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FMD: Restating Fiscal 2011 First and Second Quarter Results

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Ann Heffron, CFA

FMD: Restating Fiscal 2011 First and Second Quarter Results

The First Marblehead Corporation announced today that it will be restating results for the prior two quarters of fiscal 2011, ending September 30, 2010 and December 31, 2010, due to a change in accounting for 11 National Collegiate Student Loan Trusts (NCSLT Trusts). At the same time, FMD stated that fiscal third quarter results, ending March 31, 2011, will be released no later than May 16, 2011.

This is the second accounting change that has occurred this fiscal year. The first occurred when FMD adopted on July 1, 2010 Accounting Standards Update 2009-16 (ASU 2009-16), Accounting for Transfers of Financial Assets, and Accounting Standards Update 2009-17 (ASU 2009-17), Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (VIEs). At that time, the 11 NCSLT Trusts were consolidated into FMD’s financial statements, even though FMD does not own any of the residual interests in these trusts. Results of these 11 NCSLT Trusts were reported separately and attributed to non-controlling interests in both the income statement and the balance sheet, following consultation with KPMG LLP, FMD’s auditors.

However on May 9, KPMG LLP opined to FMD’s Board of Directors and Audit Committee that non-controlling-interest treatment of the 11 NCSLT Trusts was not consistent with generally accepted accounting principles (GAAP). Rather the results of the 11 NCSLT Trusts should be allocated to FMD until either the Trusts are deconsolidated or the Trust liabilities extinguished, even though the assets and debt liabilities of the Trusts are nonrecourse to FMD.

In addition, the Company will increase the valuation allowance for certain deferred tax assets for periods prior to July 1, 2010.

The effects of these changes are shown in the table below.

Importantly, none of these changes hurt the cash position of FMD. In addition, FMD intends to supplement its GAAP financial statements with non-GAAP disclosures that will increase transparency of the results of operations for investors and shareholders.

We will be issuing a more comprehensive report after FMD posts its fiscal third quarter results. Our 2011 and 2012 estimates, as well as our target price, are currently under review.

Founded in 1991, The First Marblehead Corporation , headquartered in Boston, Massachusetts, focused on creating private, nongovernment-sponsored, education loan programs. The company had its initial public offering on the NYSE in October 2003. First Marblehead currently has more than 200 employees. Through a fully integrated suite of services, the company offers outsourcing capabilities to national and regional financial institutions (banks-to-mutual institutions) and educational institutions (colleges and universities), with respect to the design and implementation of private education loan programs for undergraduates and graduates.

 For a free copy of the FMD research report, please email with FMD as the subject.

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