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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2023-11-07 compared with 2023-08-07 · 47 added, 57 removed, 137 unchanged (43% of the section changed)

4 unchanged sentences

When possible, the Company relied on fallback provisions or negotiated with counterparties to transition financial contracts from LIBOR to SOFR.

Due to certain noteholder consent requirements, it was not practicable to modify certain of the Company's asset-backed securities transactions.

Due to certain noteholder consent requirements, it was not practicable to modify certain of the Company's

asset-backed securities transactions.

The SAP formula for the Company's FFELP loans, the majority of which were indexed to one-month LIBOR, were not able to be modified without legislative action.

1 unchanged sentence

The LIBOR Act provides that for contracts that contain no fallback provision or contain fallback provisions that do not identify a specific USD LIBOR benchmark replacement (including the SAP formula for FFELP loans), a benchmark replacement based on SOFR will automatically replace the USD LIBOR benchmark in the contract after June 30, 2023.

Following the enactment and implementation of the LIBOR Act, all of the Company's financial instruments which are currently indexed to USD LIBOR have transitioned, or will transition, to SOFR after June 30, 2023.

Specifically, after June 30, 2023, the SAP formula for FFELP loans will transition to 30-day Average SOFR and the Company's LIBOR-indexed FFELP asset-backed securities will also transition to a short-term SOFR index.

The Company does not expect the transition from LIBOR to SOFR to significantly impact its asset-backed securitization cash flow forecast as discussed under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral - Bonds and Notes Issued in Asset-backed Securitizations." The Company's LIBOR-indexed derivatives will transition to the fallback rate (SOFR) as defined in the individual agreements and/or published industry guidelines, as applicable.

Following the enactment and implementation of the LIBOR Act, all of the Company's financial instruments which were indexed to USD LIBOR transitioned to SOFR after June 30, 2023.

Specifically, after June 30, 2023, the SAP formula for FFELP loans transitioned to 30-day Average SOFR and the Company's LIBOR-indexed FFELP asset-backed securities also transitioned to a short-term SOFR index.

The Company does not expect the transition from LIBOR to SOFR to significantly impact its asset-backed securitization cash flow forecast as discussed under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral - Bonds and Notes Issued in Asset-backed Securitizations." The Company's LIBOR-indexed derivatives transitioned to the fallback rate (SOFR) as defined in the individual agreements and/or published industry guidelines, as applicable.

The market transition away from the previous LIBOR framework could result in significant changes to the interest rate characteristics of the Company's prior LIBOR-indexed assets and funding for those assets.

The Company is still uncertain as to the long-term relationship between overnight SOFR and Term SOFR as they are new indices, and the Company's assumptions with respect to this relationship may evolve over time.

To the extent that the spread between these indices were to widen, it could adversely impact future interest income earned on the Company's FFELP student loan portfolio.

For a discussion of the risks related to the LIBOR transition, see Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2022 Annual Report for additional information.

2 unchanged sentences

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

As of June 30, 2023 As of December 31, 2022

As of September 30, 2023 As of December 31, 2022

Dollars Percent Dollars Percent

15 unchanged sentences

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

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

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

3 unchanged sentences

(a) Derivative settlements consist of settlements received 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, 2023 compared with the same periods in 2022 due to higher interest rates in 2023 compared with 2022.

Gross fixed rate floor income decreased for the three and nine months ended September 30, 2023 compared with the same periods in 2022 due to higher interest rates in 2023 compared with 2022.

The Company had a significant portfolio of derivative instruments in which the Company paid a fixed rate and received a floating rate to economically hedge loans earning fixed rate floor income.

1 unchanged sentence

Through March 15, 2023, the Company had received cash or had a receivable from its clearinghouse related to variation margin equal to the fair value of the $2.8 billion notional amount of fixed rate floor derivatives as of March 15, 2023 of $183.2 million, which included $19.1 million related to current period settlements.

The decrease in net derivative settlements received by the Company during the three months ended June 30, 2023, compared with the same period in 2022, was due to the termination of the fixed rate floor derivatives in March 2023.

The increase in net derivative settlements received by the Company during the six months ended June 30, 2023, compared with the same period in 2022, was due to an increase in settlements on the Company's derivatives outstanding during this period as a result of an increase in interest rates.

The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 2023.

The decrease in net derivative settlements received by the Company during the three months ended September 30, 2023, compared with the same period in 2022, was due to the termination of the fixed rate floor derivatives in March 2023.

The increase in net derivative settlements received by the Company during the nine months ended September 30, 2023, compared with the same period in 2022, was due to an increase in settlements on the Company's derivatives outstanding during this period as a result of an increase in interest rates.

The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of September 30, 2023.

