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

FORM 10-Q

Commission File Number 001-31825

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

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant 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.

        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 November 8, 2010, the registrant had 100,832,576 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, 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 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

(1) Nature of Business

Nature of Business

        Unless otherwise indicated or unless the context of the discussion requires otherwise, all references in these notes to "we", "us", "our" or similar references mean The First Marblehead Corporation and its subsidiaries and consolidated variable interest entities (VIEs) on a consolidated basis. All references in these notes to "First Marblehead" or "FMD" mean The First Marblehead Corporation on a stand-alone basis.

        The presentation of our financial results for the fiscal quarter ended September 30, 2010 significantly differs from prior periods due to the adoption of Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets (ASU 2009-16), and ASU 2009-17, Consolidation (Topic 810)—Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17), as described in more detail in Note 2, "Summary of Significant Accounting Policies—Consolidation" and Note 3, "Change in Accounting Principle." As a result of our adoption of ASU 2009-16 and ASU 2009-17 effective as of July 1, 2010, we have consolidated 14 VIEs. These VIEs are securitization trusts that we facilitated and previously accounted for off-balance sheet. In addition, we have deconsolidated our indirect subsidiary UFSB Private Loan SPV, LLC (UFSB-SPV). As a result, beginning with this quarterly report, we will report two lines of business for segment reporting purposes. Our determination of the activities that constitute a segment is based on the manner in which our chief operating decision makers measure profits or losses, assess performance and allocate resources.

        The results of FMD and its subsidiaries that we historically reported in our consolidated results prior to July 1, 2010, with the exception of the deconsolidation of UFSB-SPV, are referred to as "Loan Operations" throughout these notes. The financial results of our Loan Operations segment have generally been derived from our services relating to private education loans (education loans), as further described below.

        The VIEs consolidated upon our adoption of ASU 2009-16 and ASU 2009-17 consist of 14 securitization trusts that purchased portfolios of education loans facilitated by us during our fiscal years 2003 through 2007, although not all securitization trusts facilitated by us during that period have been consolidated. See Note 2, "Summary of Significant Accounting Policies—Consolidation," for a discussion of the basis on which certain securitization trusts are consolidated. The securitization trusts that we facilitated financed purchases of education loans by issuing debt to third-party investors. The education loans purchased by certain of these securitization trusts (NCSLT Trusts) were initially subject to a repayment guaranty by The Education Resources Institute, Inc. (TERI), while the education loans purchased by other securitization trusts (NCT Trusts) were, with limited exceptions, not TERI-guaranteed. Of the consolidated securitization trusts, 11 are NCSLT Trusts and three are NCT trusts (GATE Trusts). We present the financial results of the 14 consolidated securitization trusts as a single segment, referred to as "Securitization Trusts" throughout these notes. Administration of such trusts, including investor reporting and default prevention and management services, is provided by our Loan Operations segment.

        For the three months ended September 30, 2010, the revenues and expenses included in "Eliminations" for segment reporting purposes relate to revenues recorded by our Loan Operations segment, and expenses recorded by our Securitization Trusts segment, relating to services provided to the 14 consolidated securitization trusts, including life-of-trust fees related to initial securitization structuring and on-going fees for trust administration and default prevention and management, as well

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Nature of Business (Continued)

as elimination of the residual interest ownership held by our Loan Operations segment in the GATE Trusts.

        For the three months ended September 30, 2009, the financial results of UFSB-SPV, which was deconsolidated on July 1, 2010 with the adoption of ASU 2009-16 and ASU 2009-17, as well as related adjustments to deferred tax assets and inter-company eliminations that were recorded due to consolidating UFSB-SPV in prior periods, have been separately presented in "Deconsolidation and Eliminations" for segment reporting purposes to allow for comparability between periods.

Loan Operations

        Under our Loan Operations segment, we offer outsourcing services to national and regional financial and educational institutions for designing and implementing education loan programs. These school-certified loan programs are designed to be marketed through educational institutions or to prospective student borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the capital markets. We offer a fully integrated suite of services through our Monogram platform, as well as certain services on a stand-alone, fee-for-service basis. In addition, we provide administrative and other services to securitization trusts that we facilitated, portfolio management services and asset servicing to the third-party owner of the trust certificate (Trust Certificate) of NC Residuals Owners Trust, which we sold in fiscal 2009 and which held certain of the residual interests of some of the NCSLT Trusts.

