, 2010, to begin to receive these fees approximately five to 22 years after the date of a particular securitization transaction. However, for many of the NCSLT

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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.

        Prior to the third quarter of fiscal 2010, our assumptions for default, recovery and prepayment rates relied primarily on historical data, updated in the short-term for current differences between projected results and actual results. During the third quarter of fiscal 2010, we refined our models to include a prospective methodology that also applies macroeconomic factors in projecting future loan performance. Historical results are used to validate the appropriateness of the relationship between macroeconomic indicators and actual results. In the third quarter of fiscal 2010, we used our refined methodology to determine estimated default and prepayment rates for use in our discounted cash flow models. The combination of higher net default rates and a higher discount rate, offset somewhat by lower prepayment rates, resulted in a net loss recorded in revenues as additional structural advisory fees—trust updates of $21.4 million for the third quarter of fiscal 2010, for a net loss of $20.8 million in revenues for the first nine months of fiscal 2010.

        During the first nine 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. These factors resulted in losses recorded as trust updates in revenue during the third quarter of $4.1 million, for a total loss of $51.5 million for the first nine months of fiscal 2009. 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 fee receivables:

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

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residual receivables. Residual fees recognized in our statement of operations represent the change during the period in the estimated fair value of residual receivables. 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 of NC Residuals Owners Trust, 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. The purchaser of the Trust Certificate agreed to bear all future federal and state tax liabilities associated with the NCSLT Trust residuals.

        Trust updates for residual interests in fiscal 2010 relate only to the trusts that were not part of the sale of the Trust Certificate. Changes in assumptions did not have a material impact on these residual interests for the three months ended March 31, 2010. For the nine months ended March 31, 2010, trust update revenue of $2.2 million primarily reflected accretion for the passage of time and a decrease in the discount rate.

        As a result of the sale of the Trust Certificate in the third quarter of fiscal 2009, we recorded a loss of $134.5 million for the reduction to our carrying value of the NCSLT residual interests. Prior to our sale of the Trust Certificate, we recorded losses to reflect 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, somewhat offset by accretion and lower prepayment rates, for a total loss of $285.6 million in the first nine months of fiscal 2009.

        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 residual receivables:

        We entered into the Asset Services Agreement in April 2009, pursuant to which we have agreed to provide certain services to the purchaser of the Trust Certificate to support its 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 purchaser of

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the Trust Certificate has begun to receive residual cash flows. Due to changes in default assumptions related to the NCSLT Trusts, the weighted average life of our asset servicing fees has increased, and the overall expected cash flows have decreased. As a result, we recorded a loss from fee updates of $2.6 million during the third quarter of fiscal 2010, for a net loss from fee updates of $2.3 million for the first nine months of fiscal 2010. Fee income earned was $2.1 million for the third quarter and $6.0 million for the first nine months of fiscal 2010.

Administrative and Other Fees

        Administrative and other fees increased slightly to $4.6 million and $15.1 million for the third quarter and first nine months of fiscal 2010, respectively, up from $4.0 million and $15.0 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.

Service Revenues Receivables Assumptions

        Performance Assumption Overview.    During the third quarter of fiscal 2010, we completed initial enhancements to the financial models that we use to estimate the fair value of our service receivables. The enhancements provide for the inclusion of certain prospective macro-economic factors in our performance assumptions for those private education loans securitized in the NCSLT Trusts. As a result of the enhancements, which were validated by a third party, we are able to provide performance information on a segmented basis rather than solely on a weighted-average basis. As our risk models continue to evolve, we anticipate additional future enhancements.

        Risk Segments.    Using our proprietary risk score modeling developed for our new Monogram product, loans in the NCSLT Trusts were retroactively scored using origination data as well as additional credit bureau data made available following origination. We then divided loans into three risk segments, with loans in Segment 1 expected to perform better than loans in Segment 2 and loans in Segment 2 expected to perform better than loans in Segment 3. The table below identifies performance assumptions for each segment, as well as the percentage of the NCSLT Trust portfolios in each segment.

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Default and Recovery Rates.

        During the first quarter of fiscal 2010, we reduced the carrying value of additional structural advisory fee receivables by $4.7 million for potential deviations in the performance of securitized loans and did not adjust this reserve during the second quarter of fiscal 2010. The higher projected default rate assumptions derived using our enhanced modeling eliminated the need for this reserve, which lessened the negative impact of the higher default rates. Additional structural advisory fee receivables decreased on a net basis by $34.5 million during the third quarter of fiscal 2010 and by $42.6 million for the first nine months of fiscal 2010.

