First Marblehead (FMD) 10-Q 2016 Q1 Quarterly report

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 September 30, 2015

OR

¨ 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.)

One Cabot Road, Suite 200 Medford, Massachusetts	02155
(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.

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

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 November 5, 2015, the registrant had 11,678,712 shares of common stock, $0.01 par value per share, outstanding.

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

Table of Contents

Part I. Financial Information
Item 1	— Financial Statements	1
	— Consolidated Balance Sheets as of September 30, 2015 and June 30, 2015	1
	— Consolidated Statements of Operations for the three months ended September 30, 2015 and 2014	2
	— Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2015 and 2014	3
	—Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2015 and 2014	4
	— Consolidated Statements of Cash Flows for the three months ended September 30, 2015 and 2014	5
	— Notes to Unaudited Consolidated Financial Statements	6
Item 2	— Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	— Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	— Controls and Procedures	25
Part II. Other Information
Item 1	— Legal Proceedings	26
Item 1A	— Risk Factors	27
Item 2	— Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6	— Exhibits	43
SIGNATURES		44
EXHIBIT INDEX		45

Cautionary Statement

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 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,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guaranty that we actually will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements, which involve risks, assumptions and uncertainties. There are a number of important factors that could cause actual results, 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” described in Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended June 30, 2015, filed with the Securities and Exchange Commission on September 9, 2015, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—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 November 9, 2015.

Part I. Financial Information

Item 1. Financial Statements

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

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

	September 30, 2015			June 30, 2015
ASSETS
Cash and cash equivalents	$	36,236		$	47,004
Short-term investments, at cost		16,007			16,002
Restricted cash		125,089			96,964
Deposits for participation interest accounts, at fair value		21,795			17,876
Service revenue receivables, at fair value		11,304			12,151
Goodwill		20,066			20,066
Intangible assets, net		18,879			19,457
Property and equipment, net		4,892			5,259
Other assets		11,688			6,027
Total assets	$	265,956		$	240,806
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Restricted funds due to clients	$	125,125		$	96,854
Accounts payable, accrued expenses and other liabilities		14,709			12,392
Income taxes payable		27,405			27,233
Net deferred income tax liability		2,244			2,127
Total liabilities		169,483			138,606
Commitments and contingencies:
Stockholders’ equity:
Common stock, par value $0.01 per share; 25,000 shares authorized; 12,818 and 12,606 shares issued; 11,679 and 11,534 shares outstanding		128			126
Additional paid-in capital		467,276			466,640
Accumulated deficit		(182,284	)		(176,169	)
Treasury stock, 1,139 and 1,072 shares held, at cost		(188,647	)		(188,397	)
Total stockholders’ equity		96,473			102,200
Total liabilities and stockholders’ equity	$	265,956		$	240,806

See accompanying notes to unaudited consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

	Three months ended September 30,
	2015			2014
Revenues:
Tuition payment processing fees	$	9,395		$	8,287
Administrative and other fees		6,353			4,880
Fair value changes to service revenue receivables		779			950
Total revenues		16,527			14,117
Expenses:
Compensation and benefits		8,189			9,911
General and administrative		14,217			14,547
Total expenses		22,406			24,458
Other income		58			56
Loss from continuing operations, before income taxes		(5,821	)		(10,285	)
Income tax expense from continuing operations		294			243
Net loss from continuing operations		(6,115	)		(10,528	)
Discontinued operations, net of taxes		—			(2,913	)
Net loss	$	(6,115	)	$	(13,441	)
Net loss per basic and diluted common share:
From continuing operations	$	(0.53	)	$	(0.92	)
From discontinued operations		—			(0.26	)
Total basic and diluted net loss per common share	$	(0.53	)	$	(1.18	)
Basic and diluted weighted-average common shares outstanding		11,592			11,385

See accompanying notes to unaudited consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(dollars in thousands)

	Three months ended September 30,
	2015			2014
Net loss	$	(6,115	)	$	(13,441	)
Other comprehensive income, net of tax:
Net unrealized gains (losses) on investments available-for-sale arising during the period		—			120
Total other comprehensive income		—			120
Total comprehensive loss	$	(6,115	)	$	(13,321	)

See accompanying notes to unaudited consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

(dollars and shares in thousands)

	Common stock										Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income, net of tax		Total stockholders’ equity
	Issued				In treasury
	Shares		Amount		Shares			Amount
Balance at June 30, 2014		12,260	$	122		(960	)	$	(187,860	)	$	462,328		$	(128,391	)	$	299	$	146,498
Comprehensive loss:
Net loss		—		—		—			—			—			(13,441	)		—		(13,441	)
Accumulated other comprehensive income		—		—		—			—			—			—			120		120
Total comprehensive loss		—		—		—			—			—			(13,441	)		120		(13,321	)
Net stock issuance from vesting of stock units		335		3		(108	)		(511	)		(3	)		—			—		(511	)
Stock-based compensation		—		—		—			—			1,819			—			—		1,819
Balance at September 30, 2014		12,595	$	125		(1,068	)	$	(188,371	)	$	464,144		$	(141,832	)	$	419	$	134,485
Balance at June 30, 2015		12,606	$	126		(1,072	)	$	(188,397	)	$	466,640		$	(176,169	)	$	—	$	102,200
Comprehensive loss:
Net loss		—		—		—			—			—			(6,115	)		—		(6,115	)
Total comprehensive loss		—		—		—			—			—			(6,115	)		—		(6,115	)
Net stock issuance from vesting of stock units		212		2		(67	)		(250	)		(2	)		—			—		(250	)
Stock-based compensation		—		—		—			—			638			—			—		638
Balance at September 30, 2015		12,818	$	128		(1,139	)	$	(188,647	)	$	467,276		$	(182,284	)	$	—	$	96,473

See accompanying notes to unaudited consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

	Three months ended September 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(6,115	)	$	(13,441	)
Discontinued operations, net of tax		—			2,913
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,390			1,267
Deferred income tax expense		117			71
Stock-based compensation		638			1,819
Service revenue receivable distributions		1,626			1,366
Changes in assets/liabilities:
Participation interest accounts		(3,919	)		220
Fair value increase to service revenue receivables		(779	)		(950	)
Other assets		(5,661	)		(2,912	)
Accounts payable, accrued expenses and other liabilities		2,317			1,274
Income taxes payable		172			167
Net cash used in operating activities – continuing operations		(10,214	)		(8,206	)
Net cash provided by operating activities – discontinued operations		—			1,431
Net cash used in operating activities		(10,214	)		(6,775	)
Cash flows from investing activities:
Purchases of short-term investments		(5,007	)		(5,009	)
Proceeds from maturities of short-term investments		5,002			19,062
Net increase in restricted cash		(28,125	)		(16,709	)
Net increase in restricted funds due to clients		28,271			16,832
Purchases of property and equipment		(445	)		(341	)
Net cash (used in) provided by investing activities – continuing operations		(304	)		13,835
Net cash provided by investing activities – discontinued operations		—			2,352
Net cash (used in) provided by investing activities		(304	)		16,187
Cash flows from financing activities:
Payments on capital lease obligations		—			(1	)
Repurchases of common stock		(250	)		(511	)
Net cash used in financing activities – continuing operations		(250	)		(512	)
Net cash used in financing activities – discontinued operations		—			(13,086	)
Net cash used in financing activities		(250	)		(13,598	)
Net decrease in cash and cash equivalents		(10,768	)		(4,186	)
Cash and cash equivalents, beginning of period		47,004			120,349
Cash and cash equivalents, end of period		36,236			116,163
Less: cash and cash equivalents of discontinued operations, end of period		—			77,091
Cash and cash equivalents of continuing operations, end of period	$	36,236		$	39,072
Supplemental disclosure of cash flow information from continuing operations:
Income taxes paid	$	5		$	5

See accompanying notes to unaudited consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) General Information

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 and its subsidiaries on a consolidated basis. All references in these notes to “First Marblehead” or “FMD” mean The First Marblehead Corporation on a stand-alone basis. We use the term “education loan” to refer to private education loans that 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, 2016 as “fiscal 2016.” References to our “Annual Report” mean our annual report on Form 10-K for the fiscal year ended June 30, 2015 filed with the Securities and Exchange Commission (SEC) on September 9, 2015.

We are a specialty finance company focused on the education financing marketplace in the United States. We offer our clients the opportunity to outsource key components of their education financing programs through various product and service offerings, including loan originations, tuition and refund management, loan processing and disbursement and portfolio management services.

Specifically, we design, develop and manage loan programs on behalf of our lender clients for undergraduate and graduate students and for college graduates seeking to refinance private education loan obligations. We offer a fully integrated suite of services through our Monogram^® loan product service platform (Monogram platform). We partner with lenders to design and administer education loan programs through our Monogram platform, which are typically school-certified. These programs are designed to be marketed through educational institutions or to prospective borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the capital markets. We may provide credit enhancements for a Monogram-based program by funding participation interest accounts (participation accounts) to serve as a first-loss reserve for defaulted program loans. In consideration for funding participation accounts, we are entitled to receive a share of the interest income generated on the loans. We are paid for our origination and marketing services at the time approved education loans are disbursed and receive monthly payments for portfolio management services, credit enhancement and administrative services throughout the life of the loan. We also earn fees for the processing and disbursement of education loans on behalf of the approximately 340 credit union and other lender clients of FMD’s subsidiary Cology LLC.

In addition, we offer outsourced tuition planning, tuition billing, refund management and payment technology services for universities, colleges and secondary schools through FMD’s subsidiary Tuition Management Systems LLC (TMS). TMS provides such services on behalf of approximately 670 educational institutions.

As of November 9, 2015, we have loan program agreements based on our Monogram platform with three lender clients, one of which provides the majority of our Monogram-based loan program fees. As a result, we are subject to concentration risk as it relates to this revenue stream until we are able to attract additional lender clients.

The Monogram-based loans that are originated on behalf of our lender clients as well as the education loans that FMD’s subsidiary Cology LLC processes and disburses on behalf of its clients are not included on our consolidated balance sheets but, rather, are included on the balance sheets of our lender clients and Cology LLC’s clients, respectively. As such, none of the references in these notes to our unaudited consolidated financial statements to education loans included on our consolidated balance sheets include the education loans originated by our lender clients or by Cology LLC on behalf of its clients.

Basis of Financial Reporting

The accompanying unaudited consolidated financial statements as of and for the three months ended September 30, 2015 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 consolidated 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 for fiscal 2016. The accompanying unaudited consolidated financial statements should be read in conjunction with our Annual Report.

Recently Issued Accounting Pronouncements

Accounting Standards Update (ASU) 2014-08,Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity(ASU 2014-08), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held-for-sale) that have not been reported in the financial statements previously issued or available for issuance. ASU 2014-08 elevates the threshold for a disposal transaction to qualify as a discontinued operation. Under ASU 2014-08, only those disposals of components of an entity that represent a strategic shift that has or will have a major effect on an

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entity’s operations and financial results will be required to be reported as discontinued operations in the financial statements. Further, ASU 2014-08 expands disclosure requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose information about individually significant components that are disposed of or held-for-sale and do not qualify as discontinued operations. The adoption of ASU 2014-08 did not have an impact on our consolidated financial statements.

ASU 2014-09,Revenue from Contracts with Customers (Topic 606)(ASU 2014-09), is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early adoption is not permitted. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The impact ofASU 2014-09 on our consolidated financial statements is not yet known. In August 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14), that amends the effective dates of ASU 2014-09. The requirements of ASU 2014-09 for public organizations are effective for annual periods and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

ASU 2014-15,Presentation of Financial Statements—Going Concern (Subtopic 205-40) (ASU 2014-15), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The adoption of ASU 2014-15 may result in additional disclosures in our consolidated financial statements in future periods depending on management’s assessment as to our ability to continue as a going concern.

ASU 2015-01,Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply ASU 2015-01 either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. ASU 2015-01 eliminates the concept of extraordinary items and expands the presentation and disclosure guidance for items that are unusual in nature or occur infrequently to include items that are both unusual in nature and infrequently occurring. We do not expect the adoption of ASU 2015-01 to have a material impact on our consolidated financial statements.

ASU 2015-02,Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02), is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply ASU 2015-02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply ASU 2015-02 retrospectively. Early adoption is permitted. ASU 2015-02 changes the way reporting entities evaluate whether (1) they should consolidate limited partnerships and similar entities, (2) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (3) variable interests in a VIE held by related parties of the reporting entity require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. We do not expect the adoption of ASU 2015-02 to 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.