        Historically, the driver of our results of operations and financial condition for our Loan Operations segment was the volume of 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' education loan programs, and substantially all of our income was derived from securitizations. Securitization refers to the technique of pooling education loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues notes backed by those loans to 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 education loans that they did not intend to hold. For our past securitization services, we are entitled to receive additional structural advisory fees and residuals cash flows from certain securitization trusts over time.

        Our bank 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). During the second quarter of fiscal 2010, we announced that we had begun exploring strategic alternatives for Union Federal. As of November 9, 2010, we were actively considering those alternatives, including a potential sale.

Securitization Trusts

        The financial results of our Securitization Trusts segment relate only to the 14 securitization trusts consolidated as a result of a change in accounting principle effective July 1, 2010. As a result, financial results for our Securitization Trusts segment are only presented as of the effective date of adoption,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Nature of Business (Continued)

prospectively. These 14 consolidated securitization trusts are managed in accordance with their applicable indentures, as amended, and their tangible assets are limited to cash, allowable investments, and education loans, as well as the related principal and interest income receivables and recoverables on defaults. Their liabilities are limited to the debt issued to finance the education loans and payables accrued in the normal course of their operations, all of which have been structured to be non-recourse to the general credit of First Marblehead.

        Of our 14 consolidated securitization trusts, 11 are NCSLT Trusts in which we have no ownership interest. As such, all of the financial performance of such trusts is allocated to non-controlling interests and does not directly impact the net loss or equity available to our stockholders. However, the financial performance of all of the NCSLT Trusts, both on and off balance sheet, does impact the ability of our Loan Operations segment to recover service revenue receivables due from these trusts or the third-party owner of the Trust Certificate. The remaining three consolidated securitization trusts are the GATE Trusts.

        All eleven of our consolidated NCSLT Trusts hold education loans that were subject to a loan repayment guaranty by TERI. In addition, one of our consolidated GATE Trusts holds a limited number of TERI-guaranteed loans. 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 a material adverse effect on the ability of the NCSLT Trusts to realize guaranty obligations of TERI. Under the Modified Fourth Amended Joint Plan of Reorganization of The Education Resources Institute, Inc. and the Official Committee of Unsecured Creditors (Creditors Committee) as of August 26, 2010 (Modified Plan of Reorganization), which was confirmed on October 29, 2010, TERI will reject the guaranty agreements and settle claims with these securitization trusts upon the effectiveness of the Modified Plan of Reorganization. TERI's rejection of its obligations under the guaranty agreements, combined with higher levels of defaults than initially projected, has had, and will likely continue to have, a material adverse impact on the financial condition of our Securitization Trusts segment.

Business Trends, Uncertainties and Outlook

        The following discussion of business trends, uncertainties and outlook is focused on our Loan Operations segment. Almost all of the operating results of our Securitization Trusts segment are allocated to non-controlling interests and do not, therefore, have a significant effect on the net income or loss available to our stockholders.

        We have not accessed the securitization market since September 2007 as a result of market disruptions that began in the second quarter of fiscal 2008, continued through fiscal 2009 and fiscal 2010 and, to a lesser extent, persisted as of November 9, 2010. General economic conditions in the United States have deteriorated and have not fully recovered over this time period. Our business has been and continues to be materially adversely impacted by these conditions.

        In addition, credit performance of consumer-related loans generally, as well as education loan portfolios included in our consolidated balance sheet and those held by other VIEs not consolidated by us, have been adversely affected by general economic conditions in the United States, including increased unemployment rates and higher levels of education loan defaults. While there have been some recent improvements, the interest rate and economic and credit environments may continue to have a material negative effect on loan portfolio performance and the estimated value of our service revenue receivables.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Nature of Business (Continued)

        Prior to the TERI Reorganization, we received reimbursement from TERI for outsourced loan processing services we performed on TERI's behalf. As a result of capital market disruptions and the TERI Reorganization, many clients elected to terminate some or all of their agreements with us, which resulted in a significant reduction in our facilitated loan volumes since fiscal 2009 compared to prior fiscal years. The TERI Reorganization, together with capital markets dislocations, has had, and will likely continue to have, a material adverse effect on the holders of education loans guaranteed or formerly guaranteed by TERI.

