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Sallie Mae Student Loan Sell-off Eases Bite of Accounting Revamp

Jan. 24, 2020, 8:33 PM

Student loan giant SLM Corp., known as Sallie Mae, warned investors last year that new accounting rules for bad loans would distort its balance sheet so much it would have to resort to unofficial metrics to convey its financial health.

The company reversed course Thursday, saying it would present official accounting metrics, after all, when the current expected credit losses (CECL) accounting standard goes live this year.

It’s able to do so by selling $3 billion worth of loans and using the sale proceeds to buy back $600 million of its stock, which means more earnings to spread among fewer stock owners.

The company’s loan loss reserves are still tripling under CECL, but the stock buyback should improve its share price, making Wall Street happy. When investors are happy, there’s less incentive for companies to use non-GAAP, or measures that don’t comply with U.S. generally accepted accounting principles.

“It’s masking the impact of CECL,” said Sanjay Sakhrani, managing director at Keefe Bruyette & Woods, Inc.

Company executives said the accounting change wasn’t the motivation behind the sale.

“Selling the loans had nothing to do with CECL,” CEO Raymond Quinlan told investors on the company’s earnings call. “There was no reason to get those assets off the books. They were just profitable.”

Freeing Up Capital

But offloading the loans helps dampen the impact of the accounting change. That’s in part because shoring up loan reserves can affect the capital a company holds to meet regulator requirements. Less money tied up in capital gives the company freedom to buy stock back.

“In the absence of selling these loans and freeing up the capital in these reserves, they couldn’t buy back stock,” Sakhrani said. “And so this is a way to continue to be relevant in the market by originating loans as you always have and continuing to replenish the capital that’s depleted because of CECL.”

The move also eliminates the need to use non-GAAP measures. Companies typically use unofficial accounting metrics when their official accounting numbers don’t look good. Sticking with official GAAP also keeps the company in the good graces of the Securities and Exchange Commission, which warned last year against companies using non-GAAP numbers when the new loan loss accounting goes into effect.

“Clearly, the SEC wants everyone to be on GAAP and we will be,” Quinlan said. “But we will be at pains to give our investors all the information that they need to calculate what we think would be the ongoing profitability of the company. But we are bound by the rules to sort of publicize and publish GAAP.”

‘Disproportionate Impact’

The Financial Accounting Standards Board’s post-financial crisis accounting overhaul aims to make banks and other businesses think about—and highlight—losses before loans go bad. The accounting standard requires businesses to consider past experience, assess current conditions, and look to the foreseeable future to calculate losses and then set aside reserves to cover them. Old rules required businesses to wait until customers missed payments.

“Student loans are disproportionately impacted by CECL,” said Paul Noring, managing director at Berkeley Research Group.

That’s because student loans can last for decades. The longer the loan, the more opportunity for problems to arise. But while loans such as home mortgages also last years, student lending is a more uncertain line of business. College students take out loans for tuition before they start classes, and certainly well before they land jobs to pay them off.

Now, student lenders must take all that uncertainty into account when they calculate the reserves they need to set aside to cover losses.

For Sallie Mae, the impact is significant. The company plans to triple its reserves under CECL. The company disclosed that the loan loss reserve will increase from $400 million to $1.6 billion when it reports its first quarter results in the spring. When the loan sale goes through, the company can reverse some of that reserve build in the quarter it happens. Assuming it successfully sells these loans, the company expects to increase its reserves quarter to quarter by $285 million to $305 million.

“And so we expect CECL to be non-volatile,” Quinlan said.

To contact the reporter on this story: Nicola M. White in Washington at

To contact the editors responsible for this story: Jeff Harrington at; Kathy Larsen at