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

1 unchanged sentence

9.05% 6.41% 127,221

9.05% 6.41% 130,844

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

As of June 30, 2023, the weighted average estimated variable conversion rate was 5.80% and the short-term interest rate was 518 basis points.

As of September 30, 2023, the weighted average estimated variable conversion rate was 5.91% and the short-term interest rate was 541 basis points.

In June 2023, the Company entered into a derivative with a notional amount of $50.0 million and a maturity date in 2030 to hedge a portion of loans remaining that earn fixed rate floor income.

1 unchanged sentence

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 June 30, 2023.

The following table presents AGM’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of September 30, 2023.

Index Frequency of variable resets Assets Funding of student loan assets

1 month LIBOR (a) (b) Daily $ 12,002,100 —

30 day Average SOFR (a) (b) Daily $ 11,513,858 —

3 month H15 financial commercial paper Daily 396,323 —

3 month Treasury bill Daily 388,803 —

1 month LIBOR (a) Monthly — 7,239,176

3 month LIBOR (a) (b) Quarterly — 3,255,282

30 day Average SOFR / 1 month CME Term SOFR (a) Monthly — 6,932,106

90 day Average SOFR / 3 month CME Term SOFR (a) (b) Quarterly — 3,096,170

Asset-backed commercial paper (c) Varies — 1,466,178

3 unchanged sentences

$ 13,496,760 13,496,760

(a) Have transitioned, or will transition, to SOFR after June 30, 2023.

(a) Transitioned from LIBOR to SOFR after June 30, 2023.

See "LIBOR Transition" above.

(b) The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

(b) The Company has certain basis swaps outstanding in which the Company received three-month LIBOR set discretely in advance and paid one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

Subsequent to the discontinuation of LIBOR on June 30, 2023, the Company now receives and pays the term adjusted SOFR plus the tenor spread adjustment relating to LIBOR.

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 June 30, 2023.

The following table summarizes the 1:3 Basis Swaps outstanding as of September 30, 2023.

Maturity Notional amount (i)

1 unchanged sentence

2026 1,150,000

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2023 was one-month LIBOR plus 10.1 basis points.

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 2023 was the term adjusted SOFR plus the tenor spread adjustment relating to LIBOR plus 10.1 basis points.

(d) As of June 30, 2023, the Company was sponsor for $91.3 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (the “Auction Rate Securities”).

(d) As of September 30, 2023, the Company was sponsor for $89.9 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (the “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.

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

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

Funding represents overcollateralization (equity) and other liabilities included in FFELP loan asset-backed securitizations and warehouse facility.

LIBOR is in the process of being discontinued as a benchmark rate, and the market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets.

See "LIBOR Transition" above and Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2022 Annual Report for additional information.

Sensitivity Analysis

9 unchanged sentences

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended June 30, 2023

Three months ended September 30, 2023

Effect on earnings:

3 unchanged sentences

Increase (decrease) in basic and diluted earnings per share $ 0.01 $ 0.05 $ 0.04 $ 0.18

Three months ended June 30, 2022

Three months ended September 30, 2022

Effect on earnings:

3 unchanged sentences

Increase (decrease) in basic and diluted earnings per share $ 0.08 $ 0.32

Six months ended June 30, 2023

Nine months ended September 30, 2023

Effect on earnings:

1 unchanged sentence

Impact of derivative settlements (a) 159 0.1 477 0.4 (159) (0.1) (477) (0.4)

Increase (decrease) in net income

before taxes $ 1,517 2.5 % $ 7,531 12.4 % $ 357 0.5 % $ 7,313 12.0 %

Increase (decrease) in basic and

diluted earnings per share $ 0.03 $ 0.15 $ 0.01 $ 0.15

Six months ended June 30, 2022

Increase (decrease) in net income before taxes $ 2,165 1.9 % $ 10,002 8.8 % $ 2,397 2.1 % $ 16,134 14.2 %

Increase (decrease) in basic and diluted earnings per share $ 0.04 $ 0.20 $ 0.05 $ 0.33

Nine months ended September 30, 2022

Effect on earnings:

1 unchanged sentence

Impact of derivative settlements 25,008 5.3 75,025 15.8

Increase (decrease) in net income

before taxes $ 2,387 0.7 % $ 27,213 7.8 %

Increase (decrease) in basic and

diluted earnings per share $ 0.05 $ 0.55

Increase (decrease) in net income before taxes $ 6,544 1.4 % $ 43,171 9.1 %

Increase (decrease) in basic and diluted earnings per share $ 0.13 $ 0.87

(a) On March 15, 2023, the Company terminated its existing derivative portfolio hedging loans earning fixed rate floor income.

