First Marblehead 10Q 2012 Q3 Quarterly report

First Marblehead (FMD) Inactive 10-Q2012 Q3 Quarterly report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-31825

The First Marblehead Corporation

(Exact name of registrant as specified in its charter)


Delaware		04-3295311
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

The Prudential Tower 800 Boylston Street, 34th Floor Boston, Massachusetts		02199-8157
(Address of principal executive offices)		(Zip Code)

(800) 895-4283

(Registrant’s telephone number, including area code)

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 x No ¨

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 x No ¨

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 ¨ No x

As of May 7, 2012, the registrant had 101,920,601 shares of common stock, $0.01 par value per share, outstanding.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

Table of Contents


Part I. Financial Information			1
	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
	—	Quantitative and Qualitative Disclosures About Market Risk	31
	—	Controls and Procedures	33
	—	Consolidated Statements of Operations for the three and nine months ended March 31, 2012 and 2011	34
	—	Consolidated Balance Sheets as of March 31, 2012 and June 30, 2011	35
	—	Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the nine months ended March 31, 2012 and 2011	36
	—	Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and 2011	37
	—	Notes to Unaudited Consolidated Financial Statements	38
	—	FORM 10-Q PART 1 CROSS-REFERENCE INDEX	64
Part II. Other Information			65
Item 1	—	Legal Proceedings	65
Item 1A	—	Risk Factors	65
Item 2	—	Unregistered Sales of Equity Securities and Use of Proceeds	86
Item 6	—	Exhibits	86
SIGNATURES			87
EXHIBIT INDEX			88

PART I. FINANCIAL INFORMATION

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 consolidated financial statements and accompanying notes included in Part I of this quarterly report in conjunction with our audited financial statements included in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on September 8, 2011.

Unless otherwise indicated, or unless the context of the discussion requires otherwise, we use the terms “we,” “us,” “our” and similar references to refer to The First Marblehead Corporation, its subsidiaries and consolidated variable interest entities, or VIEs, on a consolidated basis. We use the terms “First Marblehead” or “FMD” to refer to The First Marblehead Corporation on a stand-alone basis. We use the term “education loans” to refer to private education loans, which are not guaranteed by the federal government. Our fiscal year ends on June 30, and we identify our fiscal years by the calendar years in which they end. For example, we refer to the fiscal year ending June 30, 2012 as “fiscal 2012.” References to our “Annual Report” mean our annual report on Form 10-K for fiscal 2011.

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 and liquidity, future funding transactions, projected costs, projected trust or loan portfolio performance, 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 results, 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, timing of events, levels of activity or performance 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 below under “—Application of Critical Accounting Policies and Estimates” and factors including, but not limited to, those set forth under the caption “Risk Factors” in Item 1A of Part II 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, 2012.

Executive Summary

Overview

We are a specialty finance company focused on education loan programs for K-12, undergraduate and graduate students in the United States, as well as tuition planning, tuition billing and payment technology services. We partner with lenders to design and administer school-certified education loan programs to be marketed through educational institutions or to prospective student borrowers and their families directly and designed to generate portfolios intended to be held by the originating lender or financed in the capital markets. We also offer a number of ancillary services in support of our clients, including loan origination, retail banking, portfolio management and securitization services.

In fiscal 2011, we began offering a fully integrated suite of services through our Monogram^® loan product service platform, which we refer to as the Monogram platform, as well as certain services on a stand-alone, fee-for-service basis. In fiscal 2011, we also began offering outsourced tuition planning, tuition billing and payment technology services for universities, colleges and secondary schools through our subsidiary Tuition Management Systems LLC, which we refer to as TMS. We acquired TMS from KeyBank National Association on December 31, 2010. Our subsidiary Union Federal Savings Bank, which we refer to as Union Federal^SM, offers retail banking products, including education loans, residential and commercial mortgage loans, time and savings deposits and money market demand accounts.

These offerings are part of a change in our revenue model that we have been implementing since fiscal 2009 to focus on fee-based revenues. Our long term success depends on the continued development of four principal revenue lines:

•

loans are disbursed and receive monthly revenues for portfolio management services, credit enhancement and administrative services throughout the life of the loan. We provide credit enhancements by funding participation interest accounts, which we refer to as participation accounts, or, in the case of Union Federal, deposit accounts, to serve as a first loss reserve for defaulted program loans. As consideration for funding participation accounts, we are entitled to receive a share of the interest generated on the loans.

•

Banking services—Union Federal generates revenues by originating Monogram-based education loan portfolios, subject to regulatory conditions, and holding them to maturity. In addition, Union Federal offers retail banking products on a stand-alone, fee-for-service basis.

•

Capital markets—Our capital markets experience coupled with our loan performance database and risk analytics provide specialized insight into funding options available to our clients. We have a right of first refusal if one of our partner lenders wishes to sell some or all of its education loan portfolio prior to maturity. In addition to traditional asset-backed securitizations, funding options may also include warehouse conduits as well as whole loan sales. We can earn fees for analytical and structuring work, on-going fees for portfolio management services and net interest income by retaining a portion of the equity in any of these transactions.

•

Fee-for-service—Loan origination, portfolio management, tuition billing and payment processing, refund management services and retail banking products are each available on a stand-alone, fee-for-service basis.

Deconsolidation Events

Upon our adoption of Accounting Standards Update, or ASU, 2009-16,Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets, or ASU 2009-16, and ASU 2009-17,Consolidation (Topic 810)—Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities, or ASU 2009-17, we consolidated 14 securitization trusts that we facilitated during fiscal 2004 through fiscal 2008. The education loans purchased by certain of the securitization trusts, which we refer to as the Trusts, were initially subject to a default repayment guaranty by The Education Resources Institute, Inc., or TERI, while the education loans purchased by other securitization trusts, which we refer to as the NCT Trusts, were, with limited exceptions, not TERI-guaranteed. Of the 14 securitization trusts consolidated on July 1, 2010, 11 were Trusts and 3 were NCT Trusts. We refer to the consolidated Trusts as the NCSLT Trusts and the consolidated NCT Trusts as the GATE Trusts.

On November 14, 2011, we sold to a third party all of our interests in the structuring advisory agreements relating to the Trusts and the asset services agreement for $13.0 million in cash. Our variable interests in the Trusts included our right to receive the additional structural advisory fees and the asset servicing fees under those respective agreements. As a result of this sale, we no longer held a variable interest in the NCSLT Trusts and were, therefore, no longer the primary beneficiary of the NCSLT Trusts. We deconsolidated $6.61 billion of total assets of the NCSLT Trusts, including $6.39 billion of education loans, and $7.85 billion of total liabilities of the NCSLT Trusts, including $7.81 billion of long-term borrowings, as of November 14, 2011. We recognized a non-cash gain of $1.24 billion in our statement of operations upon deconsolidation, representing the accumulated deficits in these trusts, net of any elimination entries. The impact of this deconsolidation was reported in our Securitization Trusts segment.

On March 2, 2012, FMD sold to a third party all of its outstanding capital stock in its subsidiary First Marblehead Data Services, Inc., which we refer to as FMDS, for $13.7 million in cash. FMDS serves as the trust administrator of securitization trusts that we previously facilitated. On March 30, 2012, the new third party owner of FMDS terminated the agreement with our subsidiary First Marblehead Education Resources, Inc., which we refer to as FMER, for the special servicing of the NCT Trusts. With the termination of this agreement, we no longer had the power to direct the activities that most significantly impact the performance of the GATE Trusts and, therefore, we were no longer the primary beneficiary of these trusts. As such, we deconsolidated the GATE Trusts effective March 31, 2012. We deconsolidated $258.4 million of assets and $260.1 million of liabilities from our consolidated balance sheet and recognized a $1.7 million non-cash gain in our statement of operations for our Securitization Trust segment, representing the accumulated deficit in these trusts. In addition to the non-cash gain of $1.7 million, we also recorded an additional gain of $9.2 million representing the fair value of the residual interests related to these trusts that were previously eliminated as part of our adoption of ASU 2009-17, resulting in a total non-cash gain of $10.9 million for the deconsolidation event. Our consolidated income statement for the period ended March 31, 2012 included the results of the GATE Trusts for the entire quarter.

As a result of the events described above, we have deconsolidated all of the securitization trusts previously required to be consolidated under the accounting rules adopted on July 1, 2010, and we do not expect to maintain a Securitization Trusts segment in future periods.

See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

Segment Reporting

Through the fiscal quarter ended March 31, 2012, we managed our operations through two business segments, Education Financing and Securitization Trusts:

Education Financing

Our Education Financing segment includes the services we perform in designing and implementing various education loan programs as well as other services, including portfolio management. Until the deconsolidation of the NCSLT Trusts, we also provided asset servicing services, and until the sale of FMDS, we also provided trust administration services. Our Education Financing segment also includes the results of Union Federal, including its Monogram-based loan programs and retail banking products, and, beginning on January 1, 2011, the results of TMS, including its tuition payment processing and transactional services. The key drivers of our results of operations and financial condition for our Education Financing segment are facilitated loan volume based on our Monogram platform and the volume of tuition payments processed by TMS. In addition, we are entitled over time to receive additional structural advisory fees and residual cash flows from the NCT Trusts for our past securitization services.

Securitization Trusts

Our Securitization Trusts segment includes securitization trusts that purchased portfolios of education loans facilitated by us that we consolidated upon our adoption of ASU 2009-16 and ASU 2009-17, though not all securitization trusts facilitated by us were consolidated. The securitization trusts financed purchases of education loans by issuing debt to third-party investors. The key driver of the results of our Securitization Trusts segment has been the performance of the underlying portfolio of education loans held by the consolidated trusts.

See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

Business Trends, Uncertainties and Outlook

The following discussion of business trends, uncertainties and outlook is focused on our Education Financing segment. We consider the results of operations of our Education Financing segment to represent our core business operations. As a result of economic conditions, we have taken a number of measures to adjust our business model since fiscal 2008. These measures are described in Item 7 of Part II of our Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Business Trends, Uncertainties and Outlook.”

We have summarized below certain developments affecting our business since the beginning of fiscal 2012:

•

On July 1, 2011, Union Federal began accepting applications under the Union Federal Private Student Loan Program, a Monogram-based national higher education loan program, and The prepGATE^® Loan Program, a Monogram-based national K-12 education loan program.

•

On November 12, 2011, we received notice that the Massachusetts Appellate Tax Board, or ATB, had issued an order, which we refer to as the Order, in cases related to the Massachusetts tax treatment of GATE Holdings, Inc., which we refer to as GATE, a former subsidiary of FMD, for fiscal 2004 through fiscal 2006. We expect an opinion to be issued by the ATB relating to the Order within approximately six months from the ATB notice. As a result of the Order, we recorded an income tax benefit of $12.5 million for the quarter ended December 31, 2011. In March 2012, we made a $5.1 million payment that satisfied our obligation to the Massachusetts Department of Revenue for GATE’s taxable years ended June 30, 2004, 2005 and 2006. Any appeal of the Order by us would occur only after the issuance of the ATB’s opinion. See Note 10, “Commitments and Contingencies—Income Tax Matters,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

•

On November 14, 2011, we received $13.0 million in cash upon the sale to a third party of our interests in the structuring advisory agreements relating to the Trusts and the asset services agreement. As a result of this sale, we deconsolidated the assets and liabilities of the NCSLT Trusts as of November 14, 2011, recognizing a non-cash gain of $1.24 billion in our statement of operations upon deconsolidation. See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

•

On November 14, 2011, we entered into an amendment to our loan program agreement with SunTrust Bank to, among other things, expand and extend our relationship with SunTrust Bank to 2015, thereby substantially increasing the volume capacity for Monogram-based education loan originations under the SunTrust Bank loan program.

•

On March 2, 2012, FMD sold to a third party all of its outstanding capital stock in its subsidiary FMDS for $13.7 million in cash, resulting in a gain of $12.6 million. FMDS serves as the trust administrator of securitization trusts that we previously facilitated.

•

On March 30, 2012, the new third party owner of FMDS terminated the agreement with FMER for the special servicing of the NCT Trusts. As a result of the termination of the agreement, we deconsolidated the assets and liabilities of the GATE Trusts as of March 31, 2012. We recorded a non-cash gain of $10.9 million in our consolidated statement of operations upon deconsolidation. See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

Loan Origination

During the first quarter of fiscal 2011, we began performing services for two lender clients related to school-certified education loan programs funded by these lender clients based on our Monogram platform. On June 30, 2011, we began performing services for Union Federal related to school-certified education loan programs based on our Monogram platform, including a K-12 loan program. Our Monogram platform provides us with an opportunity to originate, administer, manage and finance education loans, and our three lender clients’ Monogram-based loan programs are a significant step in our return to the education lending marketplace.

Historically, we have processed the greatest loan application volume during the summer and early fall months, as students and their families seek to borrow money in order to pay tuition costs for the fall semester or the entire academic year. The period of July 2011 through September 2011 was the first full peak origination season for Monogram-based loan offerings and marked our return, after a three-year absence, to meaningful origination volumes.

The following table presents our loan origination with respect to our Monogram-based programs through April 30, 2012:


	July 1, 2011 – April 30, 2012						Fiscal 2011
	Partnered Lending		Union Federal		Total		Partnered Lending		Union Federal		Total
Applications	$	172,995,162	$	509,005,326	$	682,000,488	$	96,374,499	$	—	$	96,374,499
Approved Applications		50,297,870		97,187,774		147,485,644		27,981,817		—		27,981,817
Booked Loans		20,749,398		33,644,218		54,393,616		6,233,976		—		6,233,976
Disbursed Loans		21,082,788		32,550,114		53,632,902		5,268,080		—		5,268,080

Portfolio Performance

Credit performance of consumer-related loans generally have been adversely affected by general economic conditions in the United States over the past three years. These conditions have included higher unemployment rates and deteriorating credit performance, including higher levels of education loan defaults and lower recoveries on such defaults. These conditions have had, and may continue to have, a material adverse effect on the loan portfolio performance of the securitization trusts that we previously facilitated and, accordingly, the estimated fair value of our service revenue receivables from those trusts. Further, our Monogram-based education loan portfolios have yet to experience significant adverse portfolio performance as a majority of this portfolio has yet to experience more than 12-months of seasoning. As such, in evaluating loan portfolio performance, we review projected gross default rates, post-default recovery rates, the availability of third-party credit enhancement and the creditworthiness of various guarantors that provide any such credit enhancement.

Capital Markets

We believe that conditions in the capital markets generally improved in fiscal 2011 compared to recent years. In particular, investors in asset-backed securities, or ABS, demonstrated increased interest in ABS backed by private education loans that exhibited a strong credit profile. Additionally, in fiscal 2011 investors demonstrated interest in longer duration ABS in the sector. However, global capital markets experienced volatility during the first nine months of fiscal 2012, particularly in light of the credit turmoil in Europe. We believe that, as a result of the recent market trends, there has been a tightening in credit spreads for the private education loan securitization marketplace during fiscal

2012 and that there may be opportunities to finance private education loans in the ABS market. The structure and economics of any financing transaction may be materially different from prior transactions that we have sponsored. Such differences may include lower revenues as a result of wider credit spreads and additional cash requirements on our part.

Uncertainties

The near-term financial performance and future growth of our Education Financing segment depends in large part on our ability to successfully and efficiently market our Monogram platform and TMS services and originate education loans through Union Federal so that we may grow and diversify our client base and revenues. Facilitated loan volume is a key element of our financial results and business strategy, and we believe that the results from the 2011-2012 academic year demonstrate market demand for Monogram-based education loans.

We have invested in our distribution capabilities over the course of the past year, including our school channel sales force and TMS, but we face challenges in increasing loan volumes after our prolonged absence from the marketplace. For example, competitors with larger customer bases, greater name or brand recognition, or more established customer relationships than those of our clients, have an advantage in attracting loan applicants at a lower acquisition cost than us and making education loans on a recurring, or “serialized,” basis. These disadvantages for us are particularly acute now because our lender clients’ Monogram-based loan programs were initially launched in late fiscal 2011.

Outlook

Our long-term success depends on our ability to attract additional lender clients, or otherwise obtain additional sources of interim or permanent financing. This is particularly true because of the regulatory conditions and approvals relating to the Union Federal Private Student Loan Program. To date, we have entered into education loan program agreements based on our Monogram platform with three lenders. We are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current economic environment where lenders continue to evaluate their education lending business models. We believe, however, that the credit quality of the loan portfolios originated in the 2011-2012 academic year will be attractive to additional potential lender clients, as well as capital markets participants. We also believe that the ability to permanently finance education loan portfolios through the capital markets would make our products and services more attractive to lenders and would accelerate improvement in our long-term financial results.

We are uncertain of the volume of education loans to be generated by the Monogram-based loan programs of our three lender clients, one of which is our subsidiary Union Federal, or any additional lender clients, during the upcoming peak season for the 2012-2013 academic year. It is our view that returning to profitability will be dependent on a number of factors, including our loan capacity and related volumes, expense management and growth at TMS and Union Federal, as well as financing alternatives, including our ability to successfully re-enter the securitization market. In particular, we need to generate loan volumes substantially greater than those that we have generated to date, as well as to develop funding capacity for Monogram-based loan programs at loan volume levels greater than those of our initial three lender clients with lower credit enhancement levels and higher capital market advance rates than those available today. We must also achieve efficiencies in attracting applicants, through loan serialization or otherwise, in order to reduce our overall cost of acquisition.

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

•

Demand for 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 federal or state government programs and legislation recently passed or currently under consideration;

•

The extent to which our services and products, including our Monogram platform and TMS offerings, gain market share and remain competitive at pricing favorable to us;

•

The amount of education loan volume disbursed under our lender clients’ Monogram-based loan programs;

•

An adverse outcome relating to the federal income tax treatment of our sale of the trust certificate of NC Residuals Owners Trust, which we refer to as the Trust Certificate, in fiscal 2009 or our asset services agreement with the purchaser of the Trust Certificate, including any challenge related to federal tax refunds previously received in the amount of $176.6 million as a result of the audit currently being conducted by the Internal Revenue Service, or IRS;

•

Regulatory requirements applicable to Union Federal, TMS and us, including conditions and approvals relating to the Union Federal Private Student Loan Program, which limit Union Federal’s ability to fund education loans;

•

Conditions in the education loan financing market, including the costs or availability of financing, rating agency assumptions or actions, and market receptivity to private education loan asset-backed securitizations;

•

Interest rates, unemployment rates and the general consumer credit environment, including their effects on our assumed discount, default and prepayment rates, the forward London Interbank Offered Rate, or LIBOR, curve and the securitization trusts’ ability to recover principal and interest from borrowers, including the effectiveness of various risk mitigation strategies;

•

The resolution of any appeal of the ATB’s order in the cases pertaining to our Massachusetts state income tax returns;

•

Application of critical accounting policies and estimates, which impact the carrying value of assets and liabilities, as well as our determinations to consolidate or deconsolidate a VIE;

•

Application of The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, enacted in July 2010, through the supervisory authority of the Consumer Financial Protection Bureau, or CFPB, an independent agency within the Board of Governors of the Federal Reserve System, or Federal Reserve, which has the authority to regulate consumer financial products such as education loans, and to take enforcement actions against institutions marketing and selling consumer financial products under its supervision, such as Union Federal, and institutions that act as service providers to originators of education loans, such as our subsidiary FMER;

•

Applicable laws and regulations, which may affect the terms upon which lenders agree to make education loans, the terms of future portfolio funding transactions, including disclosure and risk retention requirements, recovery rates on defaulted education loans and the cost and complexity of our loan facilitation operations; and

•

Departures or long-term unavailability of key personnel.

Results of Operations—Three and Nine Months Ended March 31, 2012 and 2011

Financial Results Summary

We present our results of operations on a consolidated basis in accordance with U.S. generally accepted accounting principles, or GAAP. However, we manage our operations through two business segments, Education Financing and Securitization Trusts. As such, our discussion first focuses on the results of our Education Financing segment, which represents our core business, followed by our discussion of the results of our Securitization Trusts segment.

Our results of operations for the three months ended March 31, 2012 included the results of the GATE Trusts, which were deconsolidated effective March 31, 2012. See “—Executive Summary—Deconsolidation Events” above and Note 3, “Deconsolidations of Securitization Trusts,” in the notes of our unaudited consolidated financial statements included in Part I of this quarterly report for additional information. For the three months ended March 31, 2011, we included the deconsolidated balances related to the NCSLT Trusts in the “Deconsolidations and Eliminations” column below in order to make the segment presentation comparable period over period.

The following table summarizes our results of operations by reporting segment:


	Three months ended March 31,
	2012											2011
	Education Financing			Securitization Trusts		Eliminations			Total			Education Financing			Securitization Trusts		Deconsolidations & Eliminations			Total
	(dollars and shares in thousands, except per share amounts)
Revenues:
Net interest income (loss) after provision for loan losses	$	963		$	1,637	$	—		$	2,600		$	341		$	2,027	$	(11,321	)	$	(8,953	)
Non-interest revenues		14,223			7		(4,160	)		10,070			(14,958	)		7		21,089			6,138

Total revenues		15,186			1,644		(4,160	)		12,670			(14,617	)		2,034		9,768			(2,815	)
Non-interest expenses		25,509			1,078		(855	)		25,732			27,178			374		9,059			36,611

Income (loss) from operations		(10,323	)		566		(3,305	)		(13,062	)		(41,795	)		1,660		709			(39,426	)
Other income:
Gain from deconsolidations of trusts		—			1,709		9,156			10,865			—			—		—			—
Gain on sale of trust administrator		12,571			—		—			12,571			—			—		—			—
Proceeds from TERI settlement		—			—		—			—			—			—		18			18

Total other income		12,571			1,709		9,156			23,436			—			—		18			18

Income (loss) before income taxes		2,248			2,275		5,851			10,374			(41,795	)		1,660		727			(39,408	)
Income tax expense (benefit)		516			—		—			516			(82	)		—		—			(82	)

Net income (loss)	$	1,732		$	2,275	$	5,851		$	9,858		$	(41,713	)	$	1,660	$	727		$	(39,326	)

Net income (loss) per common share:
Basic	$	0.02		$	0.02	$	0.05		$	0.09		$	(0.41	)	$	0.02	$	—		$	(0.39	)
Diluted		0.02			0.02		0.05			0.09			(0.41	)		0.02		—			(0.39	)
Weighted-average common shares outstanding:
Basic										101,554											100,834
Diluted										110,573											100,834

Net income for the three months ended March 31, 2012 was $9.9 million, or $0.09 per fully diluted common share, compared to a net loss of $39.3 million, or $0.39 per fully diluted common share, for the three months ended March 31, 2011. The improvement in earnings of $49.2 million was a result of an increase of $23.5 million in other income, an increase of $15.5 million in revenues and a decline of $10.9 million in non-interest expenses. The increase in other income was the result of the $12.6 million gain on the sale of FMDS and the $10.9 million non-cash gain upon the deconsolidation of the GATE Trusts recorded during the quarter ended March 31, 2012. The increase in revenues was largely attributable to an increase of $11.6 million in our net interest income after the provision for loan losses principally due to a lower provision for loan losses. The decrease in non-interest expenses was driven by a decrease in general and administrative expenses of $10.9 million principally due to the reduction of trust collection costs and other trust related expenses.


	Nine months ended March 31,
	2012												2011
	Education Financing			Securitization Trusts			Eliminations			Total			Education Financing			Securitization Trusts			Eliminations			Total
	(dollars and shares in thousands, except per share amounts)
Revenues:
Net interest income (loss) after provision for loan losses	$	2,027		$	(97,213	)	$	18		$	(95,168	)	$	378		$	(103,307	)	$	29		$	(102,900	)
Non-interest revenues		33,747			578			(8,392	)		25,933			(691	)		2,393			9,074			10,776

Total revenues		35,774			(96,635	)		(8,374	)		(69,235	)		(313	)		(100,914	)		9,103			(92,124	)
Non-interest expenses		80,596			19,092			(4,757	)		94,931			67,728			17,083			9,538			94,349

Loss from operations		(44,822	)		(115,727	)		(3,617	)		(164,166	)		(68,041	)		(117,997	)		(435	)		(186,473	)
Other income:
Gain from deconsolidations of trusts		—			1,239,068			9,514			1,248,582			—			—			—			—
Gain on sale of trust administrator		12,571			—			—			12,571			—			—			—			—
Proceeds from TERI settlement		1,405			6,885			—			8,290			8,112			42,587			—			50,699

Total other income		13,976			1,245,953			9,514			1,269,443			8,112			42,587			—			50,699

Income (loss) before income taxes		(30,846	)		1,130,226			5,897			1,105,277			(59,929	)		(75,410	)		(435	)		(135,774	)
Income tax expense (benefit)		(10,891	)		—			—			(10,891	)		1,957			—			—			1,957

Net income (loss)	$	(19,955	)	$	1,130,226		$	5,897		$	1,116,168		$	(61,886	)	$	(75,410	)	$	(435	)	$	(137,731	)

Net income (loss) per common share:
Basic	$	(0.18	)	$	10.25		$	0.05		$	10.12		$	(0.61	)	$	(0.75	)	$	(0.01	)	$	(1.37	)
Diluted		(0.18	)		10.23			0.05			10.10			(0.61	)		(0.75	)		(0.01	)		(1.37	)
Weighted average common shares outstanding:
Basic											101,459												100,809
Diluted											110,499												100,809

Net income for the nine months ended March 31, 2012 was $1.12 billion, or $10.10 per fully diluted common share, compared with a net loss of $137.7 million, or $1.37 per fully diluted common share, for the nine months ended March 31, 2011. The increase in net income was largely attributable to the $1.25 billion increase in other income principally as a result of the non-cash gain from the deconsolidations of the NCSLT Trusts and the GATE Trusts. The loss from operations for our Education Financing segment improved by $23.2 million principally as a result of higher total revenues of $36.1 million largely due to a loss of $26.4 million taken in the prior nine month period for the valuation of the service revenue receivables partially offset by $12.9 million in higher non-interest expenses largely due to the addition of the TMS operations subsequent to the acquisition on December 31, 2010.

The following sections provide additional detail on the financial results of our reporting segments for the three and nine months ended March 31, 2012 as compared to the three and nine months ended March 31, 2011:

Education Financing

We offer clients the opportunity to outsource key components of their education financing programs to us by offering the following services:

•

Loan origination—We offer a comprehensive suite of services to schools and lenders covering the entire life-cycle of an education loan. Services include program design, sales and marketing support, application intake, credit decisioning, disbursement processing and portfolio management throughout the repayment term. Through our Monogram platform, we are able to customize our services to meet the specific branding, pricing and underwriting requirements of our clients.

•

Tuition billing and payment processing—As of January 1, 2011, we expanded our service offerings to include tuition planning, tuition billing and payment technology services for educational institutions. TMS serves over 700 K-12, college and university clients and maintains relationships with more than 350,000 households nationwide.

•

Refund management—Beginning in November 2011, we expanded our service offerings to include a service to schools and students for processing refunds.

•

Portfolio management—We manage education loan portfolios on behalf of portfolio owners, including securitization trusts facilitated by us, in part by employing risk analytics to monitor and manage the performance of the portfolio over time. As part of this service offering, we monitor portfolio performance metrics, manage the performance of third-party vendors and interface with rating agencies. Our infrastructure enables comprehensive analytics, based on both historical and recent data, and we are able to customize collections strategies as needed to optimize loan performance.

•

Retail banking—We provide a host of retail banking products to our customers, including education loans, residential and commercial mortgage loans, time and savings deposits and money market demand accounts.

•

Securitization—Historically, we have facilitated securitizations to serve as a source of permanent financing for education loans originated by Union Federal and our lender clients. As demand for securitizations backed by private education loans reemerges, we hope to participate in future securitizations or other capital markets transactions, subject to market acceptance and conditions.

Loan origination and portfolio management services are each offered as an integrated part of our Monogram platform or on a stand-alone, fee-for-service basis. Tuition billing and payment processing, refund management services and retail banking products are each offered on a stand-alone, fee-for-service basis. Until the deconsolidation of the NCSLT Trusts, we provided asset servicing and until the sale of FMDS, we provided trust administration services.

Our Monogram platform enables a lender to customize some or all of our education loan service offerings based on the lender’s particular needs, including its risk control and investment return objectives. Specifically, in consultation with us, the lender can customize the range of loan terms offered to its qualified applicants, such as borrower repayment options, repayment terms and borrower pricing. Our Monogram platform 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 and features offered to applicants who pass the credit review. Lenders may provide all loan repayment options to all applicants who pass the credit review or restrict repayment options based on applicants’ risk scores. Our online 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. A Monogram-based loan program can be structured so that lenders hold the education loans through the scheduled repayment, prepayment or default, or for some limited period of time before disposing of the loans in a capital markets transaction, if available. Education loans generated through our Monogram platform to date generally have shorter repayment periods, an increased percentage of borrowers making payments while in school and comparable cosigner participation rates, in each case when compared to loans generated under programs that we previously facilitated. The success of our Monogram platform will be a key driver of our future financial results and will be critical to growing and diversifying our revenue and client base.

The first education loans based on our Monogram platform were disbursed during the first quarter of fiscal 2011. In connection with our initial three lender clients’ Monogram-based loan programs, we have provided credit enhancements by funding participation accounts or, in the case of Union Federal, deposit accounts, to serve as a first loss reserve for defaulted program loans. The deposit accounts for Union Federal were eliminated in the preparation of our consolidated financial statements. We have made initial deposits toward our credit enhancement arrangements and agreed to provide periodic supplemental deposits, up to specified limits, during the disbursement periods under our loan program agreements based on the credit mix and volume of disbursed program loans and adjustments to default projections for program loans. To the extent that outstanding loan volume decreases as a result of repayments, or if actual loan volumes or default experience are less than our funded amounts, we are eligible to receive periodic releases of funds. The timing and amount of releases from the participation accounts are uncertain and vary among the lenders. As consideration for funding participation accounts, we are entitled to receive a share of the interest generated on the loans.

The following table presents our results of operations and summary of changes for our Education Financing segment:


	Three months ended March 31,						Change between periods			Nine months ended March 31,						Change between periods
	2012			2011			2012 - 2011			2012			2011			2012 - 2011
	(dollars in thousands)
Revenues:
Net interest income:
Interest income	$	950		$	557		$	393		$	2,230		$	1,478		$	752
Interest expense		(209	)		(206	)		(3	)		(679	)		(823	)		144

Net interest income		741			351			390			1,551			655			896
Provision for loan losses		222			(10	)		232			476			(277	)		753

Net interest income (loss) after provision for loan losses		963			341			622			2,027			378			1,649
Non-interest revenues:
Tuition payment processing fees		7,697			7,055			642			22,172			7,055			15,117
Additional structural advisory fees, asset servicing fees and residuals trust updates		2,454			(26,372	)		28,826			202			(20,890	)		21,092
Other administrative fees		4,072			4,359			(287	)		11,373			13,144			(1,771	)

Total non-interest revenues		14,223			(14,958	)		29,181			33,747			(691	)		34,438

Total revenues		15,186			(14,617	)		29,803			35,774			(313	)		36,087
Total non-interest expenses		25,509			27,178			(1,669	)		80,596			67,728			12,868

Loss from operations		(10,323	)		(41,795	)		31,472			(44,822	)		(68,041	)		23,219
Other income:
Gain on sale of trust administrator		12,571			—			12,571			12,571			—			12,571
Proceeds from TERI settlement		—			—			—			1,405			8,112			(6,707	)

Total other income		12,571			—			12,571			13,976			8,112			5,864

Income (loss) before income taxes		2,248			(41,795	)		44,043			(30,846	)		(59,929	)		29,083
Income tax expense (benefit)		516			(82	)		598			(10,891	)		1,957			(12,848	)

Net income (loss)	$	1,732		$	(41,713	)	$	43,445		$	(19,955	)	$	(61,886	)	$	41,931

Overall Results

The net income (loss) for our Education Financing segment improved by $43.4 million to net income of $1.7 million for the three months ended March 31, 2012 from a net loss of $41.7 million for the three months ended March 31, 2011. The improvement was principally as a result of a loss of $26.4 million recorded on the valuation of our service revenue receivables for the quarter ended March 31, 2011 and an increase of $12.6 million in other income for the gain on the sale of FMDS for the quarter ended March 31, 2012.

