Santander Consumer Restates Three Years of Results After SEC Inquiry

Santander Consumer USA Holdings in Dallas has restated earnings going back to 2013 in response to an inquiry by securities regulators, making a series of accounting changes that significantly lowered its profits for the two most recent years.

The subprime auto lender also said Thursday that it had found an ongoing set of "material weaknesses" in the way it calculates its set-aside for bad loans, ranging from a lack of oversight to unsound business planning.

Santander is "working to develop plans" to address those weaknesses, the company said in its annual 10-K regulatory report that was filed a month late. No additional details were provided about the steps it plans to take.

In the filing, Santander revised the way it calculates its provision for loan losses. The changes lowered fourth-quarter profits significantly, to $12 million. It initially reported a profit of $68 million in mid-January.

Santander's full-year profits for 2015 and 2014 were each revised downward by about 5%, as the new accounting method drove credit costs higher. Earnings for 2013 increased 2%.

"After completing this process and revising our methodology, we remain confident in [Santander Consumer's] ability to execute on its business plan," Chief Executive Jason Kulas said in a press release Thursday.

The 10-K was due Feb. 29, but the company twice delayed the filing as it addressed questions from the Securities and Exchange Commission about changes to the way it determines set-asides for bad credits.

Santander in October tweaked its method for calculating its quarterly provision for loan losses — a figure that provides an indication of overall asset quality. The changes raised questions about the transparency of the company's loan book.

Under the changes announced Thursday, Santander will revise its assumptions for the expected losses on modified loans known as "troubled debt restructurings."

Additionally, it will make a series of changes to "nonmodeled factors," the company said.

In the past year, Santander has reported an uptick TDRs. As part of the regulatory filing Thursday, however, it said it "had incorrectly identified the population of loans" that were given a TDR designation.

"Our control environment is of the utmost importance to us, and we will remain focused on the remediation efforts," Izzy Dawood, who joined Santander in December as chief financial officer, said in the news release.

Dawood replaced Jennifer Davis, who had served as interim CFO following a leadership shake-up in July. Davis now serves as deputy chief financial officer.

The long-awaited 10-K filing actually helped calm investors' nerves about the embattled company, Steven Kwok, an analyst with Keefe, Bruyette & Woods, said in a note to clients. While Santander lowered its earnings for the past two years, it also provided more clarity to the market about the issues it faces, Kwok wrote.

Indeed, Santander shares jumped nearly 18% on Thursday, to $10.49 per share. Still the company's stock price remains down more than 40% compared with the beginning of the first quarter.

The moves announced Thursday are part of a long-running string of headaches for the company — a unit of the Spanish banking giant Banco Santander.

Meanwhile, the company's credit quality has deteriorated in recent months, as it aggressively courts borrowers with blemished credit histories. Chargeoffs have spiked as the company makes loans to borrowers with increasingly low credit scores.

The business model has attracted scrutiny from state and federal regulators, including the Justice Department, which subpoenaed the company in 2014 for information on the way it underwrites securitizes subprime loans.