Summary of Significant Accounting Policies

There have been no changes to our significant accounting policies since we filed our Annual Report with the SEC on September 9, 2015. See Note 2, “Summary of Significant Accounting Policies,” in the notes to our consolidated financial statements included in Item 8 of Part II of our Annual Report for the full disclosure of our significant accounting policies.

(2) Discontinued Operations

In April 2015, the Office of the Comptroller of the Currency (OCC) conditionally approved the dissolution application of our bank subsidiary Union Federal Savings Bank (Union Federal), subject to certain consummation requirements and conditions set forth in the OCC’s notification. On June 12, 2015, the OCC confirmed that Union Federal paid a liquidating distribution in the form of a $21.7 million net cash dividend to FMD and the OCC approved the dissolution of Union Federal and terminated Union Federal’s charter. On June 30, 2015, the Board of Governors of the Federal Reserve System terminated FMD’s status as a savings and loan holding company.

7

We evaluated the dissolution of Union Federal in accordance with Accounting Standards Codification 205-20,Presentation of Financial Statements—Discontinued Operations. Based on the evaluation performed, we concluded that Union Federal met each of the criteria required for classification as a discontinued operation. Specifically, we concluded that (1) Union Federal qualified as a component of an entity, as its operations and cash flows can clearly be distinguished from the rest of FMD, (2) the operations and cash flows of Union Federal would be eliminated from the ongoing operations of FMD subsequent to the dissolution and (3) there would be no continuing involvement of FMD in the operations of Union Federal subsequent to the dissolution.

As a result of the foregoing, we reported the operations and activities relating to Union Federal within discontinued operations for all periods presented.

Revenues and Expenses

The revenues and expenses of the discontinued operations of Union Federal presented in our consolidated statements of operations for the three months ended September 30, 2015 and 2014, after the effects of elimination entries, were as follows:

	Three months ended September 30,
	2015		2014
	(dollars in thousands)
Total revenues	$	—	$	546
Total expenses		—		928
Total other expense		—		2,530
Loss from discontinued operations, before income taxes		—		(2,912	)
Income tax expense		—		1
Discontinued operations, net of taxes	$	—	$	(2,913	)

Other expense Other expense for the three months ended September 30, 2014 included a fair value write-down of $2.3 million taken on Union Federal’s education loan portfolio and $265 thousand in other-than-temporary impairment losses on Union Federal’s investment portfolio as we did not have the intent and ability to hold the securities to recovery.

(3) Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:

	September 30, 2015		June 30, 2015
	(dollars in thousands)
Cash equivalents (money market funds)	$	29,381	$	37,845
Certificates of deposit		5,005		5,002
Interest-bearing deposits with banks		607		1,606
Non-interest-bearing deposits with banks		1,243		2,551
Total cash and cash equivalents	$	36,236	$	47,004

(4) Short-term Investments

Short-term investments of $16.0 million at September 30, 2015 and June 30, 2015 consisted of certificates of deposit with highly-rated financial institutions, carried at cost. These certificates of deposit had a range of maturities from 1.8 months to 4.9 months at September 30, 2015.

(5) Education Loans Held-to-Maturity

We hold a small portfolio of education loans held-to-maturity totaling $713 thousand at September 30, 2015 and $772 thousand at June 30, 2015, which were transferred by Union Federal to an indirect subsidiary of FMD in 2009, prior to the launch of our Monogram platform. These loans were fully reserved for at September 30, 2015 and June 30, 2015.

(6) Education Loans Held-for-Sale

We hold a small portfolio of education loans held-for-sale totaling $249 thousand at September 30, 2015 and $252 thousand at June 30, 2015, which were sold by Union Federal to an indirect subsidiary of FMD in June 2015, as part of Union Federal’s dissolution. This portfolio was classified within other assets on our consolidated balance sheet at September 30, 2015 and June 30, 2015.

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(7) Deposits for Participation Interest Accounts

In connection with certain of our 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 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 appropriate participation account, if applicable. 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.

Cash balances in the participation accounts earn interest at market rates applicable to commercial interest-bearing deposit accounts at each program lender. 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 consolidated statements of operations. Instead, accretion due to discounting and other changes in fair value are recognized in revenue.

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, if any, from the participation accounts are uncertain and vary among the loan programs.

We carry deposits for participation accounts at fair value on our consolidated balance sheets. Fair value is equal to the amount of cash on deposit in the participation 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 losses related to the participation accounts based on the net present value of expected future cash flows into and out of the participation account related to education loans originated as of our consolidated balance sheet dates, using an estimate of prepayments, defaults and recoveries, and the timing of the return of our capital, if any, at a discount rate commensurate with the risks and durations involved. We record changes in the estimated fair value of participation accounts, if any, in revenues as part of administrative and other fees.

The following table presents detailed activity related to our participation accounts for the three months ended September 30, 2015 and September 30, 2014:

	Three months ended September 30,
	2015			2014
	(dollars in thousands)
Balance, beginning of period	$	17,876		$	15,834
Fundings		4,283			39
Defaults		(446	)		(295	)
Recoveries		52			69
Interest earned/other		49			28
Fair value adjustment		(19	)		(61	)
Balance, end of period	$	21,795		$	15,614

The amount of participation account administration fees paid into the participation accounts and subsequently withdrawn by FMD during the three months ended September 30, 2015 and 2014 was $863 thousand and $577 thousand, respectively.

Under three of our Monogram-based loan program agreements, FMD provides an amount of first-loss credit enhancement, funded upfront into a participation account by FMD, based on the loans originated and the expected lifetime gross defaults of the loans agreed to by the parties under the applicable loan program agreement. The maximum amount of credit exposure related to our first-loss credit enhancement arrangements is equal to the cash value or the amount on deposit in the participation account. The aggregate amount of our funded first-loss credit enhancement was $22.4 million as of September 30, 2015 and $18.5 million as of June 30, 2015.

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(8) Fair Value Measurements

(a) Financial Instruments Recorded at Fair Value on our Consolidated Balance Sheets

For financial instruments recorded at fair value on our consolidated balance sheets, 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.

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

Deposits for Participation Interest Accounts

We record deposits for participation accounts 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 both September 30, 2015 and June 30, 2015, 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. Our significant observable and unobservable inputs are discussed below.

Service Revenue Receivables

We record our service revenue receivables at fair value on our consolidated balance sheets. Our service revenue receivables consist of additional structural advisory fees and residual receivables and represent the estimated fair value of our service revenue receivables expected to be collected over the life of the various securitization trusts that have purchased education loans facilitated by us, with no further service obligations on our part. Changes in the estimated fair value of our service revenue receivables due, less any cash distributions received, are recorded in our consolidated statements of operations within fair value changes to service revenue receivables. In the absence of market-based transactions, we use cash flow modeling techniques to derive a Level 3 estimate of fair value for financial reporting purposes. Our significant observable and unobservable inputs are discussed below.

The following table presents financial instruments carried at fair value on our consolidated balance sheets, in accordance with the valuation hierarchy described above, on a recurring basis. There have been no transfers in or out of Level 3 of the hierarchy, or between Levels 1 and 2, for the periods presented.

	September 30, 2015								June 30, 2015
	Level 1		Level 2		Level 3		Total carrying value		Level 1		Level 2		Level 3		Total carrying value
	(dollars in thousands)
Assets:
Deposits for participation interest accounts	$	—	$	—	$	21,795	$	21,795	$	—	$	—	$	17,876	$	17,876
Service revenue receivables		—		—		11,304		11,304		—		—		12,151		12,151
Total assets	$	—	$	—	$	33,099	$	33,099	$	—	$	—	$	30,027	$	30,027

The following table presents activity related to our financial assets categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for the three months ended September 30, 2015 and 2014. All realized and unrealized gains and losses recorded during the periods presented relate to assets still held at our consolidated balance sheet dates.

	Three months ended September 30,
	2015						2014
	Deposits for participation interest accounts			Service revenue receivables			Deposits for participation interest accounts			Service revenue receivables
	(dollars in thousands)
Fair value, beginning of period	$	17,876		$	12,151		$	15,834		$	13,979
Realized and unrealized (losses) gains		(417	)		779			(287	)		950
Net contributions (distributions)		4,336			(1,626	)		67			(1,366	)
Fair value, end of period	$	21,795		$	11,304		$	15,614		$	13,563

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The following table presents additional quantitative information about the assets recorded at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value at September 30, 2015:

Asset	Fair Value		Valuation Techniques		Significant Unobservable Inputs	Range
	(dollars in thousands)
Deposits for participation interest accounts	$	21,795		Discounted cash flows	Discount rates	8-15%
					Annual prepayment rates	5.75-15.0%
					Annual net recovery rates	2.67%
					Annual default rates	0-2.5%
Service revenue receivables	$	11,304		Discounted cash flows	Discount rates	10-16%
					Annual prepayment rates	3-9%
					Annual net recovery rates	2-2.5%
					Annual default rates	1-10%

(b) Level 3 Inputs Used to Determine Fair Value

The unobservable inputs used to determine the fair value of our service revenue receivables and deposits for participation accounts include, but are not limited to, discount rates, prepayment rates, net recovery rates and default rates. The forward London Interbank Offered Rate (LIBOR) curve is a key observable input utilized in determining the fair value of expected future cash flows from these assets. While there was some change in the LIBOR curve from June 30, 2015, the change did not have a material impact on the fair value of our service revenue receivables or deposits for participation accounts. There have been no other significant changes in these inputs from June 30, 2015.

Sensitivity to Changes in Assumptions

The service revenue receivables recorded at September 30, 2015 and June 30, 2015 were related to certain of the securitization trusts we previously facilitated. Substantially all of the education loans held by these securitization trusts have guarantees from schools, and, in some cases, from a third-party bank. These guarantees help to partially mitigate the overall impact of defaults and sensitivity to changes in default activity to the residual interest and additional structural advisory fee holders. In addition, the recoveries on guaranteed defaults are returned back to the schools or banks, as applicable, not the residual interest and additional structural advisory fee holders, therefore, limiting the impact and sensitivity of the holders to recoveries. Further, due to the seasoning of these trusts, many of the residual interests and additional structural advisory fees have relatively short weighted-average lives and are currently cash-flowing, and, as such, are not significantly impacted by other assumptions, such as discount rates.

The fair value of our deposits for participation accounts may be impacted by changes in prepayment rates, net default rates, the forward LIBOR curve and the timing of capital releases, if any.

(c) Fair Values of Other Financial Instruments

Fair value estimates for financial instruments not carried at fair value on our consolidated balance sheets 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. The fair value estimates for the financial instruments disclosed below do not necessarily incorporate the exit price concept used to record financial instruments at fair value. The following tables present the carrying amount, estimated fair value and placement in the fair value hierarchy for our financial instruments not recorded at fair value on our consolidated balance sheets at September 30, 2015 and June 30, 2015. The carrying amount for these instruments approximates fair value principally due to their short maturities.

September 30, 2015	Carrying Amount		Estimated Fair Value		Fair Value Measurements
					Level 1		Level 2		Level 3
	(dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	36,236	$	36,236	$	36,236	$	—	$	—
Short-term investments		16,007		16,007		16,007		—		—
Restricted cash		125,089		125,089		125,089		—		—
Financial Liabilities:
Restricted funds due to clients	$	125,125	$	125,125	$	125,125	$	—	$	—

June 30, 2015	Carrying Amount		Estimated Fair Value		Fair Value Measurements
					Level 1		Level 2		Level 3
	(dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	47,004	$	47,004	$	47,004	$	—	$	—
Short-term investments		16,002		16,002		16,002		—		—
Restricted cash		96,964		96,964		96,964		—		—
Financial Liabilities:
Restricted funds due to clients	$	96,854	$	96,854	$	96,854	$	—	$	—

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(9) Goodwill and Intangible Assets

(a) Cology LLC

Cology LLC completed its acquisition of a substantial portion of the operating assets of Cology, Inc. and its affiliates, which we refer to as the Cology Sellers, during fiscal 2013. We recorded a customer list intangible asset of $5.7 million for the approximately 250 credit union and other lender clients that the Cology Sellers did business with as of the acquisition date along with $518 thousand of goodwill. The customer list intangible asset is being amortized over a 15-year period on a straight line basis. Amortization expense related to the intangible asset is approximately $377 thousand per year. We expect amortization of the intangible asset and goodwill to be fully deductible for income tax purposes over a 15-year period. We recorded no goodwill or intangible asset impairment during the three months ended September 30, 2015.