The net loss for our Education Financing segment for the nine months ended March 31, 2012 decreased by $41.9 million to $20.0 million from $61.9 million for the nine months ended March 31, 2011. The improvement was principally due to an increase in non-interest revenues of $34.4 million, largely due to losses recorded on the valuation of our service revenue receivables in the prior year combined with an increase in tuition payment processing fees of $15.1 million attributable to TMS being included in our fiscal 2012 results for nine months, as compared to being included for only three months in the nine months ended March 31, 2011. Non-interest expenses increased by $12.9 million as a result of our acquisition of TMS and increased marketing costs incurred to originate education loans at Union Federal but were offset by a higher income tax benefit of $12.8 million as a result of the ATB’s order.

Net Interest Income after Provision for Loan Losses

Net interest income after provision for loan losses for the three and nine months ended March 31, 2012 increased by $622 thousand and $1.6 million, respectively, compared to the three and nine months ended March 31, 2011. The increases resulted from an improved net interest margin due to an increase in net interest income from higher-yielding investment securities and education loans, coupled with a decline in interest rates paid on time and savings deposits. The provision for loan losses for the three and nine months ended March 31, 2012 improved by $232 thousand and $753 thousand, respectively, compared to the three and nine months ended March 31, 2011, reflecting higher cash recoveries received during fiscal 2012 on previously defaulted education loans transferred by Union Federal to FMD in 2009. See “—Financial Condition—Consolidated Average Balance Sheet” below for additional information on our consolidated average balance sheet and interest rates earned and paid.

Non-Interest Revenues

Non-interest revenues for our Education Financing segment include tuition payment processing fees earned by TMS, fee-for-service revenues for loan origination and program support and fees related to our Monogram platform, as well as fees for trust administration and portfolio management performed on behalf of the securitization trusts that we facilitated. Non-interest revenues for the three and nine months ended March 31, 2012 were $14.2 million and $33.7 million, respectively, up $29.2 million and $34.4 million, respectively, from the three and nine months ended March 31, 2011. The increases for each of the respective periods were principally the result of a loss of $26.4 million recorded during the third quarter of fiscal 2011 related to the valuation of the service revenue receivables as it related to the change in the recovery rate assumption.

Tuition payment processing fees. Tuition payment processing fee revenues for the three and nine months ended March 31, 2012 were $7.7 million and $22.2 million, respectively, an increase of $642 thousand and $15.1 million compared to the three and nine months ended March 31, 2011, respectively. The increase for the nine months ended March 31, 2012 as compared to the prior year period was primarily attributable to results for the nine months ended March 31, 2011 only including TMS results subsequent to our acquisition of TMS on December 31, 2010.

Other administrative fees. Other administrative fees for the three and nine months ended March 31, 2012 were $4.1 million and $11.4 million, respectively, a decrease of $287 thousand and $1.8 million compared to the three and nine months ended March 31, 2011, respectively. These decreases were due to lower allowable revenues as a result of reductions in expense reimbursements by the Trusts under special servicing agreements for default prevention as well as lower education loan balances within the securitization trusts upon which the administrative fees are based. Revenues under special servicing agreements are based, in part, on the actual expenses incurred by our subsidiary FMER in its capacity as special servicer, and, in part, on the dollar volume of education loans outstanding in various consolidated and unconsolidated securitization trusts. FMER’s reimbursement for expenses as special servicer is capped at monthly and aggregate amounts.

Servicing Fees and Trust Updates Overview. We record our service revenue receivables at fair value in our balance sheet. Additional structural advisory fee and residual receivables represent the estimated fair value of service revenue receivables expected to be collected over the life of the various separate securitization trusts that have purchased education loans facilitated by us, with no further service obligations on our part. Prior to the sale of our variable interests in the Trusts, we recorded asset servicing fee receivables, which represented the estimated fair value of service revenues earned as of our balance sheet date, from the third-party owner of the Trust Certificate. This revenue stream was sold on November 14, 2011. See “—Executive Summary—Deconsolidation Events” above and Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

In the absence of market-based transactions, we use cash flow modeling techniques to derive an estimate of fair value for financial reporting purposes. Changes in the estimated fair value of receivables due from the securitization trusts, less cash received, are recorded as revenue or loss in our Education Financing segment, which we refer to as trust updates. See Note 9, “Fair Value Measurements,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for a description of the significant observable and unobservable inputs used to develop our fair value estimates. Such estimates include, but are not limited to, recovery, default and prepayment rates, discount rates and the forward LIBOR curve.

Asset Servicing Fees. Prior to the sale of our variable interests in the Trusts on November 14, 2011, we provided ongoing services, including analysis and valuation optimization and services related to funding strategy, pursuant to our asset services agreement with the third-party owner of the Trust Certificate. As compensation for our services, we were entitled to a monthly asset servicing fee based on the aggregate outstanding principal balance of the education loans owned by the Trusts. Although this fee was earned monthly, our right to receive the fee was contingent on distributions made by the Trusts to the owner of the Trust Certificate.

During the third quarter of fiscal 2012, we did not record any asset servicing fee revenue compared to a $5.0 million non-cash loss in the third quarter of fiscal 2011 as a result of the valuations in determining the fair value of the receivables, performed during that period.

Additional Structural Advisory Fee and Residual Trust Updates. Prior to the sale of our variable interests in the Trusts on November 14, 2011, a significant portion of the additional structural advisory fees were due from the consolidated securitization trusts, which were eliminated in consolidation but which continued to be recognized by our Education Financing segment. The total additional structural advisory fee receivable balance for our Education Financing segment at March 31, 2012 was $3.4 million, down $15.0 million from $18.4 million at June 30, 2011. The decrease was principally related to the sale of the additional structural advisory fees on November 14, 2011, which resulted in a net trust update loss for the nine months ended March 31, 2012 of $2.7 million. During the quarter ended March 31, 2011, we recorded a loss related to our estimated fair value of our additional structural advisory fee receivables of $26.4 million as a result of decreasing the recovery rate assumption.

The total residual interest receivable balance for our Education Financing segment at March 31, 2012 was $12.8 million, up $3.2 million from $9.6 million at June 30, 2011. We recorded $2.9 million of the $3.2 million increase in the residual trust updates in the third quarter of fiscal 2012 as the result of a change in the fair value assumptions used in the valuation.

The following table summarizes the details of trust updates to additional structural advisory fees, residual receivables and asset servicing fees:


	Three months ended March 31,						Nine months ended March 31,
	2012			2011			2012			2011
	(dollars in thousands)
Trust updates:
Additional structural advisory fees:
Due from off-balance sheet VIEs	$	(1,177	)	$	72		$	(4,044	)	$	885
Due from Securitization Trusts		738			(21,525	)		1,321			(17,016	)

Total additional structural advisory fee trust updates		(439	)		(21,453	)		(2,723	)		(16,131	)
Residuals:
Due from off-balance sheet VIEs		(412	)		161			(442	)		(987	)
Due from Securitization Trusts		3,305			(121	)		3,635			464

Total residual trust updates		2,893			40			3,193			(523	)
Asset servicing fees:
Due from off-balance sheet VIEs		—			(4,959	)		(268	)		(4,236	)

Total asset servicing fees		—			(4,959	)		(268	)		(4,236	)

Total additional structural advisory fees, residuals and asset servicing fees—trust updates	$	2,454		$	(26,372	)	$	202		$	(20,890	)

Non-Interest Expenses

The following table reflects non-interest expenses for our Education Financing segment:


	Three months ended March 31,				Change between periods			Nine months ended March 31,				Change between periods
	2012		2011		2012 - 2011			2012		2011		2012 - 2011
	(dollars in thousands)
Compensation and benefits	$	11,645	$	11,615	$	30		$	33,321	$	27,640	$	5,681

General and administrative:
Third-party services		5,093		6,377		(1,284	)		17,354		17,779		(425	)
Depreciation and amortization		1,138		2,126		(988	)		3,635		6,573		(2,938	)
Marketing		940		233		707			7,198		445		6,753
Occupancy and equipment		3,035		3,241		(206	)		8,339		8,249		90
Servicer fees		180		166		14			528		494		34
Other		3,478		3,420		58			10,221		6,548		3,673

Total general and administrative		13,864		15,563		(1,699	)		47,275		40,088		7,187

Total non-interest expenses	$	25,509	$	27,178	$	(1,669	)	$	80,596	$	67,728	$	12,868

Total number of full and part-time employees at fiscal quarter-end		317		361		(44	)

Compensation and Benefits. Compensation and benefits expenses for the three and nine months ended March 31, 2012 were $11.6 million and $33.3 million, respectively. The increase of $30 thousand for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was the result of lower headcount which was offset by an increase in severance related costs recorded in the quarter ended March 31, 2012. The increase of $5.7 million for the nine months ended March 31, 2012 as compared to the nine months ended March 31, 2011 was primarily the result of the inclusion of TMS’ operations after December 31, 2010.

General and Administrative. General and administrative expenses for the three months ended March 31, 2012 decreased by $1.7 million compared to the three months ended March 31, 2011. The decrease in the three months comparison was largely driven by a decrease in the costs of third party services of $1.3 million as a result of lower costs relating to special servicing, a decrease of $1.0 million in depreciation and amortization expense and a decrease of $206 thousand in occupancy and equipment expenses, partially offset by an increase of $707 thousand in marketing costs. General and administrative expenses for the nine months ended March 31, 2012 increased by $7.2 million compared to the nine months ended March 31, 2011. The increase was primarily a result of the $7.2 million in new marketing expenses incurred in fiscal 2012 related to loan acquisition and the initial brand development of Union Federal’s Monogram-based loan programs.

Other Income

During the quarter ended March 31, 2012, we sold FMDS for $13.7 million in cash to a third party and recognized a gain of $12.6 million. The difference between the cash proceeds and the gain was comprised of the carrying value of the capital stock sold and the accrual of certain exit costs.

In April 2008, TERI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, which we refer to as the TERI Reorganization. For the nine month periods ended March 31, 2012 and 2011, we recorded other income totaling $1.4 million and $8.1 million, respectively, under TERI’s confirmed plan of reorganization.

Income Taxes

We are subject to federal income tax, as well as income tax in multiple U.S. state and local jurisdictions. Our effective income tax rate is calculated on a consolidated basis. The securitization trusts are considered pass-through entities for income tax purposes and, accordingly, the net income or loss of the trusts is included in the tax returns of the trust owners rather than the trust entities themselves. As such, we record all income tax benefit or expense in our Education Financing segment.

The IRS has begun an audit of our tax returns for fiscal years 2007 through 2010. In addition, we are involved in several matters before the ATB relating to the Massachusetts tax treatment of GATE, a former subsidiary of FMD. See Note 10, “Commitments and Contingencies—Income Tax Matters,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information regarding these matters. Our state income tax returns in jurisdictions other than Massachusetts remain subject to examination for various fiscal years ended between June 30, 2007 and June 30, 2010.

Income tax expense for the three months ended March 31, 2012 was $516 thousand and the income tax benefit for the nine months ended March 31, 2012 was $10.9 million, which resulted in part from a benefit of $12.5 million recorded in the second quarter of fiscal 2012 related to the order issued by the ATB on November 9, 2011 related to the Massachusetts tax treatment of GATE. Beginning in fiscal 2011, we no longer had any remaining taxes paid within available net operating loss carryback periods to offset our losses. As a result, we recorded a deferred tax asset for net operating loss carryforwards as of March 31, 2012. It is more likely than not that our deferred tax assets will not be fully realized through future reversals of existing taxable temporary differences or available tax planning strategies. Accordingly, we have determined that a valuation allowance is necessary for all of our deferred tax assets not scheduled to reverse against existing deferred tax liabilities as of March 31, 2012. In addition, we recorded accrued interest related to unrecognized tax benefits for the third quarter of fiscal 2012. We will continue to review the realizability of deferred tax assets on a quarterly basis.

Securitization Trusts

From July 1, 2010 to March 31, 2012, the results of our Securitization Trusts segment were driven by the GATE Trusts and the NCSLT Trusts. Under ASU 2009-17, we deconsolidated the assets and liabilities of the NCSLT Trusts as of November 14, 2011 and we deconsolidated the assets and liabilities of the GATE Trusts as of March 31, 2012. As a result, we have deconsolidated all of the securitization trusts previously required to be consolidated under the accounting rules adopted on July 1, 2010, and we do not expect to maintain a Securitization Trusts segment in future periods.

Our results of operations for the quarter ended March 31, 2012 included only the results of the GATE Trusts, while the nine months ended March 31, 2012 also included the results of the NCSLT Trusts for approximately half that period. See “—Executive Summary—Deconsolidation Events” above and Note 3, “Deconsolidations of Securitization Trusts,” in the notes of our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

The following table reflects the financial results of our Securitization Trusts segment:


	Three months ended March 31, 2012								Three months ended March 31, 2011
	NCSLT Trusts		GATE Trusts			Total			NCSLT Trusts			GATE Trusts			Total
	(dollars in thousands)
Net interest income:
Interest income	$	—	$	2,468		$	2,468		$	76,709		$	2,614		$	79,323
Interest expense		—		(528	)		(528	)		(14,355	)		(526	)		(14,881	)

Net interest income		—		1,940			1,940			62,354			2,088			64,442
Provision for loan losses		—		(303	)		(303	)		(73,684	)		(61	)		(73,745	)

Net interest income (loss) after provision for loan losses		—		1,637			1,637			(11,330	)		2,027			(9,303	)
Administrative and other fees		—		7			7			1,811			7			1,818

Total revenues		—		1,644			1,644			(9,519	)		2,034			(7,485	)
Total general and administrative expenses		—		1,078			1,078			(10,098	)		374			(9,724	)

Income from operations		—		566			566			579			1,660			2,239
Other income:
Gain from deconsolidations of trusts		—		1,709			1,709			—			—			—
Proceeds from TERI settlement		—		—			—			18			—			18

Total other income		—		1,709			1,709			18			—			18

Net income	$	—	$	2,275		$	2,275		$	597		$	1,660		$	2,257


	Nine months ended March 31, 2012									Nine months ended March 31, 2011
	NCSLT Trusts			GATE Trusts			Total			NCSLT Trusts			GATE Trusts			Total
	(dollars in thousands)
Net interest income:
Interest income	$	105,472		$	7,461		$	112,933		$	243,105		$	8,241		$	251,346
Interest expense		(19,426	)		(1,488	)		(20,914	)		(47,289	)		(1,685	)		(48,974	)

Net interest income		86,046			5,973			92,019			195,816			6,556			202,372
Provision for loan losses		(188,412	)		(820	)		(189,232	)		(305,241	)		(438	)		(305,679	)

Net interest income (loss) after provision for loan losses		(102,366	)		5,153			(97,213	)		(109,425	)		6,118			(103,307	)
Administrative and other fees		553			25			578			2,367			26			2,393

Total revenues		(101,813	)		5,178			(96,635	)		(107,058	)		6,144			(100,914	)
Total general and administrative expenses		17,372			1,720			19,092			15,794			1,289			17,083

Income (loss) from operations		(119,185	)		3,458			(115,727	)		(122,852	)		4,855			(117,997	)
Other income:
Gain from deconsolidations of trusts		1,237,359			1,709			1,239,068			—			—			—
Proceeds from TERI settlement		6,862			23			6,885			42,536			51			42,587

Total other income		1,244,221			1,732			1,245,953			42,536			51			42,587

Net income (loss)	$	1,125,036		$	5,190		$	1,130,226		$	(80,316	)	$	4,906		$	(75,410	)

Overall Results

The net income (loss) for our Securitization Trusts segment for the three and nine months ended March 31, 2012 improved by $18 thousand and $1.21 billion, respectively, compared to the three and nine months ended March 31, 2011, to net income of $2.3 million and $1.13 billion, respectively. The increase of $18 thousand for the three month comparison was principally the result of an increase of $10.9 million in the net interest income after provision for loan losses largely offset by an increase of $10.8 million in general and administrative expenses. The increase for the nine month comparison was primarily a result of the $1.24 billion non-cash gain

recorded as a result of the deconsolidation of the NCSLT Trusts as of November 14, 2011. See “—Executive Summary—Deconsolidation Events” and Note 3, “Deconsolidations of Securitization Trusts,” in the notes of our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

Net Interest Income

Net interest income from our Securitization Trusts segment is generated by education loans held to maturity and, to a lesser extent, interest earned on restricted cash and guaranteed investment contracts. Interest income on education loans held to maturity is primarily generated by variable rate loans, indexed to the one-month LIBOR, adjusted for the amortization of loan acquisition costs and origination fees, using the effective interest method. Interest expense relates to the interest paid on long-term borrowings used to finance the purchase of education loans, which are primarily variable rate notes indexed to the one-month LIBOR and, to a lesser extent, interest-only securities that bear a fixed interest rate based on contractual notional principal values over the period they are outstanding, adjusted for the amortization of capitalized debt issuance and underwriting costs, using the effective interest method.

Net interest income for our Securitization Trusts segment for the three and nine months ended March 31, 2012 was $1.9 million and $92.0 million, respectively, a decrease of $62.5 million and $110.4 million compared to the three and nine months ended March 31, 2011, respectively. The decreases were primarily a result of the deconsolidation of the NCSLT Trusts as of November 14, 2011, coupled with lower unpaid principal balances outstanding.

Provision for Loan Losses

We adjust our allowance for loan losses for credit losses through a charge to the provision for loan losses. We recorded a provision for loan losses of $303 thousand and $189.2 million for the three and nine months ended March 31, 2012, respectively, compared to $73.7 million and $305.7 million for the three and nine months ended March 31, 2011, respectively. The decreases of $73.4 million and $116.4 million for the three and nine month comparisons, respectively, resulted from the deconsolidation of the NCSLT Trusts as of November 14, 2011.

General and Administrative Expenses

The following table presents general and administrative expenses:


	Three months ended March 31,					Nine months ended March 31,
	2012		2011			2012		2011
	(dollars in thousands)
General and administrative expenses:
Additional structural advisory fees—trust updates (due to Education Financing)	$	739	$	(21,525	)	$	1,322	$	(17,016	)
Trust administration and default prevention and collections management fees (due to Education Financing)		117		2,367			3,436		7,478
Servicer fees		148		6,147			9,337		18,251
Trust collection costs and other trust expenses		74		3,287			4,997		8,370

Total general and administrative expenses	$	1,078	$	(9,724	)	$	19,092	$	17,083

Total general and administrative expenses increased by $10.8 million and $2.0 million for the three and nine months ended March 31, 2012, compared to the three and nine months ended March 31, 2011, respectively. The increases in each of the three and nine month periods were the result of a decrease in the estimated fair value of the liability for additional structural advisory fees payable of $21.5 million in the third quarter of fiscal 2011 due to the decrease in the net recovery rate assumption, partially offset by lower other expenses as a result of the deconsolidation of the NCSLT Trusts, as these expenses were not recorded in the three months ended March 31, 2012 and were only recorded for approximately half of the nine months ended March 31, 2012.

Other Income

During fiscal 2012, we recognized gains on the deconsolidations of the NCSLT Trusts and the GATE Trusts of $1.24 billion and $1.7 million, respectively, in our Securitization Trust segment. Separately, we recorded a gain on the deconsolidation of the GATE Trusts of $9.2 million to record the residual interests that were previously eliminated as part of our adoption of ASU 2009-17 in the eliminations section of our segment reporting.

Our Securitization Trusts segment also recorded other income for cash distributions received during the three and nine months ended March 31, 2012 of $0 and $6.9 million, respectively, pursuant to TERI’s confirmed plan of reorganization. For the three and nine

months ended March 31, 2011, we recorded other income of $18 thousand and $42.6 million, respectively, to the consolidated securitization trusts. This other income represented the transfer of assets to the securitization trusts in excess of their recorded receivables, the forgiveness of guaranty fees and other liabilities and cash distributions from the liquidating trust under TERI’s confirmed plan of reorganization.

Eliminations and Deconsolidation

For the three months ended March 31, 2012, revenue and expenses included in “Eliminations” for segment reporting purposes primarily related to the elimination of the trust updates and related residual interests ownership of our Education Financing segment in the GATE Trusts, offset by the gain from the deconsolidation of the GATE Trusts. At March 31, 2012, we also recorded a gain on the deconsolidation of the GATE Trusts of $9.2 million to record the fair value of the residual interests that were previously eliminated as part of our adoption of ASU 2009-17 as they were no longer being eliminated. The residual interests of $9.2 million that were related to the GATE Trusts were not recorded in our Securitization Trust segment and, as such, were not included in the $1.7 million gain.

For the nine months ended March 31, 2012, the revenues and expenses included in “Eliminations” for segment reporting purposes related to revenues earned by our Education Financing segment, and the corresponding expenses incurred by our Securitization Trusts segment, relating to intercompany life-of-trust fees for securitization structuring. Eliminations for segment reporting purposes also included our on-going fees for default prevention and collections management through November 14, 2011, as well as the elimination of the residual interest ownership held by our Education Financing segment in the GATE Trusts.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of our financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We base our estimates, assumptions 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.

Our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report.

On an ongoing basis, we evaluate our estimates, assumptions 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. 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. We consider the following to be our critical accounting policies:

•

Whether or not to consolidate the financial results of a VIE;

•

Allowance for loan losses and the related provision for loan losses;

•

Recognition of interest income on delinquent and defaulted education loans;

•

Determination of goodwill and intangible asset impairment; and

•

Income taxes, specifically our uncertain tax positions accrued for under Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes, or FIN 48 (now incorporated into Accounting Standards Codification, or ASC, 740,Income Taxes).

As a result of the sale on November 14, 2011 of our interests in the structuring advisory agreements relating to the Trusts and the asset services agreement, which included our right to receive the additional structural advisory fees and the asset servicing fees, we no longer consider either the recognition of asset servicing fees or trust updates to our service revenue receivables to be a critical accounting policy. There were no other significant changes in our critical accounting policies from those policies disclosed in Item 7 of Part II of our Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Estimates.”

Financial Condition

Deconsolidation Events

Total assets decreased by $7.21 billion at March 31, 2012 from June 30, 2011, primarily as a result of the deconsolidation of $6.61 billion of assets related to the NCSLT Trusts as of November 14, 2011 and the deconsolidation of $258.4 million of assets related to the GATE Trusts as of March 31, 2012. See “—Executive Summary—Deconsolidation Events” and Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

The assets and liabilities of the GATE Trusts at the time of their deconsolidation and at June 30, 2011 were as follows:


	March 31, 2012			June 30, 2011
	(dollars in thousands)
Assets:
Restricted cash and guaranteed investment contracts	$	8,172		$	9,640
Education loans held to maturity, net		243,103			261,492
Interest receivable		4,477			5,929
Other assets		2,618			2,181

Total assets	$	258,370		$	279,242

Liabilities:
Accounts payable, accrued expenses and other liabilities	$	4,764		$	4,982
Long-term borrowings		255,315			279,448

Total liabilities		260,079			284,430

Accumulated deficit	$	(1,709	)	$	(5,188	)

The assets and liabilities of the NCSLT Trusts at the time of their deconsolidation, net of any elimination entries, and at June 30, 2011 were as follows:


	November 14, 2011			June 30, 2011
	(dollars in thousands)
Assets:
Restricted cash and guaranteed investment contracts	$	136,668		$	118,069
Education loans held to maturity, net		6,390,414			6,684,679
Interest receivable		49,292			60,102
Other assets		32,500			28,834

Total assets	$	6,608,874		$	6,891,684

Liabilities:
Accrued interest expense and other liabilities	$	32,000		$	23,404
Long-term borrowings		7,814,591			7,993,692

Total liabilities		7,846,591			8,017,096

Accumulated deficit⁽¹⁾	$	(1,237,717	)	$	(1,125,412	)

(1)	The gain on the deconsolidation of the NCSLT Trusts of $1,237,359 was recognized in our Securitization Trusts segment.

Cash, Cash Equivalents and Short-Term Investments

We had combined cash, cash equivalents, federal funds sold and short-term investments of $210.5 million and $267.4 million at March 31, 2012 and June 30, 2011, respectively. Of this total, FMD and its non-bank subsidiaries held interest-bearing and non-interest-bearing deposits, money market funds and certificates of deposit of $190.7 million with highly-rated financial institutions at March 31, 2012. Union Federal held a total of $19.8 million in interest-bearing and non-interest-bearing deposits and money market funds and federal funds sold at March 31, 2012. Union Federal is subject to restrictions on the payment of dividends without prior approval from the Office of the Comptroller of the Currency, or OCC. The decrease of $56.9 million from June 30, 2011 resulted primarily from the net purchase of $59.6 million of mortgage-backed securities, the funding of $31.7 million of new education loans at Union Federal, an income tax and interest payment to the Commonwealth of Massachusetts of $5.1 million and $41.6 million to fund operations, partially offset by $13.6 million in sale proceeds for the asset servicing and additional structural advisory fees, the cash proceeds of $13.7 million received in connection with the sale of FMDS and $53.3 million in deposit growth at Union Federal, including $40.0 million from TMS.

Restricted Cash and Guaranteed Investment Contracts

At March 31, 2012, restricted cash and guaranteed investment contracts in our balance sheet included cash and investments held by TMS of $81.0 million, of which $40.0 million was held at Union Federal, and restricted cash held by FMD and its other non-bank subsidiaries of $5.0 million, which consisted of funds collected on behalf of, but not yet remitted to, the securitization trusts.

Restricted cash held by TMS represents tuition payments collected from students or their families on behalf of educational institutions. These cash balances are generally subject to cyclicality, tending to peak in August of each school year, early in the enrollment cycle, and to decrease in May, at the end of the school year. Since our acquisition of TMS, on December 31, 2010, TMS’ restricted cash balances have ranged from a high of $346.8 million during August 2011 to a low of $64.0 million during May 2011. In December 2011, we transferred $40.0 million of TMS deposits from a third party institution to Union Federal. This deposit remains subject to a trust agreement between TMS and a third party trustee. Union Federal is subject to the capital requirements and other laws, regulations and restrictions applicable to banks regulated by the OCC, but it is not otherwise restricted and, accordingly, such deposit is not included in restricted cash and instruments in our consolidated financial statements.

The use of cash and guaranteed investment contracts held by each securitization trust is restricted to making payments for trust expenses and principal and interest payments on the debt of the respective trust holding such cash and guaranteed investment contracts, and, therefore, is not available to any other securitization trust, FMD or any other subsidiary of FMD. The investment of cash held by each securitization trust is subject to investment guidelines established in the applicable trust indenture. Restricted cash held by our other subsidiaries relates to recoveries on defaulted education loans collected on behalf of clients and undistributed loan proceeds. We classify changes in the balances of restricted cash and guaranteed investment contracts as investing activities in our consolidated statement of cash flows. The decrease in restricted cash and guaranteed investment contracts from June 30, 2011 to March 31, 2012 was largely a result of the deconsolidations of the NCSLT Trusts and GATE Trusts as of November 14, 2011 and March 31, 2012, respectively.

Investments Available for Sale

Investments classified as available for sale are reported at fair value in our balance sheet. Investments available for sale principally consisted of mortgage-backed federal agency securities held by Union Federal at both March 31, 2012 and June 30, 2011. The investments available for sale increased by $59.8 million from June 30, 2011 to $70.8 million as of March 31, 2012 as a result of Union Federal’s purchase of mortgage-backed securities during the first nine months of fiscal 2012. The portfolio generated a gross unrealized gain of $480 thousand at March 31, 2012, which was recognized in accumulated other comprehensive income, a component of stockholders’ equity (deficit).

Loans

At March 31, 2012 and June 30, 2011, we classified all education loans and substantially all mortgage loans as held to maturity. The net carrying value of loans consisted of the following, as of the dates indicated:


	March 31, 2012		June 30, 2011
	(dollars in thousands)
Education loans held to maturity, net	$	31,054	$	6,946,169
Mortgage loans held to maturity, net		7,955		6,417

Education Loans Held to Maturity

The decrease of $6.92 billion in education loans held to maturity at March 31, 2012 from June 30, 2011 resulted from the deconsolidation of $6.39 billion of net education loans held by the NCSLT Trusts, the deconsolidation of $243.1 million of net education loans held by the GATE Trusts and principal paydowns from borrowers, offset by new loan growth at Union Federal.

At March 31, 2012, education loans held to maturity principally consisted of education loans of $31.1 million held by Union Federal that were originated under our Monogram platform, and $1.2 million of education loans transferred by Union Federal to FMD in 2009 and had an allowance for loan losses of $1.2 million at March 31, 2012.

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


	March 31, 2012			June 30, 2011
	(dollars in thousands)
Education loans held to maturity:
Gross loan principal outstanding	$	32,330		$	7,130,599
Net unamortized loan acquisition costs and origination fees		—			265,720

Gross loans outstanding		32,330			7,396,319
Allowance for loan losses		(1,276	)		(450,150	)

Education loans held to maturity, net of allowance	$	31,054		$	6,946,169

Principal outstanding of loans serving as collateral for long-term borrowings	$	—		$	7,129,263

Allowance for Loan Losses

The following is a roll forward of the net carrying value of education loans held to maturity during the third quarter and first nine months of fiscal 2012:


	Three months ended March 31, 2012									Nine months ended March 31, 2012
	Gross loans outstanding			Allowance for loan losses			Net carrying value			Gross loans outstanding			Allowance for loan losses			Net carrying value
	(dollars in thousands)
Balance, beginning of period	$	270,216		$	(3,012	)	$	267,204		$	7,396,319		$	(450,150	)	$	6,946,169
Disbursements of principal to borrowers		14,854			—			14,854			32,214			—			32,214
Receipts of principal from borrowers		(8,308	)		—			(8,308	)		(148,204	)		—			(148,204	)
Interest capitalized on loans in deferment and forbearance		445			—			445			36,061			—			36,061
Amortization of loan acquisition costs and origination fees		95			—			95			(12,910	)		—			(12,910	)
Interest capitalized on defaulted loans		7			(7	)		—			8,180			(8,180	)		—
Provision for loan losses		—			(133	)		(133	)		—			(188,759	)		(188,759	)
Net charge-offs:
Charge-offs		(672	)		672			—			(235,415	)		235,415			—
Recoveries on defaulted loans		385			(385	)		—			16,146			(16,146	)		—

Net charge-offs		(287	)		287			—			(219,269	)		219,269			—

Subtotal		277,022			(2,865	)		274,157			7,092,391			(427,820	)		6,664,571
Deconsolidation of the trusts		(244,692	)		1,589			(243,103	)		(7,060,061	)		426,544			(6,633,517	)

Balance, end of period	$	32,330		$	(1,276	)	$	31,054		$	32,330		$	(1,276	)	$	31,054

We use the following terms to describe borrowers’ payment status:

In School and In Deferment. Under the terms of a majority of the education loans held by our securitization trusts, a borrower is eligible to defer principal and interest payments while carrying a specified academic course load and may be eligible to defer payments for an additional six months after graduation during a grace period. Either quarterly or at the end of the deferment period, depending on the terms of the credit agreement, any accrued but unpaid interest is capitalized and added to principal outstanding.