        As of July 16, 2010, we began to perform services under our loan program agreement with SunTrust Bank, and as of September 20, 2010, we began to perform services under our loan program agreement with Kinecta Federal Credit Union. The loan program agreements each relate to school-certified education loan programs to be funded by these clients based on our Monogram platform. Under the terms of the credit enhancement provision in the loan program agreements, we may facilitate up to an aggregate of $275.0 million in education loans over the life of the two loan programs. We believe that our Monogram platform will provide us with an opportunity, through our Loan Operations segment, to originate, administer and manage education loans and that the two loan program agreements we have entered into are a significant step in our return to the education lending marketplace. We also believe that conditions in the capital markets generally continued to improve during the first quarter of fiscal 2011, potentially creating additional flexibility with regard to the future financing of education loans. We continue to believe, as of November 9, 2010, however, that the structure and economics of any financing transaction will be less favorable than our past securitizations, with the potential for lower revenues and additional cash requirements on our part. We will continue to seek opportunities for innovative and efficient portfolio funding transactions.

        The near term financial performance and future growth of our Loan Operations segment depends in large part on our ability to successfully market our Monogram platform and transition to more fee-based revenues while growing and diversifying our client base. We are seeking additional lender clients, although we are uncertain as to the degree of market acceptance our Monogram platform will have, particularly in the current economic environment where many lenders continue to evaluate their education lending business models.

        We have summarized below certain recent developments affecting our business since the beginning of fiscal 2011:

•

On October 1, 2010, we received a refund from tax authorities of $45.1 million. The tax refund included $21.2 million that was attributable to Union Federal, which we distributed to Union Federal pursuant to our tax sharing agreement. On October 22, 2010, the OTS approved a cash dividend from Union Federal to First Marblehead of up to $29.0 million. The approved amount of the dividend includes the $21.2 million that we distributed to Union Federal pursuant to our tax sharing agreement. As of November 9, 2010, Union Federal had not paid such dividend.



•

On October 18, 2010, the United States Bankruptcy Court for the District of Massachusetts (Bankruptcy Court) granted a stipulation (Stipulation) among TERI, the Creditors Committee, FMD and its subsidiaries First Marblehead Education Resources, Inc. (FMER) and First Marblehead Data Services, Inc. (FMDS), settling certain claims between TERI and FMD, FMER and FMDS. See Note 17, "Subsequent Events—TERI Stipulation," for additional information regarding the Stipulation.

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(1) Nature of Business (Continued)

•

On October 29, 2010, the Bankruptcy Court entered an order confirming the Modified Plan of Reorganization. See Note 17, "Subsequent Events—TERI Modified Plan of Reorganization," for additional information regarding the Modified Plan of Reorganization.



•

On November 3, 2010, we amended the operating lease relating to our Medford, Massachusetts location to, among other things, reduce the rented space by approximately 60,000 square feet by March 31, 2011 and extend the term of the lease to March 31, 2017. The effective date of this amendment was July 1, 2010.

(2) 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 those related to changes in accounting principles and normal recurring accruals) considered necessary for a fair statement of the results for the interim periods have been included.

Use of Estimates

        The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the 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 our historical experience, economic conditions and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, we evaluate our estimates and judgments, particularly as they relate to accounting policies that we believe are most important to the portrayal of our financial condition and results of operations. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, recognition of interest income on delinquent and defaulted loans and recognition of asset servicing fees and trust updates to our service revenue receivables. Interim results are not necessarily indicative of results to be expected for the entire fiscal year.

(a) Consolidation

        Our consolidated financial statements include the accounts of FMD, its subsidiaries and certain VIEs, as applicable, after eliminating inter-company accounts and transactions. Prior to July 1, 2010, we did not consolidate the financial results of any securitization trusts purchasing education loans that we facilitated because each of the securitization trusts created after January 31, 2003 met the criteria to be a qualified special purpose entity (QSPE) as defined by Accounting Standards Codification (ASC) 860-40, Transfers and Servicing—Transfers to Qualifying Special Purpose Entities (ASC 860-40). Prior to July 1, 2010, a QSPE was exempt from consolidation. In addition, the securitization trusts created prior to January 31, 2003 in which we held a variable interest that could have resulted in our being considered the primary beneficiary of such trusts were amended in order for those trusts to be considered QSPEs and, as such, were exempt from consolidation.

        Effective July 1, 2010, we adopted ASU 2009-16 and ASU 2009-17.

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(2) Summary of Significant Accounting Policies (Continued)

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

•

the power to direct the activities of a VIE that most significantly impact that VIE's economic performance; and



•

the obligation to absorb losses of the VIE that could potentially be significant to that VIE or the right to receive benefits from the VIE that could potentially be significant to that VIE.

        In addition, ASU 2009-17 requires us to continuously reassess whether consolidation of VIEs is appropriate, as opposed to the trigger-based assessment allowed under previous guidance. As a result, we may be required to consolidate or deconsolidate VIEs, which may lead to volatility in our financial results and make comparisons of results between time periods challenging.

        Upon adoption, we consolidated 14 securitization trusts that we previously facilitated because we determined that our services related to default prevention and management, for which we can only be removed for cause, combined with the variability that we absorb as part of our fee structure, made us the primary beneficiary of those trusts. In addition, we deconsolidated UFSB-SPV because we determined that the power to direct activities that most significantly impact UFSB-SPV's economic performance does not reside with us. Assets and liabilities of the consolidated VIEs were measured as if they had been consolidated at the time we became the primary beneficiary. All inter-company transactions were eliminated. Profits and losses of the consolidated VIEs were allocated to non-controlling interests based on the percentage ownership of voting interests not held by us, before the effect of inter-company elimination entries. ASU 2009-17 was applied through a cumulative-effect adjustment to the opening balance of retained earnings at the effective date. See Note 3, "Change in Accounting Principle," for more information on the impact of our adoption of ASU 2009-16 and ASU 2009-17.

        We continue to monitor our involvement with 18 VIEs for which we perform services related to default prevention and portfolio management. As of November 9, 2010, we had determined that we are not the primary beneficiary due to the sole, unilateral rights of other parties to terminate us in our role as service provider or due to a lack of obligation on our part to absorb benefits or losses of the VIE that would be significant to that VIE. Significant changes to the pertinent rights of other parties or significant changes to the ranges of possible trust performance outcomes used in our assessment of the variability of cash flows due to us could cause us to change our determination of whether or not a VIE should be consolidated in future periods. In particular, the commencement by Ambac Financial Group, Inc. (Ambac) of a voluntary case under Chapter 11 of the Bankruptcy Code on November 8, 2010 could cause us to change our determination not to consolidate certain VIEs for which an affiliate of Ambac provides credit enhancement.

(b) Reclassifications

        Certain reclassifications have been made to the balances as of June 30, 2010 and for the three months ended September 30, 2009, to be consistent with the classifications adopted in fiscal 2011.

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(2) Summary of Significant Accounting Policies (Continued)

(c) Cash Equivalents

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

(d) Investments

        Investments with original maturities greater than three months and remaining maturities of less than one year at the date of purchase are classified as short-term investments and are carried at cost, which approximates fair value.

        Investments in marketable debt securities are classified as available for sale, trading or held to maturity. Available-for-sale investments are carried at fair value with net unrealized gains and losses recorded in other comprehensive income, a component of stockholders' equity. Trading securities are securities held in anticipation of short-term market movements, and are carried at fair value with net unrealized gains and losses recorded in the statement of operations. Investments are classified as held to maturity when we have both the ability and intent to hold the securities until maturity. Held-to-maturity investments are carried at amortized cost.

(e) Loans

        Loans are classified as held to maturity when we have both the ability and intent to hold the loans for the foreseeable future. All education loans held by the securitization trusts that we consolidated effective July 1, 2010 are classified as held to maturity, as well as education loans held by a non-bank subsidiary of FMD and substantially all mortgage loans held by Union Federal. Loans held to maturity are carried at amortized cost, less an allowance for loan losses, described more fully below. Amortized cost includes principal outstanding plus net unamortized loan acquisition costs and origination fees, the amortization of which is recognized as an adjustment of the related loan yield using the effective interest method.