(b) TMS

We completed our acquisition of TMS during fiscal 2011. We recorded goodwill of $22.2 million at the acquisition date. We also recorded intangible assets for the customer list acquired, certain technology necessary to support the customer relationships and the value of the TMS tradename. On June 30, 2011, TMS sold a portfolio of K-12 school contracts to Nelnet Business Solutions, Inc. in a transaction that eliminated $2.6 million of goodwill and decreased its customer list intangible asset by $4.1 million. As a result, $19.5 million of goodwill remained at both September 30, 2015 and June 30, 2015 and the adjusted cost basis of TMS’ customer list intangible was $17.9 million. The technology and tradename have a cost basis of $3.7 million and $2.0 million, respectively. The customer list and tradename intangible assets are being amortized over a 15-year period on a straight line basis. The technology intangible asset is being amortized over a six year period on a straight line basis. Amortization expense related to the customer list and tradename intangible assets is approximately $1.3 million per year. Amortization expense related to the technology intangible asset is approximately $608 thousand per year. We expect amortization of the intangible assets and goodwill to be fully deductible for income tax purposes over a 15-year period. We recorded no goodwill or intangible asset impairment during the three months ended September 30, 2015.

(c) Intangible Assets

Intangible assets at September 30, 2015 consisted of the following:

	Amortization period		Adjusted cost basis		Accumulated amortization			Net
	(in years)		(dollars in thousands)
Intangible assets:
Customer list		15	$	23,600	$	(6,814	)	$	16,786
Technology		6		3,650		(2,890	)		760
Tradename		15		1,950		(617	)		1,333
Total intangible assets at September 30, 2015			$	29,200	$	(10,321	)	$	18,879

Amortization expense recorded for the three months ended September 30, 2015 was $578 thousand.

Estimated annual amortization expense for the remainder of fiscal 2016 and each fiscal year thereafter is as follows:

	Customer list		Technology		Tradename		Total
	(dollars in thousands)
Estimated amortization expense:
Remainder of 2016	$	1,180	$	455	$	98	$	1,733
2017		1,573		305		130		2,008
2018		1,573		—		130		1,703
2019		1,573		—		130		1,703
2020		1,573		—		130		1,703
Thereafter		9,314		—		715		10,029
Total	$	16,786	$	760	$	1,333	$	18,879

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(10) Commitments and Contingencies

(a) Massachusetts Appellate Tax Board Matters

GATE Holdings, Inc. Taxable Years Ended June 30, 2004, 2005 and 2006

We are involved in several matters relating to the Massachusetts tax treatment of GATE Holdings, Inc. (GATE), a former subsidiary of FMD. On November 9, 2011, the Massachusetts Appellate Tax Board (ATB) issued an order (ATB Order) regarding these proceedings. On January 28, 2015, the Massachusetts Supreme Judicial Court (SJC) issued its opinion in these proceedings and affirmed the decision of the ATB. On October 13, 2015, the Supreme Court of the United States (Supreme Court) issued an order granting our petition for a writ of certiorari, summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration.

Background

We took the position in these cases that GATE was properly taxable as a financial institution and not as a business corporation 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. For the 2005 and 2006 taxable years, only one of the two assessments made by the Commissioner would ultimately be allowed. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE and us.

On November 9, 2011, the ATB issued the ATB Order regarding these proceedings. The ATB 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 excluding all income from trust-owned education loans outside of Massachusetts rather than including such income for the purposes of GATE’s Massachusetts state tax returns; and

• All penalties assessed to FMD and GATE were abated.

In connection with the ATB 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.

On April 17, 2013, the ATB issued its opinion confirming the rulings and findings included in the ATB Order. On July 22, 2013, we filed an appeal of the ATB’s findings with regard to the Property Factor in the Massachusetts Appeals Court. On December 18, 2013, the SJC notified us that it had elected to hear our appeal of the ATB’s findings and heard arguments on the appeal on October 7, 2014. On January 28, 2015, the SJC issued its opinion affirming the decision of the ATB. On February 11, 2015, we filed a petition for rehearing on this matter with the SJC, which was denied by the SJC on March 2, 2015. On May 31, 2015, we filed a petition for a writ of certiorari with the Supreme Court. On October 13, 2015, the Supreme Court summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration. The SJC must now reconsider our appeal of the ATB’s findings with regard to the Property Factor. On October 21, 2015, the SJC requested supplemental briefs from us and the Commissioner. Our brief is due by November 30, 2015. If we are unsuccessful in the SJC’s reconsideration of our appeal of the ATB Order, we could be required to make additional tax payments, including interest, as discussed below, for GATE’s taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position.

GATE’s Taxable Years Ended June 30, 2008 and 2009

On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for GATE’s taxable years ended June 30, 2008 and 2009, which included an assessment for penalties of $4.1 million. We have not accrued for the penalties as we believe that it is more likely than not that the penalties will ultimately be abated, which is consistent with the Massachusetts Department of Revenue’s treatment of GATE’s taxable years ended June 30, 2004, 2005 and 2006. On August 26, 2013, we filed an

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application to have the assessed amounts abated in full. On March 26, 2014, the Massachusetts Department of Revenue denied our application. While we have filed an appeal on this matter with the ATB, it is on hold pending resolution of the petition for a writ of certiorari we filed with the Supreme Court on May 31, 2015 related to GATE’s taxable years ended June 30, 2004, 2005 and 2006. We expect the outcome for the taxable years ended June 30, 2008 and 2009 to be influenced by the SJC’s reconsideration of our appeal of the ATB’s findings related to GATE’s taxable years ended June 30, 2004, 2005 and 2006.

We plan to vigorously pursue the litigation pending before the ATB in the cases pertaining to GATE’s taxable years ended June 30, 2008 and 2009. If we are unsuccessful in this litigation, 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. As of September 30, 2015, we had accrued a total income tax liability of $26.7 million, including interest, related to GATE’s tax returns for the taxable years ended June 30, 2008 and 2009, which amount was included in income taxes payable on our consolidated balance sheet. We cannot predict the outcome of this matter or the timing of such payments, if any, at this time.

It is reasonably possible that our liability for this uncertain tax benefit may change within the next 12 months depending on the SJC’s reconsideration of our appeal of the ATB’s findings in the cases pertaining to GATE’s taxable years ended June 30, 2004, 2005 and 2006 as well as the outcome of the litigation pending before the ATB in the cases pertaining to GATE’s taxable years ended June 30, 2008 and 2009. As of September 30, 2015, the range of potential change in our liability, excluding an assessment for penalties, was $0 to $26.7 million.

(b) TMS Guarantee Payments

TMS is subject to guarantee arrangements with certain educational institutions for a portion of eligible monthly education payment plans. We record a liability for those guarantee arrangements, which is included in other liabilities on our September 30, 2015 and June 30, 2015 consolidated balance sheets. The liability pertaining to the guarantee arrangements was approximately $3.8 million and $210 thousand at September 30, 2015 and June 30, 2015, respectively. We also record a bad debt expense if it is probable that a loss will result and the amount of the loss can be reasonably estimated. For the three months ended September 30, 2015, we recorded approximately $272 thousand in bad debt expense related to the guarantee arrangements. This expense was included in general and administrative expenses in our consolidated statements of operations. Although we believe that our estimate related to TMS’ guarantee arrangements are reasonable, we cannot make any assurances with regard to the accuracy of our estimates, and actual results could differ materially.

(c) Cology LLC Contingent Liability

Under certain of Cology LLC’s loan origination agreements, it has agreed to indemnify those lender clients for certain claims and damages in connection with its performance under such agreements. As of June 30, 2015, we recorded a liability of $350 thousand, which was included in other liabilities on our consolidated balance sheet, with a corresponding contingent loss included in general and administrative expenses on our consolidated statement of operations. As of September 30, 2015 we have evaluated the liability and determined that there was no change to the $350 thousand balance. Based on the information obtained, combined with management’s judgment regarding all of the facts and circumstances of the matter, we determined that a contingent loss is probable and that the amount of such loss can be estimated, as ranging from approximately $13 thousand to $420 thousand. In determining the range and amount of the contingent loss, we took into consideration advice received from our external counsel, which has extensive experience in the specific matter, as well as other factors. Should the judgments and estimates made by management be incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are incorrect and the contingent loss does not occur, the contingent loss recorded would be reversed thereby favorably impacting our results of operations.

(11) Net Loss per Share

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

	Three months ended September 30,
	2015			2014
	(dollars and shares in thousands,  except per share amounts)
Net loss from continuing operations available and allocated to common shares outstanding	$	(6,115	)	$	(10,528	)
Loss from discontinued operations, net of taxes, available and allocated to common shares outstanding		—			(2,913	)
Net loss available and allocated to common shares outstanding	$	(6,115	)	$	(13,441	)
Net loss per basic and diluted common share:
From continuing operations	$	(0.53	)	$	(0.92	)
From discontinued operations		—			(0.26	)
Total basic and diluted net loss per common share	$	(0.53	)	$	(1.18	)
Basic and diluted weighted-average common shares outstanding		11,592			11,385

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The following table presents the weighted-average shares outstanding for restricted stock units and stock options that were anti-dilutive, and, therefore, not included in the calculation of diluted net loss per common share:

	Three months ended September 30,
	2015		2014
	(in thousands)
Restricted stock units		744		472
Stock options		600		601

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and accompanying notes included in Part I of this quarterly report and in conjunction with our audited consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2015 filed with the Securities and Exchange Commission, or SEC, on September 9, 2015, which we refer to as our Annual Report.

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 and its subsidiaries 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 loan” to refer to private education loans that 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, 2016 as “fiscal 2016.”

Executive Summary

Overview

We are a specialty finance company focused on the education financing marketplace in the United States. We offer our clients the opportunity to outsource key components of their education financing programs through various product and service offerings, including loan origination, tuition and refund management, loan processing and disbursement and portfolio management services.

Specifically, we design, develop and manage loan programs on behalf of our lender clients for undergraduate and graduate students and for college graduates seeking to refinance private education loan obligations. We offer a fully integrated suite of services through our Monogram^® loan product service platform, which we refer to as our Monogram platform. We partner with lenders to design and administer education loan programs through our Monogram platform, which are typically school-certified. These programs are designed to be marketed through educational institutions or to prospective borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the capital markets. We may provide credit enhancements for a Monogram-based program by funding participation interest accounts, which we refer to as participation accounts, to serve as a first-loss reserve for defaulted program loans. In consideration for funding participation accounts, we are entitled to receive a share of the interest income generated on the loans. We are paid for our origination and marketing services at the time approved education loans are disbursed and receive monthly payments for portfolio management services, credit enhancement and administrative services throughout the life of the loan. We also earn fees for the processing and disbursement of education loans on behalf of the approximately 340 credit union and other lender clients of FMD’s subsidiary Cology LLC.

In addition, we offer outsourced tuition planning, tuition billing, refund management and payment technology services for universities, colleges and secondary schools through FMD’s subsidiary Tuition Management Systems LLC, which we refer to as TMS. TMS provides such services on behalf of approximately 670 educational institutions.

Recent Developments

• On July 1, 2015, FMD entered into a license and services agreement with a financial institution and a credit solutions software provider. Pursuant to this agreement, FMD has licensed intellectual property consisting of proprietary risk scoring models and underwriting scorecards based on its historical education loan performance data. The credit solutions software provider has implemented the proprietary scorecards that are being utilized by the financial institution in determining credit eligibility for the financial institution’s in-school private education loan program. In addition, FMD has agreed to provide maintenance and support services and other professional services to the financial institution and the credit solutions software provider during the term. This agreement has an initial term of three years.

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• On November 10, 2014, our subsidiary First Marblehead Education Resources, Inc., or FMER, entered into a loan origination services agreement with Nelnet Servicing, LLC d/b/a Firstmark Services, or Firstmark Services, and on May 14, 2015, FMER entered into a first amendment to the loan origination services agreement with Firstmark Services. We refer to the loan origination services agreement, as amended, as the Services Agreement. Pursuant to the Services Agreement, Firstmark Services had agreed to perform certain loan origination services, including application intake, call center services, the majority of loan processing services and certain program support functions, for our lender clients’ Monogram-based loan programs. On September 8, 2015, FMER terminated the Services Agreement, effective as of that date, because FMER had determined, after consultation with Firstmark Services, that Firstmark Services had not met certain criteria as of the date specified in the Services Agreement. As a result, FMER will continue to perform those origination services that were the subject of the Services Agreement.