Forbearance.Under the terms of the education loans, a borrower may apply for forbearance, which is a temporary reprieve from making full contractual payments. Forbearance can take many forms, at the option of the creditor. The most common forms of forbearance include the following:

•

Basic forbearance—Cessation of all contractual payments for a maximum allowable forbearance period of one year, granted in three-month increments.

•

Hardship forbearance—Hardship forbearance is offered by the GATE Trusts and enables a borrower who has a medical condition or other hardship to cease contractual payments for a maximum period of 24 months, granted in three-month increments.

•

Alternative payment plans—Alternative payment plans are offered by the Trusts and enable a borrower to make a reduced payment for a limited period of time. The amount of the payment varies under different programs available and can be set at a fixed dollar amount, a percentage of contractual required payments or interest-only payments. Generally, approval for alternative payment plans is granted for a maximum of six to 24 months, depending on the program. We expect that these plans will also be made available as part of our Monogram-based programs.

The use of forbearance is contemplated at the origination of an education loan and is included in the credit agreement with the borrower. Under basic forbearance, hardship forbearance and alternative payment plans, the education loan continues to accrue interest. When basic forbearance, hardship forbearance or alternative payment plans cease, unpaid interest is capitalized and added to principal outstanding, and the borrower’s required payments are recalculated at a higher amount to pay off the loan, plus the additional accrued and capitalized interest, at the original stated interest rate by the original maturity date. There is no forgiveness of principal or interest in basic forbearance, hardship forbearance or alternative payment plans, nor is there a reduction in the interest rate or extension of the maturity date. In addition, in light of the length of the term of the typical education loan, we believe the temporary delay in payment granted to borrowers under these programs is insignificant. For these reasons, we have concluded that our education loans in basic forbearance, hardship forbearance and/or alternative payment plans do not constitute a troubled debt restructuring. However, we will continue to evaluate emerging industry practices as well as the nature and terms of our alternative payment plans and forbearance programs in our assessment of whether future utilization of these programs constitute troubled debt restructurings.

Forbearance programs result in an insignificant delay in the timing of payments received from borrowers, but at the same time, assuming the collection of the forborne amounts, provide for an increase in the gross volume of cash receipts over the term of the education loan due to the additional accrued interest capitalized while in forbearance. Forbearance programs may have the effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance.

In Repayment. We determine the repayment status of a borrower, including a borrower making payments pursuant to alternative payment plans, by contractual due dates. A borrower making reduced payments for a limited period of time pursuant to an alternative payment plan will be considered current if such reduced payments are timely made. Under our Monogram platform, borrowers may be in repayment while also being in school. Payment options while in school include full principal and interest, partial interest and interest only.

The following table provides additional information on the status of education loans outstanding:


	March 31, 2012⁽¹⁾			As a percentage of total			June 30, 2011⁽¹⁾			As a percentage of total
	(dollars in thousands)						(dollars in thousands)
Principal of loans outstanding:
In basic forbearance	$	52			0.2	%	$	320,973			4.5	%
In school and in deferment		17,363			53.7			719,290			10.1
In repayment, including alternative payment plans⁽²⁾, classified as:
Current:£30 days past due		14,605			45.2			5,591,863			78.4
Delinquent: >30 days past due, but£120 days past due		266			0.8			355,219			5.0
Delinquent: >120 days past due, but£180 days past due		44			0.1			89,165			1.2
In default: >180 days past due, but not yet charged-off		—			—			54,089			0.8

Total gross loan principal outstanding	$	32,330			100.0	%	$	7,130,599			100.0	%

Non-accrual loan principal (>120 days past due)	$	44			0.1	%	$	143,254			2.0	%
Past due loan principal (>90 days, but£120 days past due still accruing interest)		25			0.1			77,233			1.1
End of period allowance as a percentage of gross loan principal outstanding		3.9	%					6.3	%

(1)

At June 30, 2011, the principal of loans outstanding included $6.86 billion of loans held by the NCSLT Trusts and $264.4 million of loans held by the GATE Trusts. The NCSLT Trusts and the GATE Trusts were deconsolidated as of November 14, 2011 and March 31, 2012, respectively, and, as such, were not included in the principal of loans outstanding at March 31, 2012.

(2)	At March 31, 2012 and June 30, 2011, borrowers in repayment with loan principal outstanding of approximately $0 and $1.34 billion, respectively, were making reduced payments under alternative payment plans.

Credit Quality of Education Loans Held to Maturity

Management monitors the credit quality of an education loan based on loan status, as outlined above. The impact of changes in loan status, such as delinquency and time in repayment, are incorporated into the allowance for loan loss calculation quarterly through our projection of defaults.

Beginning in fiscal 2012, Union Federal began originating and disbursing Monogram-based education loans. During the first nine months of fiscal 2012, Union Federal disbursed Monogram-based loans in the aggregate principal amount of $31.7 million. These loans had a weighted average FICO score of 747 at origination, and 85.7% had co-signors. At March 31, 2012, 1.6% of these loans were delinquent and there were no defaults.

Our allowance for loan losses has been significantly impacted as the result of the deconsolidations of the NCSLT Trusts and the GATE Trusts. To estimate the allowance for loan losses on our newly originated Monogram-based loan portfolio, we utilized specific default and recovery rates projected for the Monogram-based loan portfolio over the 12-month confirmation period. Our default experience with this loan portfolio is limited by the seasoning of the portfolio, however, we have utilized our extensive historical database, knowledge and experience in projecting the level of defaults and recoveries of the Monogram-based loan portfolio utilizing, in part, historical results from our securitization trusts that we previously facilitated for loans that have similar credit characteristics to those in our Monogram-based loan portfolio. At March 31, 2012, there was $44 thousand of educations loans that were on non-accrual status and no education loans that had specific reserves. These loans were transferred by Union Federal to FMD in 2009, prior to our Monogram platform. Our policy is to have a specific allowance for loans greater than 180 days past due, but not yet charged-off. Due to the nature and extent of the Monogram-based education loans issued through Union Federal, none of these loans were greater than 120 days past due at March 31, 2012. At June 30, 2011, the allowance for loan losses included a specific allowance of $54.1 million and a general allowance of $396.1 million. The general allowance was for estimated projected defaults, net of recoveries, over the 12 months following our balance sheet date, which we refer to as the confirmation period. We may also apply qualitative adjustments in determining the allowance for loan losses.

Deposits for Participation Interest Accounts

A participation account serves as a first-loss reserve for defaults experienced in an originating lender’s Monogram-based loan program portfolio. We account for deposits for participation accounts in a manner similar to our service revenue receivables, and we carry such deposits at fair value on our balance sheet. We estimate fair value based on the net present value of cash flows into and out of the participation accounts, based on the education loans originated by participating lenders at our balance sheet date. We record changes in estimated fair value, if any, in non-interest revenues as part of administrative and other fees.

To the extent that the credit enhancement balance in participation accounts is in excess of contractually required amounts, as a result of declining loan balances, or if actual loan volumes or default experience are less than our funded amounts, we are eligible to receive periodic releases of funds, in addition to the monthly participation account administration fee, pursuant to the terms of the applicable loan program agreement. The timing and amount of releases from the participation accounts are uncertain and vary among the lenders.

During the first nine months of fiscal 2012, we received a net return of capital of $4.8 million primarily as the result of lower than expected education loan volumes for fiscal 2011, partially offset by incremental deposits for projected fiscal 2012 activity, effectively decreasing the balance of the participation accounts from $8.5 million at June 30, 2011 to $3.7 million at March 31, 2012.

Goodwill & Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible assets acquired. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability. In connection with our acquisition of TMS, we recorded other intangible assets related to the TMS customer list and tradename, each of which we amortize on a straight-line basis over 15 years, and technology, which we amortize on a straight-line basis over six years. We record amortization expense in general and administrative expenses in our statement of operations. We evaluated our goodwill for impairment on May 31, 2011, which is our impairment testing date, and concluded that the fair market value of the TMS reporting unit was approximately 9% in excess of our recorded book value and, therefore, was not impaired as of that date. In determining whether impairment exists, we assess impairment at the level of the TMS reporting unit as opposed to our Education Financing segment. There have been no indicators of impairment since that date.

Various assumptions go into our assessment of whether there is any goodwill impairment to be recorded. The more meaningful assumptions that contribute to the cash flow model used to determine the fair value of the TMS reporting unit include the net retention rate of new and existing clients, the penetration rate achieved in the overall customer portfolio, the level of interest income to be earned by TMS on funds received but not yet disbursed to client schools, including the forward LIBOR curve, the level of cash balances and the applicable hold periods, all of which impact net interest income, expense levels at TMS and the discount rate used to determine the present value of the cash flow streams. The baselines for all of these key variables were the actual results for each of these items for the year ended December 31, 2010 adjusted for changes to the business expected to be put in place under our ownership. TMS’ business would be adversely affected if any of the following were to occur: higher attrition rates than planned as a result of the competitive environment or our inability to provide products and services that are competitive in the marketplace, higher expense levels incurred to provide services to TMS clients, a lower interest rate environment, shorter hold periods or lower cash balances than contemplated, which would reduce our overall net interest income opportunity for cash that is held by us on behalf of our school clients, increases in equity returns required by investors and changes in our business model that may impact one or more of these variables.

During the nine months ended March 31, 2012, we recorded amortization expenses on our intangible assets of $1.5 million, which effectively reduced our balance of intangible assets from $23.0 million at June 30, 2011 to $21.5 million at March 31, 2012.

Off-Balance Sheet Arrangements

We have historically structured and facilitated the securitization of education loans for our clients through a series of special purpose trusts. The principal uses of the VIEs we facilitated have been to generate sources of liquidity for our clients and make available more funds to students and colleges. At March 31, 2012, our Securitization Trusts segment no longer included the previously consolidated GATE Trusts and NCSLT Trusts. See “—Executive Summary—Deconsolidation Events” and Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information on the deconsolidations of these trusts. In addition, we have determined that we are not currently required to consolidate under ASU 2009-17 any of the other VIEs that we have previously facilitated, and such unconsolidated VIEs are considered off-balance sheet arrangements. See Item 7 of Part II of our Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Estimates—Consolidation” for a discussion of our determination to not consolidate these VIEs.

Contractual Obligations

Our consolidated contractual obligations include commitments under operating leases. At March 31, 2012, there were no material changes from the contractual obligation related to our operating lease obligations disclosed under Item 7 of Part II of our Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Contractual Obligations.” While the lease obligations have not changed since June 30, 2011, we entered into a sub-lease for one of our properties during the quarter ended December 31, 2011, which will reduce our total obligation by $896 thousand. Further, there were no long-term borrowings at March 31, 2012 as a result of the deconsolidations of the NCSLT Trusts and GATE Trusts. See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

Consolidated Average Balance Sheet

The following table reflects our consolidated average balance sheet, net interest income and rates earned and paid on interest-earning assets and interest-bearing liabilities:


	Three months ended March 31,
	2012								2011
	Average balance			Interest		Rate			Average balance			Interest		Rate
	(dollars in thousands)
Assets:
Interest-bearing cash and cash equivalents	$	158,699		$	71		0.18	%	$	229,115		$	115		0.20	%
Short-term investments and federal funds sold		65,797			81		0.50			52,002			63		0.49
Interest-bearing restricted cash and guaranteed investment contracts		52,050			52		0.41			210,745			171		0.32
Investments available for sale		56,532			273		1.96			3,554			43		4.91
Education loans held to maturity⁽¹⁾		283,739			2,871		4.10			7,706,756			79,398		4.18
Mortgage loans held to maturity		8,153			70		3.48			9,692			99		4.14

Total interest-earning assets		624,970			3,418		2.22			8,211,864			79,889		3.95
Non-interest-bearing cash		1,174								2,583
Allowance for loan losses		(2,182	)							(474,308	)
Other assets		37,021								233,852

Total assets	$	660,983							$	7,973,991

Liabilities:
Time and savings account deposits	$	42,290		$	97		0.93	%	$	40,144		$	81		0.82	%��
Money market account deposits		28,793			59		0.83			15,169			39		1.04
Other interest-bearing liabilities		3,552			55		6.28			5,776			86		6.04
Long-term borrowings⁽²⁾		259,321			526		0.82			8,489,118			14,881		0.70

Total interest-bearing liabilities		333,956			737		0.90			8,550,207			15,087		0.69
Non-interest-bearing deposits		19								43
All other liabilities		98,110								195,284

Total liabilities		432,085								8,745,534

Stockholders’ equity (deficit)		228,898								(771,543	)

Total liabilities and stockholders’ equity (deficit)	$	660,983							$	7,973,991

Total interest-earning assets	$	624,970							$	8,211,864

Net interest income				$	2,681							$	64,802

Net interest margin							1.74	%							3.20	%

(1)	The average balance of the education loans held to maturity for the three months ended March 31, 2012 included the education loans and related interest income held by the GATE Trusts through the deconsolidation of these trusts as of March 31, 2012.

(2)	The average balance of long-term borrowings for the three months ended March 31, 2012 included the long-term borrowings and related interest expense of the GATE Trusts through the deconsolidation of these trusts as of March 31, 2012.


	Nine months ended March 31,
	2012								2011
	Average balance			Interest		Rate			Average balance			Interest		Rate
	(dollars in thousands)
Assets:
Interest-bearing cash and cash equivalents	$	183,992		$	201		0.15	%	$	274,950		$	452		0.22	%
Short-term investments and federal funds sold		69,137			190		0.37			52,070			212		0.54
Interest-bearing restricted cash and guaranteed investment contracts		163,126			544		0.44			187,349			341		0.24
Investments available for sale		32,231			514		2.12			3,859			141		4.87
Education loans held to maturity⁽¹⁾		3,762,913			113,498		4.02			7,796,030			251,437		4.30
Mortgage loans held to maturity		7,520			234		4.15			8,163			270		4.41

Total interest-earning assets		4,218,919			115,181		3.64			8,322,421			252,853		4.05
Non-interest-bearing cash		1,327								1,513
Allowance for loan losses		(248,862	)							(507,422	)
Other assets		412,109								348,380

Total assets	$	4,383,493							$	8,164,892

Liabilities:
Time and savings account deposits	$	41,714		$	290		0.93	%	$	51,156		$	381		0.99	%
Money market account deposits		25,964			186		0.95			20,712			100		0.64
Other interest-bearing liabilities		4,621			204		5.88			8,051			342		5.66
Long-term borrowings⁽²⁾		4,218,084			20,913		0.66			8,720,289			48,974		0.74

Total interest-bearing liabilities		4,290,383			21,593		0.67			8,800,208			49,797		0.74
Non-interest-bearing deposits		5								36
All other liabilities		502,292								102,254

Total liabilities		4,792,680								8,902,498
Stockholders’ deficit		(409,187	)							(737,606	)

Total liabilities and stockholders’ deficit	$	4,383,493							$	8,164,892

Total interest-earning assets	$	4,218,919							$	8,322,421

Net interest income				$	93,588							$	203,056

Net interest margin							2.96	%							3.25	%

(1)

The average balance of the education loans held to maturity for the nine months ended March 31, 2012 included the education loans and related interest income held by the NCSLT Trusts and the GATE Trusts through the deconsolidations of these trusts as of November 14, 2011 and March 31, 2012, respectively.

(2)	The average balance of long-term borrowings for the nine months ended March 31, 2012 included the long-term borrowings and related interest expense of the NCSLT Trusts and the GATE Trusts through the deconsolidations of these trusts as of November 14, 2011 and March 31, 2012, respectively.

Changes in net interest income between the periods presented in the tables above, particularly as they relate to education loans held to maturity and long-term borrowings, are almost entirely related to changes in the accounts of VIEs included in consolidation. Changes in restricted cash and guaranteed investment contracts are due both to changes in the accounts of entities consolidated and our acquisition of TMS. Other changes, such as investments available for sale, mortgage loans and deposit accounts, are related to Union Federal.

Volume/Rate Analysis—Interest Income and Expense

The following tables present certain information regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earnings assets and interest bearing liabilities, information is provided on changes attributable to volume and changes attributable to rate. The net change is the combined impact of rate and volume and allocated proportionally to the individual volume and rate changes.


	Change between periods for three months ended March 31,
	2012 - 2011
	Due to change in
	Volume			Rate			Net change
	(dollars in thousands)
Interest income:
Interest-bearing cash and cash equivalents	$	(32	)	$	(12	)	$	(44	)
Short-term investments and federal funds sold		17			1			18
Interest-bearing restricted cash and guaranteed investment contracts		(159	)		40			(119	)
Investments available for sale		256			(26	)		230
Education loans held to maturity		(75,109	)		(1,418	)		(76,527	)
Mortgage loans held to maturity		(13	)		(16	)		(29	)

Total interest income								(76,471	)

Interest expense:
Time and savings account deposits		5			11			16
Money market account deposits		28			(8	)		20
Other interest-bearing liabilities		(34	)		3			(31	)
Long-term borrowings		(16,693	)		2,338			(14,355	)

Total interest expense								(14,350	)

Net decrease in net interest income								(62,121	)


	Change between periods for nine months ended March 31,
	2012 - 2011
	Due to change in
	Volume			Rate			Net change
	(dollars in thousands)
Interest income:
Interest-bearing cash and cash equivalents	$	(99	)	$	(152	)	$	(251	)
Short-term investments and federal funds sold		47			(69	)		(22	)
Interest-bearing restricted cash and guaranteed investment contracts		(81	)		284			203
Investments available for sale		452			(79	)		373
Education loans held to maturity		(121,648	)		(16,291	)		(137,939	)
Mortgage loans held to maturity		(20	)		(16	)		(36	)

Total interest income								(137,672	)

Interest expense:
Time and savings account deposits		(66	)		(25	)		(91	)
Money market account deposits		38			48			86
Other interest-bearing liabilities		(151	)		13			(138	)
Long-term borrowings		(22,322	)		(5,739	)		(28,061	)

Total interest expense								(28,204	)

Net decrease in net interest income								(109,468	)

Liquidity and Capital Resources

Sources and Uses of Cash

The following is a discussion of sources and uses of cash on a GAAP basis as presented in our consolidated statements of cash flows included in our unaudited consolidated financial statements included in Part I of this quarterly report. We also use a non-GAAP financial metric, “net operating cash usage,” when evaluating our cash and liquidity position, discussed in detail under “—Non-GAAP Measure: Net Operating Cash Usage” below.

Net cash provided by operating activities for the nine months ended March 31, 2012 was $20.2 million, compared with net cash provided by operating activities of $212.8 million for the nine months ended March 31, 2011. The change of $192.6 million was primarily due to a decrease in distributions related to the TERI Reorganization of $136.4 million and receipt of $45.1 million in tax refunds received in fiscal 2011.

We anticipate continuing to receive fees related to loan origination and portfolio management services and fees related to Monogram-based loan programs. Starting January 1, 2011, we also began to receive fees related to the operations of TMS. We believe that our significant cash, cash equivalents and investments, coupled with management of our expenses and these fees, will be adequate to fund our operating losses in the short term as we seek to expand our client and revenue base over the short and long term. We are uncertain, however, as to whether we will be successful in selling our Monogram platform to additional lenders or how much loan volume may be originated by current or any additional lenders in the future.

Net cash provided by investing activities of $69.5 million for the nine months ended March 31, 2012 was primarily due to principal cash receipts on education loans of $116.0 million, partially offset by $20.0 million in net purchases of short-term investments and $59.6 million in net purchases of investments available for sale. Cash provided by investing activities of $248.7 million for the nine months ended March 31, 2011 was primarily due to $252.2 million in principal collections on education loans and a net increase of $44.2 million in restricted cash, partially offset by the net $47.0 million of cash used for our acquisition of the assets, liabilities and operations of TMS.

Net cash used in financing activities was $166.5 million for the nine months ended March 31, 2012, primarily reflecting payments on long-term borrowings by securitization trusts of $179.7 million, partially offset by an increase in deposit volumes of $13.3 million at Union Federal. Net cash used in financing activities was $563.9 million for the nine months ended March 31, 2011, primarily reflecting principal paydowns on long-term borrowings by securitization trusts of $510.4 million and a decrease of deposit volumes of $51.5 million, particularly in time and online money market accounts, as a result of a planned reduction in deposit liabilities at Union Federal prior to our decision to retain the bank.

The OCC 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 OCC 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 OCC 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 OCC 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 OCC or a condition imposed by an OCC agreement. Under the Federal Deposit Insurance Corporation Improvement Act, or FDICIA, a Federal Deposit Insurance Corporation, or 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 FDICIA).

Sources and Uses of Liquidity

We expect to fund our short-term liquidity requirements primarily through cash and cash equivalents and revenues from operations, and we expect to fund our long-term liquidity requirements through revenues from operations and issuances of common stock, promissory notes or other securities. We expect to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, or if we were to enter into a strategic arrangement with another company, we may need to sell additional equity or debt securities. Any sale of additional equity or convertible debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to further delay, reduce the scope of, or eliminate one or more aspects of our operating activities, which could harm our business.

Our liquidity and capital funding requirements may depend on a number of factors, including:

•

Cash necessary to fund our operations, including the operations of Union Federal and TMS, and capital expenditures;

•

The extent to which our services and products, including Monogram-based loan programs and TMS offerings, gain market share and remain competitive at pricing favorable to us;

•

The results of the audit conducted by the IRS of our tax returns for fiscal 2007 through fiscal 2010, which could result in challenges to tax refunds previously received in the amount of $176.6 million in connection with our sale of the Trust Certificate;

•

The profitability of our Monogram platform, which is dependent on, among other things, the amount of loan volume our lender clients are able to generate and the costs incurred to acquire such volume;

•

The extent to which we fund credit enhancement arrangements or contribute to credit facility providers in connection with our Monogram platform;

•

The regulatory capital requirements applicable to Union Federal (see “—Support of Subsidiary Bank” below for additional information) as well as any capital contributions FMD may make to Union Federal;

•

The resolution of any appeal of the ATB’s order in the cases pertaining to our Massachusetts state income tax returns for fiscal 2004 through fiscal 2006, which could also affect our state tax liabilities in subsequent tax years through fiscal 2009; and

•

The timing, size, structure and terms of any securitization or other funding transactions that we structure, as well as the composition of the loan pool being securitized.

Liquidity is required for capital expenditures, working capital, business development expenses, income tax payments, costs associated with alternative financing transactions, general corporate expenses, capital provided in connection with Monogram-based loan program credit enhancement arrangements or capital market transactions and maintaining the regulatory capital of Union Federal. In order to preserve capital and maximize liquidity in challenging market conditions, we have taken certain broad measures to reduce the

risk related to education loans on our balance sheet, to change our fee structure and add new products and to reduce our overhead expenses. See Item 7 of Part II of our Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Business Trends, Uncertainties and Outlook” for an expanded description of actions taken by us since fiscal 2008 in response to the economic challenges facing us. In addition, our Board of Directors has eliminated regular quarterly cash dividends for the foreseeable future.

Deposits

Union Federal has liabilities for retail time, money market and savings deposits accounts. The following table summarizes Union Federal’s time deposits greater than $100 thousand by maturity at March 31, 2012:


	(dollars in thousands)
Within three months	$	4,290
Three to six months		4,668
Six months to twelve months		4,798
Greater than twelve months		1,602

Total time deposits >$100 thousand	$	15,358

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

Restricted Funds Due to Clients

As part of our TMS operations, we collect tuition payments from students or their families on behalf of educational institutions. In addition, we have cash on our balance sheet that represents recoveries on defaulted education loans due to our portfolio management clients (primarily securitization trusts facilitated by us) and undisbursed education loan proceeds for our loan origination clients. These cash balances are recorded as restricted cash on our balance sheet because they are deposited in segregated depository accounts and are not available for our use. We record an equal and offsetting liability in our balance sheet representing tuition payments due to our TMS clients, recoveries on defaults due to securitization trusts and education loan proceeds due to students or schools.

Long-term Borrowings

Through the securitization process, the securitization trusts facilitated by us issued debt instruments to finance the purchase of education loans obtained from originating lenders or their assignees. The debt securities issued are obligations of the securitization trusts. Holders of these debt securities generally have recourse only to the assets of the particular securitization trust that issued the debt and not to any other trust, FMD, its operating subsidiaries or the originating lenders or their assignees. At March 31, 2012, there were no outstanding long-term borrowings as a result of the deconsolidations of the NCSLT Trusts and GATE Trusts as of November 14, 2011 and March 31, 2012, respectively.

Other Liabilities

At March 31, 2012, through Union Federal we had $67.0 million available for borrowing under an unused line of credit with the Federal Home Loan Bank of Boston. There were no borrowings outstanding under this line of credit at March 31, 2012 or June 30, 2011.

Support of Subsidiary Bank

Union Federal is a federally-chartered thrift that is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible discretionary actions by the regulators that, if undertaken, could have a direct material effect on our liquidity. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union Federal’s assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classifications, however, are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Union Federal’s equity capital was $16.0 million at March 31, 2012, up from $11.7 million at June 30, 2011, due to a $4.7 million capital contribution paid to Union Federal by FMD during the nine months ended March 31, 2012. Quantitative measures established by regulation to ensure capital adequacy require Union Federal to maintain minimum amounts and ratios of total capital and Tier 1 capital to risk-weighted assets (each as defined in the regulations). As of March 31, 2012 and June 30, 2011, Union Federal was well capitalized under the regulatory framework for prompt corrective action.

In March 2010, the FMD Board of Directors adopted resolutions required by the U.S. Office of Thrift Supervision, or OTS, undertaking to support the implementation by Union Federal of its business plan, so long as Union Federal is owned or controlled by FMD, and to notify the OTS in advance of any distribution to our stockholders in excess of $1.0 million per fiscal quarter and any incurrence or guarantee of debt in excess of $5.0 million.

Effective July 21, 2011, FMD is subject to regulation, supervision and examination by the Federal Reserve as a savings and loan holding company, and Union Federal is subject to regulation, supervision and examination by the OCC. The resolutions formerly required by the OTS continue to be applied by the Federal Reserve.

Union Federal’s regulatory capital ratios were as follows as of the dates below:


	Regulatory Guidelines
	Minimum			Well Capitalized			March 31, 2012			June 30, 2011
Capital ratios:
Tier 1 risk-based capital		4.0	%		6.0	%		32.1	%		223.9	%
Total risk-based capital		8.0			10.0			33.0			225.2
Tier 1 (core) capital		4.0			5.0			11.8			15.5

Union Federal began originating education loans during the first quarter of fiscal 2012 and converted approximately $62.6 million of its cash and cash equivalents into U.S. federal agency mortgage-backed securities, which had the effect of decreasing its regulatory risk-based capital ratios at March 31, 2012 compared to June 30, 2011. We expect further declines in Union Federal’s risk-based regulatory capital ratios in the future as it continues to originate education loans and otherwise implements its business plan. FMD expects to make additional capital contributions to Union Federal in the future, as necessary to maintain adequate regulatory capital.

Non-GAAP Measure: Net Operating Cash Usage

In addition to providing financial measurements based on GAAP, we present below an additional financial metric that we refer to as “net operating cash usage” that was not prepared in accordance with GAAP. We define “net operating cash usage” to mean approximate cash required to fund our operations. “Net operating cash usage” is not directly comparable to our consolidated statement of cash flows prepared in accordance with GAAP. Legislative and regulatory guidance discourages the use of, and emphasis on, non-GAAP financial metrics and requires companies to explain why a non-GAAP financial metric is relevant to management and investors.

Management and our Board of Directors use this non-GAAP financial metric, in addition to GAAP financial measures, as a basis for measuring and forecasting our core operating performance and comparing such performance to that of prior periods. The non-GAAP financial measure is also used by us in our financial and operational decision-making.

We believe that the inclusion of this non-GAAP financial metric helps investors to gain a better understanding of our quarterly and annual results, including our non-interest expenses and quarter-end liquidity position, particularly in light of dislocations in the private education loan industry and the capital markets that have affected us. In addition, our presentation of this non-GAAP financial measure is consistent with how we expect that analysts may calculate their estimates of our financial results in their research reports and with how clients, investors, analysts and financial news media may evaluate our financial results.

There are limitations associated with reliance on this non-GAAP financial measure because any such measure is specific to our operations and financial performance, which makes comparisons with other companies’ financial results more challenging. Nevertheless by providing both GAAP and non-GAAP financial measures, we believe that investors are able to compare our GAAP results to those of other companies, while also gaining a better understanding of our operating performance, consistent with management’s evaluation.

“Net operating cash usage” should be considered in addition to, and not as a substitute for, or superior to, financial information prepared in accordance with GAAP. “Net operating cash usage” relates solely to our Education Financing segment, and excludes the effects of income taxes, acquisitions or divestitures, participation account net fundings and changes in other assets and other liabilities that are solely related to short-term timing of cash payments or receipts.

In accordance with the requirements of Regulation G promulgated by the SEC, the table below presents the most directly comparable GAAP financial measure, income (loss) before income taxes, for the three and nine months ended March 31, 2012 and 2011, and reconciles the GAAP measure to the comparable non-GAAP financial metric:


	Three months ended March 31,						Nine months ended March 31,
	2012			2011			2012			2011
	(dollars in thousands)
Income (loss) before income taxes	$	10,374		$	(39,408	)	$	1,105,277		$	(135,774	)
(Income) loss and related eliminations attributable to:
NCSLT Trusts		—			(597	)		(1,125,036	)		80,316
GATE Trusts		(2,275	)		(1,660	)		(5,190	)		(4,906	)
Eliminations		(5,851	)		(130	)		(5,897	)		435

Income (loss) before income taxes—Education Financing		2,248			(41,795	)		(30,846	)		(59,929	)
Adjustments to income (loss) before income taxes—Education Financing:
Trust update (income) losses—additional structural advisory fees and residuals:
Securitization Trusts segment		(4,043	)		21,646			(4,956	)		16,552
Off-balance sheet VIEs		1,589			(233	)		4,486			102
Asset servicing fees		—			4,959			268			4,236
Non-cash gain from TERI settlements		—			—			—			(5,021	)
Gain on sale of trust administrator		(12,571	)		—			(12,571	)		—
Depreciation and amortization		1,138			2,126			3,635			6,573
Stock-based compensation expense		1,081			1,275			3,603			3,526
TMS deferred revenue		(1,601	)		558			(3,694	)		558
Cash receipts from education loans, net of interest income accruals		146			118			568			413
Cash receipts from trust distributions		520			32			575			460
Other		(1,031	)		(1,778	)		(2,669	)		(4,511	)

Non-GAAP net operating cash usage	$	(12,524	)	$	(13,092	)	$	(41,601	)	$	(37,041	)

“Net operating cash usage” for the third quarter of fiscal 2012 decreased by $568 thousand compared to the third quarter of fiscal 2011. “Net operating cash usage” for the first nine months of fiscal 2012 increased by $4.6 million compared to the first nine months of fiscal 2011 as a result of $6.8 million in increased marketing expenses related to loan acquisition and the initial brand development of Union Federal’s Monogram-based loan programs incurred during the nine months ended March 31, 2012, coupled with a $1.6 million decrease in cash distributions received under TERI’s confirmed plan of reorganization as compared to the nine months ended March 31, 2011.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is separately managed between our Education Financing segment and our Securitization Trusts segment. For a description of the activities that constitute our Education Financing segment and our Securitization Trusts segment, see Note 11, “Segment Reporting,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report.

