Santander Consumer USA (SC) Updates on FY13, FY14, FY15 Filings; Prelim. Q2 EPS Tops Views

September 23, 2016 7:11 AM EDT

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Santander Consumer USA Holdings Inc. (NYSE: SC) announced that it will be restating financial statements and associated disclosures for the full years 2013, 2014 and 2015, and the quarters within 2014 and 2015, as well as the first quarter of 2016, due to errors identified in the financial statements for each of those periods. The Audit Committee of the Company's Board of Directors has concluded these financial statements and disclosures should no longer be relied upon. The Audit Committee acted on the recommendation of SC's management and in consultation with the Company's current and former independent registered public accounting firms, respectively PricewaterhouseCoopers LLP ("PwC") and Deloitte & Touche LLP ("Deloitte").

The errors leading to this restatement were identified after the Company's previously disclosed transition of audit firms. The transition occurred in response to new corporate governance recommendations related to external auditor rotation.

Management has determined that the errors should be corrected through the issuance of restated financial statements, which will be included in amendments to prior filings. The conclusion to restate financial statements is based on an assessment of both quantitative and qualitative considerations, including aggregation of all known errors with those previously corrected in the restatement effected through the filing of the 2015 Form 10-K on March 31, 2016.

The restatements announced today are primarily being made to correct errors associated with the following:

  • The Company's methodology for accreting dealer discounts, subvention payments from manufacturers and capitalized origination costs
  • The Company's lack of consideration of net discounts when estimating the allowance for credit losses
  • The discount rate used in determining the impairment for loans accounted for as troubled debt restructurings ("TDRs")

Based on management's preliminary assessment, the expected cumulative impact of the errors is an increase to total equity of approximately 1%, as of March 31, 2016. The Company also believes these restatements will increase previously reported net income for the fiscal quarter ended March 31, 2016, by approximately $9 million, or $0.02 per share. The impact on total equity and net income varies in each of the prior quarters. Similarly, the impact of the errors varies by financial statement line item. Further details, as well as reconciliations of previously reported to preliminarily restated figures for certain historical quarterly and annual filings, are available in Tables 1-4 located in the financial supplement of this press release.

"Since the identification of errors in our financial reporting, we have been completely focused on ensuring we correct everything as quickly and transparently as possible – engaging with our regulators, completing a rigorous review of our financial statements, and updating shareholders regularly," said Jason Kulas, President and Chief Executive Officer. "We are entirely committed to achieving the highest standards of integrity within our financial reporting and control environment and believe that the actions we are announcing today are a further important step toward achieving that goal. We would like to assure our customers and partners that the issues uncovered relate to non-cash items only, meaning they have no impact on our ability to continue delivering the high levels of service our customers rightly expect."

In addition, the Company expects to report the existence of additional, previously unreported material weaknesses in internal control over financial reporting. Management continues to assess the nature and extent of these additional material weaknesses and their impact on the Company's reports on the effectiveness of internal control over financial reporting, and its disclosure controls and procedures, and is working to implement remedial measures.

The Company is working through the appropriate governance process and will file amended annual and quarterly reports, as well as its Form 10-Q for the quarter ended June 30, 2016, as soon as possible, and expects to complete the amended filings prior to the deadline for filing its Form 10-Q for the quarter ended September 30, 2016. The Company has received waivers for certain debt facilities that require timely filings. The Company also will likely delay the previously announced third quarter 2016 earnings call date, currently scheduled for October 26, 2016, at 9 a.m. Eastern Time. Management will provide updates on the timing of the filings and earnings call as appropriate.

Santander has taken the following steps to address legacy issues and improve its oversight and internal controls:

  • December 2014: Timothy Ryan named Chairman of SC's parent company Santander Holdings USA, Inc. ("SHUSA"), and affiliate Santander Bank, NA boards
  • March 2015: Scott Powell named CEO of SHUSA
  • July 2015: Jason Kulas named CEO of SC, and Blythe Masters named Chair of SC
  • September 2015 - February 2016: New SC Senior Leadership team named, including new General Counsel, Chief Financial Officer, Chief Operating Officer, Chief Compliance Officer, Chief Risk Officer, Chief Information Officer and Chief Human Resources Officer
  • July 2016: William Rainer named Chairman of SC, succeeding Blythe Masters who has taken on new responsibilities within the Santander Group
  • September 2016: Scott Powell joins SC board

Preliminary and Unaudited Q2 2016 Results

The Company separately announced selected preliminary and unaudited financial results for the three months ending June 30, 2016. During the second quarter 2016, SC earned net income of $283 million, or 78 cents per diluted common share, delivered average managed asset growth that outpaced expense growth, and continued to demonstrate strong access to liquidity.

*** The Street was looking for Q2 EPS of $0.68.

Auto originations totaled $5.4 billion in the second quarter, down from the prior year second quarter due to lower nonprime originations as SC remained disciplined in its underwriting standards in a competitive market. The decline in nonprime originations was partially offset by an increase in Chrysler Capital prime loans and leases.

Preliminary and Unaudited Second Quarter 2016 Results:

  • Net finance and other interest income of $1.2 billion
  • Provision for credit losses of $511 million
  • Finance receivables, loans and leases held for investment, net of $31.6 billion
  • Total equity of $4.9 billion
  • Total originations of $5.4 billion
    • Chrysler Capital lease originations of $1.7 billion
    • Retail originations of $3.8 billion
  • Total committed liquidity of $38.1 billion
    • Issued and sold total of $3.4 billion of asset-backed securities across all three securitization platforms
  • Average managed assets of $53.2 billion
  • Expense ratio of 2.0%
  • Retail installment contract net charge-offs and net charge-off ratio of $412 million and 5.7%, respectively1
  • Recovery rate, adjusted for bankruptcy sales, of 59%
  • Retail installment contract 31-60 and 61+ delinquency rates of 9.0% and 4.2%, respectively

Further origination, asset sale and ending portfolio details can be found in Tables 5-7 located in the financial supplement of this press release.

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