• We are involved in several matters relating to the Massachusetts tax treatment of GATE Holdings, Inc., or GATE, a former subsidiary of FMD, for GATE’s taxable years ended June 30, 2004, 2005 and 2006 as well as GATE’s taxable years ended June 30, 2008 and 2009. On November 9, 2011, the Massachusetts Appellate Tax Board, or ATB, issued an order, or the ATB Order, regarding GATE’s taxable years ended June 30, 2004, 2005 and 2006. On January 28, 2015, the Massachusetts Supreme Judicial Court, or the SJC, issued its opinion in the cases pertaining to GATE’s taxable years ended June 30, 2004, 2005 and 2006 and affirmed the decision of the ATB. On May 31, 2015, we filed a petition for a writ of certiorari with the Supreme Court of the United States, or the Supreme Court. On October 13, 2015, the Supreme Court issued an order granting our petition for a writ of certiorari, summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration. On October 21, 2015, the SJC requested supplemental briefs from us and the Massachusetts Commissioner of Revenue, or Commissioner. In August 2013, the Massachusetts Department of Revenue delivered a notice of assessment for GATE’s taxable years ended June 30, 2008 and 2009. While we have filed an appeal on this matter with the ATB, it is on hold pending resolution of the petition for a writ of certiorari we filed with the Supreme Court on May 31, 2015. See Note 10, “Commitments and Contingencies—Massachusetts Appellate Tax Board Matters,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report and Item 1, “Legal Proceedings,” included in Part II of this quarterly report for additional information.

Business Trends, Uncertainties and Outlook

The following discussion of business trends, uncertainties and outlook focuses on certain developments affecting our business since the beginning of fiscal 2016.

Loan Processing and Origination

Our Monogram platform provides us with an opportunity to originate, administer, manage and finance education loans, and our lender clients’ Monogram-based loan programs are a significant component of our return to the education financing marketplace. As of November 9, 2015, we have loan program agreements with three lender clients. The Monogram-based loans that are originated on behalf of our lender clients are not included on our consolidated balance sheets but, rather, are included on the balance sheets of our lender clients. As such, none of the references in this quarterly report to education loans included on our consolidated balance sheets include the education loans processed by us on behalf of our lender clients.

Through Cology LLC, we process and disburse education loans on behalf of its credit union and other lender clients. Cology LLC supports over 800 education loan programs and provides education loan solutions to approximately 340 credit union and other lender clients. Cology LLC earns fees primarily based on the number of loan applications, loan certifications and disbursements it processes on behalf of its clients. Because Cology LLC is a loan processer, the education loans that it processes on behalf of its clients are not included on our consolidated balance sheets but, rather, are included on the balance sheets of its clients. As such, none of the references in this quarterly report to education loans included on our consolidated balance sheets include the education loans processed by Cology LLC on behalf of its clients.

The following table presents our loan facilitation metrics with respect to our Monogram-based programs, excluding our former bank subsidiary Union Federal Savings Bank, or Union Federal, for the three months ended September 30, 2015 and 2014, as well as our loan facilitation metrics with respect to the education loans processed by Cology LLC for these periods. We use the term “facilitated loan” to mean an education loan that has been approved following receipt of all applicant data, including the signed credit agreement, required certifications from the school and applicant and any required income or employment verification. We use the term “disbursed loan” to mean a loan for which loan funds have been disbursed on behalf of the lender. 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.

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	Three months ended September 30,
	2015						2014
	Partnered Lending		Cology LLC		Total		Partnered Lending		Cology LLC		Total
	(dollars in thousands)
Facilitated Loans	$	97,158	$	412,698	$	509,856	$	84,550	$	360,675	$	445,225
Disbursed Loans		53,207		272,795		326,002		42,584		213,599		256,183

The increase in partnered lending loan volume for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily the result of a stronger credit mix of applicants and an improved application conversion rate.

The increase in Cology LLC loan volume for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily the result of organic growth at existing clients, including new loan programs.

Portfolio Performance

Credit performance of consumer-related loans generally has been adversely affected by general economic conditions in the United States over the past seven years. These conditions have included higher unemployment rates and deteriorating credit performance, including higher levels of education loan defaults and lower recoveries on such defaulted loans. Although these conditions have lessened to a certain extent in more recent years, they may have a material adverse effect on consumer loan portfolio performance in the future. Our Monogram-based education loan portfolios are not yet fully exposed to significant adverse portfolio performance because a majority of these portfolios have yet to experience any significant seasoning. Consequently, in evaluating loan portfolio performance, we review projected gross default rates and projected post-default recovery rates. Further, we evaluate the loan portfolio performance of the securitization trusts that we previously facilitated for loans that have similar credit characteristics as the Monogram-based education loan portfolios.

Capital Markets

Our capital markets experience coupled with our loan performance database and risk analytics capabilities enable us to provide specialized insight into funding options available to our lender clients. We have a right of first refusal should one of our lender clients wish 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 whole loan sales or other financing alternatives. We can also earn net interest income by retaining a portion of the equity in any of these transactions.

We believe that conditions in the capital markets were generally move favorable in fiscal 2015 and for the three months ended September 30, 2015 as compared to recent years. In particular, investors in asset-backed securities, or ABS, have demonstrated more interest in ABS backed by private education loans, which also has resulted in credit spreads being narrower during the past 15 months as compared with earlier post financial crisis periods. We believe that these trends indicate that the economics of private education loan ABS have started to become more attractive to issuers in the private education loan securitization marketplace. However, we have not completed a securitization transaction since fiscal 2008, and if we execute a financing transaction in the capital markets, the structure and economics of any such transaction may be materially different from prior transactions that we have sponsored. Such differences may include lower revenues as a result of comparatively wider credit spreads and lower advance rates.

Uncertainties

Our near-term financial performance and future growth depends, in large part, on our ability to successfully and efficiently market our Monogram platform, TMS offerings and Cology LLC offerings so that we may grow and diversify our client base and revenues. Facilitated and disbursed loan volumes are key elements of our financial results and business strategy, and we believe that the results to date demonstrate market demand for Monogram-based education loans.

We have invested in our distribution capabilities over the course of the past four fiscal years, including school sales and TMS, but we face challenges in increasing loan volumes. 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.

Although we believe that our capital resources as of September 30, 2015 are sufficient to satisfy our operating needs for the succeeding 12 months, we cannot assure you that they will be sufficient. In addition, our future financial results and liquidity position could be materially impacted by the proceedings related to our state income tax returns, including the resolution of litigation pending before the ATB in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2008 and 2009. See Note 10, “Commitments and Contingencies—Massachusetts Appellate Tax Board Matters,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report and Item 1, “Legal Proceedings,” included in Part II of this quarterly report for additional information.

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Outlook

Our long-term success depends on our ability to successfully and efficiently market our Monogram platform, TMS offerings and Cology LLC offerings, generate incremental loan volume through each of our clients or otherwise obtain additional sources of interim or permanent financing, such as securitizations or alternative financing transactions, and continue to actively manage our expenses. As of November 9, 2015, we have loan program agreements based on our Monogram platform with three lender clients. While we have demonstrated market demand for Monogram-based education loans, we are uncertain as to the degree of market acceptance that our Monogram platform will achieve, particularly in the current economic and regulatory environment where lenders continue to evaluate their education lending business models. Additionally, as one of our current lender clients provides the majority of our Monogram-based loan program fees, we are subject to concentration risk as it relates to this revenue stream until we are able to attract additional lender clients. We believe, however, that the credit quality characteristics and interest rates of the Monogram-based loan portfolios originated to date will be attractive to additional potential lender clients, as well as capital markets participants. We also believe that the ability to permanently finance private 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 current lender clients, or any additional lender clients, including clients of Cology LLC. It is our view that returning to profitability will be dependent on a number of factors, including our ability to successfully and efficiently market our Monogram platform, TMS offerings and Cology LLC offerings, generate incremental loan volume through each of our clients or otherwise obtain additional sources of interim or permanent financing, such as securitizations or alternative financing transactions, and continue to actively manage our expenses. 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 current lender clients with lower credit enhancement levels and higher capital markets advance rates than those available today. We must also continue to achieve efficiencies in attracting applicants, through loan serialization or otherwise, in order to reduce our overall cost of loan acquisition.

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 currently under consideration;

• The extent to which our services and products, including our Monogram platform, TMS offerings and Cology LLC 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;

• Regulatory requirements applicable to TMS, Cology LLC and FMD;

• 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;

• The underlying loan performance of the Monogram-based loan programs, including the net default rates, and the timing and amounts of receipt of excess credit enhancements, if any, that may be material to us;

• The resolution of our appeal of the ATB Order in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2004, 2005 and 2006 and the litigation pending before the ATB in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2008 and 2009;

• Application of critical accounting policies and estimates, which impact the carrying value of assets and liabilities;

• Application of The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, through the supervisory authority of the Consumer Financial Protection Bureau, or CFPB, which has the authority to regulate consumer financial products such as education loans, and to take enforcement actions against institutions that act as service providers to originators and processers of education loans, such as our subsidiaries FMER and Cology LLC;

• 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.

Critical Accounting Policies and Estimates

During the three months ended September 30, 2015, there were no significant changes in our critical accounting policies from those 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—Liquidity and Capital Resources—Critical Accounting Policies and Estimates.”

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Results of Operations—Three Months Ended September 30, 2015 and 2014

Overall Results

The following table summarizes the results of our consolidated operations:

	Three months ended September 30,						Change between periods better (worse)
	2015			2014			2015 - 2014
	(dollars in thousands)
Revenues:
Tuition payment processing fees	$	9,395		$	8,287		$	1,108
Administrative and other fees		6,353			4,880			1,473
Fair value changes to service revenue receivables		779			950			(171	)
Total revenues		16,527			14,117			2,410
Total expenses		22,406			24,458			2,052
Other income		58			56			2
Loss from continuing operations, before income taxes		(5,821	)		(10,285	)		4,464
Income tax expense from continuing operations		294			243			(51	)
Net loss from continuing operations		(6,115	)		(10,528	)		4,413
Discontinued operations, net of taxes		—			(2,913	)		2,913
Net loss	$	(6,115	)	$	(13,441	)	$	7,326

The net loss from continuing operations for the three months ended September 30, 2015 was $6.1 million, or $(0.53) per common share, compared to a net loss from continuing operations of $10.5 million, or $(0.92) per common share, for the three months ended September 30, 2014. The decrease in the net loss from continuing operations was primarily due to increased revenues of $2.4 million coupled with a $2.1 million decrease in total expenses.

Revenues

Revenues include tuition payment processing fees earned by TMS, fee-for-service revenues for loan origination and program support, fees for portfolio management services and fees related to our Monogram platform. Revenues also include fair value changes related to service revenue receivables.

Revenues for the three months ended September 30, 2015 were $16.5 million, an increase of $2.4 million from the three months ended September 30, 2014. The increase in revenues was primarily due to increases of $1.5 million in administrative and other fees and $1.1 million in tuition management fees. The increase in administrative and other fees included increases of $723 thousand in Monogram-based fee revenues, $390 thousand in revenues from portfolio management services, primarily related to the fees earned in connection with the license and services agreement FMD entered into in July 2015, and $360 thousand in fee income from Cology LLC, partially offset by a decrease to the fair value of our service revenue receivables of $171 thousand.

The increase in Monogram-based fee revenues for the three months ended September 30, 2015 was primarily the result of increased loan portfolio balances and an increase in disbursements, which was slightly offset by an increase in defaulted loans at our lender clients. Due to the nature of the recurring fee structure under our Monogram-based programs, our Monogram-based fee revenues increase as portfolio sizes at our lender clients grow. The increase in fee income from Cology LLC for the three months ended September 30, 2015 was primarily driven by increased loan disbursements and application fees. The increase in tuition management fees for the three months ended September 30, 2015 was primarily due to an increase in enrollment fees, transaction revenue and merchant services partially offset by a decline in late fee revenues.