        Education loans held for sale at June 30, 2010 consisted solely of the loans held by UFSB-SPV, which was deconsolidated as a result of our adoption of ASU 2009-16 and ASU 2009-17 on July 1, 2010. These loans were classified as held for sale because they serve as collateral to a third-party conduit lender, and such lender has the right to call the loans at any time. Loans held for sale were carried at the lower of cost or fair value. In the absence of a readily determined market value, fair value was estimated by management based on the net present value of expected future cash flows of the loans. Expected future cash flows were based on macroeconomic indicators and our historical experience with assumptions for, among other things, default rates, recovery rates on defaulted loans and prepayment rates. Net present value was calculated using a discount rate commensurate with the risks involved. We recorded changes in the carrying value of education loans held for sale and the related interest receivable in the statement of operations.

(f) Allowance for Loan Losses, the Related Provision for Loan Losses and Charge-Offs

        Allowances for loan losses are maintained at an amount believed to be sufficient to absorb credit losses inherent in our portfolios of loans held to maturity at the balance sheet date, based on a one-year loss confirmation period. Allowances for loan losses are adjusted through charges to the provision for loan losses in the statement of operations. Inherent credit losses include losses for loans in default that have not been charged-off or foreclosed, and loans that have a high probability of default, less any

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(2) Summary of Significant Accounting Policies (Continued)

amounts expected to be recoverable from borrowers, third parties or, for mortgage loans, sale of the collateral, as applicable.

        An education loan is considered to be in default when it is approximately 180 days past due as to either principal or interest, based on the timing of cash receipts from the borrower. We use projected cash flows to determine the allowance reserve deemed necessary for education loans probable of default at the balance sheet date. Such default estimates are based on a loss confirmation period of one year, which we believe to be the approximate amount of time that it would take a loss inherent in the education loan portfolios at the balance sheet date to ultimately default and be charged-off. The estimates used in the calculation of the allowance for education loan losses are subject to a number of assumptions, including default, recovery and prepayment rates, including the effects of basic forbearance and alternative payment plans available to borrowers. These assumptions are based on the status of education loans at the balance sheet date, as well as macroeconomic indicators and our historical experience. If actual future loan performance were to differ significantly from the assumptions used, the impact on the allowance for loan losses and the related provision for loan losses for education loans recorded in the statement of operations could be material.

        Education loans are charged-off at the end of the reporting period in which they become approximately 270 days past due. Charge-offs are recorded as both a decrease in the outstanding principal and a decrease in the allowance for loan losses. Cash recoveries on education loans charged-off are recorded as an increase to the allowance for loan losses.

        We maintain an allowance for mortgage loans held to maturity on a specific-identification basis when the loan becomes 30 days past due or the borrower is making modified payments. The allowance is set at an amount believed to be adequate so that the net carrying value of the mortgage loan is not in excess of the net realizable value of the collateral. In addition, a general allowance is established for mortgage loans with certain characteristics attributable to the collateral. Mortgage loans for which we have foreclosed on the property and the related allowance are reclassified to other real estate owned, a component of other assets, and are carried at estimated net realizable value.

(g) Deposits for Participation Interest Accounts

        Deposits for participation interest accounts (participation accounts) are accounted for similar to trading account assets and are carried at fair value in the balance sheet. Fair value is estimated based on the net present value of cash flows into and out of the account, based on the education loans originated at the balance sheet date. Changes in estimated fair value, excluding cash funded by us or distributed out of the participation accounts to us, if any, are recorded in non-interest revenues as part of "Administrative and other fees." See Note 6, "Deposits for Participation Interest Accounts," for additional information on participation accounts.

(h) Service Revenue Receivables

        Service revenue receivables are carried at fair value in the balance sheet, and consist of our asset servicing fee, additional structural advisory fee and residual receivables. Additional structural advisory fee and residual receivables due from securitization trusts that we consolidate are eliminated in consolidation.

        As required under GAAP, we recognized the fair value of additional structural advisory fee and residual receivables as revenues at the time the securitization trust purchased the education loans, as they were deemed to be earned at the time of the securitization but before we actually received

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(2) Summary of Significant Accounting Policies (Continued)

payment. These amounts were deemed earned because evidence of an arrangement existed, we provided the services, the fee was fixed and determinable based upon a discounted cash flow analysis and there were no future contingencies or obligations due on our part. We earn asset servicing fees as the services are performed; however, the receipt of the fees is contingent on distributions from the NCSLT Trusts available to the third-party owner of the Trust Certificate.

