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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-08-08 compared with 2022-05-09 · 35 added, 20 removed, 109 unchanged (34% of the section changed)

4 unchanged sentences

The following table sets forth AGM’s loan assets and debt instruments by rate characteristics:

As of March 31, 2022 As of December 31, 2021

As of June 30, 2022 As of December 31, 2021

Dollars Percent Dollars Percent

15 unchanged sentences

A summary of fixed rate floor income earned by the AGM operating segment follows.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2022 2021 2022 2021

Fixed rate floor income, gross $ 18,292 36,639 47,285 72,178

1 unchanged sentence

Fixed rate floor income, net $ 21,984 31,486 47,772 62,740

(a) Derivative settlements consist of settlements paid related to the Company's derivatives used to hedge student loans earning fixed rate floor income.

Gross fixed rate floor income decreased for the three months ended March 31, 2022 as compared to the same period in 2021 due to higher interest rates in 2022 as compared to 2021.

(a) Derivative settlements consist of settlements received (paid) related to the Company's derivatives used to hedge student loans earning fixed rate floor income.

Gross fixed rate floor income decreased for the three and six months ended June 30, 2022 as compared to the same periods in 2021 due to higher interest rates in 2022 as compared to 2021.

Absent the use of derivative instruments, a rise in interest rates will reduce the amount of floor income received and has an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas.

1 unchanged sentence

The Company enters into derivative instruments to hedge student loans earning fixed rate floor income.

The decrease in net derivative settlements paid on these derivatives in 2022 as compared to 2021 was due to an increase in interest rates and a decrease in the notional amount of derivatives outstanding in 2022 as compared to 2021.

The increase in net derivative settlements received by the Company during the three and six months ended June 30, 2022, as compared to net derivative settlements paid during the same periods in 2021, was due to an increase in interest rates, partially offset by a decrease in the notional amount of derivatives outstanding.

The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%:

The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of March 31, 2022.

The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 2022.

Fixed interest rate range Borrower/lender weighted average yield Estimated variable conversion rate (a) Loan balance

10 unchanged sentences

9.05% 6.41% 164,979

8.0 - 8.99% 8.18% 5.54% 444,724

9.05% 6.41% 172,229

(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate.

As of March 31, 2022, the weighted average estimated variable conversion rate was 1.97% and the short-term interest rate was 23 basis points.

The following table summarizes the outstanding derivative instruments as of March 31, 2022 used by AGM to economically hedge loans earning fixed rate floor income.

As of June 30, 2022, the weighted average estimated variable conversion rate was 3.02% and the short-term interest rate was 100 basis points.

The following table summarizes the outstanding derivative instruments as of June 30, 2022 used by AGM to economically hedge loans earning fixed rate floor income.

Maturity Notional amount Weighted average fixed rate paid by the Company (a)

4 unchanged sentences

$ 3,100,000 0.49 %

$ 4,350,000 0.44 %

(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.

On April 28, 2022, the Company terminated $1.25 billion in notional amount of derivatives ($500 million, $250 million, and $500 million that had maturity dates in 2023, 2024, and 2025, respectively) that are included in the table above.

AGM is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of AGM’s assets do not match the interest rate characteristics of the funding for those assets.

The following table presents AGM’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of March 31, 2022.

The following table presents AGM’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of June 30, 2022.

Index Frequency of variable resets Assets Funding of student loan assets

11 unchanged sentences

The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets.

The following table summarizes the 1:3 Basis Swaps outstanding as of March 31, 2022.

The following table summarizes the 1:3 Basis Swaps outstanding as of June 30, 2022.

Maturity Notional amount (i)

2 unchanged sentences

2026 1,150,000

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2022 was one-month LIBOR plus 9.1 basis points.

(b) As of March 31, 2022, the Company was sponsor for $225.5 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”).

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2022 was one-month LIBOR plus 9.4 basis points.

(b) As of June 30, 2022, the Company was sponsor for $221.4 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”).

Since the auction feature has essentially been inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture.

While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents.

(d) Assets include accrued interest receivable and restricted cash.

14 unchanged sentences

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended March 31, 2022

Three months ended June 30, 2022

Effect on earnings:

3 unchanged sentences

Increase (decrease) in basic and diluted earnings per share $ 0.04 $ 0.26 $ 0.00 $ 0.00

Three months ended March 31, 2021

Three months ended June 30, 2021

Effect on earnings:

6 unchanged sentences

diluted earnings per share $ (0.09) $ 0.06 $ (0.00) $ (0.01)

Six months ended June 30, 2022

Effect on earnings:

Decrease in pre-tax net income before

impact of derivative settlements $ (16,068) (4.6) % $ (28,152) (8.1) % $ (2,461) (0.7) % $ (7,383) (2.1) %

Impact of derivative settlements 18,455 5.3 55,365 15.9 2,677 0.8 8,028 2.3

Increase (decrease) in net income

before taxes $ 2,387 0.7 % $ 27,213 7.8 % $ 216 0.1 % $ 645 0.2 %

Increase (decrease) in basic and

diluted earnings per share $ 0.05 $ 0.55 $ 0.00 $ 0.01

Six months ended June 30, 2021

Effect on earnings:

Decrease in pre-tax net income before

impact of derivative settlements $ (28,355) (10.6) % $ (52,005) (19.5) % $ (3,175) (1.2) % $ (9,527) (3.6) %

Impact of derivative settlements 18,692 7.0 56,075 21.0 2,987 1.1 8,962 3.4

Increase (decrease) in net income

before taxes $ (9,663) (3.6) % $ 4,070 1.5 % $ (188) (0.1) % $ (565) (0.2) %

Increase (decrease) in basic and

diluted earnings per share $ (0.19) $ 0.08 $ (0.00) $ (0.01)

Interest Rate Risk - Nelnet Bank

2 unchanged sentences

The following table presents Nelnet Bank's loan assets and deposits by rate characteristics:

As of March 31, 2022 As of December 31, 2021

As of June 30, 2022 As of December 31, 2021

Dollars Percent Dollars Percent

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk