WASHINGTON–Student loan giant Salle Mae Corp. is reportedly preparing its investors for a big hit to its balance sheet as a result of CECL.
But the company has also said the change is more a reflection of the quality of the loans looking forward than it is the result of the accounting change.
The company, with a 55% market share in private education lending in 2018, expects to have to boost by as much as 313% the reserves it sets aside to cover losses on loans when CECL takes effect in 2020, BloombertTax.com reported.
As credit unions know, the standard will require companies to look to the future, assess current conditions, and consider past experience to calculate losses and set aside corresponding reserves to cover them. Most financial institutions have disclosed that they expect to have to increase the losses they book, but no business so far has made an estimate as large as Sallie Mae’s, according to BloombergTax.com.
‘So Significant’
“The impact of the current expected credit losses (CECL) standard will be so significant the company plans to develop a tailor-made, unofficial accounting metric to better convey its financial health,” the report added.
“We think it is, over a period of time, much more representative of the quality of the franchise than the CECL distortion,” CEO Raymond Quinlan told analysts during the company’s second quarter earnings call, BloombergTax reported.
During the call Salle Mae said if it had adopted the standard on June 30, its allowance for loan losses would have increased by between $950 million and $1.2 billion. Compared to its current loss reserve of $383.9 million, that’s a boost of between 247% to 313% BloombergTax.com said.
Non-Standardized Measures
The company’s huge increase is due to several reasons, including that it must look so far forward, given the length of time students could be in school before entering the workforce.
According to BloombergTax.com, the effect of CECL on Sallie Mae’s financial reporting will be so significant that the company plans to turn to non-standardized measures to convey its financial health. It plans to introduce what it calls adjusted core earnings as an alternative to generally accepted accounting principles.