Education Financing

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

Interest Rate Risk

The interest rate characteristics of our Education Financing segment’s interest-bearing assets are driven by the nature, volume and duration of our interest-bearing liabilities. Generally, our interest-bearing liabilities are either variable-rate instruments or are instruments of a short duration. Demand deposits are generally subject to daily re-pricing, and time deposits are generally re-priced at maturity.

Approximately 12.2% of our fixed-rate customer deposits at Union Federal have maturities in excess of 12 months from March 31, 2012. Approximately 82.0% of the deposits have variable interest rates or fixed interest rates with maturities of six months or less from March 31, 2012. As a result of our decision in the third quarter of fiscal 2011 to retain ownership of Union Federal, we have increased the volume of customer deposits, begun lengthening the average maturities of our customer deposits and converted a portion of Union Federal’s cash and cash equivalents into higher earning, longer maturity assets including by means of origination and funding of Monogram-based education loans and purchasing additional investment securities. We expect each of these initiatives to continue in the short-term. Total deposits at Union Federal had a weighted average life of approximately 217 days at March 31, 2012.

Deposit pricing is subject to weekly examination by a committee of senior managers from Union Federal and FMD’s Finance and Governance, Risk and Compliance Departments. The committee considers competitors’ pricing, inflows and outflows of deposit balances and Union Federal’s funding requirements to make pricing decisions in order to attain the desired volume of deposits in each given duration and product type.

The frequent re-pricing of our liabilities drives our investment decisions. Approximately 50.0% of Union Federal’s mortgage loans and all of its education loans had variable interest rates at March 31, 2012. Although these variable interest rate assets generally reprice more frequently and have longer duration than our deposits, interest rate risk with respect to net interest revenues is mitigated by similarities in the interest rate and market risks underlying loan and deposit pricing. Cash is primarily invested in money market funds, federal funds sold, time deposits with original maturities of less than one year and U.S. federal agency mortgage-backed securities.

We use current market interest rates and our expectations of future interest rates to estimate fair value of service revenue receivables. We believe that this approach adequately reflects the interest rate risk inherent in those estimates.

Credit Risk

In our Education Financing segment, we manage cash, cash equivalents and investment assets conservatively. The primary objective of our investment policy is the preservation of capital. Therefore, cash, cash equivalents, short-term investments and investments available for sale are invested in deposits and money market funds at highly-rated institutions or in U.S. government agency mortgage-backed securities.

Union Federal offers conventional conforming and non-conforming fixed and variable-rate first and second residential mortgage loans, as well as commercial real estate loans. We base our loan underwriting criteria primarily on credit score, consumer credit file information and collateral characteristics. Union Federal originates mortgage loans that have been underwritten to be saleable to institutional investors. Union Federal does not offer high loan-to-value second mortgages, option adjustable-rate mortgages or sub-prime mortgage products. Union Federal bases its underwriting criteria for education loans on our proprietary Monogram-based risk scoring tool, and education loans are underwritten to be held to maturity.

Our assumptions regarding defaults and recoveries of securitized loans both on- and off-balance sheet affect the expected timing of cash payments to us in respect of additional structural advisory fees and residual cash flows and our estimates of their fair value. We believe that we have adequately addressed credit risks in our cash flow models.

Securitization Trusts

Our consolidated balance sheet includes portfolios of education loans, restricted cash and guaranteed investment contracts and long-term borrowings that subject our results of operations to market risk. Our results of operations include interest income associated with securitized assets, a provision for loan losses and interest expense associated with the debt issued by the securitization trusts to third parties. Many aspects of market risk are mitigated by the design of the securitization trusts established in the applicable indentures. Market risk is largely borne by the holders of the debt or the third-party owner of the residual interests of the securitization trusts. The net deficit of the consolidated securitization trusts included in our accumulated deficit is a non-cash adjustment that will reverse over the lives of these trusts or at such time as our variable interest in these trusts are fully satisfied or eliminated.

As a result of the deconsolidations of the NCSLT Trusts and the GATE Trusts effective November 14, 2011 and March 31, 2012, respectively, we have deconsolidated all of the securitization trusts previously required to be consolidated under the accounting rules adopted on July 1, 2010, and we do not expect to maintain a Securitization Trusts segment in future periods. See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information. Consequently, we expect that in future periods we will not be subject to the interest rate and credit risks described below with respect to our Securitization Trusts segment.

Interest Rate Risk

We do not have the ability to actively manage interest rate risk for the consolidated securitization trusts. Interest rate risk is somewhat mitigated by the design of the trusts at the time of securitization. Generally, the securitization trusts financed the purchase of education loans with long-term borrowings that have the same underlying index type and index reset frequency as the purchased loans, or use an index that would behave similarly to that of the purchased loans. The majority of the education loans included in our Securitization Trusts segment have variable rates based on the one-month LIBOR, as do our long-term borrowings. The securitization trusts remain subject to interest rate risk, particularly with respect to certain fixed-rate interest-only ABS, to the extent that the interest rate on outstanding principal on performing education loans does not match the interest expenses on outstanding debt, but such risks will ultimately be borne by the holders of the debt or the third-party owners of the trusts.

Credit Risk

Our consolidated balance sheet includes the restricted cash and guaranteed investment contracts of the consolidated securitization trusts. Credit risk related to cash and investments is managed through the design of the securitization trust. Cash may only be invested in allowable investments established in the applicable trust indentures, including U.S. Treasury obligations, or deposits, money market accounts or guaranteed investment contracts of highly-rated institutions. Trust administration performed by our Education Financing segment includes monitoring the placement of cash and investments in allowable investments established in the applicable indenture.

With respect to the education loans included in our Securitization Trusts segment, default prevention and collections management is performed on the securitization trusts’ behalf by FMER in accordance with the applicable trust administration and special servicing agreements. Our portfolio management services for the securitization trusts, for which we receive a fee, puts us in a position to influence activities impacting the economic performance of the trusts, which, in turn, is a factor in our determination to consolidate these trusts. We employ risk analytics to monitor and manage the performance of the portfolios over time. As part of this service offering, we monitor portfolio performance metrics, manage the performance of third-party vendors and interface with rating agencies. Our infrastructure provides us with data that enables comprehensive analytics, and we are able to customize collections strategies as needed to optimize loan performance. The financial results of FMER are included in our Education Financing segment.

CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred during the fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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


	Three months ended March 31,						Nine months ended March 31,
	2012			2011			2012			2011
Revenues:
Net interest income:
Interest income	$	3,418		$	79,889		$	115,181		$	252,853
Interest expense		(737	)		(15,087	)		(21,593	)		(49,797	)

Net interest income		2,681			64,802			93,588			203,056
Provision for loan losses		(81	)		(73,755	)		(188,756	)		(305,956	)

Net interest income (loss) after provision for loan losses		2,600			(8,953	)		(95,168	)		(102,900	)
Non-interest revenues:
Tuition payment processing fees		7,697			7,055			22,172			7,055
Additional structural advisory fees, asset servicing fees and residuals—trust updates		(1,589	)		(4,726	)		(4,754	)		(4,338	)
Other administrative fees		3,962			3,809			8,515			8,059

Total non-interest revenues		10,070			6,138			25,933			10,776

Total revenues		12,670			(2,815	)		(69,235	)		(92,124	)
Non-interest expenses:
Compensation and benefit		11,645			11,615			33,321			27,640
General and administrative		14,087			24,996			61,610			66,709

Total non-interest expenses		25,732			36,611			94,931			94,349

Loss from operations		(13,062	)		(39,426	)		(164,166	)		(186,473	)
Other income:
Gain from deconsolidations of trusts		10,865			—			1,248,582			—
Gain on sale of trust administrator		12,571			—			12,571			—
Proceeds from TERI settlement		—			18			8,290			50,699

Total other income		23,436			18			1,269,443			50,699

Income (loss) before income taxes		10,374			(39,408	)		1,105,277			(135,774	)
Income tax expense (benefit)		516			(82	)		(10,891	)		1,957

Net income (loss)	$	9,858		$	(39,326	)	$	1,116,168		$	(137,731	)

Net income (loss) per common share:
Basic	$	0.09		$	(0.39	)	$	10.12		$	(1.37	)
Diluted		0.09			(0.39	)		10.10			(1.37	)
Weighted-average common shares outstanding:
Basic		101,554			100,834			101,459			100,809
Diluted		110,573			100,834			110,499			100,809

See accompanying notes to unaudited consolidated financial statements.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

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


	March 31, 2012			June 30, 2011
ASSETS
Cash and cash equivalents	$	140,525		$	217,367
Short-term investments, at cost		70,000			50,000
Restricted cash and investments, at cost		45,955			252,396
Investments available for sale, at fair value		70,841			11,019
Education loans held to maturity, net of allowance of $1,276 and $450,150		31,054			6,946,169
Mortgage loans held to maturity, net of allowance of $814 and $882		7,955			6,417
Interest receivable		621			66,104
Deposits for participation interest accounts, at fair value		3,726			8,512
Service revenue receivables, at fair value		16,238			8,192
Goodwill		19,548			19,548
Intangible assets, net		21,454			23,040
Other assets		13,370			44,018

Total assets⁽¹⁾	$	441,287		$	7,652,782

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities:
Deposits	$	73,783		$	60,492
Restricted funds due to clients		85,357			121,888
Accounts payable, accrued expenses and other liabilities		17,451			36,391
Income taxes payable		23,703			39,979
Net deferred tax liability		1,039			831
Long-term borrowings		—			8,273,140

Total liabilities⁽¹⁾		201,333			8,532,721
Commitments and contingencies:
Stockholders’ equity (deficit):
Preferred stock, par value $0.01 per share; 20,000 shares authorized; 133 shares issued and outstanding		1			1
Common stock, par value $0.01 per share; 250,000 shares authorized; 110,018 and 109,717 shares issued; 101,558 and 101,318 shares outstanding		1,100			1,097
Additional paid-in capital		451,689			448,088
Accumulated deficit		(26,687	)		(1,142,855	)
Treasury stock, 8,460 and 8,399 shares held, at cost		(186,629	)		(186,551	)
Accumulated other comprehensive income		480			281

Total stockholders’ equity (deficit)		239,954			(879,939	)

Total liabilities and stockholders’ equity (deficit)	$	441,287		$	7,652,782

(1)

Our consolidated assets at June 30, 2011 included total assets of $7,168,168 of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs. These assets included restricted cash and guaranteed investment contracts of $127,709, education loans held to maturity, net of allowance for loan losses, of $6,946,169, interest receivable of $66,031, and other assets of $28,709. Our consolidated liabilities at June 30, 2011 included liabilities of certain VIEs for which the VIE creditors do not have recourse to FMD. These liabilities included long-term borrowings of $8,273,140 and accounts payable and accrued expenses of $11,682.

See accompanying notes to unaudited consolidated financial statements.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(dollars and shares in thousands)


	Non-voting convertible preferred stock issued				Common stock										Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income			Total stockholders’ equity (deficit)
	Non-voting convertible preferred stock issued				Issued				In treasury
	Shares		Amount		Shares		Amount		Shares			Amount
Balance at June 30, 2010		133	$	1		108,975	$	1,090		(8,239	)	$	(186,218	)	$	443,290		$	(41,174	)	$	263		$	217,252
Cumulative effect of a change in accounting principle, net of tax		—		—		—		—		—			—			—			(880,120	)		—			(880,120	)
Comprehensive loss:
Net loss		—		—		—		—		—			—			—			(137,731	)		—			(137,731	)
Accumulated other comprehensive loss		—		—		—		—		—			—			—			—			(60	)		(60	)

Total comprehensive loss		—		—		—		—		—			—			—			(137,731	)		(60	)		(137,791	)
Net stock issuance from vesting of stock units		—		—		119		1		(16	)		(36	)		(1	)		—			—			(36	)
Stock-based compensation		—		—		—		—		—			—			3,526			—			—			3,526
Tax expense from stock-based compensation		—		—		—		—		—			—			(553	)		—			—			(553	)

Balance at March 31, 2011		133	$	1		109,094	$	1,091		(8,255	)	$	(186,254	)	$	446,262		$	(1,059,025	)	$	203		$	(797,722	)


Balance at June 30, 2011		133	$	1		109,717	$	1,097		(8,399	)	$	(186,551	)	$	448,088		$	(1,142,855	)	$	281		$	(879,939	)
Comprehensive loss:
Net income		—		—		—		—		—			—			—			1,116,168			—			1,116,168
Accumulated other comprehensive income		—		—		—		—		—			—			—			—			199			199

Total comprehensive income		—		—		—		—		—			—			—			1,116,168			199			1,116,367
Net stock issuance from vesting of stock units		—		—		301		3		(61	)		(78	)		(2	)		—			—			(77	)
Stock-based compensation		—		—		—		—		—			—			3,603			—			—			3,603

Balance at March 31, 2012		133	$	1		110,018	$	1,100		(8,460	)	$	(186,629	)	$	451,689		$	(26,687	)	$	480		$	239,954

See accompanying notes to unaudited consolidated financial statements.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)


	Nine months ended March 31,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	1,116,168		$	(137,731	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities net of effects of the deconsolidations of the trusts and acquisition:
Provision for loan losses		188,756			305,956
Amortization of long-term borrowings, net of issuance costs		(22,349	)		(64,013	)
Net amortization of loan acquisition costs and origination fees		12,910			23,755
Non-cash gain from the deconsolidations of trusts		(1,248,582	)		—
Non-cash gain from TERI settlements		—			(16,774	)
Depreciation and amortization expense		3,635			6,573
Deferred income tax (benefit) expense		208			(601	)
Stock-based compensation		3,603			3,526
Service revenue receivable sale proceeds and distributions		13,575			460
Gain on sale of trust administrator		(12,571	)		—
TERI pledged account distributions		—			136,446
Changes in assets/liabilities:
Interest receivable		(24,347	)		(86,007	)
Deposits for participation interest accounts		4,786			(8,505	)
Service revenue receivables		4,373			4,338
Other assets		(3,625	)		245
Accounts payable, accrued expenses and other liabilities		(81	)		(2,889	)
Income taxes payable		(16,276	)		48,001

Net cash provided by operating activities		20,183			212,780
Cash flows from investing activities net of effects of the deconsolidations of trusts and acquisition:
Net cash paid for acquisition of TMS		—			(46,959	)
Proceeds from sale of trust administrator		13,693			—
Purchases of short-term investments		(70,000	)		—
Proceeds from maturities of short-term investments		50,000			—
Net decrease in education loans held to maturity		115,996			252,241
Net decrease in restricted cash and investments		61,601			96,489
Net decrease in restricted funds due to clients		(40,363	)		(52,291	)
Purchases of investments available for sale		(62,555	)		—
Principal repayments from investments available for sale		2,932			852
Net change in mortgage loans held to maturity		(1,541	)		926
Purchases of property and equipment		(295	)		(2,523	)

Net cash provided by investing activities		69,468			248,735
Cash flows from financing activities net of effects of the deconsolidations of trusts and acquisition:
Net increase (decrease) in deposits		13,291			(51,474	)
Payments on capital lease obligations		—			(1,396	)
Payments on long-term borrowings		(179,706	)		(510,394	)
Tax expense from stock-based compensation		—			(553	)
Repurchases of common stock		(78	)		(36	)

Net cash (used in) financing activities		(166,493	)		(563,853	)

Net decrease in cash and cash equivalents		(76,842	)		(102,338	)
Cash and cash equivalents, beginning of period		217,367			331,047

Cash and cash equivalents, end of period		140,525			228,709

Supplemental disclosures of cash flow information:
Interest paid	$	37,190		$	112,399
Income tax paid		5,177			177
Supplemental disclosure of non-cash investing and financing activities:
Interest receivable capitalized to loan principal	$	36,061		$	115,410
Extinguishment of TERI note payable		—			3,101

See accompanying notes to unaudited consolidated financial statements.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business

Overview

Unless otherwise indicated, or unless the context of the discussion requires otherwise, all references in these notes to “we”, “us”, “our” and similar references mean The First Marblehead Corporation, its subsidiaries and consolidated variable interest entities (VIEs) on a consolidated basis. All references in these notes to “First Marblehead” and “FMD” mean The First Marblehead Corporation on a stand-alone basis. We use the term “education loans” to refer to private education loans, which are not guaranteed by the federal government. Our fiscal year ends on June 30, and we identify our fiscal years by the calendar years in which they end. For example, we refer to the fiscal year ending June 30, 2012 as “fiscal 2012.”

In fiscal 2011, we began offering a fully integrated suite of services through our Monogram^® loan product service platform (Monogram platform), as well as certain services on a stand-alone, fee-for-service basis. In fiscal 2011, we also began offering outsourced tuition planning, tuition billing and payment technology services for universities, colleges and secondary schools through our subsidiary Tuition Management Systems LLC (TMS). We acquired TMS from KeyBank National Association on December 31, 2010. Our subsidiary Union Federal Savings Bank (Union Federal^SM) offers retail banking products, including education loans, residential and commercial mortgage loans, time and savings deposits and money market demand accounts.

•

Partnered lending—We provide customized Monogram-based education loan programs for lenders who wish to hold originated portfolios to maturity. We are paid for our origination and marketing services at the time approved education loans are disbursed and receive monthly revenues for portfolio management services, credit enhancement and administrative services throughout the life of the loan. We provide credit enhancements by funding participation interest accounts, which we refer to as participation accounts, or, in the case of Union Federal, deposit accounts, to serve as a first loss reserve for defaulted program loans. As consideration for funding participation accounts, we are entitled to receive a share of the interest generated on the loans.

•

Upon our 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), we consolidated 14 securitization trusts that we facilitated during fiscal 2004 through fiscal 2008. The education loans purchased by certain of the securitization trusts (Trusts) were initially subject to a default repayment guaranty by The Education Resources Institute, Inc. (TERI), while the education loans purchased by other securitization trusts, which we refer to as the NCT Trusts, were, with limited exceptions, not TERI-guaranteed. Of the 14

securitization trusts consolidated on July 1, 2010, 11 were Trusts and 3 were NCT Trusts. We refer to the consolidated Trusts as the NCSLT Trusts and the consolidated NCT Trusts as the GATE Trusts. The NCSLT Trusts and GATE Trusts were deconsolidated as of November 14, 2011 and March 31, 2012, respectively, as we no longer were the primary beneficiary of these trusts. We recorded the impact of these deconsolidations principally in our Securitization Trusts segment. See Note 3, “Deconsolidations of Securitization Trusts,” for additional information.

Basis of Financial Reporting

The accompanying unaudited consolidated financial statements as of March 31, 2012 and for the three and nine months ended March 31, 2012 and 2011 have been prepared in accordance with U.S. generally accepted accounting principles (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, the unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of the results of the fiscal year ending June 30, 2012. The unaudited consolidated financial statements should be read in conjunction with our annual report on Form 10-K for fiscal 2011 (Annual Report) filed with the Securities and Exchange Commission on September 8, 2011.

Use of Estimates

The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of our financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We base our estimates, assumptions 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, assumptions 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, assumptions and judgments that are particularly susceptible to change relate to:

•

Whether or not to consolidate the financial results of a VIE;

•

Allowance for loan losses and the related provision for loan losses;

•

Recognition of interest income on delinquent and defaulted education loans;

•

Determination of goodwill and intangible asset impairment; and

•

Income taxes relating to uncertain tax positions accrued for under Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income Taxes (now incorporated into Accounting Standards Codification (ASC) 740, Income Taxes).

(2) Summary of Significant Accounting Policies

(a) Consolidation

Our consolidated financial statements include the accounts of FMD, its subsidiaries and certain VIEs, after eliminating intercompany accounts and transactions.

Effective July 1, 2010, we adopted ASU 2009-16 and ASU 2009-17 which amended the accounting for the consolidation of VIEs. The new guidance requires that we evaluate whether to consolidate a VIE on an ongoing basis, as opposed to a trigger-based quantitative assessment under previous guidance. As a result of the new guidance, on July 1, 2010, we consolidated 14 securitization trusts that were facilitated by us because we determined that our services related to default prevention and collections management, for which we can only be removed for cause, combined with the variability that we absorbed as part of our securitization fee structure, made us the primary beneficiary of those trusts. In addition, we deconsolidated our indirect subsidiary, UFSB Private Loan SPV, LLC (UFSB-SPV), because we determined that we did not have the power to direct the activities that most significantly impact UFSB-SPV’s economic performance. The 11 previously consolidated NCSLT Trusts and the 3 previously consolidated GATE Trusts were deconsolidated as of November 14, 2011 and March 31, 2012, respectively, as we no longer were the primary beneficiary of these trusts. We recorded the impact of the deconsolidation principally in our Securitization Trusts segment. See Note 3, “Deconsolidations of Securitization Trusts,” for additional information.

We continually reassess our involvement with each VIE in which we have an interest, both on- and off-balance sheet, and our determination of whether consolidation or deconsolidation of a VIE is appropriate. We monitor matters related to our ability to control

economic performance, such as contractual changes in the services we provide, the extent of our ownership and the rights of third parties to terminate us as a service provider. In addition, we monitor the financial performance of each VIE for indications that we may or may not have the right to absorb benefits or the obligation to absorb losses associated with variability in the financial performance of the VIE that could potentially be significant to that VIE. If, for any reason, we determine that we can no longer be considered the primary beneficiary, we would be required to deconsolidate the VIE. Deconsolidation of a VIE is accounted for in the same manner as the sale of a subsidiary, with a gain or loss recorded in our statement of operations to the extent that proceeds, if any, are more or less than the net assets of the VIE.

We also monitor our involvement with 18 other off-balance sheet VIEs for which we have 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 financial 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. Our determination to consolidate or deconsolidate a VIE may lead to increased volatility in our financial results and make comparisons of results between time periods challenging.

(b) Cash Equivalents

We consider highly liquid debt instruments with original maturities of three months or less on the date of purchase and investments in money market funds to be cash equivalents. Cash equivalents are carried at cost, which also approximates fair value.

(c) Restricted Cash and Restricted Funds Due to Clients

As part of our operations, we have cash that is recorded as restricted cash on our balance sheet because it is deposited in segregated depository accounts and is not available for our use. The consolidated securitization trusts held cash and guaranteed investment contracts that are restricted to making payments for trust expenses and principal and interest payments on the debt of the particular trust holding such cash and guaranteed investment contracts, and which are not available to any other securitization trust, FMD or any other subsidiary of FMD. The investment of cash held by each securitization trust is subject to the investment guidelines established in the applicable trust indenture. TMS collects tuition payments from students or their families on behalf of educational institutions and will at times deposit a portion of this cash in a deposit account at Union Federal. Such deposit is governed by a trust agreement between TMS and a third party trustee. This cash is subject to the capital requirements and other laws, regulations and restrictions applicable to banks regulated by the Office of the Comptroller of the Currency (OCC) but it is not otherwise restricted, and, accordingly, is not included in restricted cash and investments in our consolidated financial statements. Restricted cash held by our other subsidiaries relates to recoveries on defaulted education loans collected on behalf of clients as well as undistributed loan proceeds. We record an equal and offsetting liability in our balance sheet representing tuition payments due to our TMS clients, recoveries on defaults due to securitization trusts and education loan proceeds due to schools.

(d) Investments

We classify investments with original maturities greater than three months and remaining maturities of less than one year at the date of purchase as short-term investments and carry such short-term investments at cost, which approximates fair value.

We classify investments in marketable debt securities as available-for-sale, trading or held-to-maturity. Management determines the appropriate classification of securities at the time of purchase. We carry available-for-sale investments 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 our statement of operations. We classify investments as held-to-maturity when we have both the ability and intent to hold the securities until maturity. We carry held-to-maturity investments at amortized cost. We currently do not own a held-to-maturity or trading securities portfolio.

When the fair value of an investment security is less than its amortized cost basis, we assess whether the decline in value is other than temporary. Management considers various factors in making these determinations including the length of time and extent to which the fair value has been less than amortized cost, projected future cash flows, creditworthiness, and near-term prospects of issuers. If we determine that a decline in fair value is other-than-temporary and it is more likely than not that we will be required to sell the security before recovery of its amortized cost, the entire difference between the amortized cost and fair value of the security will be recognized in earnings. If we determine that a decline in fair value is other-than-temporary and that it is more likely than not that we will not sell or be required to sell the security before its recovery of amortized cost, the credit portion of the impairment loss is recorded in earnings and the noncredit portion is recognized in accumulated other comprehensive income.

(e) Loans

We classify loans 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 previously consolidated were classified as held-to-maturity, as well as education loans held by a non-bank subsidiary of FMD, and substantially all education loans and mortgage loans held by Union Federal. We carry loans held to maturity 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. Interest income is accrued on a level yield basis on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loan using the effective interest method. Education loans are placed on nonaccrual status and interest recognition is suspended when the loan becomes 120 days past due. Mortgage loans are placed on nonaccrual status and interest recognition is suspended when the loan becomes 90 days past due.

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

We maintain an allowance for loan losses at an amount sufficient to absorb probable credit losses inherent in our portfolios of loans held to maturity at our balance sheet date. The allowance for loan losses is increased through charges to the provision for loan losses in our statement of operations, and reduced by net charge-offs of loans deemed uncollectible from the borrower and third party guarantors, if any. Inherent credit losses include losses for loans in default that have not been charged-off or foreclosed and loans that are probable of default, less any amounts expected to be recoverable from borrowers or third parties, or for mortgage loans, sale of the collateral, as applicable.

Education Loans

We consider an education loan to be in default when it is 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 amount deemed necessary for education loans with a probability of default at our balance sheet date. We may also incorporate qualitative adjustments in determining our allowance for loan losses. We base our default estimates 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 portfolio at our balance sheet date to ultimately default and be charged-off. The calculation of the allowance for education loan losses is subject to a number of estimates and assumptions, including default and recovery rates, the effects of basic forbearance, hardship forbearance and alternative payment plans available to borrowers, and the appropriateness of assessing both quantitative and qualitative factors. These estimates and assumptions are principally the same as those used for the estimated fair value of our service revenue receivables. These assumptions are based on the status of education loans at our balance sheet date, as well as macroeconomic indicators and our historical experience. If actual future loan performance were to differ significantly from the estimates and assumptions used, the impact on the allowance for loan losses and the related provision for loan losses for education loans recorded in our statement of operations could be material.

(g) Deposits for Participation Interest Accounts

We account for deposits for participation accounts in a manner similar to our service revenue receivables, and we carry such deposits at fair value on our balance sheet. We estimate fair value based on the net present value of cash flows into and out of the participation accounts, based on the education loans originated by participating lenders at our balance sheet date. We record changes in estimated fair value, excluding cash funded by us or distributed out of the participation accounts to us, if any, in non-interest revenues as part of administrative and other fees. See Note 7, “Deposits for Participation Interest Accounts,” for additional information.

(h) Service Revenue Receivables

Service revenue receivables consist of our additional structural advisory fee and residual receivables, which we carry at fair value in our balance sheet. We eliminate any additional structural advisory fee and residual receivables due from the consolidated securitization trusts. Prior to the sale of our variable interests in the Trusts in November 2011, service revenue receivables also included asset servicing fees. These fees were earned as services were performed.

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

Payment of these receivables is contingent upon the following:

•

Additional structural advisory fees are paid to us over time, based on the payment priorities established in the applicable indenture 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 liabilities reaches a stipulated level or after all noteholders have been 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.

In the absence of readily determinable 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 regarding discount, defaults, net of third party guarantees, net recovery, prepayment and forward interest rates, among others. If readily determinable 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) Goodwill and Intangible Assets

Goodwill is not amortized, but is subject to annual evaluation for impairment (or more frequently if indicators of impairment exist). Impairment of goodwill is deemed to exist if the carrying value of a reporting unit, including its allocation of goodwill and other intangible assets, exceeds its estimated fair value. Impairment of other intangible assets is deemed to exist if the balance of the other intangible assets exceeds the cumulative expected net cash inflows related to the asset over its remaining estimated useful life. If we determine that goodwill or other intangible assets are impaired based on our periodic reviews, we write down the values of these assets through a charge included in general and administrative expenses.

(j) Fair Value of Financial Instruments

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 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—Quoted prices (unadjusted) foridentical assets or liabilities in active markets.

•

Level 2—Observable inputs other than Level 1 prices, such as quoted prices forsimilar assets and liabilities in active markets, quoted prices for identical orsimilar 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. All of our investment securities are debt securities and have Level 2 fair values in our consolidated balance sheet.

•

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservable in the markets and which reflect our market assumptions. Examples in this category include interests in certain securitized financial assets, service revenue receivables and our deposits in participation accounts.

We apply quoted market prices, where available, to determine fair value of eligible assets. For financial instruments for which quotes from recent exchange transactions are not available, we base fair value 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 we use for current fair value estimates may not be indicative of net realizable value or reflective of future fair values. If readily determinable market values became available or if actual performance were to vary appreciably from assumptions used, we may need to adjust our assumptions, 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.

(k) Revenue Recognition

Net Interest Income

We recognize interest income and expense using the effective interest method.

We recognize interest income on education and mortgage loans held to maturity as earned, adjusted for the amortization of loan acquisition costs and origination fees, based on the expected yield of the loan over its life, which for education loans includes the effect of expected prepayments. Our estimate of the effects of expected prepayments on education loans reflects voluntary prepayments based on our historical experience and macroeconomic indicators. When changes to assumptions occur, we adjust amortization on a cumulative basis to reflect the change since acquisition of the education loan portfolio.

We place education loans held to maturity 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, we discontinue the accrual of interest, and previously recorded but unpaid interest is reversed and charged against interest revenues. For education loans on non-accrual status but not yet charged-off, we recognize interest revenues on a cash basis. If a borrower makes payments sufficient to become current on principal and interest prior to being charged-off, or “cures” the education loan delinquency, we remove the loan from non-accrual status and recommence recognizing interest revenues. Once a loan has been charged-off, we apply any payments made by the borrower to outstanding principal, and we only record income on a cash basis when all principal has been recovered.

We place mortgage loans 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, we do not resume recognition of interest until the borrower has become current on the loan as to both principal and interest for a consecutive period of 12 months.

We adjust interest expense on long-term borrowings for the amortization of debt issuance costs and underwriting fees using an effective yield over the projected life of the related borrowings.

Tuition Payment Processing Fees

Since our acquisition of TMS, administrative and other fees have included revenues generated by TMS, including program enrollment fees, late fees, convenience fees and tuition billing fees. Program enrollment fees are up-front nonrefundable fees, the recognition of which is deferred and amortized into revenue over the payment term which approximates when services are provided. Late fees and convenience fees are recognized in the period in which the transactions occur, typically monthly, and tuition billing fees are recognized in the period that the services are provided.

Additional Structural Advisory Fees and Residuals—Trust Updates

We record changes in the fair value of additional structural advisory fee and residual receivables as revenues in our statement of operations. To the extent such fees are due from a VIE that we consolidate, the changes in fair value have been eliminated in consolidation, but continue to be recognized by our separate reporting segments as revenues or expenses, as applicable. We record any change in the assumptions used to estimate fair value in our statement of operations in the period in which the change is made.

Administrative and Other Fees

Prior to the sale of FMDS on March 2, 2012, we provided trust administration services and received fees, which were based on the volume of education loans outstanding in securitization trusts we facilitated. These fees were recognized in the period in which the services were rendered. Trust administration services included the daily management of the securitization trusts, coordination of loan servicers and reporting information to the parties related to the trusts. Master servicing and special servicing fees due from certain securitization trusts represent compensation to us for managing the performance of default prevention and collections management services. Such fees are based, in part, upon the volume of assets under management, and in part, upon the reimbursement of expenses. We recognize such fees as the services are performed or as the reimbursable expenses are 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, the 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 collections management services have been provided by our Education Financing segment to our Securitization Trusts segment, the revenues earned by our Education Financing segment 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.

