Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(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
AGM’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact AGM due to shifts in market interest rates.
The following table sets forth AGM’s loan assets and debt instruments by rate characteristics:
As of June 30, 2025 As of December 31, 2024
Dollars Percent Dollars Percent
Fixed-rate loan assets $ 948,581 10.6 % $ 814,843 9.1 %
Variable-rate loan assets 7,986,588 89.4 8,141,025 90.9
Total $ 8,935,169 100.0 % $ 8,955,868 100.0 %
Fixed-rate debt instruments $ 361,495 4.5 % $ 399,994 4.8 %
Variable-rate debt instruments 7,599,856 95.5 7,958,357 95.2
Total $ 7,961,351 100.0 % $ 8,358,351 100.0 %
FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the special allowance payment (SAP) formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its FFELP student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, the Company’s FFELP student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.
Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. 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.
The Company earned no variable-rate floor income in 2025 or 2024.
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The following table shows AGM’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 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% $ 19,777
7.5 - 7.99% 7.72% 5.08% 88,309
8.0 - 8.99% 8.18% 5.54% 216,744
> 9.0%
9.06% 6.42% 86,002
$ 410,832
(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, 2025, the weighted average estimated variable conversion rate was 5.58% and the short-term interest rate was 452 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.
A summary of fixed rate floor income earned by the AGM operating segment follows.
Three months ended June 30, Six months ended June 30,
2025 2024 2025 2024
Fixed rate floor income, gross $ 997 159 $ 1,972 338
Derivative settlements (a) 427 1,193 855 2,383
Fixed rate floor income, net $ 1,424 1,352 $ 2,827 2,721
(a) Derivative settlements consist of settlements received related to the Company's derivatives used to hedge student loans earning fixed rate floor income.
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.
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 June 30, 2025:
Index Frequency of variable resets Assets Funding of student loan assets
30-day average SOFR (a) Daily $ 7,865,701 —
3-month Treasury bill Daily 252,964 —
3-month H15 financial commercial paper Daily 248,420 —
30-day average SOFR / 1-month CME Term SOFR Monthly — 4,711,755
90-day average SOFR / 3-month CME Term SOFR (a) Quarterly — 1,900,089
Asset-backed commercial paper / SOFR (b) Varies — 553,313
Fixed rate — — 324,392
Auction-rate (c) Varies — 321,880
Other (d) — 798,880 1,354,536
$ 9,165,965 9,165,965
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(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 Basis Swaps outstanding as of June 30, 2025:
Maturity Notional amount
2026 $ 1,150,000
2027 250,000
$ 1,400,000
(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 June 30, 2025, the Company was sponsor for $321.9 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 SOFR or Treasury Securities, or the Net Loan Rate as defined in the financing documents.
(d) Assets include accrued interest receivable and restricted cash. Funding represents overcollateralization (equity) and other liabilities included in FFELP loan asset-backed securitizations and warehouse facilities.
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
Increase of
10 basis points Increase of
30 basis points Increase of
10 basis points Increase of
30 basis points
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
Three months ended June 30, 2025 Three months ended June 30, 2024
Effect on earnings:
Increase (decrease) in pre-tax net income before impact of derivative settlements $ (823) (0.3) % $ (2,468) (1.0) % $ (878) (1.5) % $ (2,633) (4.5) %
Impact of derivative settlements 349 0.1 1,047 0.4 348 0.6 1,044 1.8
Increase (decrease) in net income before taxes $ (474) (0.2) % $ (1,421) (0.6) % $ (530) (0.9) % $ (1,589) (2.7) %
Increase (decrease) in basic and diluted earnings per share $ (0.01) $ (0.03) $ (0.01) $ (0.03)
Six months ended June 30, 2025 Six months ended June 30, 2024
Effect on earnings:
Increase (decrease) in pre-tax net income before impact of derivative settlements $ (1,584) (0.5) % $ (4,750) (1.4) % $ (1,895) (1.2) % $ (5,683) (3.7) %
Impact of derivative settlements 694 0.2 2,083 0.6 1,131 0.7 3,393 2.2
Increase (decrease) in net income before taxes $ (890) (0.3) % $ (2,667) (0.8) % $ (764) (0.5) % $ (2,290) (1.5) %
Increase (decrease) in basic and diluted earnings per share $ (0.02) $ (0.06) $ (0.02) $ (0.05)
Interest Rate Risk - Nelnet Bank
To manage Nelnet Bank's risk from fluctuations in market interest rates, the Company actively monitors interest rates and other interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income, and cash flow. 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.
