Figures don’t add up for auto finance lender

Auto finance specialist Santander Consumer USA Holdings (SCUSA) has been forced to restate its financial statements for three years due to errors in accounting, including in the way in which it recorded dealer discounts, and says it is tightening up its governance and financial controls.

The Dallas-based sub-prime lender has 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 after the company changed audit firm, replacing Deloitte with PwC.

The mistakes include problems with the company’s methodology for accreting dealer discounts, subvention payments from manufacturers and capitalized origination costs; SCUSA’s lack of consideration of net discounts when estimating the allowance for credit losses; and difficulties with the discount rate used in determining the impairment for loans accounted for as troubled debt restructurings (TDRs).

Based on management’s preliminary assessment, the company says the expected cumulative impact of the errors is an increase to total equity of approximately 1%, as of March 31, 2016. SCUSA 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.

“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,” he added.

In addition, SCUSA 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, and is working to implement remedial measures.

Preliminary Q2 2016 results

Separately, SCUSA has released selected preliminary and unaudited financial results for the three months ending June 30, 2016. During the second quarter 2016, the lender earned net income of $283 million, delivered average managed asset growth that outpaced expense growth, and continued to demonstrate strong access to liquidity.

Auto originations totaled $5.4 billion in the second quarter, down from the prior year second quarter due to lower non-prime originations, with company reporting it remained disciplined in its underwriting standards in a competitive market. The decline in non-prime originations was partially offset by an increase in Chrysler Capital prime loans and leases, which reached $1.7 billion.