Beginning in the first quarter of fiscal 2011, we began to receive fees related to our Monogram platform. Revenue recognition associated with our Monogram platform is subject to accounting guidance under 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 requires that revenue under a contract be allocated to separately-identifiable deliverables based on a fair value analysis and 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.

(l) Income Taxes

In determining a provision for income taxes, we base our estimated annual effective tax rate on expected annual income or loss, statutory tax rates, our ability to utilize net operating loss carryforwards and tax planning opportunities available to us in the various jurisdictions in which we operate. The estimated annual effective income tax rate also includes our best estimate of the ultimate outcome of income tax audits.

We use the asset and liability method of accounting for recognition of deferred income taxes. Under the asset and liability method, we recognize deferred tax assets and liabilities in connection with the tax effects of temporary differences between our financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carrybacks and carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income or loss in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities as tax expense (benefit) in the period that includes the enactment date. We establish a deferred tax asset valuation allowance if we consider it more likely than not that all or a portion of the deferred tax assets will not be realized. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We also record interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense, in the period of which the penalty has been assessed.

(m) Net Income (Loss) Per Share

We compute basic net income or loss per share utilizing the two-class method earnings allocation formula to determine earnings per share for each class of stock according to dividends and participation rights in undistributed earnings. Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding. We compute diluted net income or loss per share attributable to common stockholders by dividing net income of loss by the sum of the weighted-average number of shares determined for the basic earnings per common share computation and the number of common stock equivalents that would have a dilutive effect, excluding those related to participating securities. In the case of a loss, we assume all common stock equivalents to be anti-dilutive, and they are excluded from diluted weighted-average shares outstanding. We determine common stock equivalent shares outstanding in accordance with the treasury stock method.

(n) New Accounting Pronouncements

ASU 2010-28,When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts(ASU 2010-28), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, Step 2 is required when it is more likely than not that goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are adverse qualitative factors, which requires that goodwill of a reporting unit be evaluated for impairment between annual tests if an event or circumstance occurs that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We adopted ASU 2010-28 during the first quarter of fiscal 2012. However, no events or circumstances have since occurred that would require us to perform an interim impairment test. As such, the adoption did not have a material impact on our consolidated financial statements.

ASU 2011-01,Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, deferred the required disclosures contained in ASU 2010-20,Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20) related to troubled debt restructurings to be concurrent with adoption of ASU 2011-02,Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors (ASU 2011-02). ASU 2011-02 was issued in April 2011 and is effective for the first interim or annual period beginning on or after June 15, 2011, to be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 provides additional guidance for determining whether changes made to a loan constitute a concession by the lender. We adopted ASU 2011-02 during the first quarter of fiscal 2012. The adoption of the remaining provisions of ASU 2010-20 and ASU 2011-02 did not have a material impact on our consolidated financial statements, as it did not materially change our determinations relating to troubled debt restructurings in our mortgage loan portfolio or education loan portfolio.

ASU 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04), was issued concurrently with International Financial Reporting Standards 13,Fair Value Measurements(IFRS 13), to provide largely identical guidance about fair value measurement and disclosure requirements. ASU 2011-04 provides clarifications to GAAP to align with IFRS 13. ASU 2011-04 is required to be applied prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying ASU 2011-04 and to quantify the total effect, if practicable. The adoption of ASU 2011-04 did not have a material impact on our consolidated financial statements.

ASU 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and will be applied retrospectively. Under ASU 2011-05, we will have the option to present the components of net income (loss) and comprehensive income (loss) in either one or two consecutive financial statements. ASU 2011-05 eliminates the option in GAAP to present other comprehensive income in our statement of changes in stockholders’ equity (deficit). On December 23, 2011, the FASB issued a final standard to defer the requirement to present components of reclassifications of other comprehensive income on the face of the statement of operations. We do not anticipate that the adoption of ASU 2011-05 will have a material impact on our consolidated financial statements.

ASU 2011-08,Intangibles—Goodwill and Other, (Topic 350) Testing Goodwill for Impairment (ASU 2011-08), is effective for fiscal years beginning after December 15, 2011, however, early adoption is permitted. ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step goodwill impairment test for that reporting unit. The standard is intended to simplify the goodwill impairment test, rather than change the quantitative assessment in determining how much impairment exists. We do not anticipate that the adoption of ASU 2011-08 will have a material impact on our consolidated financial statements.

We do not expect any other recently issued, but not yet effective, accounting pronouncements to have a material impact on our consolidated financial statements.

(3) Deconsolidations of Securitization Trusts

Upon our adoption of ASU 2009-16 and ASU 2009-17, we consolidated 14 securitization trusts that we facilitated during fiscal 2004 through fiscal 2008, including 11 NCSLT Trusts and 3 GATE Trusts.

On March 2, 2012, FMD sold to a third party all of its outstanding capital stock in its subsidiary First Marblehead Data Services, Inc. (FMDS) for $13.7 million in cash. FMDS serves as the trust administrator of securitization trusts that we previously facilitated. On March 30, 2012, the new third party owner of FMDS terminated the agreement with our subsidiary First Marblehead Education Resources, Inc. (FMER) for the special servicing of the NCT Trusts. With the termination of this agreement, we no longer had the power to direct the activities that most significantly impact the performance of the GATE Trusts and, therefore, we were no longer the primary beneficiary of these trusts. As such, we deconsolidated the GATE Trusts effective March 31, 2012. We deconsolidated $258.4 million of assets and $260.1 million of liabilities from our consolidated balance sheet and recognized a $1.7 million non-cash gain in our statement of operations for our Securitization Trust segment, representing the accumulated deficit in these trusts. In addition to the non-cash gain of $1.7 million, we also recorded an additional gain of $9.2 million representing the fair value of the residual interests related to these trusts that were previously eliminated as part of the adoption of ASU 2009-17, resulting in a total non-cash gain of $10.9 million for the deconsolidation event. Our consolidated statement of operations for the period ended March 31, 2012 included the results of the GATE Trusts for the entire quarter.

The assets and liabilities of the GATE Trusts at the time of their deconsolidation and at June 30, 2011 were as follows:


	March 31, 2012			June 30, 2011
	(dollars in thousands)
Assets:
Restricted cash and guaranteed investment contracts	$	8,172		$	9,640
Education loans held to maturity, net		243,103			261,492
Interest receivable		4,477			5,929
Other assets		2,618			2,181

Total assets	$	258,370		$	279,242


Liabilities:
Accounts payable, accrued expenses and other liabilities	$	4,764		$	4,982
Long-term borrowings		255,315			279,448

Total liabilities		260,079			284,430

Accumulated deficit	$	(1,709	)	$	(5,188	)

On November 14, 2011, we sold to a third party all of our interests in the structuring advisory agreements relating to the Trusts and the asset services agreement for $13.0 million in cash resulting in a gain of $12.6 million. Our variable interests in the Trusts included our right to receive the additional structural advisory fees and the asset servicing fees under those respective agreements. As a result of this sale, we no longer held a variable interest in the NCSLT Trusts and were, therefore, no longer the primary beneficiary of the NCSLT Trusts. We recognized a non-cash gain of $1.24 billion in our statement of operations upon deconsolidation, representing the accumulated deficits in these trusts, net of any elimination entries. The NCSLT Trusts have historically been included in our Securitization Trusts segment. Further, any gains, losses or net income recognized by the trusts are included in the tax returns of the trust owners rather than the trust entities themselves, as these trusts are considered pass-through entities. As such, the deconsolidation of the NCSLT Trusts did not affect taxes recorded in our consolidated financial statements. The results of the NCSLT Trusts through November 14, 2011 are presented in our consolidated statement of operations and in our Securitization Trusts segment results.

The assets and liabilities of the NCSLT Trusts at the time of their deconsolidation, net of any elimination entries, and at June 30, 2011 were as follows:


	November 14, 2011			June 30, 2011
	(dollars in thousands)
Assets:
Restricted cash and guaranteed investment contracts	$	136,668		$	118,069
Education loans held to maturity, net		6,390,414			6,684,679
Interest receivable		49,292			60,102
Other assets		32,500			28,834

Total assets	$	6,608,874		$	6,891,684


Liabilities:
Accounts payable, accrued expenses and other liabilities	$	32,000		$	23,404
Long-term borrowings		7,814,591			7,993,692

Total liabilities		7,846,591			8,017,096

Accumulated deficit⁽¹⁾	$	(1,237,717	)	$	(1,125,412	)

(1)	The gain on the deconsolidation of the NCSLT Trusts of $1,237,359 was recognized in our Securitization Trusts segment.

(4) Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:


	March 31, 2012		June 30, 2011
	(dollars in thousands)
Cash equivalents (money market funds)	$	113,289	$	142,581
Interest-bearing deposits with the Federal Reserve		18,434		50,901
Interest-bearing deposits with other banks		7,111		20,032
Non-interest-bearing deposits with banks		1,491		1,858
Federal funds sold		200		1,995

Total cash and cash equivalents	$	140,525	$	217,367

Cash and cash equivalents of Union Federal of $20.0 million and $53.8 million at March 31, 2012 and June 30, 2011, respectively, were not available for dividends without prior approval from the OCC or the U.S. Office of Thrift Supervision (OTS), Union Federal’s regulator at those respective times.

(5) Investments Available for Sale

We categorize available for sale investment securities by major security type and class of security. Government-sponsored enterprises (GSE) are comprised of debt securities issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.

The following table provides a summary of investments available for sale by major category:


	Amortized cost		Unrealized gains		Unrealized losses			��	Fair value
	(dollars in thousands)
At March 31, 2012:
GSE mortgage-backed securities	$	53,823	$	369	$	(27	)		$	54,165
Mortgage-backed securities issued by U.S. government agencies		16,538		170		(32	)			16,676

Total	$	70,361	$	539	$	(59	)		$	70,841

At June 30, 2011:
GSE mortgage-backed securities	$	2,834	$	182	$	—			$	3,016
Mortgage-backed securities issued by U.S. government agencies		7,904		99		—				8,003

Total	$	10,738	$	281	$	—			$	11,019

At March 31, 2012, three investment securities totaling $16.3 million had unrealized losses of $59 thousand and have been in an unrealized loss position for less than one year. The unrealized losses have generally occurred as a result of increases in interest rates since the time of purchase, a structural change in the investment or deterioration in credit quality of the issuer. Management evaluates impairments in values, whether caused by adverse interest rates or credit movements, to determine if they are other-than-temporary. Additionally, management evaluates whether it intends to sell or will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost.

At June 30, 2011, there were no securities with an unrealized loss position.

The following table sets forth the contractual maturities of available for sale securities:


	March 31, 2012
	Due in one year or less			Due after one year but within five years			Due after five years but within ten years			Due after ten years			Total
	(dollars in thousands)
Securities available for sale:
GSE mortgage-backed securities:
Amortized cost	$	—		$	—		$	6,319		$	47,504		$	53,823
Weighted average yield		—	%		—	%		1.74	%		1.85	%		1.83	%
Mortgage-backed securities issued by U.S. government agencies:
Amortized cost	$	—		$	—		$	—		$	16,538		$	16,538
Weighted average yield		—	%		—	%		—	%		2.28	%		2.28	%

Total debt securities:

Amortized cost	$	—		$	—		$	6,319		$	64,042		$	70,361
Weighted average yield		—	%		—	%		1.74	%		1.96	%		1.94	%

Fair value	$	—		$	—		$	6,338		$	64,503		$	70,841

At March 31, 2012, the expected weighted average remaining life of the mortgage-backed securities was 4.0 years.

(6) Education Loans Held to Maturity and the Related Allowance for Loan Losses

(a) Gross Education Loans Outstanding

At March 31, 2012, education loans held to maturity primarily consisted of loans held by Union Federal and originated during fiscal 2012. At June 30, 2011, education loans held to maturity consisted primarily of loans held by the 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. At June 30, 2011, education loans held to maturity included $6.86 billion of gross education loans held by the NCSLT Trusts and $264.4 million of gross education loans held by the GATE Trusts. The NCSLT Trusts and the GATE Trusts were deconsolidated as of November 14, 2011 and March 31, 2012, respectively. See Note 3, “Deconsolidations of Securitization Trusts,” for additional information.

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


	March 31, 2012			June 30, 2011
	(dollars in thousands)
Gross loan principal outstanding	$	32,330		$	7,130,599
Net unamortized acquisition costs and origination fees		—			265,720

Gross loans outstanding		32,330			7,396,319
Allowance for loan losses		(1,276	)		(450,150	)

Education loans held to maturity, net of allowance	$	31,054		$	6,946,169

Principal outstanding of loans serving as collateral for long-term borrowings	$	—		$	7,129,263

(b) Education Loan Allowance for Loan Losses and the Related Provision for Loan Losses

We recorded the following activity in the allowance for loan losses for education loans:


	Three months ended March 31,						Nine months ended March 31,
	2012			2011			2012			2011
	(dollars in thousands)
Balance, beginning of period	$	3,012		$	500,429		$	450,150		$	24,804
Cumulative effect of a change in accounting principle (consolidation of securitization trusts)		—			—			—			517,804
Deconsolidation pertaining to the NCSLT Trusts		—			—			(424,955	)		—
Deconsolidation pertaining to the GATE Trusts		(1,589	)		—			(1,589	)		—
Provision for loan losses		133			73,745			188,759			305,679
Reserves reclassified from interest receivable for capitalized interest		7			4,762			8,180			16,606
Charge-offs		(672	)		(139,923	)		(235,415	)		(438,301	)
Recoveries from borrowers		385			8,927			16,146			21,348

Balance, end of period	$	1,276		$	447,940		$	1,276		$	447,940

(c) Credit Quality of Education Loans

We use the following terms to describe borrowers’ payment status:

In School and In Deferment

Under the terms of a majority of the education loans held by our securitization trusts, a borrower is eligible to defer principal and interest payments while carrying a specified academic course load and may be eligible to defer payments for an additional six months after graduation during a grace period. Either quarterly or at the end of the deferment period, depending on the terms of the credit agreement, any accrued but unpaid interest is capitalized and added to principal outstanding.

Forbearance

Under the terms of the education loans, a borrower may apply for forbearance, which is a temporary reprieve from making full contractual payments. Forbearance can take many forms, at the option of the creditor. The most common forms of forbearance include the following:

•

Basic forbearance—Cessation of all contractual payments for a maximum allowable forbearance period of one year, granted in three-month increments.

•

plans do not constitute a troubled debt restructuring. However, we will continue to evaluate emerging industry practices as well as the nature and terms of our alternative payment plans and forbearance programs in our assessment of whether future utilization of these programs constitute troubled debt restructurings.

In Repayment

We determine the repayment status of a borrower, including a borrower making payments pursuant to alternative payment plans, by contractual due dates. A borrower making reduced payments for a limited period of time pursuant to an alternative payment plan will be considered current if such reduced payments are timely made. Under our Monogram platform, borrowers may be in repayment while also being in school. Payment options while in school include full principal and interest, partial interest and interest only.

The following table provides information on the status of education loans outstanding:


	March 31, 2012⁽¹⁾		As a percentage of total			June 30, 2011⁽¹⁾		As a percentage of total
	(dollars in thousands)					(dollars in thousands)
Principal of loans outstanding:
In basic forbearance	$	52		0.2	%	$	320,973		4.5	%
In school and in deferment		17,363		53.7			719,290		10.1
In repayment, including alternative payment plans⁽²⁾, classified as:
Current:<30 days past due		14,605		45.2			5,591,863		78.4
Delinquent: >30 days past due, but<120 days past due		266		0.8			355,219		5.0
Delinquent: >120 days past due, but<180 days past due		44		0.1			89,165		1.2
In default: >180 days past due, but not yet charged-off		—		—			54,089		0.8

Total gross loan principal outstanding	$	32,330		100.0	%	$	7,130,599		100.0	%

Non-accrual loan principal (>120 days past due)	$	44		0.1	%	$	143,254		2.0	%
Past due loan principal (>90 days, but<120 days past due still accruing interest)		25		0.1			77,233		1.1

(1)

(2)	At March 31, 2012 and June 30, 2011, borrowers in repayment with loan principal outstanding of approximately $0 and $1.34 billion, respectively, were making reduced payments under alternative payment plans.

Credit Quality of Education Loans Held to Maturity

(7) Deposits for Participation Interest Accounts

In connection with two of our initial three lender clients’ Monogram-based loan programs, we have provided credit enhancements by funding participation accounts to serve as a first-loss reserve for defaulted program loans. We have made initial deposits toward our credit enhancement arrangements and agreed to provide periodic supplemental deposits, up to specified limits, during the disbursement periods under our loan program agreements based on the credit mix and volume of disbursed program loans and adjustments to default projections for program loans.

Participation accounts serve as a first-loss reserve to the originating lenders for defaults experienced in Monogram-based loan program portfolios. As defaults occur, our lender clients withdraw the outstanding balance of defaulted principal and interest from the participation account applicable to their respective programs. As amounts are recovered from borrowers, those amounts are deposited back into the applicable participation account. Legal ownership of the defaulted education loan may be transferred to us or continue to be owned by the lender client, depending on the terms of the loan program agreement. Defaulted education loans transferred to us are immediately charged-off and the recoveries are deposited back to the applicable participation account regardless of our ownership of the education loan. We expect education loans originated under our Monogram platform to perform better in general than the education loans held by the securitization trusts facilitated by us as a result of the relative credit characteristics of the loan portfolios.

Cash balances in the participation accounts earn interest at market rates applicable to commercial interest-bearing deposit accounts. In addition, participation account administration fees are deposited directly by our lender clients into the applicable participation accounts. These fees represent compensation to us for providing the credit enhancement, and are distributed from the participation accounts to us monthly and are not eligible to be used as credit enhancement. Interest and fees deposited into the participation accounts are not recognized as revenue in our statement of operations, but are considered in the determination of the change in fair value recognized in revenue.

We carry participation accounts at fair value in our balance sheet. Fair value is equal to the amount of cash on deposit in the account adjusted for unrealized gains or losses. Due to the lack of availability of market prices for financial instruments of this type, we estimate unrealized gains and unrealized losses related to the participation accounts based on the net present value of expected future cash flows into and out of the account related to education loans originated as of our balance sheet date, using an estimate of prepayments, defaults and recoveries, as well as a discount rate commensurate with the risks and durations involved. We record changes in estimated fair value of participation accounts, if any, in non-interest revenues as part of administrative and other fees.

(8) Long-term Borrowings

Through the securitization process, the securitization trusts facilitated by us issued debt instruments to finance the purchase of education loans obtained from originating lenders or their assignees. The debt securities issued are obligations of the securitization trusts. Holders of these debt securities generally have recourse only to the assets of the particular securitization trust that issued the debt and not to any other trust, FMD, its operating subsidiaries or the originating lenders or their assignees. We deconsolidated the NCSLT Trusts and GATE Trusts as of November 14, 2011 and March 31, 2012, respectively. As such, there were no outstanding long-term borrowings at March 31, 2012 compared to an outstanding balance of $8.27 billion at June 30, 2011. See Note 3, “Deconsolidations of Securitization Trusts,” for additional information on the deconsolidations of the NCSLT Trusts and the GATE Trusts.

(9) Fair Value Measurements

(a) Financial Instruments Recorded at Fair Value in our Balance Sheet

For financial instruments recorded at fair value in our balance sheet, we base that financial instrument’s categorization within the valuation hierarchy upon the lowest level of input that is significant to the fair value measurement. During the third quarter of fiscal 2012 and the third quarter of fiscal 2011, there were no transfers between the hierarchy levels.

The following table presents financial instruments carried at fair value in our consolidated balance sheet, in accordance with the valuation hierarchy described above, on a recurring basis:


	March 31, 2012								June 30, 2011
	Level 1		Level 2		Level 3		Total carrying value		Level 1		Level 2		Level 3		Total carrying value
	(dollars in thousands)
Assets:
Investments available for sale	$	—	$	70,841	$	—	$	70,841	$	—	$	11,019	$	—	$	11,019
Deposits for participation interest accounts		—		—		3,726		3,726		—		—		8,512		8,512
Service revenue receivables		—		—		16,238		16,238		—		—		8,192		8,192

Total assets	$	—	$	70,841	$	19,964	$	90,805	$	—	$	11,019	$	16,704	$	27,723

The following is a description of the valuation methodologies used for financial instruments recorded at fair value in our balance sheet:

Investments Available for Sale

Investments available for sale include GSE mortgage-backed securities and mortgage-backed securities issued by U.S. government agencies that are recorded at fair value using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by market data. These investments are classified as Level 2 in the hierarchy.

Participation Interest Account Deposits

We record participation account deposits at fair value using cash flow modeling techniques as they do not have available market prices. As such, we estimate fair value using the net present value of expected future cash flows. At March 31, 2012 and June 30, 2011, the fair value of deposits for participation accounts was not materially different from the cash balance of the underlying interest-bearing deposits. These assets are classified within Level 3 of the valuation hierarchy.

Service Revenue Receivables

We record our service revenue receivables from the GATE Trusts at fair value using cash flow modeling techniques used to estimate the net present value of fees to be received for services provided and expected to be collected over the life of various separate securitization trusts. Significant observable and unobservable inputs used to develop our fair value estimates include, but are not limited to, defaults, after considering all third party guarantees, recovery and prepayment rates, discount rates and the forward London Interbank Offered Rate (LIBOR) curve. These assumptions have generally not changed significantly from the period ended June 30, 2011. Additionally, due to the seasoning of the GATE Trusts, as well as the loan guarantees provided by various third parties, the fair value of these receivables have limited sensitivity to changes in the current default, recovery, and prepayment rate assumptions. The most significant unobservable input into the fair value determination is the discount rate. See Note 11, “Service Revenue Receivables and Related Income,” in the notes to our consolidated financial statements included in Part 8 of Item II of our Annual Report for additional information.

The following tables present activity related to our financial assets categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for March 31, 2012 and 2011. All realized and unrealized gains and losses recorded during the periods presented relate to assets still held at our balance sheet date. There have been no transfers in or out of Level 3 of the hierarchy, or between Levels 1 and 2, for the three and nine month periods presented.


	Three months ended March 31,
	2012					2011
	Deposits for participation interest accounts		Service revenue receivables			Deposits for participation interest accounts		Service revenue receivables
	(dollars in thousands)
Fair value, beginning of period	$	3,584	$	6,403		$	8,492	$	14,547
Realized and unrealized gains (losses)		24		(1,589	)		13		(4,726	)
Adjustment for the deconsolidation of the GATE Trusts		—		11,944			—		—
Funding and settlements		118		(520	)		—		(32	)

Fair value, end of period	$	3,726	$	16,238		$	8,505	$	9,789


	Nine months ended March 31,
	2012						2011
	Deposits for participation interest accounts			Service revenue receivables			Deposits for participation interest accounts		Service revenue receivables
	(dollars in thousands)
Fair value, beginning of period	$	8,512		$	8,192		$	—	$	53,279
Change in accounting principle		—			—			—		(38,692	)
Adjustment for the deconsolidations of the NCSLT Trusts and the GATE Trusts		—			26,375			—		—
Realized and unrealized gains (losses)		(9	)		(4,754	)		28		(4,338	)
Funding and settlements⁽¹⁾		(4,777	)		(13,575	)		8,477		(460	)

Fair value, end of period	$	3,726		$	16,238		$	8,505	$	9,789

(1)

During the nine months ended March 31, 2012, we recorded a settlement of our asset servicing fee receivable and additional structural advisory fee receivable in connection with the deconsolidation of the NCSLT Trusts as of November 14, 2011. These service revenue receivables were reported in our Education Financing segment and eliminated in consolidation. See Note 3, “Deconsolidations of Securitization Trusts,” for additional details.

(b) Fair Values of Other Financial Instruments

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,Fair Value Measurements and Disclosures, to these assets and liabilities.

The short duration of many of our assets and liabilities results 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 cash equivalents, short-term investments, federal funds sold, restricted cash and guaranteed investment contracts, deposits and restricted funds due to clients approximate fair value due to their short duration, and that the fair value of mortgage loans held to maturity is not materially different from its carrying value.

At March 31, 2012, the estimated fair value of education loans held to maturity was also not materially different than its carrying value principally as a result of these loans being newly originated in fiscal 2012 and the market rates at which they were being carried being reflective of current market rates. The education loans and long-term borrowings presented in the table below at June 30,

2011 were held by the securitization trusts we previously consolidated and were based on the net present value of cash flows, using the same observable and unobservable performance assumptions that we used to estimate the fair value of our service revenue receivables, applying discount rates commensurate with the duration, yield and credit ratings of the assets or liabilities, as applicable. The fair value estimated on our loans and borrowings are classified as Level 3 in the fair value hierarchy.

The following table discloses the carrying values and estimated fair values of certain financial instruments at June 30, 2012 not recorded at fair value in our balance sheet:


	June 30, 2011⁽¹⁾
	Carrying value		Fair value
	(dollars in thousands)
Education loans held to maturity, net of allowance for loan losses	$	6,946,169	$	5,009,277
Long-term borrowings		8,273,140		5,573,127

(1)

At June 30, 2011, education loans held to maturity, net of allowance for loan losses included $6.69 billion of loans held by the NCSLT Trusts and $261.5 million held by the GATE Trusts. Long-term borrowings included $7.99 billion of long-term borrowings of the NCSLT Trusts and $279.4 million of the GATE Trusts. These trusts were deconsolidated as of November 14, 2011 and March 31, 2012, respectively. As a result, the education loans held to maturity by the NCSLT Trusts and the GATE Trusts were not included in education loans held to maturity at March 31, 2012 and the long-term borrowings of the NCSLT Trusts and the GATE Trusts were not included in long-term borrowings at March 31, 2012.

(10) Commitments and Contingencies

(a) Income Tax Matters

Internal Revenue Service Audit

As a result of the sale of the trust certificate of NC Residuals Owners Trust (the Trust Certificate), effective March 31, 2009, as well as our operating losses incurred in fiscal 2009, we recorded an income tax receivable for federal income taxes paid on taxable income in prior taxable years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables. In April 2010, the Internal Revenue Service (IRS) commenced an audit of our tax returns for fiscal 2007, fiscal 2008 and fiscal 2009. Such audits are consistent with the practice of the Joint Committee of Taxation, which requires the IRS to audit a taxpayer who receives a tax refund in excess of $2.0 million. In connection with this audit, the IRS is reviewing, among other things, the tax treatment of the sale of the Trust Certificate, including the related income tax refund previously received by us. The IRS has also expanded its audit to include our tax return for fiscal 2010 in light of the $45.1 million tax refund that we received in October 2010. We cannot predict the timing or outcome of the IRS audit. As of March 31, 2012, the IRS had not issued any notice of proposed adjustment in connection with its audit.

Massachusetts Appellate Tax Board Matters

We are involved in several matters before the Massachusetts Appellate Tax Board (ATB) relating to the Massachusetts tax treatment of GATE Holdings, Inc. (GATE), a former subsidiary of FMD. We took the position in these proceedings that GATE was properly taxable as a financial institution and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue (Commissioner) took alternative positions: that GATE was properly taxable as a business corporation, or that GATE was taxable as a financial institution, but was not entitled to apportionment or was subject to 100% Massachusetts apportionment. In September 2007, we filed a petition with the ATB seeking a refund of state taxes paid for our taxable year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of taxes, along with accrued interest, of approximately $11.9 million for GATE’s taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE and us. The assessments against GATE were in the alternative to the assessments against us. In April 2011, the ATB held an evidentiary hearing on the foregoing, and the parties filed their final briefs in September 2011. On November 9, 2011, the ATB issued an order (Order) regarding these proceedings. The Order reflected the following rulings and findings:

•

GATE was properly taxable as a financial institution, rather than a business corporation, for each of the tax years at issue;

•

GATE was entitled to apportion its income under applicable provisions of Massachusetts tax law for each of the tax years at issue;

•

GATE properly calculated one of the two applicable apportionment factors used to calculate GATE’s financial institution excise tax;

•

GATE incorrectly calculated the other apportionment factor, which we refer to as the Property Factor, by assigning all trust-owned education loans outside of Massachusetts rather than assigning all of them to Massachusetts; and

•

All penalties assessed to FMD and GATE were abated.

We expect an opinion to be issued by the ATB relating to the Order within approximately six months from the ATB notice. The opinion will set out the ATB’s findings of fact and the reasons for its ruling in the Order. After the ATB has issued its opinion, we will consider an appeal of the Order’s finding with regard to the Property Factor. The Commissioner may also consider an appeal of the Order’s other findings.

In connection with the Order, as well as the expiration of the statute of limitations applicable to GATE’s taxable year ended June 30, 2007, we recognized an income tax benefit of $12.5 million during the second quarter of fiscal 2012. In the third quarter of fiscal 2012, we made a $5.1 million payment that satisfied our obligation to the Massachusetts Department of Revenue for GATE’s taxable years ended June 30, 2004, 2005 and 2006. Any appeal of the Order by us would occur only after the issuance of the ATB’s opinion. If we are unsuccessful in an appeal of the Order, we could be required to make additional tax payments, including interest, for GATE’s taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position. Such accruals totaled $23.1 million at March 31, 2012, which were included in income taxes payable in the accompanying consolidated balance sheet. We have not accrued penalties associated with the matter as the Massachusetts Department of Revenue has waived penalties associated with the tax years 2004 through 2006 for GATE. We cannot predict the timing of any such payments at this time.

(b) Indemnifications—Sale of FMDS

In connection with the sale of FMDS, we have agreed to indemnify the buyer for breaches of representations, warranties and covenants, subject to certain terms, conditions and exceptions.

The buyer’s rights to indemnification with respect to breaches of certain of our representations and warranties in the purchase agreement, which we refer to as the Non-Fundamental Representations, are subject to:

•

an aggregate deductible of $1.0 million (the Deductible),

•

an aggregate cap of $2.0 million (the Non-Fundamental Cap), and

•

a survival limitation requiring the buyer to assert claims within 18 months after the closing date of March 2, 2012 (the Survival Limitation).

With respect to breaches of Non-Fundamental Representations, the buyer would be entitled to indemnification if its aggregate indemnifiable losses were to exceed the Deductible. In that event, the buyer would be entitled to indemnification to the extent that its losses exceeded $750,000, up to the Non-Fundamental Cap; provided, however, that if the Non-Fundamental Cap were reached and the buyer were to have suffered additional indemnifiable losses solely as a result of a breach of our representations and warranties with regard to legal compliance, the buyer would be entitled to recover up to an additional $2.0 million in the aggregate.

The buyer’s rights to indemnification with respect to breaches of our other representations and warranties in the purchase agreement , which we refer to as the Fundamental Representations, are not subject to the Deductible or the Survival Limitations and are subject to a cap equal to the purchase price minus the aggregate amount paid by us in connection with breaches of Non-Fundamental Representations, which we refer to as the Fundamental Cap. The Fundamental Representations include representations and warranties by FMD with regard to its organization, its authorization of the transaction, the absence of broker’s fees and its ownership of the shares of capital stock of FMDS. The Fundamental Representations also include representations and warranties by FMD with regard to FMDS’ organization, qualification and corporate power, FMDS’ capitalization, the absence of broker’s fees, the absence of subsidiaries and certain tax matters.

