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Wells Fargo Has Billions of Dollars Left to Release Back Into Earnings



After building up billions of dollars in reserves last year to prepare for loan losses from the pandemic, most banks have been releasing reserves back into earnings as profits over the last few quarters, largely because the losses that were expected never materialized. But one bank that has been slower on the reserve releases is Wells Fargo (NYSE:WFC). That’s why when CEO Charlie Scharf told investors at an industry conference in June to expect a “significant reserve release” in the second quarter, I was expecting something pretty big considering how much Wells Fargo has built up reserves, and with the greatly improving credit outlook.

But instead, the bank released a much smaller amount than I anticipated. This isn’t necessarily bad news considering the bank had a decent quarter, but it means the bank has potentially billions left to release into earnings if the economy stays on its current trajectory.

Slacking on reserve releases

On an improving economic backdrop and the deployment of COVID-19 vaccines, banks began releasing reserves in the fourth quarter of 2020, so there have really been three quarters of releases now for a lot of banks. Here is how much each of the big four banks have released from reserves since Q4 of 2020 on a gross basis.

Bank Gross Reserve Releases Since Q4 2020 (billions)
JPMorgan Chase (NYSE:JPM) $11.1
Bank of America (NYSE:BAC) $5.73
Citigroup (NYSE:C) $7.6
Wells Fargo $4

Data source: Bank financial statements.

As you can see, Wells Fargo has released $1.7 billion less than its next closest peer, Bank of America. And in the fourth quarter of 2020, it only released $757 million because it sold its student loan portfolio. The disparity doesn’t make a whole lot of sense to me right now because Wells Fargo arguably has some of the best credit quality of these four banks. Look at net charge-off rates (debt unlikely to be collected and a good indicator of actual losses) for these four banks at the end of the second quarter.

Bank Net Charge-Off Rate Q2 2021
JPMorgan Chase 0.31%
Bank of America 0.27%
Citigroup 0.80%
Wells Fargo 0.18%

Data source: Bank financial statements, Cap IQ.

Additionally, nonperforming assets, those in risk of going into default, are also down at Wells Fargo from the first quarter. While you never know the whole credit picture, there is nothing that would lead me to believe that credit conditions are different at Wells Fargo than at any of these other banks. Scharf said the bank was keeping reserves high to account for risks and uncertainty that are still in the environment, but added that if things keep progressing, there should be future reserve releases.

Wells Fargo logo on outside of building.

Image source: Wells Fargo.

How much could Wells Fargo still release?

The short answer is a lot. A key credit-related metric to watch at banks is called the allowance for credit losses (ACL), which is a measure of how much capital banks have in reserves for loan losses as a percentage of their total average loans and other commitments. The ACL obviously increased a lot during the pandemic, but it has since come down as banks released reserves. Still, many banks’ ACLs remain above where they were prior to the pandemic.

We can look at the ACL at the end of the second quarter and compare it to what it was at prior to the pandemic to get an idea of how much reserves banks could still release. Although keep in mind they may not ever fully get back down to that pre-pandemic level.

Bank ACL as of Q2 2021 ACL 01/01/2020
JPMorgan Chase 2.02% 1.80%*
Bank of America 1.55% 1.27%
Citigroup 2.88% 2.60%*
Wells Fargo 1.92% 0.90%

Data source: Bank financial statements *Rough calculation.

Wells Fargo has the largest cushion above its ACL prior to the pandemic. Currently its ACL is 1.92% of average loans versus 0.90% prior to the pandemic, and credit metrics are better now than they were before the pandemic. There are still uncertainties related to the pandemic, and credit quality could deteriorate once stimulus money runs down and interest rates rise, but ACLs are still currently accounting for losses that are no longer expected to materialize.

If you look at Wells Fargo from a dollar perspective, the bank’s ACL at the end of the second quarter was nearly $16.4 billion, while its ACL prior to the pandemic would have been $9.3 billion, meaning the bank is currently reserved by more than $7 billion over ACL levels prior to the pandemic.

A boon for earnings

Given the pace management is going with reserve releases, don’t expect this to happen all at once, but more gradually over the next year reserves should keep coming down as long as the economy keeps moving in a positive direction. Loan growth may offset some of the release and I doubt Wells Fargo will ever get down to that $9.3 billion level, as it will always want to keep some buffer to account for uncertainty.

But remember, Wells Fargo is also currently limited in how much it can grow its balance sheet due to the $1.95 trillion asset cap currently in place. So I think billions more from reserves are likely to be released back into earnings over the next year, which should add nicely to profits.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Are Sallie Mae Student Loans Federal or Private?



When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances



Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit



Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.



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