        Due to the long-term, contingent nature of the timing of cash receipts, our service revenue receivables are carried at fair value on the balance sheet.

•

The receipt of asset servicing fees due from the third-party owner of the Trust Certificate is contingent on residual interest distributions from the NCSLT Trusts.



•

Additional structural advisory fees are paid to us over time, based on the payment priorities established in the applicable indentures for each of the securitization trusts. We generally become entitled to receive these additional fees, plus interest, if applicable, once the parity ratio of securitization trust assets to securitization trust liabilities reaches a stipulated level, which ranges from 103.0% to 105.5% for the NCSLT Trusts, 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 would instead be directed to the holders of the notes issued by the securitization trusts until the condition causing the Trigger Event ceases to exist or all notes and related interest are paid in full.



•

Residuals associated with any securitization trusts that we facilitated are typically junior in priority to the rights of the holders of the asset-backed securities (ABS) issued in the securitizations and any additional structural advisory fees. For certain of the securitization trusts, upon a Trigger Event, payments that would otherwise be due with respect to residuals would instead be directed to the holders of the notes issued by the securitization trusts until the condition causing the Trigger Event ceases to exist or all notes and related interest are paid in full.

        In the absence of readily determined market values, we update our estimates of the fair value of service revenue receivables on a quarterly basis, based on the present value of expected future cash flows. Such estimates include assumptions for discount, default, recovery, prepayment and forward interest rates, among others. 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.

(i) Fair Value of Financial Instruments

        ASC 820, Fair Value Measurements and Disclosures (ASC 820), 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 did not elect to measure other assets and liabilities at fair value.

        Fair value is defined as the price that would be received in the sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-level

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

valuation hierarchy is used to qualify fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date:

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

        Level 2.    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 whose 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 certain securitized financial assets or certain private equity investments.

        Fair value is applied to eligible assets based on quoted market prices, where available. For financial instruments for which quotes from recent exchange transactions are not available, fair value is based on discounted cash flow analysis and comparison to similar instruments. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates.

        The methods used for current fair value calculations may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.

(j) Revenue Recognition

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

        Interest income on education and mortgage loans held to maturity is recognized as earned, adjusted for the amortization of loan acquisition costs and origination fees, based on the expected yield of the loan over its life, after giving effect to expected prepayments, as applicable. The estimate of expected prepayments on education loans reflects voluntary prepayments and is based on our historical experience and macroeconomic indicators. When changes to assumptions occur, amortization is adjusted on a cumulative basis to reflect the change since acquisition of the education loan.

        Education loans held to maturity are placed on non-accrual status when they become 120 days past due as to either principal or interest, or earlier when full collection of principal or interest is not considered probable. When we place an education loan on non-accrual status, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and charged against interest

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(2) Summary of Significant Accounting Policies (Continued)

revenue. For education loans on non-accrual status but not yet charged-off, interest revenue is recognized on a cash basis. If a borrower makes payments sufficient to become current on principal and interest prior to ever being charged-off, or "cures" the education loan, the loan is taken off of non-accrual status and recognition of interest revenue is continued. Once a loan has been charged-off, all payments made by the borrower are applied to outstanding principal and income is only recorded on a cash basis when all principal has been recovered.

        Mortgage loans are placed on non-accrual status when they become 90 days past due as to either principal or interest. Once a loan has been placed on non-accrual status, recognition of interest is not resumed until the borrower has become current as to both principal and interest for a consecutive period of 12 months.

        Interest expense on long-term borrowings is adjusted for the amortization of debt issuance costs and underwriting fees and amortization of the proceeds from interest-only strips using an effective yield over the life of the related borrowings.

        Asset Servicing Fees.    We earn asset servicing fees as the services are performed. We record asset servicing fee income at fair value, based on the estimated present value of the fees earned during the reporting period, and we record changes in the estimated fair value of fees earned in prior periods as asset servicing fee updates.