The buyer’s rights to indemnification would not be subject to the Deductible, the Non-Fundamental Cap, the Fundamental Cap or the Survival Limitation in the case of any breach or nonperformance by us or any of our covenants or obligations set forth in the purchase agreement. In addition, we have agreed to provide a separate, unconditional indemnity with regard to tax matters related to FMDS arising prior to the closing date, including the audit currently being conducted by the IRS, as discussed above. This special indemnity is not subject to the Deductible, the Non-Fundamental Cap, the Fundamental Cap or the Survival Limitation. Finally, we have agreed to indemnify and defend the buyer from certain other specified matters. The buyer’s rights to such indemnification would be initially capped at the Purchase Price, and the applicable cap would then decrease over time. We believe that at the time of the sale of FMDS and at March 31, 2012, the likelihood of making any payment under these indemnifications was remote. As such, the fair value of any such liability for the indemnifications would, therefore, also be immaterial to our overall consolidated financial statements.

(c) Performance Guaranty

In connection with Union Federal’s sale of an education loan portfolio in October 2009, FMD delivered a performance guaranty pursuant to which FMD guarantees the performance by Union Federal of its obligations and agreements under the loan purchase and sale agreement relating to the transaction. We were not aware of any contingencies existing at our balance sheet date that were both probable and estimable for which we would record a reserve, nor can we estimate a range of possible losses at this time.

(d) Assumption of Potential Contingent Liabilities of Union Federal

FMD 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 limit discussed above. In addition, FMD assumed any contingent liability of Union Federal under the facility arising prior to April 16, 2010 based on fraud, willful misconduct or gross negligence, and agreed to provide a separate indemnity for third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors. On December 15, 2011, FMD and certain of its subsidiaries entered into a letter agreement with the conduit lender and other secured parties pursuant to which, among other things, the conduit lender foreclosed on the collateral in satisfaction of UFSB-SPV’s obligations under the facility, the parties agreed to maintain existing servicing agreements with respect to the education loan portfolio formerly serving as collateral and the parties agreed that the obligations assumed by FMD in April 2010, but not its separate indemnity, will terminate on June 30, 2012. We were not aware of any contingencies existing at our balance sheet date that were both probable and estimable for which we would record a reserve, nor can we estimate a range of possible losses at this time.

(11) Segment Reporting

We manage our operations through two business segments, Education Financing and Securitization Trusts.

Education Financing

In our Education Financing segment, we offer outsourcing services to national and regional financial and educational institutions in the United States for designing and implementing education loan programs. We partner with lenders to design and administer school-certified loan programs, which 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. Starting in fiscal 2011, we began offering a fully integrated suite of services through our Monogram platform, as well as certain services on a stand-alone, fee-for-service basis.

As of January 1, 2011, we began offering outsourced tuition planning, tuition billing and payment technology services for universities, colleges and secondary schools through TMS. TMS is one of the largest U.S. providers of such services, operating in 48 states and serving over 700 schools. TMS provides students and their families with the opportunity to structure tuition payment plans that meet their financial needs while providing a broad array of tuition payment options. In November 2011, TMS began offering refund management services to education institutions and students.

We also include in our Education Financing segment the financial results of Union Federal. Union Federal offers retail banking products, including education loans, residential and commercial mortgage loans, time and savings deposits and money market demand accounts. On June 30, 2011, Union Federal launched the Union Federal Private Student Loan Program, a Monogram-based national higher education loan program, and The prepGATE^® Loan Program, a Monogram-based national K-12 education loan program, and began accepting applications under these programs as of July 1, 2011.

Until the sale of FMDS, we provided administrative and other services to securitization trusts that we facilitated, and until the deconsolidation of the NCSLT Trusts, we provided asset servicing to the third-party owner of the Trust Certificate.

Securitization Trusts

Our Securitization Trusts segment includes securitization trusts that purchased portfolios of education loans facilitated by us that we consolidated upon our adoption of ASU 2009-16 and ASU 2009-17, though not all securitization trusts facilitated by us were consolidated. The securitization trusts financed purchases of education loans by issuing debt to third-party investors. The key driver of the results of our Securitization Trusts segment is the performance of the underlying portfolio of education loans held by these trusts.

At July 1, 2010, 14 securitization trusts were consolidated, 11 of which were the NCSLT Trusts and 3 of which were the GATE Trusts.

On November 14, 2011, we sold to a third party all of our interests in the structuring advisory agreements relating to the Trusts and the asset services agreement for $13.0 million in cash. Our variable interests in the Trusts included our right to receive the additional structural advisory fees and the asset servicing fees under those respective agreements. As a result of this sale, we no longer held a variable interest in the NCSLT Trusts and were, therefore, no longer the primary beneficiary of the NCSLT Trusts. As such, we deconsolidated the assets and liabilities of the NCSLT Trusts as of November 14, 2011. On March 2, 2012, FMD sold to a third party all of its outstanding capital stock in its subsidiary FMDS for $13.7 million in cash. FMDS serves as the trust administrator of securitization trusts that we previously facilitated. On March 30, 2012, the new third party owner of FMDS terminated the agreement with our subsidiary FMER for the special servicing of the NCT Trusts. With the termination of this agreement, we no longer had the power to direct the activities that most significantly impact the performance of the GATE Trusts and, therefore, we were no longer the primary beneficiary of these trusts. As such, we deconsolidated the assets and liabilities of the GATE Trusts as of March 31, 2012. See Note 3, “Deconsolidations of Securitization Trusts,” for additional information.

Our consolidated income statement for the period ended March 31, 2012 included the results of the GATE Trusts for the entire quarter. The administration of the GATE Trusts, including investor reporting through the sale date of FMDS and default prevention and collections management services, was provided by our Education Financing segment. The extent that revenues earned by our Education Financing segment, were paid for by trusts included in our Securitization Trusts segment, such revenues and experses were eliminated in consolidation.

Results of operations for our Securitization Trusts segment include interest income, net of any amortization of loan acquisition costs, which is generated on the education loan portfolios held by the consolidated securitization trusts, and interest expense related to the debt issued by these trusts to finance the purchase of education loans. General and administrative expenses include amounts paid to our Education Financing segment for additional structural advisory fees, trust administration, default prevention and collections management, as well as collection costs and trust expenses paid to unrelated third parties. The consolidated securitization trusts are managed in accordance with their applicable indentures and their tangible assets are limited to cash, allowable investments and education loan principal, as well as the related interest income receivables and recoverables on defaulted loans. Liabilities are limited to the debt issued to finance the education loans purchased and payables accrued in the normal course of operations, all of which have been structured to be non-recourse to the general credit of FMD, its operating subsidiaries or any other securitization trust.

Operating results by segment were as follows:


	Three months ended March 31,
	2012												2011
	Education Financing			Securitization Trusts			Eliminations			Total			Education Financing			Securitization Trusts			Eliminations			Total
	(dollars and shares in thousands, except per share amounts)
Revenues:
Net interest income:
Interest income	$	950		$	2,468		$	—		$	3,418		$	557		$	79,323		$	9		$	79,889
Interest expense		(209	)		(528	)		—			(737	)		(206	)		(14,881	)		—			(15,087	)

Net interest income		741			1,940			—			2,681			351			64,442			9			64,802
Provision for loan losses		222			(303	)		—			(81	)		(10	)		(73,745	)		—			(73,755	)

Net interest income (loss) after provision for loan losses		963			1,637			—			2,600			341			(9,303	)		9			(8,953	)
Non-interest revenues:
Tuition payment processing fees		7,697			—			—			7,697			7,055			—			—			7,055
Additional structural advisory fees, asset servicing fees and residual trust updates		2,454			—			(4,043	)		(1,589	)		(26,372	)		—			21,646			(4,726	)
Other administrative fees		4,072			7			(117	)		3,962			4,359			1,818			(2,368	)		3,809

Total non-interest revenues		14,223			7			(4,160	)		10,070			(14,958	)		1,818			19,278			6,138

Total revenues		15,186			1,644			(4,160	)		12,670			(14,617	)		(7,485	)		19,287			(2,815	)
Non-interest expenses:
Compensation and benefits		11,645			—			—			11,645			11,615			—			—			11,615
General and administrative		13,864			1,078			(855	)		14,087			15,563			(9,724	)		19,157			24,996

Total non-interest expenses		25,509			1,078			(855	)		25,732			27,178			(9,724	)		19,157			36,611

Income (loss) before other income and income taxes		(10,323	)		566			(3,305	)		(13,062	)		(41,795	)		2,239			130			(39,426	)
Other income:
Gain from deconsolidations of trusts		—			1,709			9,156			10,865			—			—			—			—
Gain on sale of trust administrator		12,571			—			—			12,571			—			—			—			—
Proceeds from TERI settlement		—			—			—			—			—			18			—			18

Total other income		12,571			1,709			9,156			23,436			—			18			—			18

Income (loss) before income taxes		2,248			2,275			5,851			10,374			(41,795	)		2,257			130			(39,408	)
Income tax (benefit) expense		516			—			—			516			(82	)		—			—			(82	)

Net (loss) income	$	1,732		$	2,275		$	5,851		$	9,858		$	(41,713	)	$	2,257		$	130		$	(39,326	)

Net income (loss) per common share:
Basic	$	0.02		$	0.02		$	0.05		$	0.09		$	(0.41	)	$	0.02		$	—		$	(0.39	)
Diluted		0.02			0.02			0.05			0.09			(0.41	)		0.02			—			(0.39	)
Weighted-average common shares outstanding:
Basic											101,554												100,834
Diluted											110,573												100,834


	Nine months ended March 31,
	2012												2011
	Education Financing			Securitization Trusts			Eliminations			Total			Education Financing			Securitization Trusts			Eliminations			Total
	(dollars and shares in thousands, except per share amounts)
Revenues:
Net interest income:
Interest income	$	2,230		$	112,933		$	18		$	115,181		$	1,478		$	251,346		$	29		$	252,853
Interest expense		(679	)		(20,914	)		—			(21,593	)		(823	)		(48,974	)		—			(49,797	)

Net interest income		1,551			92,019			18			93,588			655			202,372			29			203,056
Provision for loan losses		476			(189,232	)		—			(188,756	)		(277	)		(305,679	)		—			(305,956	)

Net interest income (loss) after provision for loan losses		2,027			(97,213	)		18			(95,168	)		378			(103,307	)		29			(102,900	)
Non-interest revenues:
Tuition payment processing fees		22,172			—			—			22,172			7,055			—			—			7,055
Additional structural advisory fees, asset servicing fees and residual trust updates		202			—			(4,956	)		(4,754	)		(20,890	)		—			16,552			(4,338	)
Other administrative fees		11,373			578			(3,436	)		8,515			13,144			2,393			(7,478	)		8,059

Total non-interest revenues		33,747			578			(8,392	)		25,933			(691	)		2,393			9,074			10,776

Total revenues		35,774			(96,635	)		(8,374	)		(69,235	)		(313	)		(100,914	)		9,103			(92,124	)
Non-interest expenses:
Compensation and benefits		33,321			—			—			33,321			27,640			—			—			27,640
General and administrative		47,275			19,092			(4,757	)		61,610			40,088			17,083			9,538			66,709

Total non-interest expenses		80,596			19,092			(4,757	)		94,931			67,728			17,083			9,538			94,349

(Loss) income from operations		(44,822	)		(115,727	)		(3,617	)		(164,166	)		(68,041	)		(117,997	)		(435	)		(186,473	)
Other income:
Gain from deconsolidations of trusts		—			1,239,068			9,514			1,248,582			—			—			—			—
Gain of trust administrator		12,571			—			—			12,571			—			—			—			—
Proceeds from TERI settlement		1,405			6,885			—			8,290			8,112			42,587			—			50,699

Total other income		13,976			1,245,953			9,514			1,269,443			8,112			42,587			—			50,699

Income (loss) before income taxes		(30,846	)		1,130,226			5,897			1,105,277			(59,929	)		(75,410	)		(435	)		(135,774	)
Income tax (benefit) expense		(10,891	)		—			—			(10,891	)		1,957			—			—			1,957

Net (loss) income	$	(19,955	)	$	1,130,226		$	5,897		$	1,116,168		$	(61,886	)	$	(75,410	)	$	(435	)	$	(137,731	)

Net income (loss) per common share:
Basic	$	(0.18	)	$	10.25		$	0.05		$	10.12		$	(0.61	)	$	(0.75	)	$	(0.01	)	$	(1.37	)
Diluted		(0.18	)		10.23			0.05			10.10			(0.61	)		(0.75	)		(0.01	)		(1.37	)
Weighted-average common shares outstanding:
Basic											101,459												100,809
Diluted											110,499												100,809

Eliminations and Deconsolidation

For the three months ended March 31, 2012, revenue and expenses included in “Eliminations” for segment reporting purposes primarily related to the elimination of the trust updates and related residual interests ownership of our Education Financing segment in the GATE Trusts, offset by the gain from the deconsolidation of the GATE Trusts. At March 31, 2012, we also recorded a gain on the deconsolidation of the GATE Trusts of $9.2 million to record the fair value of the residual interests that were previously eliminated as the result of our adoption of ASU 2009-17. The residual interests of $9.2 million that were related to the GATE Trusts were not recorded in our Securitization Trust segment and, as such, were not included in the $1.7 million gain recorded.

For the nine months ended March 31, 2012, the revenues and expenses included in “Eliminations” for segment reporting purposes related to revenues earned by our Education Financing segment, and the corresponding expenses incurred by our Securitization Trusts segment, relating to intercompany life-of-trust fees for securitization structuring. Eliminations for segment reporting purposes prior to March 31, 2012 also included our on-going fees for trust administration, default prevention and collections management, as well as the elimination of the residual interest ownership held by our Education Financing segment in the GATE Trusts.

At March 31, 2012, there were no assets or liabilities in our Securitization Trusts segment due to the deconsolidations of the NCSLT Trusts and the GATE Trusts. All assets and liabilities in our consolidated balance sheet are held by our Education Financing segment.


	June 30, 2011
	Education Financing		Securitization Trusts			Eliminations			Total
	(dollars in thousands)
Assets:
Cash, cash equivalents and short-term investments	$	267,367	$	—		$	—		$	267,367
Restricted cash and investments, at cost		124,687		127,709			—			252,396
Investments available for sale, at fair value		11,019		—			—			11,019
Education loans held to maturity		—		6,946,545			(376	)		6,946,169
Service revenue receivables		29,610		—			(21,418	)		8,192
Goodwill		19,548		—			—			19,548
Intangible assets, net		23,040		—			—			23,040
Other assets		32,279		97,046			(4,274	)		125,051

Total assets	$	507,550	$	7,171,300		$	(26,068	)	$	7,652,782

Liabilities:
Deposits	$	60,492	$	—		$	—		$	60,492
Restricted funds due to clients		124,194		—			(2,306	)		121,888
Long-term borrowings		—		8,273,140			—			8,273,140
Other liabilities		65,519		28,385			(16,703	)		77,201

Total liabilities		250,205		8,301,525			(19,009	)		8,532,721
Total stockholders’ equity (deficit)		257,345		(1,130,225	)		(7,059	)		(879,939	)

Total liabilities and stockholders’ equity (deficit)	$	507,550	$	7,171,300		$	(26,068	)	$	7,652,782

(12) Net Interest Income

The following table reflects the components of net interest income:


	Three months ended March 31,				Nine months ended March 31,
	2012		2011		2012		2011
	(dollars in thousands)
Interest income:
Cash and cash equivalents	$	71	$	115	$	201	$	452
Short-term investments and federal funds sold		81		63		190		212
Restricted cash and investments		52		171		544		341
Investments available for sale		273		43		514		141
Education loans held to maturity		2,871		79,398		113,498		251,437
Mortgage loans held to maturity		70		99		234		270

Total interest income		3,418		79,889		115,181		252,853
Interest expense:
Time and savings account deposits		97		81		290		381
Money market account deposits		59		39		186		100
Other interest-bearing liabilities		55		86		204		342
Long-term borrowings		526		14,881		20,913		48,974

Total interest expense		737		15,087		21,593		49,797

Net interest income	$	2,681	$	64,802	$	93,588	$	203,056

(13) Income Taxes

Our effective income tax rate is calculated on a consolidated basis. The securitization trusts are considered pass-through entities for income tax purposes and, accordingly, the net income or loss of the trusts is included in the tax returns of the trust owners rather than the trust entities themselves. As such, we record all income tax benefit or expense in our Education Financing segment.

We are subject to federal income tax as well as income tax in multiple U.S. state and local jurisdictions. The IRS has begun an audit of our tax returns for the taxable years 2007, 2008, 2009 and 2010. In addition, we are involved in several matters before the ATB relating to the Massachusetts treatment of GATE, a former subsidiary of FMD. See Note 10, “Commitments and Contingencies—Income Tax Matters,” above for additional information regarding these matters.

Our state income tax returns in jurisdictions other than Massachusetts remain subject to examination for various fiscal years ended between June 30, 2008 and June 30, 2011.

Unrecognized Tax Benefits

In connection with the Order issued by the ATB, as well as the expiration of the statute of limitations applicable to GATE’s tax year ended June 30, 2007, as described in Note 10, “Commitments and Contingencies—Income Tax Matters,” above, we adjusted our unrecognized tax benefits. The unrecognized tax benefits for the taxable year ended June 30, 2007 represented 56.2% of the total reduction. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the nine months ended March 31, 2012 is as follows:


	Nine months ended March 31, 2012
	(dollars in thousands)
Beginning unrecognized tax benefits	$	30,936
Increase related to positions taken in the current year		—
Reduction as a result of ATB order and expiration of statute of limitations		(11,306	)

Ending unrecognized tax benefits	$	19,630


Beginning accrued interest		8,375
Interest expense recognized		1,380
Reduction to interest as a result of ATB order and expiration of statute of limitations		(6,281	)

Ending accrued interest	$	3,474

The ending balance at March 31, 2012 if recognized would favorably affect our effective income tax rate. We recognize interest and penalties, if any, in income tax expense when incurred.

(14) Net Income (Loss) per Share

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


	Three months ended March 31,						Nine months ended March 31,
	2012			2011			2012			2011
	(dollars and shares in thousands, except per share amounts)
Net income (loss) available to common stockholders	$	9,858		$	(39,326	)	$	1,116,168		$	(137,731	)
Less: Earnings allocated to participating securities		(790	)		—			(89,519	)		—

Earnings (loss) allocated to common shares outstanding		9,068			(39,326	)		1,026,649			(137,731	)

Net income (loss) per common share:
Basic	$	0.09		$	(0.39	)	$	10.12		$	(1.37	)
Diluted		0.09			(0.39	)		10.10			(1.37	)
Weighted-average common shares outstanding:
Basic		101,554			100,834			101,459			100,809
Diluted		110,573			100,834			110,499			100,809

Anti-dilutive common stock equivalents		9,019			9,141			9,040			9,017

For the periods in which a net loss was incurred, common stock equivalents are considered anti-dilutive, and, therefore, are excluded from diluted weighted-average shares outstanding. Common stock equivalents include restricted stock units, series B non-voting convertible 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.

(15) Union Federal Regulatory Matters

the regulators that, if undertaken, could have a direct material effect on our liquidity. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union Federal’s assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classifications, however, are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Union Federal’s equity capital was $16.0 million and $11.7 million at March 31, 2012 and June 30, 2011, respectively. During the nine months ended March 31, 2012, Union Federal received a capital contribution of $4.7 million from FMD.

Quantitative measures established by regulation to ensure capital adequacy require Union Federal to maintain minimum amounts and ratios of total capital and Tier 1 capital to risk-weighted assets (each as defined in the regulations).


	Regulatory Guidelines
	Minimum			Well capitalized			March 31, 2012			June 30, 2011
Capital ratios:
Tier 1 risk-based capital		4.0	%		6.0	%		32.1	%		223.9	%
Total risk-based capital		8.0			10.0			33.0			225.2
Tier 1 (core) capital		4.0			5.0			11.8			15.5

As of March 31, 2012 and June 30, 2011, Union Federal was well capitalized under the regulatory framework for prompt corrective action.

Effective July 21, 2011, FMD is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (Federal Reserve) as a savings and loan holding company, and Union Federal is subject to regulation, supervision and examination by the OCC. Prior to July 21, 2011, FMD’s and Union Federal’s primary federal regulator was the OTS.

A notice or application to make a capital distribution by Union Federal may be disapproved or denied by the OCC 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 OCC or a condition imposed by an OCC agreement. Under the Federal Deposit Insurance Corporation Improvement Act (FDICIA), an Federal Deposit Insurance Corporation (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 FDICIA).

In March 2010, the FMD Board of Directors adopted resolutions required by the OTS undertaking to support the implementation by Union Federal of its business plan, so long as Union Federal is owned or controlled by FMD, and to notify the OTS in advance of any distribution to our stockholders in excess of $1.0 million per fiscal quarter and any incurrence or guarantee of debt in excess of $5.0 million. The resolutions continue to be applied by the Federal Reserve.

FORM 10-Q PART I CROSS-REFERENCE INDEX

The information required by the items presented below is incorporated herein by reference from the “Financial Information” section of this quarterly report.


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Operations for the three and nine months ended March 31, 2012 and 2011		34
	Consolidated Balance Sheets as of March 31, 2012 and June 30, 2011		35
	Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the nine months ended March 31, 2012 and 2011		36
	Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and 2011		37
	Notes to Unaudited Consolidated Financial Statements		38
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4.	Controls and Procedures		33

Part II. Other Information

Item 1.

Legal Proceedings.

There were no material developments during the third quarter of fiscal 2012 in the matters entitled “Internal Revenue Service Audit,” “Massachusetts Appellate Tax Board Matters” and “TERI Database Dispute” included in Item 3 of Part I of our Annual Report.

We are involved from time to time in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, there are no matters outstanding, other than those referenced above, that would have a material adverse impact on our operations or financial condition.

Item 1A.

Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below in addition to the other information included in this quarterly report. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected, which, in turn, could have a negative impact on the price of our common stock. Although we have grouped risk factors by category, the categories are not mutually exclusive. Risks described under one category may also apply to another category, and you should carefully read the entire risk factors section, not just any one category of risk factors.

We have updated the risk factors described in this Item 1A to reflect financial and operating information for the most recently completed fiscal quarter. In addition, we have made material changes to the following risk factors as compared to the version disclosed in Item 1A of Part I of our Annual Report under the heading “Risk Factors”:

•

Challenges exist in implementing revisions to our business model.

•

We have provided credit enhancements in connection with Monogram-based loan programs for our initial lender clients and may enter into similar arrangements in connection with future loan programs. As a result, we have capital at risk in connection with our lender clients’ loan programs. We may lose the capital we have provided and our financial results could be adversely affected.

•

Continuation of the current economic conditions could adversely affect the education loan industry.

•

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

•

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

•

We have consolidated and subsequently deconsolidated certain securitization trusts in our financial results, which has resulted in significant changes to the presentation of our financial statements.

•

ASU 2009-17 may result in increased volatility in our reported financial condition and results of operations.

•

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

•

Our liquidity could be adversely affected if the sale of the Trust Certificate does not result in the tax consequences that we expect or if we are unable to successfully resolve the state tax matters pending before the Massachusetts Appellate Tax Board.

•

We have guaranteed the performance of Union Federal’s obligations under a loan purchase and sale agreement and assumed potential contingent liabilities of Union Federal under an indenture. We may incur substantial costs if we have to perform or assume obligations of Union Federal, which could have a material adverse effect on our liquidity or financial condition.

•

Changes in interest rates could affect the value of our additional structural advisory fee and residual receivables, as well as demand for education loans and our services.

•

Our financial and operating results are subject to seasonality and cyclicality.

•

In structuring and facilitating securitizations of our clients’ education loans, administering securitization trusts or providing portfolio management, we may incur liabilities to transaction parties.

•

We are subject to, or will become subject to, new supervision and regulations which could increase our costs of compliance and alter our business practices.

•

Failure to comply with consumer protection laws could subject us to civil and criminal penalties or litigation, including class actions, and have a material adverse effect on our business.

•

Recent legislative proposals could affect the prepayment of education loans in the securitization trust portfolios. If the legislative proposals are enacted, they could adversely affect the performance of the GATE Trusts, and/or the key assumptions we use to estimate the fair value of our service revenue receivables.

•

The price of our common stock may be volatile.

Finally, we have deleted the following risk factors that were disclosed in Item 1A of Part I of our Annual Report under the heading “Risk Factors”:

•

We may be unable to realize all of the anticipated benefits of our acquisition of TMS.

•

Our consolidated financial results include VIEs that we do not own and it may be difficult for investors to understand and analyze our financial results without evaluating the results of our Education Financing segment.

•

TERI’s rejection of its guaranty agreements in the context of the Modified Plan of Reorganization could result in litigation against us by former clients for breach of contractual obligations, which could adversely affect our business, reputation and financial results.

Risks Related to Our Industry, Business and Operations

Challenges exist in implementing revisions to our business model.

Since the beginning of fiscal 2009, we have taken several measures to adjust our business in response to economic conditions. Most significantly, we refined our service offerings and added fee-for-service offerings such as portfolio management and asset servicing. During fiscal 2010, we completed the development of our Monogram platform, including an enhanced application interface, an expanded credit decisioning model and additional reporting capabilities. We continue to incorporate refinements to our Monogram platform. During fiscal 2011, we began originating Monogram-based education loans under loan program agreements with two lender clients and began offering outsourced tuition planning, tuition billing and payment technology services for educational institutions through TMS. On June 30, 2011, we launched two Monogram-based loan programs through Union Federal and began accepting applications under these programs on July 1, 2011. In November 2011, we began offering refund management services to education institutions and students through TMS. Successful sales of our service offerings, particularly our Monogram platform and TMS services, will be critical to stemming the losses of our Education Financing segment and growing and diversifying our revenues and client base in the future.

We are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current economic environment where there has been reluctance by many lenders to focus on education lending opportunities. Moreover, we are uncertain of the extent to which borrowers will choose Monogram-based loans offered by our lender clients, which depends, in part, on competitive factors such as brand and pricing. We are uncertain of the total application volume for the 2012-2013 academic year and beyond, the extent to which application volume will ultimately result in disbursed loans or the overall characteristics of the disbursed loan portfolio. If we are unsuccessful in originating Monogram-based loans, we may encounter difficulty in the future in signing new lender clients.

Commercial banks have historically served as the initial funding sources for the education loans we facilitate and have been our principal clients. Since the first quarter of fiscal 2008, we have not facilitated take-out securitization transactions to support the long-term funding of education loans, and commercial banks may be facing liquidity and credit challenges from other sources, in particular mortgage, auto loan and credit card lending losses. In addition, the synergies that previously existed between federal and private education loan marketing have been eliminated by legislation that eliminated the Federal Family Education Loan Program, or FFELP. As a result, many lenders have re-evaluated their business strategies related to education lending. In light of legislative changes, general economic conditions, capital markets disruptions and the overall credit performance of consumer-related loans, the education loan business may generally be less attractive to commercial banks than in the past.

Some of our former clients have exited the education loan market completely. To the extent that commercial banks exit the education loan market, the number of our prospective clients diminishes. One of our primary challenges is to convince national and regional lenders that they can address the market opportunity in a manner that meets their desired risk control and return objectives. A related challenge is to successfully finance education loans generated through our Monogram platform through capital market transactions. We cannot assure you that we will be successful in either the short term or the long term in meeting these challenges.

Our revised business model depends on our ability to facilitate education loan volumes substantially in excess of those that we have originated to date and those contemplated by our three initial lender clients’ Monogram-based loan programs. As a result of continued instability in the capital markets generally and the market for securitized education loans in particular, as well as the tightening by lending institutions of their underwriting standards in the current economic environment, we have been required to expend capital to

support loan volume under our Monogram platform. Specifically, a portion of the loan volume to date under our Monogram platform has been originated by our subsidiary Union Federal and we have been further required to provide credit enhancements for Monogram-based loans originated by all three of our initial lender clients by funding participation accounts or, in the case of Union Federal, deposit accounts, to serve as a first-loss reserve for defaulted program loans. While we believe that we have sufficient capital resources to continue to provide such support to our Monogram platform under our revised business model, our ability to return to profitability while maintaining appropriate levels of liquidity will be predicated, in part, on our ability to fund participation accounts at levels lower than we are today, as well as the availability of higher capital market advance rates, including the re-emergence of subordinated bonds in the private education loan securitization market, than are available today.

Our business, financial condition, results of operations and cash flows will be adversely affected if we do not achieve widespread market acceptance of loan programs based on our Monogram platform.

Through May 10, 2012, we had entered into loan program agreements with three lender clients for Monogram-based loan programs, including our subsidiary Union Federal. The process of negotiating loan program agreements can be lengthy and complicated. Both the timing and success of contractual negotiations are unpredictable and partially outside of our control, and we cannot assure you that we will successfully identify potential clients or ultimately reach acceptable terms with any particular party with which we begin negotiations. Deployment of our Monogram platform, and disbursed loan volume under our lender clients’ Monogram-based loan programs, has been limited, and we will need to gain widespread market acceptance of our Monogram platform among lenders, and of our lender clients’ Monogram-based loan programs among borrowers, in order to improve our long-term financial condition, results of operations and cash flow. If we do not succeed in doing so, we may need to re-evaluate our business plans and operations.

The Union Federal Private Student Loan Program has generated a significant percentage of the loan volumes that we have processed through May 10, 2012. This loan program is subject to regulatory approvals and conditions, as well as regulatory capital requirements. In particular, Union Federal’s business plan includes a limit on the amount of education loans to be held on its balance sheet, and any material change to Union Federal’s business plan would be subject to regulatory conditions, as well as prior regulatory approval for any interim or permanent financing of education loan portfolios held by Union Federal, including future securitization transactions. As a result, we cannot assure you that Union Federal will be able to serve as a meaningful funding lender in the future for Monogram-based loan programs.

In connection with our initial three lender clients’ Monogram-based loan programs, we have provided credit enhancements by funding participation accounts or, in the case of Union Federal, deposit accounts, to serve as a first-loss reserve for defaulted program loans. We have limited amounts of cash available to offer to prospective clients, and there is a risk that lenders will not enter into loan program agreements with us unless we offer credit enhancement. We expect that the amount of any such credit enhancement arrangement offered to a particular lender would be determined based on the particular terms of the lender’s loan program, including the anticipated size of the lender’s program and the underwriting guidelines of the program, as well as the particular terms of our business relationship with the lender. Should additional lenders require credit enhancement from us as a condition to entering into a loan program agreement, our growth may be constrained by the level of capital available to us. In addition, growth of Union Federal’s Monogram-based loan programs may be constrained by the amount of regulatory capital we are able to provide.

We have made initial deposits toward our credit enhancement arrangements and agreed to provide periodic supplemental deposits, up to specified limits, during the disbursement periods under our loan program agreements based on the credit mix and volume of disbursed program loans and adjustments to default projections for program loans. To the extent that outstanding loan volume decreases as a result of repayments, or if actual loan volumes or default experience are less than our funded amounts, we are eligible to receive periodic releases of funds. The timing and amount of releases from the participation accounts are uncertain and vary among the lenders. As of April 30, 2012, the balance of our funded credit enhancements was $4.1 million. We could lose some or all of the amounts that we have deposited, or will deposit in the future, in the participation accounts, depending on the performance of the portfolio of program loans. Such losses would erode our liquidity position and could damage business prospects for our Monogram platform.

Our Monogram platform is based on proprietary scoring models and risk mitigation and pricing strategies that we have developed. We have limited experience with the actual performance of loan portfolios generated by lenders based on our Monogram platform, and we may need to adjust marketing, pricing or other strategies from time to time based on the distribution of loan volume among credit tiers or competitive considerations. We must closely monitor the characteristics and performance of each lender’s loan portfolio in order to suggest adjustments to the lenders’ programs and tailor our default prevention and collections management strategies. The infrastructure that we have built for such monitoring requires extensive operational and data integration among the loan servicer,

multiple default prevention and recovery agencies, and us. To the extent that our infrastructure is inadequate or we are otherwise unsuccessful in identifying portfolio performance characteristics and trends, or to the extent that lenders are unwilling to adjust their loan programs, our risk of losing amounts deposited in the participation accounts or, in the case of Union Federal, deposit accounts, may increase.