Fair value changes to service revenue receivables We record our service revenue receivables at fair value on our consolidated balance sheets. At September 30, 2015, our service revenue receivables consisted of additional structural advisory fees and residual receivables and represent the estimated fair value of our 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.

Changes in the estimated fair value of our service revenue receivables due, less any cash distributions received, are recorded in our consolidated statements of operations within fair value changes to service revenue receivables.

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In the absence of market-based transactions, we use cash flow modeling techniques to derive an estimate of fair value for financial reporting purposes. Significant observable and unobservable inputs used to develop our fair value estimates include, but are not limited to, discount rates, prepayment rates, net recovery rates, default rates and the forward London Interbank Offered Rate, or LIBOR, curve. See Note 8, “Fair Value Measurements,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report for additional information.

Expenses

The following table reflects the composition of expenses:

	Three months ended September 30,				Change between periods better (worse)
	2015		2014		2015 - 2014
	(dollars in thousands)
Compensation and benefits	$	8,189	$	9,911	$	1,722
General and administrative:
Third-party services		3,623		4,566		943
Depreciation and amortization		1,390		1,267		(123	)
Marketing		1,329		1,339		10
Occupancy and equipment		2,307		2,640		333
Merchant fees		3,419		2,871		(548	)
Other		2,149		1,864		(285	)
Total general and administrative		14,217		14,547		330
Total expenses	$	22,406	$	24,458	$	2,052
Total number of employees from continuing operations at period end		266		282

Compensation and benefits Compensation and benefits expenses for the three months ended September 30, 2015 and 2014 were $8.2 million and $9.9 million, respectively. The decrease of $1.7 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily driven by decreased non-cash compensation as we did not grant any restricted stock units or options to any employees during the first quarter of fiscal 2016 and lower salaries and benefits expense due to decreased headcount.

General and administrative General and administrative expenses for the three months ended September 30, 2015 and 2014 were $14.2 million and $14.5 million, respectively. The decrease of $330 thousand for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily due to decreased third-party services of $943 thousand, largely legal fees pertaining to the tax matters, and temporary employment services. Additionally, there was a decrease in occupancy costs of $333 thousand, principally related to cost savings on expired leases. These decreases were partially offset by an increase in merchant fee expenses of $548 thousand related to payment processing services performed by TMS and an increase of $285 thousand in other expenses, primarily bad debt expense related to TMS guarantees.

Other Income

Other income for three months ended September 30, 2015 consisted of $35 thousand in net interest income and $23 thousand in cash recoveries on previously defaulted education loans held by us. Other income for the three months ended September 30, 2014 consisted of $36 thousand in net interest income and $20 thousand in cash recoveries on previously defaulted education loans held by us. Net interest income for both periods presented primarily consisted of interest earned on cash and cash equivalents and short-term investments.

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. We remain subject to federal income tax examinations for fiscal 2012 through fiscal 2015. We are involved in several matters relating to the Massachusetts tax treatment of GATE. See Note 10, “Commitments and Contingencies—Massachusetts Appellate Tax Board Matters,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report and Item 1, “Legal Proceedings,” included in Part II 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, 2011 and June 30, 2015.

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Beginning in fiscal 2011, we no longer had any taxable income in prior periods to offset current period net operating losses for federal income tax purposes. As a result, we recorded a net operating loss carryforward asset as of September 30, 2015 and June 30, 2015, totaling $77.4 million and $74.9 million, respectively, for which we recorded a full valuation allowance.

Under current law, we do not have remaining taxes paid within available net operating loss carryback periods, and it is more likely than not that our deferred tax assets will not be realized through future reversals of existing temporary differences or available tax planning strategies. Accordingly, we have determined that a valuation allowance was necessary for all of our deferred tax assets not scheduled to reverse against existing deferred tax liabilities as of September 30, 2015 and June 30, 2015. We will continue to review the recognition of deferred tax assets on a quarterly basis.

Discontinued Operations, Net of Taxes

The discontinued operations of Union Federal, net of taxes, for the three months ended September 30, 2014 was a net loss of $2.9 million, or $(0.26) per common share. The $2.9 million net loss in fiscal 2015 was comprised of other expenses of $2.5 million and operating expenses of $928 thousand, partially offset by revenues of $546 thousand.

See Note 2, “Discontinued Operations,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report for additional information.

Financial Condition

The changes in our financial condition for the three months ended September 30, 2015 are discussed below.

Continuing Operations

Cash, Cash Equivalents and Short-term Investments

We had combined cash, cash equivalents and short-term investments of $52.2 million and $63.0 million at September 30, 2015 and June 30, 2015, respectively, representing interest-bearing and non-interest bearing deposits, money market funds and certificates of deposit with highly-rated financial institutions.

The decrease of $10.8 million was primarily a result of cash used to fund continuing operations coupled with fundings for participation accounts and cash outflows for accrued expenses.

Restricted Cash

At September 30, 2015, restricted cash on our consolidated balance sheets was $125.1 million, of which $121.3 million was held by TMS, $3.1 million was held by Cology LLC and $767 thousand was held by FMER. Restricted cash at June 30, 2015 was $97.0 million, of which $94.6 million was held by TMS, $2.1 million was held by Cology LLC and $261 thousand was held by FMER.

Restricted cash held by TMS represents tuition payments collected from students or their families on behalf of educational institutions. These cash balances are held in escrow under a trust agreement for the benefit of TMS’ educational institution clients and are generally subject to cyclicality, tending to peak in August of each school year, early in the enrollment cycle, and to decrease in May, the end of the school year. Over the last 12 months, TMS’ restricted cash balances ranged from a high of $376.1 million during August 2015 to a low of $32.3 million during May 2015. Restricted cash held by Cology LLC represents loan origination proceeds that it collects and disburses on behalf of its clients. Restricted cash held by FMER relates to recoveries on defaulted education loans collected on behalf of clients as well as undistributed loan origination proceeds. We record a liability on our consolidated balance sheets representing tuition payments due to our TMS clients, loan origination proceeds due to our Cology LLC clients and recoveries on defaulted education loans and education loan proceeds due to schools.

Deposits for Participation Interest Accounts

We record deposits for participation accounts at fair value on our consolidated balance sheets. Deposits for participation accounts increased by $3.9 million from $17.9 million at June 30, 2015 to $21.8 million at September 30, 2015, primarily due to additional fundings partially offset by net defaults.

See Note 7, “Deposits for Participation Interest Accounts,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report for additional information.

Goodwill and 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 assets can be exchanged on their own or in combination with a related contract, asset or liability. In connection with our acquisition of assets from TMS and from Cology, Inc. and its affiliates, which we refer to as the Cology Sellers, we recorded other intangible assets related to the TMS customer list and tradename and the Cology Sellers customer list, each of which we amortize on a straight-line basis over 15 years, and TMS technology, which we amortize on a straight-line basis over six years. We record amortization expense in general and administrative expenses in our consolidated statements of operations.

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As it relates to TMS, the customer list intangible asset is related to educational institutions with which TMS had existing tuition programs in place as of December 31, 2010, the closing date of the acquisition. The trade name intangible asset is related to the name and reputation of TMS in the tuition payment industry. Intangible assets attributable to technology represents the replacement cost of software and systems acquired that are necessary to support operations, net of an obsolescence factor. Goodwill represents the value ascribed to the acquisition of TMS that cannot be separately ascribed to a tangible or intangible asset.

As it relates to Cology LLC, the customer list intangible asset is related to clients, including credit union and other lender clients, with which the Cology Sellers had existing loan origination and servicing programs in place as of October 19, 2012, the closing date of the acquisition. Goodwill represents the value ascribed to the acquisition of a substantial portion of the operating assets of the Cology Sellers that cannot be separately ascribed to a tangible or intangible asset.

In fiscal 2015, we evaluated our goodwill for impairment on May 31, which is our annual impairment testing date, and concluded that the fair market values of the TMS and Cology LLC reporting units were approximately 55% and 101%, respectively, in excess of our recorded book value and, therefore, were not impaired as of that date. The fair values are estimates and may not represent the values achievable in the event that TMS and Cology LLC are offered for sale. In determining whether impairment exists, we assess impairment at the level of the TMS and Cology LLC reporting units. 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, adoption of refund management and Student Account Center products and pricing, 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. 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, lower-than-planned adoption rates of refund management and Student Account Center products, higher-than-expected expense levels to provide services to TMS’ clients, a lower interest rate environment than depicted by the LIBOR curve, 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 TMS’ school clients, increases in equity returns required by investors and changes in our business model that may impact one or more of these variables. The more meaningful assumptions that contribute to the cash flow model used to determine the fair value of the Cology LLC reporting unit include loan volume growth, revenues related to the cross-selling of Monogram-based products and services, client attrition, costs required to support the assumed volume of the business and discount rates. Cology LLC’s business would be adversely affected if any of the following were to occur: higher attrition rates than planned, a lack of acceptance of Monogram products and services by its credit union and other lender clients, higher-than-expected expense levels to provide services to Cology LLC clients and changes in our business model that may impact one or more of these variables.

At September 30, 2015, our goodwill balance was $20.1 million, of which $19.5 million related to TMS and $518 thousand related to Cology LLC.

At September 30, 2015, our net intangible assets balance was $18.9 million, of which $14.4 million related to TMS and $4.5 million related to Cology LLC. During the three months ended September 30, 2015, we recorded amortization expense of $484 thousand related to TMS and $94 thousand related to Cology LLC.

Discontinued Operations

See Note 2, “Discontinued Operations,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report for additional information.

Contractual Obligations

Our consolidated contractual obligations consist of commitments under operating leases. At September 30, 2015, there were no material changes from the contractual 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.”

Total Stockholders’ Equity

Total stockholders’ equity decreased from $102.2 million at June 30, 2015 to $96.5 million at September 30, 2015 primarily as a result of our net loss of $6.1 million, partially offset by an increase of $636 thousand in additional paid-in capital related to stock compensation.

Off-Balance Sheet Arrangements

We offer outsourcing services in connection with education loan programs, from program design through securitization of the education loans. 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 securitization trusts we facilitated have been to generate sources of liquidity for our

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clients’ and make available more funds to students and colleges. In accordance with the guidance in Accounting Standards Codification, or ASC, 810,Consolidation, we do not consolidate these securitization trusts as we are not deemed to be the primary beneficiary.

Liquidity and Capital Resources

Sources and Uses of Cash

The following is a discussion of the sources and uses of cash on a U.S. generally accepted accounting principles, or GAAP, basis as presented in our consolidated statements of cash flows included in our unaudited consolidated financial statements included in Item 1 of 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 below under “—Non-GAAP Measure: Net Operating Cash Usage.”

Net cash used in operating activities from continuing operations for the three months ended September 30, 2015 was $10.2 million, compared with net cash used in operating activities from continuing operations of $8.2 million for the three months ended September 30, 2014. The $2.0 million increase in net cash used in operating activities from continuing operations was principally the result of increased fundings for participation accounts of $4.1 million, driven by the timing of funding for new program year loan volume, and by increased funding for other assets of $2.7 million partially offset by a decrease in net loss of $4.4 million.

We anticipate continuing to receive fees related to loan processing and origination and portfolio management services as well as fees related to Monogram-based loan programs. We believe that our cash, cash equivalents and short-term investments, coupled with the 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 used in investing activities from continuing operations for the three months ended September 30, 2015 was $304 thousand, compared with net cash provided by investing activities from continuing operations of $13.8 million for the three months ended September 30, 2014. The decline of $14.1 million in net cash provided by investing activities from continuing operations was primarily due to a decrease in proceeds from maturities of short-term investments of $14.1 million.

Net cash used in financing activities from continuing operations was $250 thousand for the three months ended September 30, 2015 compared to net cash used in financing activities from continuing operations of $512 thousand for the three months ended September 30, 2014. The improvement in net cash used in financing activities from continuing operations was primarily due to a decline in repurchases of common stock.

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 a combination of revenues from operations and various financing vehicles available to us. We may also utilize issuances of common stock, promissory notes or other securities or the potential sale of certain assets of FMD. 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 FMD stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to further delay, reduce the scope of or eliminate one or more aspects of our operational activities, which could harm our business.