        Asset servicing fees are based on outstanding assets of the NCSLT Trusts and our receipt of such fees is contingent on the performance of such trusts, eleven of which we consolidated as of July 1, 2010. The fees, however, are due from the third-party owner of the Trust Certificate for services performed on its behalf, and as such, we do not eliminate these fees in consolidation.

        Additional Structural Advisory Fees and Residuals—Trust Updates.    Changes to the fair value of additional structural advisory fee and residual receivables are recorded in revenue in the statement of operations. To the extent such fees are due from VIEs that we consolidate, they have been eliminated in consolidation, but continue to be recognized by our separate reporting segments as revenue or expense, as applicable. Changes in assumptions used to estimate fair value are recorded in the statement of operations in the periods in which the changes are made.

        Administrative and Other Fees.    Trust administration fees, which are based on the volume of education loans outstanding in securitization trusts facilitated by us, are recognized in the period in which the services are rendered as compensation for administration, including the daily management of the trusts, coordination of loan servicers and reporting information to the parties related to the trusts. Master servicing and special servicing fees due from certain trusts represent compensation to us for managing the performance of default prevention services and education loan collections. Such fees are based, in part, upon the volume of assets under management, and in part, upon the reimbursement of expenses. Such fees are recognized as the services are performed, or as the reimbursable expense is incurred, as applicable. In addition, we provide other services on a stand-alone, fee-for-service basis that may be based on the volume of education loans disbursed, number of applications processed or other contractual terms. Our recognition of such fees is based on these contractual terms. To the extent that trust administration, default prevention and default management services have been provided by our Loan Operations segment to our Securitization Trusts segment, such Loan Operations revenue and the expenses incurred by our Securitization Trusts segment have been eliminated in consolidation but continue to be recognized by each reporting segment on a stand-alone basis.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

        Beginning in the first quarter of fiscal 2011, we began to receive fees related to our Monogram platform offering. Revenue associated with our Monogram platform is subject to the accounting guidance found in ASU 2009-13, Revenue Recognition-Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which is effective prospectively for contracts entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU 2009-13 prohibits separate recognition for each element of a contract unless certain criteria are met. We have applied the guidance in ASU 2009-13 to our recognition of revenues related to our Monogram platform.

(k) Income Taxes

        In determining a provision for income taxes, the estimated annual effective tax rate is based on expected annual income, statutory tax rates, our ability to utilize net operating loss carry forwards 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 deferred 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.

(l) Non-controlling Interest

        In accordance with ASC 810, non-controlling interests are presented as a component of total equity. Net income or loss attributable to non-controlling interests for the applicable periods presented is allocated prior to the elimination of inter-company transactions, based on the percentage of equity of the consolidated entity not held by us.

(m) Net Loss Per Share Available to First Marblehead Stockholders

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

(n) New Accounting Pronouncements

        ASU 2009-16 and ASU 2009-17, as described in "—Consolidation" above, are the only recently effective accounting pronouncements to have a material impact on our financial statements. ASU 2010-18, Receivables-Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, is applicable only to loans acquired with a deterioration in credit quality, and did not have an impact on our financial results. ASU 2010-20, Receivables-Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), is effective for interim or annual periods ending on or after December 15, 2010. ASU 2010-20 clarifies the disclosure requirements applicable to the credit quality of loans, troubled debt restructurings and the allowance for loan losses on a segmented basis. No other recently issued, but not yet effective, accounting pronouncements are expected to have a material impact on our financial statements.

(3) Change in Accounting Principle

        Effective July 1, 2010, we adopted ASU 2009-16 and ASU 2009-17. As a result, on July 1, 2010, we consolidated 14 securitization trusts facilitated by us, and deconsolidated UFSB-SPV. ASU 2009-17 was applied retrospectively through a cumulative-effect adjustment to the opening balance of retained

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(3) Change in Accounting Principle (Continued)

earnings at the effective date. The following adjustments were made to our balance sheet at the effective date:

        Our non-interest revenues no longer reflect the additional structural advisory fees—trust updates and administrative and other fees due from the 14 newly-consolidated securitization trusts, but continue to reflect such fees due from other off-balance sheet VIEs. We have no ownership interest in the 11 consolidated NCSLT Trusts. As a result, inter-company revenues due from the consolidated NCSLT Trusts are allocated to non-controlling interests. Non-controlling interests are calculated before eliminations, and inter-company revenues due from the consolidated NCSLT Trusts therefore continue to impact the consolidated net income or loss available to our stockholders. We no longer recognize gains or losses related to the residual interest receivables due from the three consolidated GATE Trusts, but we continue to recognize revaluation gains and losses on residual receivables due from other off-balance sheet VIEs.

