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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2025-05-08 compared with 2024-11-07 · 58 added, 87 removed, 88 unchanged (62% of the section changed)

1 unchanged sentence

(All dollars are in thousands, except share amounts, unless otherwise noted)

The Company’s consolidated balance sheets include assets and liabilities whose fair values are subject to market risks, primarily interest rate risk.

The following sections address the interest rate risk associated with our relevant business activities.

Interest Rate Risk - AGM Operating Segment

1 unchanged sentence

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

As of September 30, 2024 As of December 31, 2023

As of March 31, 2025 As of December 31, 2024

Dollars Percent Dollars Percent

14 unchanged sentences

All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for those loans to the Department.

No variable-rate floor income was earned by the Company in 2025 or 2024.

The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of March 31, 2025.

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

7.0 - 7.49% 7.31% 4.67% $ 21,068

7.5 - 7.99% 7.72% 5.08% 91,151

8.0 - 8.99% 8.18% 5.54% 224,564

9.06% 6.42% 88,905

(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, 2025, the weighted average estimated variable conversion rate was 5.58% and the short-term interest rate was 455 basis points.

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.

In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

No variable-rate floor income was earned by the Company in 2024 or 2023.

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

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

2024 2023 2024 2023

Three months ended March 31,

Fixed rate floor income, gross $ 975 180

2 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 nine months ended September 30, 2024 compared with the same periods in 2023 due to higher interest rates in 2024 compared with 2023.

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.

During the first quarter of 2023, to minimize the Company's exposure to market volatility and increase liquidity, the Company terminated its derivative portfolio hedging loans earning fixed rate floor income ($2.8 billion in notional amount of derivatives).

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 2023 settlements.

Subsequent to terminating these derivatives, during the second and fourth quarters of 2023, the Company entered into a total of $400.0 million notional amount of derivatives to hedge loans earning fixed rate floor income and other loans and investments in which the Company receives a fixed rate.

The increase in net derivative settlements received by the Company during the three months ended September 30, 2024, compared with the same period in 2023, was due to an increase in the notional amount of derivatives outstanding.

The decrease in net derivative settlements received by the Company during the nine months ended September 30, 2024, compared with the same period in 2023, was due to a decrease in the notional amount of derivatives outstanding and less favorable terms on the $400.0 million of notional derivatives entered into in 2023 compared with the $2.8 billion notional derivatives that were terminated due to an increase in interest rates from when the terminated derivatives were initially executed.

For further details of the Company’s derivatives used to hedge fixed rate loans, see note 5 of the notes to consolidated financial statements included in Part I, Item 1 of this report.

The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of September 30, 2024.

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

8.0 - 8.99% 8.25% 5.61% $ 163,939

9.06% 6.42% 93,691

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

As of September 30, 2024, the weighted average estimated variable conversion rate was 5.90% and the short-term interest rate was 556 basis points.

AGM is also exposed to interest rate risk in the form of repricing risk and basis 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 September 30, 2024.

The following table presents AGM’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of March 31, 2025.

Index Frequency of variable resets Assets Funding of student loan assets

30-day average SOFR (a) Daily $ 8,150,392 —

3-month H15 financial commercial paper Daily 283,164 —

3-month Treasury bill Daily 261,089 —

3-month H15 financial commercial paper Daily 258,803 —

30-day average SOFR / 1-month CME Term SOFR Monthly — 4,875,220

1 unchanged sentence

Asset-backed commercial paper / SOFR (b) Varies — 821,803

Fixed rate — — 360,044

Auction-rate (c) Varies — 457,395

Fixed rate — — 335,506

Other (d) — 812,704 997,360

$ 9,482,988 9,482,988

(a) The Company has certain basis swaps outstanding in which the Company receives and pays the term adjusted SOFR plus the tenor spread adjustment to LIBOR.

Prior to the discontinuation of LIBOR on June 30, 2023, 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").

(a) The Company has certain basis swaps outstanding in which the Company receives payments indexed to three-month SOFR and makes payments based on the one-month SOFR index (plus or minus a spread) as defined in the agreements (the "Basis Swaps").

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 September 30, 2024.

Maturity Notional amount (i)

The following table summarizes the Basis Swaps outstanding as of March 31, 2025.

Maturity Notional amount

2026 $ 1,150,000

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 2024 was the term adjusted SOFR (plus the tenor spread adjustment relating to LIBOR) plus 10.4 basis points.

(b) The interest rate on the Company's FFELP warehouse facilities is indexed to asset-backed commercial paper rates and daily SOFR.

(c) As of September 30, 2024, the Company was sponsor for $70.2 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”).

(c) As of March 31, 2025, the Company was sponsor for $457.4 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.