        As a result of the change in our default assumptions, the projected timing of our receipt of asset servicing fees has been delayed by almost two years from our previous cash flow projections. We reduced asset servicing fee receivables by $2.6 million during the third quarter of fiscal 2010, resulting in a net decrease of $2.3 million for the first nine months of fiscal 2010. The decrease is attributable to the change in timing of our cash receipts, and is not related to collectability of asset servicing fees accrued to date. Our residual interests were less affected by the change in default rates, in light of our sale of the Trust Certificate. Residual receivables decreased by $0.4 million during the third quarter and first nine months of fiscal 2010 as a result of the increase in the projected default rates.

        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 fee receivables of $2.6 million and $8.8 million during the third quarter and first nine months of fiscal 2009, respectively.

        Due to the sale of the Trust Certificate at March 31, 2009, no decrease in residual receivables was allocated to changes in default rates for the third quarter of fiscal 2009 because the residuals of the NCSLT Trusts were reduced to zero in that quarter as a result of the sale. During the first and second quarters of fiscal 2009, residual receivables decreased by $50.1 million due to increases in the default rates.

        We did not adjust our assumptions regarding recovery rates during the fiscal 2010 or fiscal 2009 periods.

        Prepayment Rates.    In general, prepayment rates have been in decline since March 2008. Over the past year, in response to a historically low prepayment rate, the interest rate environment and limited availability of consumer credit, we adjusted our prepayment assumption by extending the period during which decreased prepayments were expected to persist. Our financial model enhancements now allow prepayment assumptions to be segmented, incorporating certain prospective macro-economic factors. As a result of our enhanced model, prepayments are expected to be lower and slower than previously projected, providing for an increase in the value of our structural advisory fee receivables by $25.3 million during the third quarter and for the first nine months of fiscal 2010.

        During the third quarter of fiscal 2009, we decreased our assumed prepayment rate by 11 basis points, which resulted in an increase to additional structural advisory fee receivables of $0.8 million, for a total increase in the first nine months of fiscal 2009 of $3.1 million.

        Discount Rate—Additional Structural Advisory Fees.    Until the third quarter of fiscal 2010, the discount rate that we used to estimate the fair value of our additional structural advisory fees was based on the 10-year U.S. Treasury Bond rate plus a risk premium. In determining the risk premium, we considered factors such as yields on B-rated instruments, the level of available cash flows from

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residual interests that support the additional structural advisory fees, as well as the weighted-average life of the additional structural advisory fee receivables.

        For the quarter ended March 31, 2010, we utilized a discount rate of 14% in determining the fair value of the additional structural advisory fee receivables. The change from an index-based discount rate to a rate of 14% reflects our financial model enhancements and resulting adjustments to our cash flow assumptions that had the effect of lengthening the weighted-average life of the additional structural advisory fee receivables. As a result, the amount of residual interest cash flows available to support the cash flows available for additional structural advisory fees was significantly reduced. In addition, the projected timing of receipt of additional structural advisory fees was delayed. The combination of these factors led us to determine that additional structural advisory fee receivables are more analogous to longer-term financial instruments than 10-year debt instruments and, therefore, a higher discount rate is appropriate. The 14% discount rate used for the additional structural advisory fees reflects market data made available to us on spreads on federally guaranteed loans and private education loans, as well as rates used in much broader ABS market and is 200 basis points less than the 16% used for residual receivables, reflecting the seniority of the additional structural advisory fees in the cash waterfall of the securitization trusts.

        The increase in the discount rate resulted in a $14.7 million decrease in the value of additional structural advisory fee receivables for the third quarter, for a net decrease of $11.0 million for the first nine months of fiscal 2010.

        During the third quarter of fiscal 2009, we used a spread of 1,000 basis points over the 10-year U.S. Treasury Bond rate, resulting in a discount rate of 12.7%. The spread was flat from the prior quarter, but up 425 basis points for the first nine months of fiscal 2009. During the third quarter of fiscal 2009, the 10-year U.S. Treasury Bond rate increased by 45 basis points, and we recorded a decrease of $2.9 million in additional structural advisory fees for the period. For the nine months ended March 31, 2009, the 425 basis point increase in the spread net of the 131 basis point decrease in the 10-year U.S. Treasury Bond rate resulted in a net decrease of $23.1 million in the value of additional structural advisory fee receivables.

        Discount Rate—Asset Servicing Fees and Residuals.    In determining an appropriate discount rate for purposes of estimating the fair value of our asset servicing fee and residual 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 evaluated yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals.