We will need to facilitate substantial loan volume in order to return to profitability.

We designed our Monogram platform, in part, to reduce our dependence on the securitization market in order to generate revenue. Although we expect to generate ongoing monthly revenue through the maturity of the program loans, we will need to facilitate loan volumes substantially in excess of those that we have originated to date, and substantially in excess of those contemplated by our three initial lender clients’ Monogram-based loan programs, in order for our Education Financing segment to return to profitability. We need to attract additional lender clients, or otherwise obtain additional sources of interim or permanent financing, particularly in light of regulatory conditions and approvals relating to Union Federal’s Monogram-based loan programs. As a result of legislative changes that significantly reduced the profit margins of traditional non-governmental providers of federal loans and eliminated FFELP as of July 2010, as well as the capital markets disruptions and declining credit performance of consumer-related loans, including education loans, many lenders have re-evaluated their business strategies related to education lending and exited the marketplace altogether. Demand for our services may not increase unless additional lenders enter or re-enter the marketplace, which could depend in part on capital markets conditions and improved market conditions for other consumer financing segments. In addition, because the revenues that we expect to generate for Monogram-based loan programs will depend in part on the size, credit mix and actual performance of our lender clients’ loan portfolios, it is difficult for us to forecast the level or timing of our revenues or income with respect to our Monogram platform generally or a specific lender client’s Monogram-based loan program.

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

We offer our clients and prospective clients, national and regional financial and educational institutions, services in structuring and supporting their education loan programs. The outsourcing services market in which we operate remains competitive with a number of active participants, some of which have longer operating histories and significantly greater financial, marketing, technical or other competitive resources than we or our clients have, including funding capacity. As a result, our competitors or potential competitors may be better able to overcome capital markets dislocations, adapt more quickly to new or emerging technologies and changes in customer preferences, compete for skilled professionals, build upon efficiencies based on a larger volume of loan transactions, fund internal growth and compete for market share, generally, than we are. In particular, competitors with larger customer bases, greater name or brand recognition, or more established customer relationships than those of our clients have an advantage in attracting loan applicants at a lower acquisition cost than us and making education loans on a recurring, or “serialized,” basis. These disadvantages for us are particularly acute now because our initial lender clients’ Monogram-based loan programs were initially launched in late fiscal 2011.

Based on the range of services that we offer, we believe that SLM Corporation, also known as Sallie Mae, is our principal competitor. Sallie Mae has announced that it intends to concentrate on growth of its private education loan volumes, particularly following the elimination of FFELP. Our business could be adversely affected if Sallie Mae’s private education loan programs continues to grow, or if Sallie Mae seeks to market more aggressively to third parties the full range of services that we offer. Other education loan competitors include Wells Fargo & Company and Discover Financial Services. In addition, Sallie Mae, FACTS Management and Higher One Payments, Inc. compete directly with TMS.

We may face competition from loan originators, including our clients or former clients, if they choose to develop an internal capability to provide any of the services that we currently offer. For example, a loan originator that has developed, or decides to develop, a portfolio management or capital markets function may not choose to engage us for our services. Historically, lenders in the education loan market have focused their lending activities on federal loans because of the relative size of the federal loan market and because the federal government guarantees repayment of those loans, thereby significantly limiting the lenders’ credit risk. Following the elimination of FFELP, lenders are more focused on private education loans and may be less reluctant than in the past to develop an internal capacity to conduct the services that we provide, which could result in a decline in the potential market for our services.

We cannot assure you that we will be able to compete successfully with new or existing competitors. If we are not able to compete effectively, our results of operations may be adversely affected.

The growth of our business could be adversely affected by changes in government education loan programs or expansions in the population of students eligible for loans under government education loan programs.

We focus our business on the market for private education loans, and the majority of our business is concentrated in products for post-secondary education. The availability and terms of loans that the government originates or guarantees affects the demand for private education loans because students and their families often rely on private education loans to bridge a gap between available funds, including family savings, scholarships, grants and federal and state loans, and the costs of post-secondary education. The federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student eligibility. These guidelines are generally adjusted in connection with funding authorizations from the U.S. Congress for programs under the Higher Education Act of 1965. Recent federal legislation expanded federal grant and loan assistance, which could weaken the demand for private education loans. In addition, the elimination of FFELP could result in increased competition in the market for private education loans, which could adversely affect the volume of private education loans and future capital markets transactions, if any, that we facilitate and impede the growth of our business. On the other hand, the reinstatement of FFELP, or similar federal or state programs which make additional government loan funds available, could decrease the demand for private education loans.

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

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Increased the loan limits for unsubsidized Stafford loans for undergraduate students; and

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Permitted a parent borrower under the federal Parent Loan for Undergraduate Students, or PLUS, loan program to defer repayment of a PLUS loan until six months after the student ceases to carry at least one-half the normal full-time academic workload.

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

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Significant restrictions on the marketing of private education loans; and

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Significant compliance burdens to private education loan lenders by adding new Truth-in-Lending Act, or TILA, disclosures, procedures and rescission rights, as well as accompanying civil penalties.

Access to alternative means of financing the costs of education may reduce demand for private education loans.

The demand for private education loans could weaken if student borrowers use other vehicles to bridge the gap between available funds and costs of post-secondary education. These vehicles include, among others:

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Home equity loans or other borrowings available to families to finance their education costs;

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Pre-paid tuition plans, which allow students to pay tuition at today’s rates to cover tuition costs in the future;

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Section 529 plans, which include both prepaid tuition plans and college savings plans that allow a family to save funds on a tax-advantaged basis;

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Education IRAs, now known as Coverdell Education Savings Accounts, under which a holder can make annual contributions for education savings;

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Government education loan programs, generally; and

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Direct loans from colleges and universities.

If demand for private education loans weakens, we would experience reduced demand for our services, which could have a material adverse effect on our results of operations.

Continuation of the current economic conditions could adversely affect the education loan industry.

High unemployment rates and the unsteady financial sector have adversely affected many consumers, loan applicants and borrowers throughout the country. Loan applicants that have experienced trouble repaying credit obligations may not be able to meet the credit standards of our lender clients’ Monogram-based loans, which could limit our lending market or have a negative effect on the rate at which loan applications convert into disbursed loans. In addition, current borrowers may experience more trouble in repaying credit obligations, which could increase loan delinquencies, defaults and forbearance, or otherwise negatively affect loan portfolio

performance and the estimated fair value of our service revenue receivables and our participation accounts. Forbearance programs may have the effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance. In addition, some consumers may find that higher education is an unnecessary investment during turbulent economic times and defer enrollment in educational institutions until the economy improves or turn to less costly forms of secondary education, thus decreasing education loan application and funding volumes. Finally, many lending institutions have been reluctant to lend and have significantly tightened their underwriting standards, and several clients and potential clients have exited the education loan business and may not seek our services as the economy improves. If the adverse economic environment continues, our financial condition may deteriorate for any one of the foregoing reasons.

If our clients do not actively or successfully market and fund education loans, our business will be adversely affected.

We have in the past relied, and will continue to rely in part, on our clients to market and fund education loans to borrowers. If our clients do not devote sufficient time, emphasis or resources to marketing their Monogram-based loan programs or are not successful in these efforts, then we may not reach the full potential of our capacity for facilitated loan volume and our business will be adversely affected. In addition, our lender clients’ Monogram-based loan programs, and related marketing efforts, will not necessarily extend nationwide and, in fact, may focus on a limited geographic footprint.

In addition, if education loans were or are marketed by our clients in a manner that is unfair or deceptive, or if the marketing, origination or servicing violated or violates any applicable law, federal or state unfair and deceptive practices acts could impose liability or create defenses to the enforceability of the loan. Investigations by state Attorneys General, the CFPB, the U.S. Congress or others could have a negative impact on lenders’ desire to market education loans. The Higher Education Opportunity Act creates significant additional restrictions on the marketing of education loans.

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

Our cost reduction initiatives have placed and will continue to place a burden on our management, systems and resources, generally increasing our dependence on key persons and reducing functional back-ups. The reorganization of our management structure in support of these initiatives also resulted in the loss of many of our former senior managers, many of whom possessed institutional knowledge and experience with our business that cannot be immediately replaced through the hiring of new managers. We must retain, train, supervise and manage our employees effectively during this period of change in our business and our ability to respond in a timely and effective fashion to unanticipated exigencies of our new business model could be negatively affected during this transition. Furthermore, we believe that retaining our employees may become more difficult as we face an increasingly competitive landscape with respect to talented employees as the economy begins to re-emerge from the financial crisis. As a result of these recent changes in our management structure we are particularly dependent on the continuing members of our management team and the loss of any of these key employees could adversely affect our business.

We may outsource some borrower or client service functions in an effort to reduce costs, take advantage of technologies and effectively manage the seasonality associated with education loan volume and tuition payment processing. We rely on our vendors to provide high levels of service and support. Our reliance on external vendors subjects us to risks associated with inadequate or untimely service and could result in problems with service or support that we would not experience if we performed the service functions in-house.

We cannot assure you that we will be able to:

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Expand our capabilities or systems effectively;

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Successfully develop or implement new products or services;

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Allocate our human resources optimally;

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Identify, hire or retain qualified employees or vendors; or

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Incorporate effectively the components of any business that we may acquire in our effort to achieve growth.

If we are unable to manage our cost reductions, or if we lose key employees or are unable to attract and properly train new employees, our operations and our financial results could be adversely affected.

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

We own a database of historical information on education loan performance that we use to help us enhance our proprietary origination risk score model, determine the terms of portfolio funding transactions and derive the estimates and assumptions we make in preparing our financial statements and cash flow models. We have also developed a proprietary loan information processing system to enhance our application processing and loan origination capabilities. We believe that our education loan database and loan information processing system provide us with a competitive advantage in offering our services. A third party could create or acquire databases and systems such as ours, and TERI possesses certain historical information related to loans formerly guaranteed by TERI. As lenders and other organizations in the education loan market originate or service loans, they compile over time information for their own education loan performance database. Our competitors and potential competitors may have originated or serviced a greater volume of education loans than we have over the past three fiscal years, which may have provided them with comparatively greater borrower or loan data, particularly during the most recent economic cycle. If a third party creates or acquires an education loan database or develops a loan information processing system, our competitive positioning, ability to attract new clients and business could be adversely affected.

In November 2010, following the confirmation of its plan of reorganization, TERI filed with the United States Bankruptcy Court for the District of Masschusetts, or Bankruptcy Court a Motion for Interpretation of Order, effectively requesting the Bankruptcy Court to rule that certain contractual restrictions on TERI’s rights have lapsed with respect to a loan database that we provided in 2008. We refer to this matter as the Database Dispute. In general, the contractual restrictions limited TERI to using or disclosing that loan database in connection with education loan guaranty programs offered and guaranteed by TERI. In December 2010, the Bankruptcy Court issued an order with respect to the Database Dispute, which we refer to as the Database Order, in response to TERI’s motion. The Database Order stated that an earlier order issued by the Bankruptcy Court in June 2008 was not intended to extend the contractual restrictions applicable to TERI beyond two years following the termination by TERI of our 2001 database sale and supplementation agreement. TERI rejected that agreement effective as of May 31, 2008. In December 2010, FMD filed in Bankruptcy Court a notice of appeal of the Database Order and an election to have the appeal heard in the United States District Court for the District of Massachusetts, which we refer to as the District Court. On December 8, 2011, the District Court affirmed the Database Order, which we refer to as the District Court Order. On January 4, 2012, FMD filed a notice of appeal of the District Court Order with the United States Court of Appeals for the First Circuit. If we are not successful in preventing TERI from selling, licensing or transferring the subset of our database that we provided in 2008, the competitive advantage of our loan database could diminish.

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

We rely on trade secret laws and restrictions on disclosure to protect our proprietary information and processes. We have entered into confidentiality agreements with third parties and with most of our employees to maintain the confidentiality of our trade secrets and proprietary information. These methods may neither effectively prevent use or disclosure of our confidential or proprietary information nor provide meaningful protection for our confidential or proprietary information if there is unauthorized use or disclosure. Although we sought in the context of the TERI Reorganization to limit TERI’s rights with respect to a historical loan database that we provided in 2008, the Bankruptcy Court issued the Database Order in December 2010, which was affirmed by the District Court in December 2011. We may not ultimately be successful in preventing TERI from selling, licensing or transferring that database.

We own no material patents. Accordingly, our technology, including our loan information processing systems, is not covered by patents that would preclude or inhibit competitors from entering our market. Monitoring unauthorized use of the systems and processes that we have developed is difficult, and we cannot be certain that the steps that we have taken will prevent unauthorized use of our technology. Furthermore, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and services could be adversely affected.

Our business processes are becoming increasingly dependent upon technological advancement, and we could lose clients and market share if we are not able to keep pace with rapid changes in technology.

Our future success depends, in part, on our ability to process loan applications and tuition-related payments in an automated manner with high-quality service standards. The volume of loan originations and tuition-related payments that we are able to process is based, in large part, on the systems and processes we have implemented and developed. These systems and processes are becoming increasingly dependent upon technological advancement, such as the ability to process loans and payments over the Internet, accept electronic signatures and provide initial decisions instantly. Our future success also depends, in part, on our ability to develop and implement technology solutions that anticipate and keep pace with continuing changes in technology, industry standards and client

preferences. We may not be successful in anticipating or responding to these developments on a timely basis. In addition, the industry in which TMS competes has undergone rapid technological change over the past several years. We have made, and need to continue to make in the near-term, investments in TMS’ technology platform in order to enable TMS to provide products and services to its clients, and compete, more effectively. If competitors in any business line introduce products, services, systems and processes that are better than ours or that gain greater market acceptance, those that we offer or use may become obsolete or noncompetitive. In addition, if we fail to execute our lender clients’ origination requirements or properly administer our clients’ credit agreement templates or required disclosures, or if TMS fails to properly administer its tuition payment plans or other services, we could be subject to breach of contract claims and related damages. Any one of these circumstances could have a material adverse effect on our business reputation and ability to obtain and retain clients.

We may be required to expend significant funds to develop or acquire new technologies. If we cannot offer new technologies as quickly as our competitors, we could lose clients and market share. We also could lose market share if our competitors develop more cost effective technologies than those we offer or develop.

Our business could be adversely affected if PHEAA fails to provide adequate, proper or timely services or if our relationship with PHEAA terminates.

As of March 31, 2012, the Pennsylvania Higher Education Assistance Agency, also known as AES and which we refer to as PHEAA, serviced a substantial majority of education loans held by the securitization trusts that we administered and served as the sole loan servicer for loan programs based on our Monogram platform. Our arrangements with PHEAA allow us to avoid the overhead investment in servicing operations, but require us to rely on PHEAA to adequately service the education loans, including collecting payments, responding to borrower inquiries, effectively implementing servicing guidelines applicable to loans and communicating with borrowers whose loans have become delinquent. Reliance on PHEAA and other third parties to perform education loan servicing or collections subjects us to risks associated with inadequate, improper or untimely services. In the case of PHEAA, these risks include the failure to properly administer servicing guidelines, including forbearance programs, and failure to provide notice of developments in prepayments, delinquencies and defaults, and usage rates for forbearance programs, including alternative payment plans. In the case of third party collection agencies, these risks include failure to properly administer collections guidelines and compliance with federal and state laws and regulations relating to interactions with debtors. If our relationship with PHEAA terminates, we would either need to expand our operations or develop a relationship with another loan servicer, which could be time consuming and costly. In such event, our business could be adversely affected.

An interruption in or breach of our information systems, or those of a third party on which we rely, may result in lost business.

We rely heavily upon communications and information systems to conduct our business. Our systems and operations are potentially vulnerable to damage or interruption from network failure, hardware failure, software failure, power or telecommunications failures, computer viruses and worms, penetration of our network by hackers or other unauthorized users and natural disasters. Any failure, interruption or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received, slower processing of applications or tuition-related payments, and reduced efficiency in loan processing or our other services, including TMS’ services. A failure, interruption or breach in security could also result in an obligation to notify clients in a number of states that require such notification, with possible civil liability resulting from such failure, interruption or breach. Although we maintain and periodically test a business continuity and disaster recovery plan, the majority of our infrastructure and employees are concentrated in the Boston, Massachusetts and Providence, Rhode Island metropolitan areas. An interruption in services for any reason could adversely affect our ability to activate our contingency plan if we are unable to communicate among locations or employees.

We cannot assure you that systems failures, interruptions or breaches will not occur, or if they do occur that we or the third parties on whom we rely will adequately address them. The precautionary measures that we have implemented to avoid systems outages and to minimize the effects of any data or communication systems interruptions may not be adequate, and we may not have anticipated or addressed all of the potential events that could threaten or undermine our information systems. The occurrence of any systems failure, interruption or breach could significantly impair the reputation of our brand, diminish the attractiveness of our services and harm our business.

If we or one of our third party service providers experience a data security breach and confidential customer information is disclosed, we may be subject to penalties imposed by regulators, civil actions for damages and negative publicity, which could affect our customer relationships and have a material adverse effect on our business. In addition, state and federal legislative proposals, if enacted, may impose additional requirements on us to safeguard confidential customer information, which may result in increased compliance costs.

Data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislation, legislative proposals and regulatory rule-making to address data privacy and security. Consequently, we may be subject to rapidly changing and increasingly extensive requirements intended to protect the consumer information that we process in connection with education loans and tuition payment plans. Implementation of systems and procedures to address these requirements has increased our compliance costs, and these costs may increase further as new requirements emerge. If we or one of our third party service providers were to experience a data security breach, or if we or the securitization trusts that we administer were to otherwise improperly disclose confidential customer or consumer information, such breach or other disclosure could generate negative publicity about us and could adversely affect our relationships with our clients, including the lenders and educational institutions with which we do business. This could have a material adverse effect on our business. In addition, such pending legislative proposals and regulations, if adopted, likely would result in substantial penalties for unauthorized disclosure of confidential consumer information. Failure to comply with those requirements could result in regulatory sanctions imposed on our lender clients and loss of business for us.

Risks Related to Our Financial Reporting and Liquidity

We have consolidated and subsequently deconsolidated certain securitization trusts in our financial results, which has resulted in significant changes to the presentation of our financial statements.

As a result of our adoption of ASU 2009-16 and ASU 2009-17 effective July 1, 2010, we consolidated 14 securitization trusts that we facilitated during fiscal 2004 through fiscal 2008 and previously accounted for off-balance sheet, and we deconsolidated our subsidiary UFSB Private Loan SPV, LLC, or UFSB-SPV. As a result of these changes, as of July 1, 2010, we recorded a net increase in total assets and total liabilities of approximately $7.90 billion and $8.78 billion, respectively, and a net decrease in total stockholders’ equity of approximately $880.1 million. We adjusted our opening retained earnings by $990.3 million for the net deficit of the consolidated securitization trusts, which was partially offset by an adjustment of $110.2 million to remove the deficit of UFSB-SPV and reverse certain deferred tax asset valuation allowances. In addition, beginning with the first quarter of fiscal 2011, we recognized interest income associated with securitized assets, including education loans held by the consolidated securitization trusts, in the same line item as interest income from non-securitized assets, as well as a provision for loan losses, and we recognized interest expense associated with debt issued by the consolidated securitization trusts to third-party investors on the same line item as other interest-bearing liabilities of FMD. We recognize trust updates from additional structural advisory fees and residual receivables, and administrative and other fees, from off-balance sheet VIEs that are not consolidated.

On March 30, 2012, FMDS terminated its agreement with our subsidiary FMER for special servicing of the GATE Trusts. As a result, we no longer had the power to direct the activities that most significantly impact the performance of the GATE Trusts and, therefore, we were no longer the primary beneficiary of the GATE Trusts. We deconsolidated $258.0 million of total assets and $260.0 million of total liabilities of the GATE Trusts effective March 31, 2012. We recognized a non-cash gain of $1.7 million in our Securitization Trusts segment upon deconsolidation, representing the accumulated deficits in these trusts. We also recognized an additional gain of $9.2 million, representing the residual interests related to the GATE Trusts that were previously eliminated as a result of our adoption of ASU 2009-17, resulting in a total non-cash gain of $10.9 million upon the deconsolidation event.

These deconsolidations may make it challenging to compare results for periods in which we do not consolidate these trusts with results for periods in which we have consolidated these trusts. See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information. Following these deconsolidations, we remain subject to ASU 2009-17.

ASU 2009-17 may result in increased volatility in our reported financial condition and results of operations.

Under ASU 2009-17, the determination of whether to consolidate a VIE is based on whether the company is considered to be the primary beneficiary. Such determination is based on both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. The nature of these determinations, made on an entity-by-entity basis, requires a high level of subjectivity and judgment.

We are required to continuously reassess whether consolidation or deconsolidation of a VIE is appropriate. As a result, determinations that we make from time to time will be susceptible to change. For example, upon the sale of our interests in the structuring advisory agreements relating to the Trusts and the asset services agreement, we determined that we no longer held a variable interest in the NCSLT Trusts and were, therefore, no longer the primary beneficiary of the NCSLT Trusts. In addition, upon FMDS’ termination of its agreement with FMER to provide special servicing of the GATE Trusts, we no longer had the power to direct the activities that most significantly impact the performance of the GATE Trusts and, therefore, we determined that were no longer the primary beneficiary of the GATE Trusts. See Note 3, “Deconsolidations of Securitization Trusts,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

We continue to monitor our involvement with each unconsolidated VIE for which we perform services related to default prevention and collections management. We have determined that we are not the primary beneficiary of any unconsolidated VIE 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. A significant change to the pertinent rights of other parties or us, or a significant change to the range of possible financial 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. Given the size of each of our VIEs, any decision to consolidate or deconsolidate a VIE could result in significant changes to our reported assets and liabilities and results of operations during the fiscal quarter in which the change occurs. Changes in our determinations to consolidate or deconsolidate a VIE may also lead to increased volatility in our financial results and make comparisons of results between time periods challenging. See Note 4, “Consolidation—Reassessment of Consolidation of VIEs,” in the notes to our consolidated financial statements included in Item 8 of Part II of our Annual Report for additional information.

The accounting for these matters is complex. Failure to accurately apply ASU 2009-17 could result in additional deconsolidation or consolidation of securitization trusts, which could materially affect our financial statements and make analysis of our financial standing difficult. As we continue to execute our business model, we may be required to consolidate future financing transactions in accordance with ASU 2009-17.

Our consolidated financial statements include a number of estimates, which reflect management’s judgments. Some of our estimates also rely on certain assumptions. The most significant estimates we make include the determination of which securitization trusts to consolidate, the allowance for loan losses and related provision, income taxes relating to uncertain tax positions accrued for under FIN 48 (now incorporated into ASC 740,Income Taxes), the valuation of our deposits for participation accounts, recognition of interest income on delinquent and defaulted education loans and our determination of goodwill and intangible asset impairment.

In our determination of the fair value of our service revenue receivables and deposits for participation accounts, we use discounted cash flow modeling techniques and certain assumptions to estimate fair value because there are no quoted market prices. Our key assumptions to estimate fair value include, as applicable:

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Discount rates, which we use to estimate the present fair value of our future cash flows;

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The annual rate and timing of education loan prepayments;

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The trend of interest rates over the life of the loan pool, including the forward LIBOR curve, which is a projection of future LIBOR rates over time;

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The expected annual rate and timing of education loan defaults, including the effects of various risk mitigation strategies, such as forbearance programs and alternative payment plans; and

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The expected amount and timing of recoveries on defaulted education loans, including collections costs.

We use the same projected default and recovery assumptions, and may use additional subjective adjustments, to determine the allowance for loan losses and related provision. Because our estimates rely on quantitative and qualitative factors, including macroeconomic indicators and our historical experience to predict default, recovery and prepayment rates, management’s ability to determine which factors should be more heavily weighted in our estimates, and to accurately incorporate those factors into our loan performance assumptions, are subjective and can have a material effect on valuations.

If the actual performance of the education loan portfolios held by us or our clients who hold Monogram-based loans were to vary appreciably from the assumptions we use, we may need to adjust our key assumptions. Such an adjustment could materially affect our earnings in the period in which our assumptions change. In addition, our actual loan losses could be significantly greater than our allowance, and our actual service revenues or releases from participation accounts could be significantly less than reflected in our current financial statements. In particular, economic, regulatory, competitive and other factors affecting the key assumptions used in the cash flow model could cause or contribute to differences between actual performance of the portfolios and our other key assumptions. Furthermore, the GATE Trusts generally hold education loans that benefit from credit enhancement arrangements from the borrowers’ educational institutions or with a lender that has provided a guaranty on behalf of certain educational institutions, up to specified limits. If loan default experience exceeds the guarantees on the education loans that benefit from these credit enhancement arrangements, or if the guarantors of such loans are unable to fulfill their respective responsibilities, our financial results could be adversely affected.

Effective March 31, 2009, we completed the sale of the Trust Certificate, which generated a cash refund of income taxes previously paid of $189.3 million. The federal and state income tax consequences of the sale of the Trust Certificate, however, are complex and uncertain. The IRS has begun an audit of our tax returns for fiscal 2007 through fiscal 2010, including a review of the tax treatment of the sale of the Trust Certificate, as well as the $45.1 million income tax refund that we received in October 2010. The IRS or a state taxing authority could challenge our tax position in connection with the transactions, notwithstanding our receipt of any income tax refund. If such a challenge were successful, in whole or in part, we may not keep all or a portion of any refund of income taxes previously paid, or we may not eliminate our income tax obligations relating to the Trust Certificate. In either case, our near-term and long-term financial condition and liquidity would be materially adversely affected. In addition, any investigation, audit or suit relating to the sale of the Trust Certificate, including any such proceeding brought by the IRS, could result in substantial costs. As of March 31, 2012, the IRS had not issued any notice of proposed adjustment in connection with its audit.

In addition, we are involved in several matters before the ATB relating to the Massachusetts tax treatment of GATE. We took the position in these proceedings that GATE was properly taxable as a financial institution and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue, or Commissioner, took alternative positions: that GATE was properly taxable as a business corporation, or that GATE was taxable as a financial institution, but was not entitled to apportionment or was subject to 100% Massachusetts apportionment. In December 2009, the Commissioner made additional assessments of taxes, along with accrued interest, of approximately $11.9 million for GATE’s taxable years ended June 30, 2004, 2005 and 2006 and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. On November 9, 2011, the ATB issued the Order regarding these proceedings. In March 2012, we made a $5.1 million payment that satisfied our obligation to the Massachusetts Department of Revenue for GATE’s taxable years ended June 30, 2004, 2005 and 2006. Any appeal of the Order by us would occur only after the issuance of the ATB’s opinion and could include a refund claim with respect to the $5.1 million payment made in the third quarter of fiscal 2012. The Commissioner may also consider an appeal of the Order’s findings. If we are unsuccessful in an appeal of the Order, we could be required to make additional tax payments for GATE’s taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position. We cannot predict the timing of any such payments at this time.

See Note 10, “Commitments and Contingencies—Income Tax Matters,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information on the IRS audit and the ATB matters.

In connection with Union Federal’s sale of an education loan portfolio in October 2009, FMD delivered a performance guaranty to the purchaser of the loan portfolio. See Note 10, “Commitments and Contingencies—Performance Guaranty,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information. If Union Federal were to default in the performance of any of its obligations or agreements under the loan purchase and sale agreement, including its indemnification or loan repurchase obligations, FMD would be required to perform such obligations. As a result, we may incur substantial costs pursuant to the performance guaranty if Union Federal were unable to perform its obligations.

In April 2010, FMD and certain of its subsidiaries entered into agreements relating to the restructuring of the education loan warehouse facility of UFSB-SPV. In connection with the restructuring, the third party conduit lender released potential claims against Union Federal and UFSB-SPV pursuant to an indenture relating to the facility based upon events arising prior to April 16, 2010, subject to certain liability limits. FMD 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 same liability limits. In addition, FMD assumed any contingent liability of Union Federal under the facility arising prior to April 16, 2010 based on fraud, willful misconduct or gross negligence, and agreed to provide a separate indemnity for third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors. On December 15, 2011, FMD and certain of its subsidiaries entered into a letter agreement with the conduit lender and other secured parties pursuant to which, among other things, the conduit lender foreclosed on the collateral in satisfaction of UFSB-SPV’s obligations under the facility, the parties agreed to maintain existing servicing arrangements with respect to the education loan portfolio formerly serving as collateral and the parties agreed that the obligations assumed by FMD, but not its separate indemnity, will terminate on June 30, 2012. See Note 10, “Commitments and Contingencies—Assumption of Potential Contingent Liabilities of Union Federal,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information. As a result, we may incur substantial costs in the event of a claim for damages related to the facility, which could have a material adverse affect on our liquidity or financial condition.

Changes in interest rates could affect the value of our additional structural advisory fee and residual receivables, as well as demand for education loans and our services.

Education loans held by us and the securitization trusts facilitated by us typically carry floating interest rates tied to prevailing short-term interest rates. Changes in interest rates could have the following effects on us:

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Higher interest rates would increase the cost of the loan to the borrower, which, in turn, could cause an increase in delinquency and default rates for outstanding education loans, as well as increased use of forbearance programs;

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Higher interest rates, or the perception that interest rates could increase in the future, could cause an increase in full or partial prepayments; or

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An increase in interest rates could reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to decline.

Other factors, such as challenging economic times, including high unemployment rates, can also lead to an increase in delinquency and default rates or such use. If the prepayment or default rates increase for the education loans held by us, the GATE Trusts or our Monogram platform clients, we may experience a decline in the value of service revenue receivables and our participation accounts, as well as a decline in fees related to Monogram-based loan programs in the future, which could cause a decline in the price of our common stock and could also prevent, or make more challenging, any future portfolio funding transactions.

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

We have generated significant net losses since fiscal 2008, and we cannot predict at this time when or if our Education Financing segment will return to profitability. We may require additional funds for our products, operating expenses, including expenditures relating to TMS, capital in connection with credit enhancement arrangements for Monogram-based loan programs or capital markets financings, the pursuit of regulatory approvals, acquisition opportunities and the expansion of our capabilities. Historically, we have satisfied our funding needs primarily through fees earned from education loan asset-backed securitizations. We have not accessed the securitization market since fiscal 2008, and the securitization market may not be accessible to us in the future and, if available, on terms that are acceptable to us. We have also satisfied our funding needs through equity financings. We cannot be certain that additional public or private financing would be available in amounts or on terms acceptable to us, if at all. Although we believe that our capital resources as of March 31, 2012, which include proceeds of tax refunds under audit, are sufficient to satisfy our operating needs for the succeeding 12 months, we cannot assure you that they will be sufficient, particularly in light of ongoing income tax audits. Insufficient funds could require us to delay, scale back or eliminate certain of our products, eliminate our ability to provide credit enhancement commitments to prospective clients relating to Monogram-based loan programs, curtail or delay plans for TMS or further scale back our expenses. In addition, our short-term financing needs are subject to regulatory capital requirements related to Union Federal. See Note 15, “Union Federal Regulatory Matters,” in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

A significant portion of the purchase price for our acquisition of TMS is allocated to goodwill and intangible assets that are subject to periodic impairment evaluations. An impairment loss could have a material adverse impact on our financial condition and results of operations.