2 unchanged sentences

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

Sensitivity Analysis

The following tables summarize the effect on the Company’s consolidated earnings, based upon a sensitivity analysis performed on AGM’s assets and liabilities assuming hypothetical increases and decreases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant.

In addition, a sensitivity analysis was performed assuming the funding index increases 10 basis points and 30 basis points while holding the asset index constant, if the funding index is different than the asset index.

The sensitivity analysis was performed on AGM’s variable rate assets (including loans earning fixed rate floor income) and liabilities.

Interest rates

Change from increase of

100 basis points Change from increase of

300 basis points Change from decrease of

100 basis points Change from decrease of

300 basis points

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended September 30, 2024

Effect on earnings:

Increase in pre-tax net income before impact of derivative settlements $ 261 11.7 % $ 2,017 90.7 % $ 1,674 75.3 % $ 6,812 306.4 %

Impact of derivative settlements 754 33.9 2,262 101.8 (754) (33.9) (2,262) (101.8)

Increase in net income before taxes $ 1,015 45.6 % $ 4,279 192.5 % $ 920 41.4 % $ 4,550 204.6 %

Increase in basic and diluted earnings per share $ 0.02 $ 0.09 $ 0.02 $ 0.09

Three months ended September 30, 2023

Effect on earnings:

Increase in pre-tax net income before impact of derivative settlements $ 522 1.0 % $ 2,093 4.0 % $ 2,166 4.1 % $ 9,199 17.4 %

Impact of derivative settlements 126 0.2 378 0.7 (126) (0.2) (378) (0.7)

Increase in net income before taxes $ 648 1.2 % $ 2,471 4.7 % $ 2,040 3.9 % $ 8,821 16.7 %

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

Nine months ended September 30, 2024

Effect on earnings:

Increase in pre-tax net income before impact of derivative settlements $ 1,834 1.2 % $ 7,427 4.9 % $ 5,094 3.4 % $ 22,227 14.8 %

Impact of derivative settlements 2,246 1.5 6,738 4.5 (2,246) (1.5) (6,738) (4.5)

Increase in net income before taxes $ 4,080 2.7 % $ 14,165 9.4 % $ 2,848 1.9 % $ 15,489 10.3 %

Increase in basic and diluted earnings per share $ 0.08 $ 0.29 $ 0.06 $ 0.32

Nine months ended September 30, 2023

Effect on earnings:

Increase in pre-tax net income before impact of derivative settlements $ 2,006 1.8 % $ 9,525 8.4 % $ 2,556 2.2 % $ 16,611 14.6 %

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

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

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

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

The table above excludes the impact of these derivatives for the entire period.

The following table summarizes the effect on the Company’s consolidated earnings based upon a sensitivity analysis performed on AGM’s variable rate assets (including loans earning fixed rate floor income) and liabilities.

The sensitivity analysis was performed assuming the funding index increases 10 basis points and 30 basis points while holding the asset index constant, if the funding index is different than the asset index.

Asset and funding index mismatches

4 unchanged sentences

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended September 30, 2024 Three months ended September 30, 2023

Effect on earnings:

Decrease in pre-tax net income before impact of derivative settlements $ (819) (36.8) % $ (2,457) (110.5) % $ (1,167) (2.2) % $ (3,501) (6.6) %

Impact of derivative settlements 352 15.8 1,056 47.5 794 1.5 2,382 4.5

Decrease in net income before taxes $ (467) (21.0) % $ (1,401) (63.0) % $ (373) (0.7) % $ (1,119) (2.1) %

Decrease in basic and diluted earnings per share $ (0.01) $ (0.03) $ (0.01) $ (0.02)

Nine months ended September 30, 2024 Nine months ended September 30, 2023

Three months ended March 31, 2025 Three months ended March 31, 2024

Effect on earnings:

Decrease in pre-tax net income before impact of derivative settlements $ (2,714) (1.8) % $ (8,140) (5.4) % $ (3,462) (3.0) % $ (10,387) (9.1) %

Increase (decrease) in pre-tax net income before impact of derivative settlements $ (761) (0.7) % $ (2,282) (2.1) % $ (1,017) (1.0) % $ (3,050) (3.2) %

Impact of derivative settlements 345 0.3 1,036 1.0 783 0.8 2,349 2.5

Decrease in net income before taxes $ (1,231) (0.8) % $ (3,691) (2.4) % $ (1,106) (0.9) % $ (3,319) (2.9) %

Decrease in basic and diluted earnings per share $ (0.03) $ (0.08) $ (0.02) $ (0.07)

Increase (decrease) in net income before taxes $ (416) (0.4) % $ (1,246) (1.1) % $ (234) (0.2) % $ (701) (0.7) %

Increase (decrease) in basic and diluted earnings per share $ (0.01) $ (0.03) $ (0.00) $ (0.01)

Interest Rate Risk - Nelnet Bank

1 unchanged sentence

To achieve this objective, the Company manages and mitigates Nelnet Bank’s exposure to fluctuations in market interest rates through several techniques, including managing the maturity, repricing, and mix of fixed and variable rate assets and liabilities and the use of derivative instruments.