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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 June 30, 2025 As of December 31, 2024
Dollars Percent Dollars Percent
Fixed-rate loan assets $ 569,977 $ 505,539
Fixed-rate investments 93,679 90,303
Total fixed-rate assets 663,656 38.2 % 595,842 42.8 %
Variable-rate loan assets 257,664 139,058
Variable-rate investments 815,051 656,794
Total variable-rate assets 1,072,715 61.8 795,852 57.2
Total assets $ 1,736,371 100.0 % $ 1,391,694 100.0 %
Fixed-rate deposits $ 469,123 30.6 % $ 449,706 35.8 %
Variable-rate deposits (a) 1,062,772 69.4 804,916 64.2
Total deposits $ 1,531,895 100.0 % $ 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 June 30, 2025.
Interest Rate and Market Risk - Investments
The following table presents the rates earned on the Company’s available-for-sale debt securities (investments) and debt facilities used to fund a portion of such investments. The table below excludes securities (investments) held by Nelnet Bank.
Average balance Interest income/ expense Average yields/ rates Average balance Interest income/ expense Average yields/ rates
Three months ended June 30,
2025 2024
Investments:
Asset-backed securities available-for-sale (a) (b) $ 620,800 8,110 5.24 % $ 827,144 13,991 6.78 %
Debt funding asset-backed securities available-for-sale:
Participation agreement - variable rate (c) $ 100 1 4.01 % $ 11,374 175 6.17 %
Repurchase agreements - variable rate (d) — — — 112,016 1,842 6.60
$ 100 1 4.01 $ 123,390 2,017 6.56
Six months ended June 30,
2025 2024
Investments:
Asset-backed securities available-for-sale (a) (b) $ 605,050 16,105 5.37 % $ 845,389 28,110 6.67 %
Debt funding asset-backed securities available-for-sale:
Participation agreement - variable rate (c) $ 100 2 4.03 % $ 5,731 176 6.16 %
Repurchase agreements - variable rate (d) — — — 126,461 4,259 6.75
$ 100 2 4.03 $ 132,192 4,435 6.73
(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. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. 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 SOFR + 100 to 250 basis points to maturity. As of June 30, 2025, $208.6 million (par value) of the Company’s asset-backed securities earn a weighted average fixed rate of 3.47%.
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(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 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 June 30, 2025, the gross unrealized loss on the Company’s available-for-sale debt securities (including available-for-sale securities held at Nelnet Bank) was $22.7 million, and the aggregate fair value of available-for-sale debt securities with unrealized losses was $534.6 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 June 30, 2025
Effect on earnings:
AGM Operating Segment (a) $ 374 $ 5,253 $ 373 $ 3,457
Nelnet Bank Operating Segment (b) 303 910 (303) (910)
NFS Other Operating Segments (c) 975 2,924 (975) (2,924)
ETSP Operating Segment (d) 1,259 3,776 (1,259) (3,776)
Corporate and Other Activities (d) 1,232 3,695 (1,232) (3,695)
Increase (decrease) in net income before taxes $ 4,143 1.7 % $ 16,558 7.0 % $ (3,396) (1.4) % $ (7,848) (3.3) %
Increase (decrease) in basic and diluted earnings per share $ 0.09 $ 0.34 $ (0.07) $ (0.16)
Six months ended June 30, 2025
Effect on earnings:
AGM Operating Segment (a) $ 776 $ 10,520 $ 728 $ 6,709
Nelnet Bank Operating Segment (b) 1,018 3,054 (1,018) (3,054)
NFS Other Operating Segments (c) 1,891 5,674 (1,891) (5,674)
ETSP Operating Segment (d) 2,826 8,478 (2,826) (8,478)
Corporate and Other Activities (d) 1,312 3,936 (1,312) (3,936)
Increase (decrease) in net income before taxes $ 7,823 2.3 % $ 31,662 9.2 % $ (6,319) (1.8) % $ (14,433) (4.2) %
Increase (decrease) in basic and diluted earnings per share $ 0.16 $ 0.66 $ (0.13) $ (0.30)
(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, including the impact of derivative settlements.
(c) Impact associated with variable rate debt securities (investments).
(d) Impact associated with interest earning operating and restricted cash accounts.
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