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

• Cash necessary to fund our operations, including the operations of TMS and Cology LLC, and capital expenditures;

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

• 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 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 ability to effectively and efficiently manage our expense base;

• The resolution of our appeal of the ATB Order in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2004, 2005 and 2006, which could also affect our state tax liabilities for fiscal 2008 and fiscal 2009, and the litigation pending before the ATB in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2008 and 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 or sold.

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Liquidity is required for capital expenditures, working capital, business development expenses, business acquisitions, income tax payments, costs associated with alternative financing transactions, general corporate expenses, and capital provided in connection with Monogram-based loan program credit enhancement arrangements or capital markets transactions. In order to preserve capital and maximize liquidity in challenging market conditions, we have in the past taken certain broad measures to reduce the risk related to education loans and residual receivables on our consolidated balance sheet, change our fee structure, add new products and reduce our overhead expenses. In addition, the FMD Board of Directors has eliminated regular quarterly cash dividends for the foreseeable future.

Restricted Funds Due to Clients

As part of our operations, we have cash that is recorded as restricted cash on our consolidated balance sheets because it is deposited with third–party institutions and not available for our use. Included in restricted cash on our consolidated balance sheets are tuition payments due to schools, undisbursed loan origination proceeds and recoveries on defaulted education loans. We record a liability on our consolidated balance sheets representing tuition payments due to our TMS clients, loan origination proceeds due to our Cology LLC clients and recoveries on defaulted education loans and education loan proceeds due to schools.

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 approximate cash requirements to fund our operations. “Net operating cash usage” is not directly comparable to our consolidated statements of cash flows prepared in accordance with GAAP. Legislative and regulatory guidance discourage the use of, and emphasis on, non-GAAP financial metrics and require companies to explain why a non-GAAP financial metric is relevant to management and investors.

Management and the FMD 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. This 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 results, including our expenses and liquidity position. 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 any 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” excludes the effects of income taxes, acquisitions or divestitures, participation account 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, loss from continuing operations, before income taxes, for the three months ended September 30, 2015 and 2014 and reconciles the GAAP measure to the comparable non-GAAP financial metric:

	Three months ended September 30,
	2015			2014
Loss from continuing operations, before income taxes	$	(5,821	)	$	(10,285	)
Adjustments to loss from continuing operations, before income taxes:
Fair value changes to service revenue receivables		(779	)		(950	)
Distributions from service revenue receivables		1,626			1,366
Depreciation and amortization		1,390			1,267
Stock-based compensation		638			1,819
Change in TMS deferred revenue		1,446			1,310
Additions to property and equipment		(445	)		(341	)
Other, net of cash flows from Union Federal for the three months ended September 30, 2014		46			(232	)
Non-GAAP net operating cash usage	$	(1,899	)	$	(6,046	)

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“Net operating cash usage” for the three months ended September 30, 2015 decreased $4.1 million, or 69%, compared to the three months ended September 30, 2014. The decrease in “net operating cash usage” for the three months ended September 30, 2015 was largely driven by an improvement in revenues and further by a decline in expenses.

“Net operating cash usage” included $295 thousand in cash used by Union Federal for the three months ended September 30, 2014 compared to no cash used by Union Federal for the three months ended September 30, 2015. The decline in cash used by Union Federal for the three months ended September 30, 2015 was driven by the dissolution of Union Federal in June 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk is the primary market risk associated with our continuing operations. Management monitors liquidity and interest rate risk matters and discusses such matters with the FMD Board of Directors. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. Interest rate risk applies to our interest-bearing cash and cash equivalents and short-term investments, as well as our service revenue receivables and deposits for participation accounts.

We invest our excess cash primarily in money market funds and certificates of deposits with original maturities of less than one year. Management regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve. The changes contemplated in these interest rate scenarios would result in immaterial changes to our overall results, largely as a result of the short-term nature of our interest-bearing assets.

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

Item 4. Controls and Procedures

Our management, with the participation of FMD’s Chief Executive Officer and Chief Financial Officer (FMD’s principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. 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 September 30, 2015, FMD’s 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 September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

Massachusetts Appellate Tax Board Matters

GATE Holdings, Inc. Taxable Years Ended June 30, 2004, 2005 and 2006

We are involved in several matters relating to the Massachusetts tax treatment of GATE, a former subsidiary of FMD, includingThe First Marblehead Corp. v. Commissioner of Revenue, ATB Docket No. C293487, which was instituted on September 5, 2007;GATE Holdings, Inc. v. Commissioner of Revenue, ATB Docket No. C305217, which was instituted on March 16, 2010;The First Marblehead Corp. v. Commissioner of Revenue, ATB Docket No. C305241, which was instituted on March 22, 2010; andGATE Holdings, Inc. v. Commissioner of Revenue, ATB Docket No. C305240, which was instituted on March 22, 2010. On November 9, 2011, the ATB issued the ATB Order regarding these proceedings. On January 28, 2015, the SJC issued its opinion in these proceedings and affirmed the decision of the ATB. On October 13, 2015, the Supreme Court issued an order granting our petition for a writ of certiorari, summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration.

Background

We took the position in these cases that GATE was properly taxable as a financial institution and not as a business corporation and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The 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. For the 2005 and 2006 taxable years, only one of the two assessments made by the Commissioner would ultimately be allowed. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE and us.

On November 9, 2011, the ATB issued the ATB Order regarding these proceedings. The ATB 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 excluding all income from trust-owned education loans outside of Massachusetts rather than including such income for the purposes of GATE’s Massachusetts state tax returns; and

• All penalties assessed to FMD and GATE were abated.

In connection with the ATB 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.

On April 17, 2013, the ATB issued its opinion confirming the rules and findings included in the ATB Order. On July 22, 2013, we filed an appeal of the ATB’s findings with regard to the Property Factor in the Massachusetts Appeals Court (No. 2013-P-0935). On December 18, 2013, the SJC notified us that it had elected to hear our appeal of the ATB’s findings and heard arguments on the appeal on October 7, 2014. On January 28, 2015, the SJC issued its opinion affirming the decision of the ATB. On February 11, 2015, we filed a petition for rehearing on this matter with the SJC, which was denied by the SJC on March 2, 2015. On May 31, 2015, we filed a petition for a writ of certiorari with the Supreme Court. On October 13, 2015, the Supreme Court summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration. On October 21, 2015, the SJC requested supplemental briefs from us and the Commissioner. Our brief is due by November 30, 2015. The SJC must now reconsider our appeal of the ATB’s findings with regard to the Property Factor. If we are unsuccessful in the SJC’s reconsideration of our appeal of the ATB Order, we could be required to make additional tax payments, including interest, as discussed below, for GATE’s taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position.

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GATE’s Taxable Years Ended June 30, 2008 and 2009

On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for GATE’s taxable years ended June 30, 2008 and 2009, which included an assessment for penalties of $4.1 million. We have not accrued for the penalties as we believe that it is more likely than not that the penalties will ultimately be abated, which is consistent with the Massachusetts Department of Revenue’s treatment of GATE’s taxable years ended June 30, 2004, 2005 and 2006. On August 26, 2013, we filed an application to have the assessed amounts abated in full. On March 26, 2014, the Massachusetts Department of Revenue denied our application. While we have filed an appeal on this matter with the ATB, it is on hold pending resolution of the petition for a writ of certiorari we filed with the Supreme Court on May 31, 2015 related to GATE’s taxable years ended June 30, 2004, 2005 and 2006. We expect the outcome for the taxable years ended June 30, 2008 and 2009 to be influenced by the SJC’s reconsideration of our appeal of the ATB’s findings related to GATE’s taxable years ended June 30, 2004, 2005 and 2006.

We plan to vigorously pursue the litigation pending before the ATB in the cases pertaining to GATE’s taxable years ended June 30, 2008 and 2009. If we are unsuccessful in this litigation, 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. As of September 30, 2015, we had accrued a total income tax liability of $26.7 million, including interest, related to GATE’s tax returns for the taxable years ended June 30, 2008 and 2009, which amount was included in income taxes payable on our consolidated balance sheet. We cannot predict the outcome of this matter or the timing of such payments, if any, at this time.

It is reasonably possible that our liability for this uncertain tax benefit may change within the next 12 months depending on the SJC’s reconsideration of our appeal of the ATB’s findings in the cases pertaining to GATE’s taxable years ended June 30, 2004, 2005 and 2006 as well as the outcome of the litigation pending before the ATB in the cases pertaining to GATE’s taxable years ended June 30, 2008 and 2009. As of September 30, 2015, the range of potential change in our liability, excluding an assessment for penalties, was $0 to $26.7 million.

NC Residuals Owners Trust Litigation

On April 2, 2014, FMD filed a complaint in the Delaware Court of Chancery, or Chancery Court, against NC Residuals Owners Trust, or NC Residuals, and The Wilmington Trust Company in its capacity as owner trustee, or the Owner Trustee, of certain of the securitization trusts that we previously facilitated, which we refer to as the GATE Trusts. The action is entitledThe First Marblehead Corporation v. NC Residuals Owners Trust, et. al., C.A. No. 9500-VCN. On May 21, 2015, FMD and NC Residuals entered into a settlement agreement. As part of the settlement, FMD paid NC Residuals $5.0 million and NC Residuals released any and all claims of ownership of the GATE Trusts, including any and all claims to the cash distributions from the GATE Trusts, and agreed to cooperate with FMD to transfer ownership on the records of the Owner Trustee of the GATE Trusts to FMD, including executing any documents necessary to cause FMD to become properly reflected as the GATE Trusts’ registered owner in the Owner Trustee’s books and records. In addition, as part of the settlement, cash distributions of $4.2 million from the GATE Trusts that had previously been withheld, were paid to FMD. On July 10, 2015, the Chancery Court dismissed this matter with prejudice.

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 FMD 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 Item 1A of Part II of 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 FMD 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”:

• 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.

• If competitors or potential competitors acquire or develop an education loan database or advanced loan information processing system, our business 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 liquidity could be adversely affected if we are unable to successfully resolve the pending state tax 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.

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Risks Related to Our Industry, Business and Operations

We have incurred net losses since fiscal 2008 and could incur losses in the future.

We have generated significant net losses since fiscal 2008, and may continue to incur losses. There can be no assurance that we will report net income in any future period. We must develop new lender client relationships and substantially increase our revenues derived from our Monogram platform, TMS offerings and Cology LLC offerings. We are actively managing our expenses in the current economic environment and in light of the status of our business. To the extent that we are not able to increase our revenues and continue to manage our operating expenses, we will continue to experience net losses.

We will need to facilitate substantial loan volume, achieve market acceptance of our Monogram platform and TMS’ offerings and continue to manage our expenses, among other things, in order to return to profitability.

Our ability to achieve and sustain profitability is dependent on many factors. Primarily, we believe that the following must occur in order for us to return to profitability:

• We need to facilitate Monogram-based loan volumes substantially in excess of those that have been originated to date, and substantially in excess of those contemplated by our current lender clients’ Monogram-based loan programs. 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 cash flows with respect to our Monogram platform generally or a specific lender client’s Monogram-based loan program.

• We need to attract additional lender clients, or otherwise obtain additional sources of interim or permanent financing, such as securitizations or alternative financing transactions, particularly given that one of our current lender clients provides the majority of our Monogram-based loan program fees, which subjects us to concentration risk as it relates to this revenue stream.

• 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.

• We need to gain widespread market acceptance of our refund management services and Student Account Center product among TMS’ existing clients as well as new clients, in order to improve our long-term financial condition, results of operations and cash flow. In addition, it is uncertain whether our refund management services and Student Account Center product will generate the revenues required to be successful.

• We need to continue to actively manage our expenses in the current economic environment to better align costs with our business. In the past we have engaged in cost reduction initiatives and we may need to engage in similar cost reduction initiatives in the future. Despite our efforts to structure our business to operate in a cost-effective manner, some cost reduction measures could have unexpected negative consequences. If we are unable to successfully manage our expenses and run our business in a cost-effective manner, our results of operations would be harmed and it may impact our return to profitability.