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

As of September 30, 2024 As of December 31, 2023

The following table presents Nelnet Bank's loan assets, asset-backed security investments, deposits (including intercompany deposits), and debt instruments by rate characteristics:

As of March 31, 2025 As of December 31, 2024

Dollars Percent Dollars Percent

8 unchanged sentences

Variable-rate deposits (a) 919,108 804,916

Total deposits $ 1,148,466 100.0 % $ 847,564 100.0 %

Variable-rate debt 85,124 —

Total variable-rate deposits and debt 1,004,232 68.5 804,916 64.2

Total deposits and debt instruments $ 1,467,096 100.0 % $ 1,254,622 100.0 %

(a) Nelnet Bank uses derivative instruments to hedge exposure to variability in cash flows of variable rate deposits to minimize the exposure to volatility in cash flows from future changes in interest rates.

The derivatives are not reflected in the above table.

See note 5 of the notes to 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, 2024.

See note 5 of the notes to consolidated financial statements included under Part I, Item 1 of this report for a summary of Nelnet Bank's derivatives outstanding as of March 31, 2025.

Interest Rate and Market Risk - Investments

1 unchanged sentence

The table below excludes securities (investments) held by Nelnet Bank.

Three months ended March 31,

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

Three months ended September 30,

Asset-backed securities available-for-sale (a) (b) $ 589,299 7,995 5.50 % $ 863,634 14,012 6.51 %

3 unchanged sentences

$ 100 1 4.06 $ 138,005 2,418 7.03

Nine months ended September 30,

Asset-backed securities available-for-sale (a) (b) $ 836,400 39,612 6.31 % $ 1,018,489 44,058 5.78 %

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

Participation agreement - variable rate (c) $ 3,841 177 6.14 % $ 154,295 6,206 5.38 %

Repurchase agreements - variable rate (d) 120,977 6,039 6.65 421,266 18,654 5.92

$ 124,818 6,216 6.63 $ 575,561 24,860 5.77

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

4 unchanged sentences

(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, 2024, $206.9 million (par value) of the Company’s asset-backed securities earn a weighted average fixed rate of 3.32%.

As of March 31, 2025, $209.2 million (par value) of the Company’s asset-backed securities earn a weighted average fixed rate of 3.48%.

(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 repurchase agreements is at a variable rate of SOFR + 100 to 140 basis points.

(d) Interest incurred by the Company on amounts that were borrowed under repurchase agreements were at a variable rate of SOFR + 100 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 September 30, 2024, the gross unrealized loss on the Company’s available-for-sale debt securities was $23.3 million, and the aggregate fair value of available-for-sale debt securities with unrealized losses was $367.0 million.

As of March 31, 2025, the gross unrealized loss on the Company’s available-for-sale debt securities (including available-for-sale securities held at Nelnet Bank) was $23.2 million, and the aggregate fair value of available-for-sale debt securities with unrealized losses was $399.4 million.

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

See note 6 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information.

Consolidated Sensitivity Analysis

The following table summarizes the effect on the Company’s consolidated earnings, based upon a sensitivity analysis performed on the Company’s significant interest-earning assets and interest-bearing liabilities assuming hypothetical increases and decreases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant.

Interest rates

Change from increase of

100 basis points Change from increase of

300 basis points Change from decrease of

100 basis points Change from decrease of

300 basis points

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended March 31, 2025

Effect on earnings:

AGM Operating Segment (a) $ 402 $ 5,267 $ 355 $ 3,252

Nelnet Bank Operating Segment (b) 728 2,184 (728) (2,184)

NFS Other Operating Segments (c) 916 2,747 (916) (2,747)

ETSP Operating Segment (d) 1,567 4,702 (1,567) (4,702)

Corporate and Other Activities (d) 1,392 4,177 (1,392) (4,177)

Increase (decrease) in net income before taxes $ 5,005 4.7 % 19,077 18.0 % (4,248) (4.0) % (10,558) (9.9) %

Increase (decrease) in basic and diluted earnings per share $ 0.10 $ 0.40 $ (0.09) $ (0.22)

(a) Impact associated with variable rate loans and variable rate bonds and notes payable, including the impact of derivative settlements.

(b) Impact associated with variable rate loans and debt securities (investments) and variable rate deposits and bonds and notes payable, including the impact of derivative settlements.

(d) Impact associated with interest earning operating and restricted cash accounts.

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