        We maintained a discount rate of 16% during the third quarter of fiscal 2010, flat from the prior quarter but a decrease of 100 basis points, from 17%, at the prior year-end. As a result, there was no change in the residual receivables during the third quarter and an increase in residual receivables of $1.2 million during the first nine months of fiscal 2010 due to changes in the discount rate.

        During fiscal 2009, no decrease in residual receivables was allocated to changes in discount rates for the third quarter as a result of the sale of the Trust Certificate on March 31, 2009. The increases in the discount rate for the first six months of fiscal 2009 resulted in decreases in the estimated fair value of our residual receivables of $83.6 million prior to the sale.

        Forward LIBOR Curve.    Fluctuations in interest rates, specifically the LIBOR rate which is the underlying rate for most of the trusts' assets and liabilities, can have a significant impact on the cash flows generated by each trust. The forward LIBOR curve is a market observable input obtained from an independent third party. Changes in the forward LIBOR curve can have a significant impact on the principal balances of the education loans (especially early in a loan's life when interest is capitalizing while in deferment), which affects the overall net interest margin the trust can generate, and can

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impact our additional structural advisory fee receivables as accrued but unpaid fees bear interest at LIBOR plus 150 basis points. 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-rate tranche, which, in turn, decreases the estimated fair value of our service receivables.

        For the quarter ended March 31, 2010, the forward LIBOR curve shifted slightly upward in the first five years, and then slightly downward in the longer-term. Overall, the net result was not material to the fair value of the additional structural advisory fee or residual receivables.

        During the third quarter of fiscal 2009, there was an upward shift in the forward LIBOR curve which resulted in increases to our additional structural advisory fees of $2.6 million for the third quarter; however, over the first nine months of fiscal 2009, the forward LIBOR curve shifted downward from the prior year end, and we recorded net decreases of $16.9 million and $22.1 million, for additional structural advisory fees and residuals, respectively.

        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 the credit enhancement provider 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 residual receivables and delayed the timing of receipt of additional structural advisory fees. As a result, during the second quarter of fiscal 2009, we decreased the estimated fair value of our additional structural advisory fees by $13.1 million and our residual receivables by $31.8 million. We did not make any further adjustments during the third quarter of fiscal 2009. During fiscal 2010, we have assumed that the notes would continue to bear interest at the contractual maximum spread.

        Decrease to Reflect Disposition.    Effective March 31, 2009, we entered into a purchase agreement with VCG Owners Trust and VCG Securities, LLC, pursuant to which we transferred our sole ownership of the Trust Certificate. As a result of the sale of the Trust Certificate, we are no longer entitled to receive residual cash flows from the NCSLT Trusts. The decrease to reflect the disposition reflects the carrying value of all residual interests of the NCSLT Trusts included in the sale.

        TERI's Obligation to Pay Claims.    During the third quarter of fiscal 2010, we updated our assumptions regarding TERI's obligation to pay claims based on the Plan of Reorganization presented for creditor approval in April 2010. The updated assumptions did not have a material impact on our additional structural advisory fee or asset servicing fee receivables.

Net Interest Income

        Net interest income decreased to $0.7 million in the third quarter of fiscal 2010, down from $5.8 million in the third quarter of fiscal 2009. For the first nine months of fiscal 2010, net interest income was $6.6 million, down from $20.4 million for the comparable period in fiscal 2009.

        Interest income for the third quarter of fiscal 2010 was $4.4 million, compared with $9.0 million a year earlier. This decrease is almost entirely attributable to the sale of Union Federal's education loan portfolio in the second quarter of fiscal 2010. The proceeds from the sale were reinvested in lower yielding cash equivalents. Interest expense for the third quarter of fiscal 2010 was $3.7 million, compared with $3.2 million a year earlier. The increase was primarily attributable to higher interest rates on the education loan warehouse facility triggered by the events of termination that occurred in fiscal 2009. The rate increase occurred in the fourth quarter of fiscal 2009.

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        For the first nine months of fiscal 2010, interest income was $18.3 million, compared with $33.4 million a year earlier. The decrease is attributable to a lower yield and lower volume of education loans held for sale. Lower yield is attributable to changes in the average LIBOR rates over the period and the lower volume is due to the sale of Union Federal's portfolio. Interest expense for the first nine months of fiscal 2010 was $11.7 million, compared to $13.0 million a year earlier. Lower expenses on time and savings deposits were largely offset by higher interest expense on the education loan warehouse facility.

        See the discussion under "Financial Condition, Liquidity and Capital Resources" for more information on the impact that the potential sale of Union Federal would have on net interest income.

        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))

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