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 loan origination services and portfolio management. In fiscal 2010, we completed the development of our Monogram platform, including an expanded credit decisioning model and additional reporting capabilities. We continue to incorporate refinements to our Monogram platform. In fiscal 2011, we began originating Monogram-based education loans under loan program agreements and began offering outsourced tuition planning, tuition billing and payment technology services for educational institutions through TMS. In fiscal 2012, we began offering refund management services to educational institutions and students through TMS. In fiscal 2013, we began providing education loan processing and disbursement services to credit union and other lender clients through Cology LLC. Successful sales of our service offerings, particularly our Monogram platform, TMS offerings and Cology LLC offerings, will be critical to stemming our losses 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 and regulatory environment where there has been reluctance by many lenders to focus on education lending opportunities. As of November 9, 2015, we have loan program agreements with three lender clients for Monogram-based loan programs. 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

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ultimately reach acceptable terms with any particular party with which we begin negotiations. Furthermore, we cannot be sure that, if we do reach acceptable terms with any particular party, we will do so in a timely or cost-effective manner. Our failure to timely and cost-effectively enter into loan program agreements could have a material adverse effect on our business, results of operations and financial condition.

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. Several of our current and potential competitors 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, or may be able to devote greater resources to the promotion and sale of their products and services. 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 and making education loans on a recurring, or “serialized,” basis. We are uncertain of the total application volume for fiscal 2016 and beyond, the extent to which application volume will ultimately result in disbursed loans and the overall characteristics of the disbursed loan portfolio.

Commercial banks have historically served as the initial funding sources for the education loans we facilitate and have been our principal clients. Since fiscal 2008, we have not facilitated 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 and regulatory changes, general economic conditions, capital markets disruptions and the overall credit performance of consumer-related loans, the education loan business may be less attractive to commercial banks than in the past. 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.

Some of our former clients and competitors 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 this 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 or other sources of capital. We cannot assure you that we will be successful in either the short-term or the long-term in meeting these challenges.

Our business model depends on our ability to facilitate Monogram-based education loan volumes substantially in excess of those that have been originated to date and those contemplated by our current lender clients’ Monogram-based loan programs. We have been required to expend capital to support loan volume under our Monogram platform. Specifically, we have been required to provide credit enhancements for Monogram-based loans originated by certain of our lender clients by funding participation 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 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 markets advance rates than are available today.

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

We have engaged in cost reduction initiatives in the past and we may engage in cost reduction initiatives in the future. These types of cost reduction activities are complex. Even if we carry out these strategies in the manner we expect, we may not be able to achieve the efficiencies or savings we anticipate, or on the timetable we anticipate, and any expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted.

We continue to experience negative net operating cash flows. Our continued use of cash to fund operations may necessitate further significant changes to our cost structure if we are unable to grow our revenue base to the level necessary to fund our ongoing operations.

In addition, 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. 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 business model could be negatively affected during this transition.

Although we believe that our capital resources as of September 30, 2015 are sufficient to satisfy our operating needs for the succeeding 12 months, we cannot assure you that they will be sufficient. Insufficient funds could require us to, among other things, terminate additional employees, which could, in turn, place additional strain on any remaining employees and could further disrupt our business, including our ability to grow and expand our business.

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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.

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 we are unable to retain our key employees and hire qualified sales and technical personnel, our ability to compete could be harmed.

Our future success depends upon the continued services of our executive officers and other key personnel who have critical industry experience and relationships. If we were to lose the services of any of our executive officers and other key personnel and were not able to find replacements in a timely manner, our business could be disrupted, it could hinder or delay the implementation of our business model and the development and introduction of, and negatively impact our ability to sell, our services and other key personnel might decide to leave.

Members of our senior management team and other key personnel have left First Marblehead over the years for a variety of reasons, some of whom possessed institutional knowledge and experience with our business that could not be immediately replaced through the hiring of new managers. In addition, there is significant competition for talented individuals in our industry, which affects both our ability to retain key employees and hire new ones.

We have provided credit enhancements in connection with Monogram-based loan programs for certain of our 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 some or all of the capital we have provided and our financial results could be adversely affected.

In connection with certain of our 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 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.

We have made deposits pursuant to 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, if any, from the participation accounts are uncertain and vary among the loan programs. As of September 30, 2015, the fair value of our funded credit enhancements was $21.8 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 weaken our financial 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 collection 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 collection 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 may increase.

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 and tuition payment processing plans. The outsourcing services market in which we operate

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is 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, or may be able to devote greater resources to the promotion and sale of their products and services. In particular, competitors with larger customer bases, greater name or brand recognition or more established customer relationships than us or those of our clients have an advantage in attracting loan applicants at a lower acquisition cost.

Based on the range of services that we offer, we believe that SLM Corporation, also known as Sallie Mae, is our principal competitor. Our business could be adversely affected if Sallie Mae’s private education loan program 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, Nelnet Business Solutions, TouchNet Information Systems, Inc. and Higher One Holdings, Inc. compete directly with TMS and LendKey Technologies, Inc. and Campus Door Holdings Inc. compete directly with Cology LLC.

Demand for our services could also be affected by developments with regard to federal loan programs. For example, in Spring 2015, the President announced a “Student Aid Bill of Rights” that would seek, among other initiatives, to increase certain grant aid and reduce certain tuitions, both of which could decrease the demand for private education loans.

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.

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 disbursed loan volume and our business will be adversely affected. In addition, our lender clients’ Monogram-based loan programs, and related marketing efforts, may 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 found to be unfair, deceptive or abusive, 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, in limited circumstances, 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 originate and market education loans. The Higher Education Opportunity Act creates significant additional restrictions on the marketing of education loans.

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 September 30, 2015, Pennsylvania Higher Education Assistance Agency, also known as AES and which we refer to as PHEAA, served as the sole loan servicer for our Monogram-based loan programs. 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.

If competitors or potential competitors acquire or develop an education loan database or advanced loan information processing system, 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 consolidated 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. 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 several years, which may have provided

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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.

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.

We own no material patents. Accordingly, our technology, including our loan information processing system, 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.

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 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’ and Cology LLC’s offerings. 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 and potentially large fines and penalties 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 Medford, Massachusetts, Warwick, Rhode Island and Sacramento, California 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.

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 review applications and process loans and payments via the Internet, accept electronic signatures and provide initial credit 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, investments in our technology platform in order to provide competitive products and services to our clients. 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 lender clients’ credit agreements or required disclosures, if TMS fails to properly administer its tuition payment plans or other services or if Cology LLC fails to properly provide its education loan processing and disbursement 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.

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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 be costly, 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 were to otherwise improperly disclose confidential customer or consumer information, such breach or other disclosure could be costly, generate negative publicity about us and adversely affect our relationships with our clients, including the lenders and educational institutions with which we do business, any of which 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.

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 Spring 2015, the President announced a “Student Aid Bill of Rights” that would seek, among other initiatives, to increase certain grant aid and reduce certain tuitions, both of which could decrease the demand for private education loans. The creation of similar federal or state programs that make additional government loan funds available could decrease the demand for private education loans.

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:

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

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

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

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

• Government education loan programs, generally, and interest rates on the loans under these programs, specifically; and

• Direct loans from colleges and universities.

In addition, certain colleges and universities offer discounts to tuition costs and fees as a way to maintain their competitive positioning in the education marketplace. 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 loan programs, 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 participation accounts. Forbearance programs may have the effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance. In

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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.

We may face risks related to litigation that could result in significant legal expenses and settlement or damage awards.

From time to time, we are subject to claims and litigation, which could seriously harm our business and require us to incur significant costs. In the past, we have been named as a defendant in securities class action lawsuits. We are generally obligated, to the extent permitted by law, to indemnify our current and former officers and directors who are named as defendants in these lawsuits. Defending against litigation may require significant attention and resources of management. Regardless of the outcome, such litigation could result in significant legal expenses.

We may also be subject to employment claims in connection with employee terminations. In addition, companies in our industry whose employees accept positions with us may claim that we have engaged in unfair hiring practices. These claims may result in material litigation. We could incur substantial costs defending ourselves or our employees against those claims, regardless of their merits. In addition, defending ourselves from those types of claims could divert our management’s attention from our operations.

If we are a party to material litigation and if the defenses we claim are ultimately unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could have a material adverse effect on our business and consolidated financial statements.

Risks Related to Our Financial Reporting and Liquidity

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

We have generated significant net losses since fiscal 2008, and we cannot predict at this time when or if we will return to profitability. Furthermore, while we have made progress towards reducing our overall cash needs, we continue to utilize significant levels of cash to fund the many priorities required of a diverse business such as ours. We may require additional funds for our products, operating expenses, including expenditures relating to TMS and Cology LLC, 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. In addition, under certain of Cology LLC’s loan origination agreements, it has agreed to indemnify those lender clients for certain claims and damages in connection with its performance under such agreements. As a result, we may incur substantial costs in the event of a claim for damages related to these agreements, which could have a material adverse effect on our liquidity or financial condition. See Note 10, “Commitments and Contingencies—Cology LLC Contingent Liability,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report for additional information.

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 or, if available, not 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. If sufficient funds to finance our business and meet our obligations are not available to us when needed or on acceptable terms, we may be required 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, delay or terminate plans for TMS or Cology LLC, terminate personnel, further scale back our expenses or cease operations.

Our liquidity could be adversely affected if we are unable to successfully resolve our pending state tax matters.

We are involved in several matters relating to the Massachusetts tax treatment of GATE. We took the position in the ATB proceedings that GATE was properly taxable as a financial institution and not as a business corporation and was entitled to apportion its income under applicable provisions of Massachusetts tax law. The 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 ATB Order which concurred with our position that GATE was a financial institution but disagreed with our methodology utilized to apportion income. 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. On April 17, 2013, the ATB issued the ATB Opinion. On January 28, 2015, SJC issued its opinion in and affirmed the decision of the ATB. On October 13, 2015, the Supreme Court issued an order granting our petition for a writ of certiorari, summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration. On October 21, 2015, the SJC requested

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supplemental briefs from us and the Commissioner. If we are unsuccessful in the SJC’s reconsideration of our appeal of the ATB Order, we could be required to make additional tax payments, including interest, as discussed below, for GATE’s taxable years ended June 30, 2008 and 2009, which could materially adversely affect our liquidity position.

On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for GATE’s taxable years ended June 30, 2008 and 2009, which included an assessment for penalties of $4.1 million. We have not accrued for the penalties as we believe that it is more likely than not that the penalties will ultimately be abated, which is consistent with the Massachusetts Department of Revenue’s treatment of GATE’s taxable years ended June 30, 2004, 2005 and 2006. On August 26, 2013, we filed an application to have the assessed amounts abated in full. On March 26, 2014, the Massachusetts Department of Revenue denied our application. While we have filed an appeal on this matter with the ATB, it is on hold pending resolution of the petition for a writ of certiorari we filed with the Supreme Court on May 31, 2015 related to GATE’s taxable years ended June 30, 2004, 2005 and 2006. We expect the outcome for the taxable years ended June 30, 2008 and 2009 to be influenced by the SJC’s reconsideration of our appeal of the ATB’s findings related to GATE’s taxable years ended June 30, 2004, 2005 and 2006. We plan to vigorously pursue the litigation pending before the ATB in the cases pertaining to GATE’s taxable years ended June 30, 2008 and 2009. If we are unsuccessful in this litigation, 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. As of September 30, 2015, we had accrued a total income tax liability of $26.7 million, including interest, related to GATE’s tax returns for the taxable years ended June 30, 2008 and 2009, which amount was included in income taxes payable on our consolidated balance sheet. We cannot predict the outcome of this matter or the timing of such payments, if any, at this time.

See Item 1 of Part II, “Legal Proceedings,” and Note 10, “Commitments and Contingencies—Massachusetts Appellate Tax Board Matters,” in the notes to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report for additional information.

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

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 income taxes relating to uncertain tax positions under ASC 740,Income Taxes, or ASC 740, the valuation of our service revenue receivables and deposits for participation accounts 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:

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

• The annual rate and timing of education loan prepayments;

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

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

• In the case of participation accounts, the timing of the return of capital;

• The expected amount and timing of recoveries on defaulted education loans; and

• The fees and expenses of the securitization trusts.

Because our estimates rely on quantitative and qualitative factors, including 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 might 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 service revenue receivables or releases from participation accounts could be significantly less than reflected in our current consolidated 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.

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Changes in macro-economic conditions, including interest rates, could affect the value of our additional structural advisory fees, residual receivables and participation accounts, 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:

• Higher interest rates would increase the cost of the education 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;

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

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

In addition to higher interest rates, other factors, such as challenging economic times, including high unemployment rates, can also lead to an increase in delinquency and default rates. If the prepayment or default rates increase for the education loans held by us 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 FMD common stock and could also prevent, or make more challenging, any future portfolio funding transactions.