        The total deficit from non-controlling interests of $979.0 million relates solely to the 11 consolidated NCSLT Trusts. The assets of each securitization trust can only be used to settle the obligations of that particular trust and are not available to other securitization trusts, FMD or its other

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Change in Accounting Principle (Continued)

subsidiaries, or their respective creditors. The trusts have been structured to provide creditors or beneficial interest holders of a securitization trust recourse only to the assets of that particular securitization trust, and not to the assets of FMD.

        The statement of operations for the three months ended September 30, 2009 and the balance sheet as of June 30, 2010 have not been retrospectively adjusted to reflect the updates to ASC 810 and ASC 860-40; however, prior period amounts may have been reclassified to conform to the presentation adopted in fiscal 2011. We recognize assets, liabilities, income and expense related to the newly consolidated VIEs in the same line items used by FMD and its consolidated subsidiaries prior to the effective date of ASU 2009-16 and ASU 2009-17. Current period results and balances will not be comparable to prior period amounts, particularly with regard to assets, liabilities and equity components included in the table above, as well as the following in the statement of operations:

•

Net interest income;



•

Provision for loan losses;



•

Additional structural advisory fees and residuals—trusts updates;



•

Administrative and other fees;



•

General and administrative expenses;



•

Losses on education loans held for sale;



•

Net losses attributable to non-controlling interests; and



•

Net loss and net loss per share available to First Marblehead stockholders.

(4) Cash and Cash Equivalents; Short-term Investments and Federal Funds Sold

        The following table summarizes our cash and cash equivalents:

        Cash and cash equivalents of Union Federal of $85.1 million and $115.1 million at September 30, 2010 and June 30, 2010, respectively, are not available for dividends without prior approval from the OTS.

        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 a member of our Board of Directors owned 65% of Milestone Group Partners as of September 30, 2010, making MCM a related party. At

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Cash and Cash Equivalents; Short-term Investments and Federal Funds Sold (Continued)

September 30, 2010 and June 30, 2010, $30.0 million of our holdings in money market funds were invested in funds managed by MCM.

        Short-term investments and federal funds sold at September 30, 2010 and June 30, 2010 included $2.0 million of federal funds sold through our bank subsidiary, Union Federal.

(5) Education Loans Held to Maturity

(a) Gross Loans Outstanding

        At September 30, 2010, education loans held to maturity were primarily loans held by our 14 consolidated securitization trusts. Through the securitization process, a series of special purpose statutory trusts purchased education loans from the originating lenders or their assignees, which relinquished to the trusts their ownership interest in the education loans. The debt instruments issued by the securitization trusts to finance the purchase of these education loans are collateralized by the purchased loan portfolios. In addition, to a much lesser extent, education loans held to maturity include loans originated by Union Federal that we were unable to securitize or sell to a third party. Such loans are unencumbered.

        The majority of securitized loans are education loans guaranteed by TERI. As a result of the TERI Reorganization, the securitization trusts included in our Securitization Trusts segment have experienced a material negative effect on their ability to realize guaranty obligations of TERI. At September 30, 2010, we assumed that the trusts' receipts from TERI would be limited to the amount available in the pledged accounts held by TERI, which we have recorded as a separate receivable on the balance sheet. We expect to adjust our assumptions at December 31, 2010 to reflect the terms of the Modified Plan of Reorganization. See Note 10, "Commitments and Contingencies—TERI Reorganization," and Note 17, "Subsequent Events," for additional information.

        The remaining securitized loans are held by GATE Trusts that benefit from credit enhancement arrangements with the borrowers' educational institutions or with a lender that has provided a guaranty on behalf of certain educational institutions, up to specified limits.

        The following table summarizes the composition of the net carrying value of our education loans held to maturity:

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(5) Education Loans Held to Maturity (Continued)

(1)

At September 30, 2010, borrowers in repayment with loan principal outstanding of approximately $1.61 billion were making reduced payments under alternative payment plans.