Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Santander Holdings USA, Inc. (811830) 10-Q published on Nov 13, 2018 at 5:13 pm
Reporting Period: Sep 29, 2018
Although SAM is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company elected to report the results of SAM on a prospective basis beginning July 2, 2018. As a result of the 2017 contribution of SFS in 2017 and SAM in 2018, SHUSA's net income is understated $1.0 million and $5.3 million for the nine-month period ended September 30, 2018 and 2017, respectively, and a contribution to stockholder's equity of $4.4 million and $322.1 million was recorded on July 2, 2018, and July 1, 2017, respectively, which are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.
In connection with preparing its financial statements for the quarter ended September 30, 2018, the Company identified and corrected two immaterial errors impacting its previously issued 2018 and 2017 financial statements. To correct the misstatements, the Company has revised its Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements as of and for the periods ended September 30, 2017. Financial reporting periods not presented herein will be revised, as applicable, in future periods and filings. The matters giving rise to the corrections are summarized below:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and ASU 2018-11 Targeted Improvements, in August 2018. The primary effect of this ASU is the requirement of lessees to recognize a right of-use-asset and lease liability for all operating leases with a term greater than 12 months. The right-of-use-asset and lease liability are then derecognized in a manner that effectively yields a straight-line lease expense over the lease term. Lessee accounting requirements for finance leases (previously described as capital leases) and lessor accounting requirements for operating, sales-type, and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. The Company is currently in the process of reviewing its lease contracts, examining the practical expedients and accounting policy elections provided in the ASU, as well as ensuring the Company's control environment and reporting processes reflect the requirements of this ASU. The ASU will be applied on a modified retrospective basis with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt this ASU on its effective date of January 1, 2019. At December 31, 2017, the Company reported $720 million of minimum lease payments for its facilities leases. The adoption of the ASU will not have a material impact on the increase in total assets and total liabilities, shareholder's equity or the recognition of lease expense in its Condensed Consolidated Statements of Operations.
Puerto Rico’s economic conditions continued improving during the third quarter of 2018, driven by the inflow of federal recovery funds and insurance claims payouts post-Hurricane Maria. The pace of economic contraction is slowing down, with the Economic Development Bank Index of Economic Activity posting a 0.2% decline in economic activity in August compared to a contraction of 19.7% in November 2017 and of 1.7% in August 2017. Industry sectors reflecting a growing trend comprise, but are not limited to, cement, automobile, housing sales, and tourism, supported by declining bankruptcies filings and unemployment rates (the lowest level since 2010).
On the fiscal side, net revenues to the Puerto Rico's general fund were $358.6 million above tax revenue collections for the three months ended September 30, 2018, while the government’s bank cash position improved $231 million to $3.432 billion as of October 5, 2018. Debt restructuring efforts continue, with the Governor of Puerto Rico recently submitting a bill to Puerto Rico’s Legislature to implement Puerto Rico Sales Tax Financing Corporation's ("COFINA"’s) debt restructuring agreement. The agreement would reduce COFINA’s debt by 32%, resulting in $15.5 billion in debt service savings and $450 million in additional funds during the next 40 years if the agreement is finally supported by the Puerto Rico Legislature and approved under Title III court proceedings. Other topics are currently under evaluation by the Commonwealth of Puerto Rico, including a possible reduction in the income tax rate and eliminations of other certain surtaxes.
As of September 30, 2018, SHUSA did not have material direct credit exposure to the Commonwealth of Puerto Rico, and its exposure to Puerto Rico municipalities in total was approximately $207.0 million. Direct and indirect exposure in the public sector is being closely monitored and continues to have a positive performance trend. The action plan for the municipalities’ portfolio included an increase in the allowance for loan losses. The public sector portfolios are behaving better than expected compared to pre-hurricane figures. Overall delinquency at September 30, 2018 improved 80 bps from the previous year (7.9% vs. 8.7%). Adversely classified assets have continued to improve through the year, driven by proactive actions and close monitoring over the classified portfolio. As Federal Housing Agency moratorium programs expired on September 16, 2018, the amount of foreclosures is expected to increase in upcoming months, with a negative impact on selling prices. As of September 30, 2018, the Company had approximately $3.4 billion of loan exposures in Puerto Rico, consisting of $1.6 billion in consumer loans and $1.8 billion in commercial loans, including $207.0 million in loans to municipalities.
The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's allowance for loan and lease losses (“ALLL") had approximately