A significant portion of the purchase price for our acquisition of TMS and our acquisition of a substantial portion of the operating assets of the Cology Sellers 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 September 30, 2015, we had $20.1 million of goodwill and $18.9 million of intangible assets related to our acquisition of TMS and our acquisition of a substantial portion of the operating assets of the Cology Sellers. 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. TMS’ business would be adversely affected, and impairment of goodwill could be triggered, 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, lower-than-planned adoption rates of refund management and Student Account Center products, higher-than-expected expense levels to provide services to TMS clients, a lower interest rate environment than depicted by the LIBOR curve, 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 TMS school clients, increases in equity returns required by investors and changes in our business model that may impact one or more of these variables. Cology LLC’s business would be adversely affected, and impairment of goodwill could be triggered, if any of the following were to occur: higher attrition rates than planned, a lack of acceptance of Monogram products and services by its credit union and other lender clients, higher-than-expected expense levels to provide services to Cology LLC clients and changes in our business model that may impact one or more of these variables.

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 the U.S. Congress as a result of turbulence in the financial services industry. The Dodd-Frank Act 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 some time.

The Dodd-Frank Act established the CFPB as an independent agency within the Board of Governors of the Federal Reserve System, or Federal Reserve. The CFPB has been given broad powers, including the power to:

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

• Supervise depository institutions with assets of $10 billion or more for compliance with consumer protection laws, as well as the service providers to such institutions;

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

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

• Take enforcement action against institutions under its supervision.

The CFPB may institute regulatory measures that directly impact our business operations. The CFPB has initiated an 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 Cology LLC.

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 established a Student Loan Ombudsman within the CFPB, who, among other things, receives, reviews and attempts to resolve informally complaints from education loan borrowers. To date, the Student Loan Ombudsman has issued three Annual Reports. The first of these reports, the 2012 Annual Report of the Student Loan Ombudsman, noted concerns that private education loan borrowers may not have fully understood all the terms and conditions of their different loans. As a result, we expect private education loan marketing practices will continue to be carefully scrutinized. The 2013 Annual Report of the Student Loan Ombudsman analyzed complaints received by the CFPB regarding education loans during the prior year, noting trends in complaints related to payment processing, loan modification, treatment of military families and other servicing practices. The 2014 Annual Report of the Student Loan Ombudsman again analyzed complaints received by the CFPB regarding education loans during the prior year, noting trends in complaints related to servicing practices and focused on issues related to co-signers. In 2015, the CFPB issued a “Mid-Year Update on Student Loan Complaints” that again was strongly focused on servicing and collection concerns, including co-signers, payment allocation among billing groups, and the ability of borrowers to obtain payoff statements to allow them to refinance their education loan obligations. Later in 2015, the CFPB issued a Student Loan Servicing Report, which reviewed and discussed public comments submitted in response to a Request for Information Regarding Student Loan Servicing published by the CFPB in the Federal Register. This CFPB action was exclusively focused on student loan servicing. As a result, we expect marketing and origination statements made regarding co-signers to receive additional scrutiny. We also expect to see increased scrutiny of the entire life cycle of education loans by the CFPB and other regulatory and enforcement agencies.

The CFPB’s initiatives could increase our costs and the complexity of our operations. See Item 1, “Business—Government Regulation,” included in Part I of our Annual Report for additional information.

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.

On October 30, 2015, the Department of Education issued a final rule updating Part 668 of its regulations, including Subpart K, which governs how an institution requests, maintains, disburses and otherwise manages funds received under Title IV of the Higher Education Act of 1965. Among other things, the rulemaking revised existing regulations to address the allowable methods and procedures for institutions to pay students their Title IV student aid credit balance. The revisions, which will be implemented beginning on July 1, 2016, will limit the fees that we are able to charge related to disbursing refunds via prepaid cards, impact the terms and conditions under which refunds may be provided on those cards and may reduce the number of institutions interested in disbursing refunds via prepaid cards, any of which could impede our ability to offer prepaid cards as a refund management option.

Although the Department of the Treasury does not regulate student lending, Treasury officials have noted concerns that borrowers from for-profit schools, two-year institutions, and certain other non-selective institutions have had materially greater difficulties after they left school, with materially higher default rates and with many failing to realize significant benefits from their higher education. In addition, the CFPB has initiated enforcement actions against a number of major for-profit schools, indicating concerns that students at for-profit schools may be taking on excessive debt obligations. It is possible that this regulatory trend could lead to actions that would limit the ability of students at for-profit schools to obtain private education loans.

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, money transmitters and collection agencies. Some of these statutes are drafted or interpreted to cover a broad scope of activities. While we believe we have satisfied 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

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submit additional license applications, 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. 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.

We may 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 or delays, which could have a material adverse effect on our business. Our failure to comply with these laws could lead to, among other things:

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

• Administrative enforcement actions;

• Class action lawsuits;

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

• 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 the Trust-in-Lending Act and other consumer protection laws and regulations. For example, some of the third-party marketers with which we have done or may do business may be subject to state registration or licensing requirements and laws and regulations, including those relating to 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 whom 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.

Regulatory agencies have increased their expectations with respect to how regulated institutions oversee their relationships with service providers, which could impact us as both a provider of services to financial institutions as well as a consumer of such services by third-party service providers.

The CFPB, the Office of the Comptroller of the Currency and the Federal Reserve have each issued guidance documents outlining their expectations of supervised banks and non-banks with respect to their relationships with service providers that increase the responsibilities of parties to vet and supervise the activities of service providers to ensure compliance with federal consumer financial laws. Regulators increasingly espouse a “life cycle” approach to vendor management that includes five important stages of the vendor relationship, including planning, due diligence and service provider selection, contract negotiation, ongoing monitoring and termination. The issuance of regulatory guidance, and the enforcement of the enhanced vendor management standards via examination and investigation of us or any third party with whom we do business, may increase our costs, require increased management attention and adversely impact our operations. In the event we should fail to meet the heightened standards for management of service providers, either in our supervision of vendors or as a result of acts or omissions of counter parties who are deficient in their supervision of us as a service provider, 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.

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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 activities, including laws governing fair lending, unfair, deceptive and abusive acts and practices, service member protections, licensing, 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.

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 impair our business reputation and ability to operate our business. In some cases, such violations may render the loan assets unenforceable.

Recent legislative proposals could affect the ability of an owner of an education loan to receive all of the principal and interest due, including proposals to change the non-dischargeability of education loans in bankruptcy, the obligation of borrowers who die or become disabled and the obligation of borrowers whose financial circumstances make repayment difficult. If the legislative proposals are enacted, it could adversely affect the loan portfolios under our Monogram platform, including loans for which we have provided credit enhancements with certain of our lender clients, and adversely affect the overall desirability of private education loan assets to investors.

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. Legislation has been introduced in both houses of the U.S. Congress that would generally end the bankruptcy exemption from dischargeability for certain private education loans. If enacted as initially proposed, this legislation would apply retroactively to private education loans already made, and would not require the borrower to make any payments before seeking discharge in bankruptcy. This legislation is substantially similar to legislation that was previously introduced in both houses of the U.S. Congress. If enacted, such legislation may adversely affect the performance of the education loans under our Monogram platform, restrict the availability of capital to fund education loans and 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 addition, the CFPB’s annual reports in 2012, 2013 and 2014 recommended that the U.S. Congress reconsider the advisability of continuing the current non-dischargeable status of private education loans.

The CFPB has also raised concerns that education loan servicers have taken insufficient measures to enter into work-outs with borrowers who are having difficulties repaying their education loans, and there is legislation pending to affect the obligations of both borrowers and co-signers on loans obtained by a borrower who dies or becomes disabled. Similar to the dischargeability issue, although our operations would not be directly affected because we are not engaged in the servicing of education loans, these proposals may make private education loans less attractive to investors.

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.

A majority 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 lender 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, 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.

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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 Asset-Backed Securitizations and Other Funding Sources

Our financial results and future growth may continue to be adversely affected if we are unable to structure securitizations or alternative financings.

Although our Monogram platform has been designed to generate recurring revenues with less dependence on the securitization market and third-party credit enhancement, a return to profitability is dependent on a number of factors, including the facilitation of Monogram-based loan volumes substantially in excess of those that have been originated to date, and substantially in excess of those contemplated by our current lender clients’ Monogram-based loan programs or other financing alternatives, expense management and growth at TMS and Cology LLC. 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 lower advance rates.

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 or may 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, or may 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:

• Volatility in the capital markets generally or in the education loan ABS sector specifically, which could restrict or delay our access to the capital markets;

• 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;

• 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 violations of such laws and regulations;

• 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

• Changes to bankruptcy laws that change the current non-dischargeable status of private education loans, which could materially adversely affect the profitability of the loan portfolios if applied to loans originated prior to the date of the change.

Recent legislation will affect the terms of future securitization transactions.

The SEC is considering new rules governing issuance of securities backed by education loans, which may affect the desirability of issuing this type of 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.

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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 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 breached 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 if 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. 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 near-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 lower advance rates. 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.

Risks Related to Ownership of FMD Common Stock

The price of FMD common stock may be volatile.

The trading price of FMD 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 FMD 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, including our TMS offerings and our Cology LLC offerings, together with our ability to attract new clients for each of our product 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;

• The resolution of our appeal of the ATB Order in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2004, 2005 and 2006 and the litigation pending before the ATB in the cases pertaining to GATE’s Massachusetts state income tax returns for the taxable years ended June 30, 2008 and 2009;

• Difficulties we may encounter in structuring securitizations or alternative financings, including 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;

• 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 the education finance marketplace generally;

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

• Regulatory developments or sanctions directed at us;

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

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

• Major catastrophic events;

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

• Dilution from raising capital through a stock or other equity instrument issuance;

• Our ability to effectively and efficiently manage our expense base; or

• Departures or long-term unavailability of key personnel, including FMD’s 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.

Stockholders that own large blocks of FMD common stock could substantially influence matters requiring approval by FMD stockholders and could limit your ability to influence the outcome of key transactions, including a change of control.

There are certain investors that hold large blocks of FMD common stock, which could impact the outcome of key transactions. In addition, FMD’s directors and executive officers owned approximately 10.5% of the outstanding shares of FMD common stock as of September 30, 2015, excluding shares issuable upon vesting of outstanding restricted stock units and shares issuable upon exercise of outstanding vested stock options. These stockholders, if acting together, could substantially influence matters requiring approval by FMD 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 FMD 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 FMD common stock.

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

FMD’s 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 the FMD Board of Directors, including the following:

• Only the FMD Board of Directors, FMD’s Chairman of the Board or FMD’s President may call special meetings of FMD’s stockholders;

• FMD stockholders may take action only at a meeting of FMD stockholders and not by written consent;

• FMD has authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

• FMD’s directors may be removed only by the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and

• FMD imposes 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 FMD 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 FMD’s stockholders might consider to be in their best interests.

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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 September 30, 2015 regarding shares of FMD common stock that were repurchased under our 2003 stock incentive plan, as amended and restated, which we refer to as our 2003 Plan, and our 2011 stock incentive plan, as amended, which we refer to as our 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
July 1—31, 2015		20	$	4.88		—		N/A
August 1—31, 2015		30,582		3.75		—		N/A
September 1—30, 2015		36,146		3.73		—		N/A
Total Purchases of Equity Securities(1)		66,748	$	3.74		—		N/A

(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 FMD 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 expired on September 14, 2013. Our 2011 Plan was approved by stockholders on November 14, 2011 and has an expiration date of November 13, 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.

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SIGNATURES

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

	THE FIRST MARBLEHEAD CORPORATION
Date: November 9, 2015	By:	/s/    Alan Breitman
		Alan Breitman
		Managing Director, Chief Financial Officer and Chief Accounting Officer (Duly Authorized Officer and Principal Financial Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.1	Letter Agreement, dated January 14, 2010, between the Registrant and Suzanne Murray, as supplemented
10.2	Letter Agreement, dated March 31, 2014, between the Registrant and Suzanne Murray
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	Instance Document
101.SCH	Taxonomy Extension Schema Document
101.CAL	Taxonomy Calculation Linkbase Document
101.LAB	Taxonomy Label Linkbase Document
101.PRE	Taxonomy Presentation Linkbase Document
101.DEF	Taxonomy Extension Definition Linkbase Document

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