6 unchanged sentences

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended June 30, 2023 Three months ended June 30, 2022

Three months ended September 30, 2023 Three months ended September 30, 2022

Effect on earnings:

3 unchanged sentences

Increase (decrease) in basic and diluted earnings per share $ (0.01) $ (0.02) $ 0.00 $ 0.01

Six months ended June 30, 2023 Six months ended June 30, 2022

Nine months ended September 30, 2023 Nine months ended September 30, 2022

Effect on earnings:

1 unchanged sentence

Impact of derivative settlements 2,356 2.1 7,068 6.2 3,912 0.8 11,733 2.5

Increase (decrease) in net income

before taxes $ (733) (1.2) % $ (2,200) (3.6) % $ 216 0.1 % $ 645 0.2 %

Increase (decrease) in basic and

diluted earnings per share $ (0.01) $ (0.04) $ 0.00 $ 0.01

Increase (decrease) in net income before taxes $ (1,106) (0.9) % $ (3,319) (2.9) % $ 303 — % $ 905 0.2 %

Increase (decrease) in basic and diluted earnings per share $ (0.02) $ (0.07) $ 0.01 $ 0.02

Interest Rate Risk - Nelnet Bank

2 unchanged sentences

The following table presents Nelnet Bank's loan assets, asset-backed security investments, and deposits by rate characteristics:

As of June 30, 2023 As of December 31, 2022

As of September 30, 2023 As of December 31, 2022

Dollars Percent Dollars Percent

11 unchanged sentences

The derivatives are not reflected in the above table.

See note 4 of the notes to the consolidated financial statements included under Part I, Item 1 of this report for a summary of Nelnet Bank's derivatives outstanding as of June 30, 2023.

See note 4 of the notes to the consolidated financial statements included under Part I, Item 1 of this report for a summary of Nelnet Bank's derivatives outstanding as of September 30, 2023.

Interest Rate and Market Risk - Investments

2 unchanged sentences

Average balance Interest income/ expense Average yields/ rates Average balance Interest income/ expense Average yields/ rates

Three months ended June 30,

Asset-backed securities available-for-sale (a) (b) $ 1,076,344 22,911 8.54 % $ 1,258,770 5,104 1.63 %

Debt funding asset-backed securities available-for-sale:

Participation agreement - variable rate (c) $ 76,966 1,094 5.70 % $ 352,804 1,384 1.57 %

Repurchase agreements - variable rate (d) 415,514 6,278 6.06 471,033 1,682 1.43

$ 492,480 7,372 6.00 $ 823,837 3,066 1.49

Six months ended June 30,

Nine months ended September 30,

Asset-backed securities available-for-sale (a) (b) $ 1,018,489 50,182 6.59 % $ 1,219,013 18,373 2.02 %

3 unchanged sentences

$ 575,561 24,859 5.77 $ 788,922 10,335 1.75

(a) The Company has repurchased certain of its own FFELP loan asset-backed securities (bonds and notes payable) in the secondary market.

(a) The Company has repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market.

For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements.

2 unchanged sentences

The table above includes these repurchased bonds.

(b) The majority of the Company’s asset-backed securities earn floating rates with expected returns of approximately LIBOR + 100 to 350 basis points to maturity.

As of June 30, 2023, $258.1 million (par value) of the Company’s asset-backed securities earn a weighted average fixed rate of 3.29%.

(c) Interest incurred by the Company on amounts borrowed under the participation agreement is at a variable rate of LIBOR + 62.5 basis points.

(d) Interest incurred by the Company on amounts borrowed under the repurchase agreements is at a variable rate of LIBOR + 70 to 90 basis points or SOFR + 75 to 140 basis points.

(b) The majority of the Company’s asset-backed securities earn floating rates with expected returns of approximately SOFR + 100 to 350 basis points to maturity.

As of September 30, 2023, $257.5 million (par value) of the Company’s asset-backed securities earn a weighted average fixed rate of 3.52%.

(c) Interest incurred by the Company on amounts borrowed under the participation agreement is at a variable rate of SOFR + 62.5 basis points.

(d) Interest incurred by the Company on amounts borrowed under the repurchase agreements is at a variable rate of SOFR + 75 to 140 basis points.

The Company’s portfolio of asset-backed investment securities has limited liquidity, and the Company could incur a significant loss if the investments were sold prior to maturity at an amount less than the original purchase price.

As of June 30, 2023, the gross unrealized loss on the Company’s available-for-sale debt securities was $37.1 million, and the aggregate fair value of available-for-sale debt securities with unrealized losses was $783.0 million.

As of September 30, 2023, the gross unrealized loss on the Company’s available-for-sale debt securities was $44.6 million, and the aggregate fair value of available-for-sale debt securities with unrealized losses was $717.1 million.

The Company currently has the intent and ability to retain these investments, and none of the unrealized losses were due to credit losses.

1 unchanged sentence

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