At March 31, 2012, we had $19.5 million of goodwill and $21.5 million of intangible assets related to our acquisition of TMS. As required by current accounting standards, we review intangible assets for impairment either annually or whenever changes in circumstances indicate that the carrying value may not be recoverable.

The risk of impairment to goodwill is higher during the early years following an acquisition. This is because the fair values of these assets align very closely with what we paid to acquire the reporting units to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value (typically referred to as “headroom”) is smaller at the time of acquisition. Until this headroom grows over time, due to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges. When impairment charges are triggered, they tend to be material due to the size of the assets involved.

Our financial and operating results are subject to seasonality and cyclicality.

The financial and operational results of our Education Financing segment are subject to seasonal trends. For example, the volume of education loan applications typically increases with the approach of tuition payment dates. Historically, we have processed the greatest loan application volume during the summer months, as students and their families seek to borrow money in order to pay tuition costs for the fall semester or the entire academic year. We expect this seasonality of education loan originations to continue as we re-enter the market and expect it to impact the amount of processing fees that we earn in a particular fiscal quarter and the level of expenses we incur to generate loan application volume and process the higher origination activity. In addition, TMS’ financial and operating results are also subject to seasonal trends, with plan enrollment activity and expenses generally increasing from March to July as TMS hires temporary staff to meet higher demand for enrollment in tuition payment plans for the succeeding school year. In addition, TMS holds restricted cash that represents tuition payments collected from students or their families on behalf of educational institutions. This cash reflects a certain cyclicality, tending to peak in August of each school year, early in the enrollment cycle, and to decrease in May, at the end of the school year. Since our acquisition of TMS on December 31, 2010, TMS’ restricted cash balances have ranged from a high of $346.8 million during August 2011 to a low of $64.0 million during May 2011.

Risks Related to Asset-Backed Securitizations and Other Funding Sources

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

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

Although our Monogram platform has been designed to generate recurring revenues with less dependence on the securitization market and third-party credit enhancement, we will need to facilitate loan volumes substantially in excess of those that we have originated to date, and substantially in excess of those contemplated by our three initial lender clients’ Monogram-based loan programs, in order for our Education Financing segment to return to profitability. Accordingly, our future financial results and growth may continue to be affected by our inability to structure securitizations or alternative financing transactions involving education loans on terms acceptable to us. In particular, such transactions may enable us to generate fee revenues or access and recycle capital previously deployed as credit enhancement for interim financing facilities. If we are able to facilitate securitizations in the near-term, we expect the structure and economics of the transactions to be substantially different from our past transactions, including lower revenues and additional cash requirements on our part.

If our inability to access the ABS market on acceptable terms continues, our revenues may continue to be adversely impacted, and we may continue to generate net losses, which would further erode our liquidity position.

A number of factors, some of which are beyond our control, have adversely affected and may continue to adversely affect our portfolio funding activities and thereby adversely affect our results of operations.

The success of our business may depend on our ability to structure securitizations or other funding transactions for our clients’ loan portfolios. Several factors have had, and may continue to have, a material adverse effect on both our ability to structure funding transactions and the revenue we may generate for providing our structural advisory and other services, including the following:

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Persistent and prolonged disruption or volatility in the capital markets generally or in the education loan ABS sector specifically, which could continue to restrict or delay our access to the capital markets;

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Our inability to generate sufficient loan volume through our Monogram platform;

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Continuing degradation of the credit quality or performance of the loan portfolios of the securitization trusts we facilitated or further adverse modifications in rating agency assumptions, ratings or conclusions with respect to the trusts that we have facilitated, which could reduce or eliminate investor demand for future securitizations that we facilitate, particularly for subordinate classes of ABS;

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Material breach of our obligations to clients, including securitization trusts and former or current lender clients;

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The timing and size of education loan asset-backed securitizations that other parties facilitate, or the adverse performance of, or other problems with, such securitizations, which could impact pricing or demand for our future securitizations, if any;

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Challenges to the enforceability of education loans based on violations of federal or state consumer protection or licensing laws and related regulations, or imposition of penalties or liabilities on assignees of education loans for violation of such laws and regulations;

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Our inability to structure and gain market acceptance for new products or services to meet new demands of ABS investors, rating agencies, or credit facility providers; and

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Changes to bankruptcy laws that change the current non-dischargeable status of education-related loans, which could materially adversely affect recovery rates on defaulted loans.

Recent legislation will affect the terms of future securitization transactions.

The SEC has proposed new rules governing ABS issuance that, due to the requirements for risk retention, may affect the desirability of issuing ABS as a funding strategy. In addition, the Dodd-Frank Act grants federal banking regulators substantial discretion in developing specific risk retention requirements for all types of consumer credit products and requires the SEC to establish new data requirements for all issuers, including standards for data format, asset-level or loan-level data, the nature and extent of the compensation of the broker or originator, and the amount of risk retention required by loan securitizers.

The Dodd-Frank Act and its implementing regulations, once adopted, will affect the terms of future securitization transactions, if any, that we facilitate and may result in greater risk retention and less flexibility for us in structuring such transactions.

We facilitated and structured a number of special purpose trusts that have been used in securitizations to finance education loans that our clients originated, including securitization trusts that have issued auction rate notes. Under applicable state and federal securities laws, if investors incur losses as a result of purchasing ABS that those securitization trusts have issued, we could be deemed responsible and could be liable to those investors for damages. We could also be liable to investors or other parties for certain updated information that we have provided subsequent to the original ABS issuances by the trusts. If we have failed to cause the securitization trusts or other transaction parties to disclose adequately all material information regarding an investment in any securities, if we or the trusts made statements that were misleading in any material respect in information delivered to investors in any securities or if we breach any duties as the structuring advisor, administrator or special servicer of the securitization trusts, it is possible that we could be sued and ultimately held liable to an investor or other transaction party. This risk includes failure to properly administer or oversee servicing or collections guidelines and may increase as the performance of the securitization trusts’ loan portfolios degrades, and rating agencies over the past several years have downgraded various ABS issued by the trusts we facilitated. TERI’s confirmed plan of reorganization provides exculpation for certain of our actions as administrator of the securitization trusts in connection with the TERI Reorganization, but the exculpation may not cover all of our actions as administrator of the trusts during the TERI Reorganization. Recent investigations by state Attorneys General, as well as private litigation, have focused on auction rate securities, including the marketing and trading of such securities. It is possible that we could become involved in such matters in the future. In addition, under various agreements entered into with underwriters or financial guaranty insurers of those ABS, as well as certain lenders, we are contractually bound to indemnify those persons if an investor is successful in seeking to recover any loss from those parties and the securitization trusts are found to have made a materially misleading statement or to have omitted material information.

If we are liable to an investor or other transaction party for a loss incurred in any of the securitizations that we have facilitated or structured and any insurance that we may have does not cover this liability or proves to be insufficient, our results of operations or financial position could be materially adversely affected.

We may determine to incur near-term losses based on longer-term strategic considerations.

We may consider long-term strategic considerations more important than short-term economic gains when assessing business arrangements and opportunities, including financing arrangements for education loans. For example, we expect the structure and pricing terms in near-term future securitization transactions, if any, to be substantially different from our past transactions, including lower revenues and additional cash requirements on our part. We may nevertheless determine to participate in, or structure, future financing transactions based on longer-term strategic considerations. As a result, net cash flows over the life of a future securitization trust, particularly any trust that we may facilitate in the near-term as we re-enter the securitization market, could be negative as a result of transaction size, transaction expenses or financing costs.

We serve as a special servicer to various securitization trusts that we facilitated. In that role, we manage and coordinate third party collection agencies, including account placement and borrower contact and recovery strategies. We are reimbursed by the securitization trusts for our expenses, including the fees and expenses of the third-party collection agencies, subject to pre-specified limits. We believe that our services as special servicer have generally had a positive effect on portfolio performance trends, which may facilitate our re-entry to the securitization market.

Risks Related to Regulatory Matters

We are subject to, or will become subject to, new supervision and regulations which could increase our costs of compliance and alter our business practices.

Various regulators have increased diligence and enforcement efforts and new laws and regulations have been passed or are under consideration in Congress as a result of turbulence in the financial services industry. The Dodd-Frank Act, which was signed into law on July 21, 2010, requires various federal agencies to adopt a broad range of new implementing rules and regulations, and the federal agencies are given significant discretion in drafting the implementing rules and regulations. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act also restructures the regulation of depository institutions. Under the Dodd-Frank Act, the OTS, which historically was the primary federal regulator for FMD and Union Federal, transferred its authority to the Federal Reserve and the OCC on July 21, 2011. On that date, the OCC, the primary federal regulator for national banks, became the primary federal regulator for federal thrifts, including Union Federal, and the Federal Reserve became the primary regulator for all savings and loan holding companies that were formerly regulated by the OTS, including FMD. Although the OCC and Federal Reserve are directed to

implement existing OTS regulations, orders, resolutions, determinations and agreements for thrifts and their holding companies under the Home Owners’ Loan Act, or HOLA, the transition of supervisory functions from the OTS to the OCC (with respect to Union Federal) and the Federal Reserve (with respect to FMD) could alter the supervisory approach for Union Federal and FMD. This could, in turn, affect the operations of FMD and Union Federal. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies, but they are not effective for five years.

In addition, the Dodd-Frank Act changes the federal preemption of state consumer protection laws. Prior to the enactment of the Dodd-Frank Act, OTS regulations provided that the HOLA, which authorized the creation of federal savings associations, and the OTS regulations that interpret the HOLA, preempted the entire field of state regulation in the critical areas of lending and deposit-taking, resulting in federal preemption of the bulk of state consumer protection laws in those areas. The Dodd-Frank Act, effective July 21, 2011, changed the legal standard for federal savings association preemption of state laws. As a result, state laws are now preempted only if those laws stand in conflict with federal laws. This “conflict” preemption standard is consistent with the standard for national bank preemption of state laws.

The Dodd-Frank Act establishes the CFPB as an independent agency within the Federal Reserve. The CFPB has been given broad powers, including the power to:

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Supervise non-depository institutions, including those that offer or provide education loans;

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Regulate consumer financial products, including education loans, and services offered primarily for personal, family or household purposes;

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Promulgate rules with respect to unfair, deceptive or abusive practices; and

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Take enforcement action against institutions under its supervision.

The CFPB may institute regulatory measures that directly impact our business operations. The CFPB was unable to supervise non-depository institutions or take action under its unfair, deceptive, or abusive acts or practices powers until a CFPB Bureau Director was confirmed. Now that a CFPB Bureau Director has been appointed, the CFPB has initiated its examination program of non-depository institutions (which could include service providers such as FMER). The Federal Trade Commission, or FTC, maintains parallel authority to enforce Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices against non-depository financial providers, such as FMER, TMS and Union Federal’s operating subsidiary FM Loan Origination Services, LLC, or FMLOS. The OCC maintains parallel authority to enforce Section 5 of the Federal Trade Commission Act against federal savings associations, such as Union Federal, as well as authority to examine and supervise federal savings associations with assets of less than $10 billion, such as Union Federal, for compliance with consumer protection laws.

The CFPB has significant rulemaking and enforcement powers and the potential reach of the CFPB’s broad new rulemaking powers and enforcement authority on the operations of financial institutions offering consumer financial products or services, including FMD, is currently unknown. In addition, the Dodd-Frank Act establishes a private education loan ombudsman within the CFPB, which would, among other things, receive, review and attempt to resolve informally complaints from education loan borrowers. Finally, the Dodd-Frank Act requires the CFPB and the Secretary of Education, in consultation with the FTC commissioners and the U.S. Attorney General, to submit a report, by July 21, 2012, on a variety of matters relating to the private education lending market, including education loan lenders. The CFPB has begun gathering data in connection with this report. The CFPB has initiated a number of projects focused on the education loan market, including a “Know Before You Owe” campaign designed to provide additional information to consumers and a new Office of Students intended to provide students with tools to facilitate decision making regarding various credit products, including education loans. These initiatives, and similar efforts with respect to other credit and retail banking products, could increase our costs and the complexity of our operations.

The Dodd-Frank Act also includes several provisions that could affect our future portfolio funding transactions, if any, including potential risk retention requirements applicable to any entity that organizes and initiates an ABS transaction, new disclosure and reporting requirements for each tranche of ABS, including new loan-level data requirements, and new disclosure requirements relating to the representations, warranties and enforcement mechanisms available to ABS investors. The Dodd-Frank Act may have a material impact on our operations, including through increased operating and compliance costs.

In addition, regulators and enforcement officials are taking increasingly expansive positions with respect to whether certain products or product terms may run afoul of state and federal unfair or deceptive acts and practices laws. Furthermore, as discussed above, the Dodd-Frank Act potentially expands the ambit of such laws by prohibiting “abusive” lender actions. These and other regulatory changes could result in, among other things, increased compliance costs, more limited lending markets and alterations to our business practices, any of which could have a material adverse effect on our business operations and financial results.

We are subject to regulation as a savings and loan holding company, and Union Federal is regulated extensively. We could incur additional costs in complying with regulations applicable to savings and loan holding companies and savings banks, or significant penalties if we fail to comply.

As a result of our acquisition of Union Federal in November 2006, we became subject to regulation as a savings and loan holding company, and our business is limited to activities that are financial or real-estate related. Pursuant to the Dodd-Frank Act, the OTS, which historically was the primary federal regulator for FMD and Union Federal, transferred its authority to the Federal Reserve and the OCC on July 21, 2011. The OCC and the Federal Reserve each have certain types of enforcement authority over us, including the ability in certain circumstances to review and approve changes in management and compensation arrangements, issue cease-and-desist orders, force divestiture of Union Federal and impose civil and monetary penalties for violations of federal banking laws and regulations or for unsafe or unsound banking practices. Any such actions could adversely affect our reputation, liquidity or ability to execute our business plan. In addition, we could incur additional costs in complying with differing interpretations by these new regulators, or significant penalties if we fail to comply.

Union Federal is subject to regulation, supervision and examination by the OCC and the FDIC. Such regulation covers all banking business, including activities and investments, lending practices, safeguarding deposits, capitalization, risk management policies and procedures, relationships with affiliated companies, efforts to combat money laundering, recordkeeping and conduct and qualifications of personnel. In particular, the failure to meet minimum capital requirements could initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on our operations and financial statements. We have in the past been required to make capital infusions to Union Federal, and regulatory authorities could require additional capital infusions or take other corrective measures in the future.

We could incur additional costs in complying with regulations applicable to savings and loan holding companies and savings banks, or significant penalties if we fail to comply. Our ability to comply with all applicable laws and rules depends largely on our establishment and maintenance of a system to ensure such compliance, as well as our ability to attract and retain qualified compliance personnel. Further reductions in staffing levels could make it difficult to retain experienced personnel to maintain adequate internal controls related to regulatory matters. If severe failures in internal controls occur, regulatory authorities could impose sanctions on Union Federal or us. We could in the future be subject to supervisory orders to cease and desist, civil monetary penalties or other actions due to claimed noncompliance, which could have an adverse effect on our business, financial condition and operating results.

We may become subject to additional state registration or licensing requirements, which could increase our compliance costs significantly and may result in other adverse consequences.

Many states have statutes and regulations that require the licensure of small loan lenders, loan brokers, credit services organizations, loan arrangers and collection agencies. Some of these statutes are drafted or interpreted to cover a broad scope of activities. FMER has been approved for licenses in Massachusetts, New Jersey, Pennsylvania and Texas. TMS has submitted license applications or registrations and/or received licenses or registrations as a credit services organization and/or collection agency in approximately 15 states. Although we believe that our prior consultations with regulatory counsel and, in some cases state regulators, have identified all material licensing, registration and other regulatory requirements that could be applicable to us based on current laws and the manner in which we currently conduct business, we may determine that we need to submit additional license applications in other states, and we may otherwise become subject to additional state licensing, registration and other regulatory requirements in the future. In particular, certain state licenses or registrations may be required if we change our operations, if regulators reconsider their prior guidance or if federal or state laws or regulations are changed. For example, the Dodd-Frank Act eliminated the federal preemption of state licensing requirements for federal savings association operating subsidiaries, such as Union Federal’s operating subsidiary, FMLOS. Even if we are not physically present in a state, its regulators may take the position that registration or licensing is required because we provide services to borrowers located in the state by mail, telephone, the Internet or other remote means.

Absent a change in federal law, either by judicial interpretation or legislation, to the extent that our services are conducted through Union Federal, we believe it is less likely that state regulatory requirements affecting loan brokers, small loan lenders, credit services organizations, loan arrangers or collection agencies will be asserted. In addition, we may now be subject to state consumer protection laws in each state where we do business and those laws may be interpreted and enforced differently in different states. We will continue to review state registration and licensing requirements, and we intend to pursue registration or licensing in applicable jurisdictions where we are not currently registered or licensed if we elect to operate through an entity that does not enjoy federal preemption of such registration or licensing requirements. We cannot assure you that we will be successful in obtaining additional state licenses or registrations in a timely manner, or at all. If we determine that additional state registrations or licenses are necessary, we may be required to delay or restructure our activities in a manner that will not subject us to such licensing or registration requirements.

Compliance with state licensing requirements could involve additional costs, which could have a material adverse effect on our business. Our failure to comply with these laws could lead to, among other things:

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Curtailment of our ability to continue to conduct business in the relevant jurisdiction, pending a return to compliance or processing of registration or a license application;

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Administrative enforcement actions;

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Class action lawsuits;

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The assertion of legal defenses delaying or otherwise affecting the enforcement of loans; and

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Criminal as well as civil liability.

Any of the foregoing could have a material adverse effect on our business.

We may be exposed to liability for failures of third parties with which we do business to comply with the registration, licensing and other requirements that apply to them.

Third parties with which we do, or have done, business, including federal and state chartered financial institutions and non-bank loan marketers are subject to registration, licensing and governmental regulations, including TILA and other consumer protection laws and regulations. For example, some of the third-party marketers with which we have done or may do business may be subject to state registration or licensing requirements and laws and regulations, including those relating to loan brokers, small loan lenders, credit services organizations, loan arrangers and collection agencies. As a result of the activities that we conduct or may conduct for our clients, it may be asserted that we have some responsibility for compliance by third parties with which we do business with the laws and regulations applicable to them, whether on contractual or other grounds. If it is determined that we have failed to comply with our obligations with respect to these third parties, we could be subject to civil or criminal liability. Even if we bear no legal liability for the actions of these third parties, the imposition of licensing and registration requirements on them, or any sanctions against them for conducting business without a license or registration, may reduce the volume of loans we process from them in the future.

Failure to comply with consumer protection laws could subject us to civil and criminal penalties or litigation, including class actions, and have a material adverse effect on our business.

We are subject to a broad range of federal and state consumer protection laws applicable to our student lending, mortgage lending and other retail banking activities, including laws governing fair lending, unfair, deceptive and abusive acts and practices, servicemember protections, interest rates and loan fees, disclosures of loan terms, marketing, brokering, servicing, collections and foreclosure.

Violations or changes in federal or state consumer protection laws or related regulations, or in the prevailing interpretations thereof, may expose us to litigation, result in greater compliance costs, constrain the marketing of education loans, adversely affect the collection of balances due on the loan assets held by securitization trusts or otherwise adversely affect our business. We could incur substantial additional expense complying with these requirements and may be required to create new processes and information systems. Moreover, changes in federal or state consumer protection laws and related regulations, or in the prevailing interpretations thereof, could invalidate or call into question the legality of certain of our services and business practices.

In August 2009, the Federal Reserve issued regulations to implement provisions of the Higher Education Opportunity Act. The regulations revised the number, timing, and content of disclosures required for education loans by TILA and the Federal Reserve’s implementing regulation for TILA, Regulation Z. Under the regulations, education loan creditors are now required to provide disclosures about loan terms and features on or with the loan application and are also required to disclose information about federal education loan programs that may offer less costly alternatives to private education loans. Additional disclosures must be provided when the loan is approved and after loan acceptance but prior to loan disbursement. Compliance with the new regulations became mandatory in February 2010. In addition, in December 2009, the Federal Reserve and the FTC announced final rules to implement the risk-based pricing provisions of the Fair and Accurate Credit Transactions Act of 2003. The final rules generally require that lenders provide disclosures to all consumers or alternatively to certain consumers if credit is offered to them on less favorable terms than those offered by the lender to other consumers. Compliance with the disclosure requirements became mandatory as of January 1, 2011.

Violations of the laws or regulations governing our operations, or the operations of our clients, could result in the imposition of civil or criminal penalties, the cancellation of our contracts to provide services or our exclusion from participating in education loan programs. These penalties or exclusions, were they to occur, would negatively impair our business reputation and ability to operate our business. In addition, the loan assets held by securitization trusts that we have structured could be adversely impacted by violation of tax or consumer protection laws or changes in bankruptcy laws. In such event, the value of our residual interests or additional structural advisory fees could also be adversely impacted. In some cases, such violations may render the loan assets unenforceable.

A Supreme Court decision, and recent legislative proposals, could affect the non-dischargeability of education loans in bankruptcy. If the legislative proposals are enacted, it could adversely affect the performance of the GATE Trusts, the key assumptions we use to estimate the fair value of our service revenue receivables, and/or the competiveness of our Monogram platform.

Under current law, education loans can be discharged in bankruptcy only upon a court finding of “undue hardship” if the borrower were required to continue to make loan payments. The bankruptcy court must hear evidence and make a finding of “undue hardship” in order to discharge the debtor’s education loans. In March 2010, the U.S. Supreme Court upheld a bankruptcy confirmation order that discharged a debtor’s education loans without a finding of “undue hardship” by the bankruptcy court. Specifically, the debtor’s proposed plan, which the bankruptcy court ultimately approved, included a discharge of the debtor’s education loans; however, the bankruptcy court never heard evidence or made a finding of “undue hardship.” As a result of the Supreme Court’s decision, it may be advisable for us, in performing collections management for the securitization trusts and our clients, to review certain bankruptcy filings that we do not currently review to determine if plans include a discharge of education loans without the necessary adversary proceeding and a finding of “undue hardship.” Such additional review could increase our costs and the complexity of our operations.

In April 2010 and again in May 2011, legislation was introduced in both the U.S. Senate and the U.S. House of Representatives that would generally end the bankruptcy exemption from dischargeability for certain education loans. If enacted as initially proposed, both bills would apply retroactively to education loans already made, and would not require the borrower to make any payments before seeking discharge in bankruptcy. Although the April 2010 bill was not enacted in the last Congress, if the May 2011 bill is enacted in this Congress, such legislation could adversely affect the performance of the GATE Trusts and the key assumptions we used, including recovery assumptions, to estimate the fair value of our service revenue receivables. In addition, the May 2011 bill, if enacted, may restrict the availability of capital to fund education loans and may increase loan pricing to borrowers to compensate for the additional risk of bankruptcy discharge, which could adversely affect the competitiveness of our Monogram platform and our ability to engage lenders to fund loans based on our Monogram platform.

In the last Congress, legislation was introduced in both the U.S. Senate and the U.S. House of Representatives that would have allowed education loan borrowers to “swap” their private education loan debt for federal unsubsidized Stafford or graduate/professional PLUS debt to the extent that previous Stafford or PLUS loans, as applicable, to such borrowers had not exceeded the aggregate limits established by federal law for such loans. Similar legislation was introduced in the U.S. House of Representatives in 2012. If such legislation is enacted, borrowers with loans in the securitization trusts could exchange their private education loans for federal Stafford, PLUS, and/or Direct Consolidation loans. Accordingly, any such bill could adversely affect the performance of the GATE Trusts and the key assumptions that we have used to estimate the fair value of our service revenue receivables.

Recent litigation has sought to re-characterize certain loan marketers and other originators as lenders; if litigation on similar theories were successful against us or any third-party marketer we work with, the education loans that we facilitate would be subject to individual state consumer protection laws.

All of the lenders with which we work are federally-insured banks and credit unions. As a result, they are able to charge the interest rates, fees and other charges available to the most favored lender in their home state. In addition, our lender clients or prospective lender clients may be chartered by the federal government and enjoy preemption from enforcement of state consumer protection laws. In providing our education loan services to our clients, we do not act as a lender, guarantor or loan servicer, and the terms of the education loans that we facilitate are regulated in accordance with the laws and regulations applicable to the lenders.

The association between marketers of high-interest “payday” loans, tax-return anticipation loans, or subprime credit cards, and online payment services, on the one hand, and banks, on the other hand, has come under recent scrutiny. Recent litigation asserts that loan marketers use lenders with a bank charter that authorizes the lender to charge the most favored interest rate available in the lender’s home state in order to evade usury and interest rate caps, and other consumer protection laws imposed by the states where they do business. Such litigation has sought, successfully in some instances, to re-characterize the loan marketer as the lender for purposes of state consumer protection law restrictions. Similar civil actions have been brought in the context of gift cards. Moreover, federal banking regulators and the FTC have undertaken enforcement actions challenging the activities of certain loan marketers and their bank partners, particularly in the context of subprime credit cards. We believe that our activities, and the activities of third parties whose marketing on behalf of lenders may be coordinated by us, are distinguishable from the activities involved in these cases.

Additional state consumer protection laws would be applicable to the education loans we facilitate if we, or any third-party loan marketer engaged by us, were re-characterized as a lender, and the education loans (or the provisions governing interest rates, fees and other charges) could be unenforceable unless we or a third-party loan marketer had the requisite licenses or other authority to make such loans. In addition, we could be subject to claims by consumers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial delay or cost to us. There have been no actions taken or threatened against us on the theory that we have engaged in unauthorized lending; however, if such actions occurred, they could have a material adverse effect on our business.

Risks Related to Ownership of Our Common Stock

The price of our common stock may be volatile.

The trading price of our common stock may fluctuate substantially, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in your shares of our common stock. Those factors that could cause fluctuations include, but are not limited to, the following:

•

The success of our Monogram platform, our fee-for-service offerings and our tuition payment plan offerings;

•

Announcements by us, our competitors or our potential competitors of acquisitions, new products or services, significant contracts, commercial relationships or capital markets activities;

•

Actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts, including as a result of the timing, size or structure of any portfolio funding transactions;

•

Unfavorable developments in litigation or proceedings in which we are involved, including any challenges to tax refunds previously received in the amount of $176.6 million as a result of the ongoing IRS audit of our past tax returns and the resolution of any appeal of the ATB’s Order in the cases pertaining to our Massachusetts state income tax returns;

•

Difficulties we may encounter in structuring securitizations or alternative financings, including continued disruptions in the education loan ABS market or demand for securities offered by securitization trusts that we facilitate, or the loss of opportunities to structure securitization transactions;

•

Any variance between the actual performance of the GATE Trusts and the key assumptions that we have used to estimate the fair value of our service revenue receivables, including among others, discount, net default and prepayment rates;

•

General economic conditions and trends, including unemployment rates and economic pressure on consumer asset classes such as education loans;

•

Legislative initiatives affecting federal or private education loans, including initiatives relating to bankruptcy dischargeability and the federal budget and regulations implementing the Dodd-Frank Act;

•

Changes in demand for our product and service offerings or in the education finance marketplace generally;

•

Negative publicity about the education loan market generally or us specifically;

•

Regulatory developments or sanctions directed at Union Federal or us;

•

Application of accounting policies and pronouncements, and their effects on our reported financial condition and results of operations, including future determinations under ASU 2009-17 to consolidate or deconsolidate VIEs;

•

Price and volume fluctuations in the overall stock market and volatility in the ABS market, from time to time;

•

Delisting of our common stock from the New York Stock Exchange, or NYSE, for failure to comply with NYSE continued listing standards, including without limitation, the NYSE’s average closing price standard;

•

Significant volatility in the market price and trading volume of financial services and process outsourcing companies;

•

Major catastrophic events;

•

Purchases or sales of large blocks of our common stock or other strategic investments involving us;

•

Dilution from raising capital through a stock issuance; or

•

Departures or long-term unavailability of key personnel, including our Chief Executive Officer, who we believe has unique insights and experience at this point of change in our business and the education loan industry.

Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. We have, in the past, been the target of securities litigation. Although we succeeded in having prior litigation dismissed without any compensation passing to plaintiffs or any of their attorneys, any future litigation could result in substantial costs and divert management’s attention and resources from our business.

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

Our directors and executive officers, and entities affiliated with them, owned approximately 20.0% of the outstanding shares of our common stock as of March 31, 2012, excluding shares issuable upon vesting of outstanding restricted stock units, shares issuable upon exercise of outstanding vested and unvested stock options and shares of preferred stock held by affiliates of GS Capital Partners, or GSCP, convertible into 8,846,733 additional shares of our common stock. Affiliates of GSCP have agreed not to convert shares of preferred stock if, after giving effect to any such conversion, they and their affiliates would own more than 9.9% of our outstanding shares of common stock. Approximately 5,182,347 additional shares of common stock could be issued to affiliates of GSCP upon conversion of shares of preferred stock before they and their affiliates would own more than 9.9% of our outstanding shares of common stock. These stockholders, if acting together, could substantially influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

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

Our restated certificate of incorporation and amended and restated by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:

•

Only our Board of Directors, our Chairman of the Board or our President may call special meetings of our stockholders;

•

Our stockholders may take action only at a meeting of our stockholders and not by written consent;

•

We have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

•

Our directors may be removed only for cause by the affirmative vote of a majority of the directors present at a meeting duly held at which a quorum is present, or by the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and

•

We impose advance notice requirements for stockholder proposals.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire.

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

We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period following the date that such stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

The following table provides information as of and for the fiscal quarter ended March 31, 2012 regarding shares of our common stock that were repurchased under our 2003 stock incentive plan, which we refer to as the 2003 Plan, and our 2011 stock incentive plan, which we refer to as the 2011 Plan.


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs
Other⁽¹⁾:
January 1—31, 2012		32,732		1.17		—		N/A
February 1—29, 2012		3,265		1.27		—		N/A
March 1—31, 2012		2,420	$	1.41		—		N/A

Total Other		—		—		—		N/A

Total Purchases of Equity Securities		38,417		1.19		—

(1)

Participants in our 2003 Plan and our 2011 Plan may elect to satisfy tax withholding obligations upon vesting of restricted stock units by delivering shares of our common stock, including shares retained from the restricted stock units creating the tax obligation. Our 2003 Plan was approved by stockholders on November 16, 2009 and has an expiration date of September 14, 2013. Our 2011 Plan was approved by stockholders on November 14, 2011 and has an expiration date of November 14, 2021.

Item 6.

Exhibits.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE FIRST MARBLEHEAD CORPORATION

Date: May 10, 2012	By:	/s/ KENNETH KLIPPER
		Kenneth Klipper
		Managing Director and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

EXHIBIT INDEX


Exhibit Number		Description

10.1⁽¹⁾^#		Form of Restricted Stock Unit Agreement evidencing grants under the 2011 Stock Incentive Plan

31.1		Chief Executive Officer—Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Chief Financial Officer—Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Chief Executive Officer—Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Chief Financial Officer—Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS⁽²⁾		Instance Document

101.SCH⁽²⁾		Taxonomy Extension Schema Document

101.CAL⁽²⁾		Taxonomy Calculation Linkbase Document

101.LAB⁽²⁾		Taxonomy Label Linkbase Document

101.PRE⁽²⁾		Taxonomy Presentation Linkbase Document

101.DEF⁽²⁾		Taxonomy Extension Definition Linkbase Document

(1)	Incorporated by reference to Exhibit 99.2 to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2012.

(2)	These interactive data files shall not be deemed filed for purposes of Section 11 or Section 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise be subject to liability under those sections.

#	This Exhibit is a management contract or compensatory plan or arrangement.

Positive
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Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company