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sovereignbank Q2_2004


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sovereignbank Q2_2004

  1. 1. Second Quarter 2004 Investor Report NYSE: SOV Quarter Ended June 30, 2004 Sovereign Bancorp, Inc. reported second quarter 2004 net income and earnings per share of $131 million or $.42 per diluted share, up 26% and 14%, respectively, compared to $104 million or $.37 per diluted share for the second quarter of 2003. Cash earnings increased to $147 million, up 23%, Highlights compared to $120 million for the second quarter of 2003. Commenting on results for the second quarter of Mortgage banking revenues were $16.4 million in ■ Net income of $131 million, up 2004, Jay S. Sidhu, Sovereign’s Chairman and Chief the second quarter of 2004, including a reversal of the Executive Officer, said, “This was another successful valuation reserve related to mortgage servicing rights, 26% from $104 million in 2Q ’03 quarter for Sovereign. Earnings per share for the as compared to $5.4 million in the first quarter of quarter exceeded the analysts’ mean earnings estimate 2004 and $8.8 million in the second quarter of 2003. ■ Earnings per share were by $.02. Commercial and consumer loans, excluding As of June 30, 2004, mortgage servicing rights, net of the impact of the First Essex Bancorp Inc. acquisition, reserves of $2.0 million, were $83.4 million and our $.42 for 2Q ’04, up 14% from increased 7% and 25%, respectively, from the second servicing portfolio was $6.5 billion, a capitalized cost quarter of last year. Fee revenue was very strong, of 129 basis points. $.37 in 2Q ’03 commercial and consumer banking fees reached Expenses all-time highs of $30.6 million and $58.1 million, ■ Cash earnings of $147 million, G&A expenses increased by $1.4 million or .6% from respectively. Our asset quality improved substantially the first quarter of 2004 and increased about 4% from resulting in non-performing assets and net charge-off up 23% from $120 million in 2Q $215 million a year ago. G&A expenses for the quarter levels being the lowest levels in more than four years. were $225 million, up from $223 million in the first ’03. Cash earnings per share were We are also very excited to have had our stock added quarter. James D. Hogan, Sovereign’s Chief Financial to the S&P 500 index.” $.47, up from $.42 in 2Q ’03 Officer stated, “After normalizing for the effect of our Net Interest Income first quarter acquisition, operating expenses actually and Margin decreased approximately $350 thousand during the Sovereign reported net interest income of $332 million second quarter as compared to the first quarter of 2004 for the second quarter of 2004, an increase of $25 and increased only 1.8% from the first quarter of 2003. million, or 8.2%, compared to the second quarter of Our efficiency ratio decreased to 49.2% from 51.7% in 2003. On a linked-quarter basis, net interest income the first quarter of 2004.” Other News increased by $9.2 million, or 2.9%. Sovereign’s effective tax rate declined in the second Net interest margin was 3.22% for the second quarter quarter to 23.8% due, in part, to the timing of (for complete articles, go to of 2004 compared to 3.28% in the first quarter of 2004 acquisitions and an investment in a synthetic fuel, Investor and 3.47% in the second quarter of 2003. The majority facility in Pennsylvania. After giving effect to an Relations, News & Press) of the net interest margin compression was a result of acquisition expected to close in the second half of the full quarter effect of an $800 million convertible 2004, Sovereign’s effective tax rate is expected to rise to trust preferred offering in February of 2004 as well as approximately 28%. ■ Sovereign completed Sovereign’s desire to maintain an asset sensitive interest Franchise Growth its aquisition of rate risk position. Seacoast Financial Sovereign’s total loan portfolio increased during the Sovereign remains positioned to benefit from rising second quarter by $1.4 billion to $29.1 billion, the Services Corporation rates, as $13.9 billion of our loans are tied to short-term majority of the increase was in the consumer loan indices, and only $10.6 billion of our liabilities will on July 23, 2004. portfolio, principally home equity loans. Commercial re-price with any short-term rate movements. Seacoast was the loans increased 14% over the second quarter of Non-Interest Income last year. “As can be expected in this environment, largest remaining and Expense commercial loans are our lowest yielding portfolio; financial institution however, this portfolio will benefit the most from Sovereign generated record level consumer and headquartered in rising rates,” stated Hogan. Commercial and consumer commercial banking fees in the second quarter of loans now make up 42% and 41%, respectively, of the 2004. Consumer banking fees increased by $4.8 Massachusetts with total loan portfolio. million, or 9%, compared to the same period in 2003. approximately $5 The increase was driven principally by deposit fees, Core deposits increased $885 million during the billion in assets which increased by $3.3 million to $47.9 million. quarter to $22.8 billion, or 16% annualized growth. Commercial banking fees increased $3.8 million to and $3.6 billion Sovereign’s cost of deposits declined by 5 basis points $30.6 million, or 14.1%, over the same period a year in deposits. to .90% in the second quarter of 2004 due to a decline ago driven by growth in loan fees. Consumer and in the cost of time deposits. Time or certificates of commercial banking fees increased 9% and 14%, deposit account for only 21% of total deposits at June respectively, in the second quarter of 2004 as compared 30, 2004. to first quarter 2004 levels, in part due to banking fees continued on page 3 generated from the acquisition of First Essex.
  2. 2. Second Quarter 2004 Investor Report Quarterly Financial Highlights Quarter Ended (unaudited) Quarter Ended (unaudited) June 30 June 30 June 30 June 30 (dollars in millions, except per share data) 2004 2003 (dollars in millions) 2004 2003 Financial Condition Data: Operating Data: General Net income $131.4 $104.2 Operating earnings (1) 131.4 104.2 Total assets $48,687 $41,343 Cash earnings (2) 147.2 119.4 Loans 29,130 24,329 Net interest income 332.0 306.8 Total deposits and customer related accounts: 29,001 27,617 Provision for loan losses 32.0 42.0 Core deposits and other customer related accounts 22,824 21,065 Total fees and other income before securities transactions 124.2 111.9 Time deposits 6,176 6,552 Net gain on investments and related derivatives transactions 0.8 19.4 Borrowings (3) 15,157 9,507 G&A expense 224.6 215.3 Redeemable capital securities and Other expenses (3) 28.1 36.6 other minority interests (3) 203 409 Stockholders’ equity 3,815 3,131 Performance Statistics Goodwill 1,289 1,025 Bancorp Core deposit intangible 249 306 Net interest margin (3) 3.22% 3.47% Asset Quality Cash return on average assets (2) 1.23% 1.16% Non-performing assets $176.1 $253.4 Operating return on average assets (1) 1.10% 1.01% Non-performing loans $152.2 $229.2 Cash return on average equity (2) 15.26% 16.50% Non-performing assets to total assets 0.36% 0.61% Operating return on average equity (1) 13.62% 14.38% Non-performing loans to total loans 0.52% 0.94% Annualized net loan charge-offs to average loans 0.43% 0.53% Allowance for loan losses $352.6 $319.5 Efficiency ratio (3)(4) 49.22% 51.41% Allowance for loan losses Per Share Data to total loans 1.21% 1.31% Allowance for loan losses Basic earnings per share $0.43 $0.40 to non-performing loans 232% 139% Diluted earnings per share 0.42 0.37 Operating earnings per share (1) 0.42 0.37 Capitalization - Bancorp (6) Cash earnings per share (2) 0.47 0.42 Dividend declared per share .030 .025 Stockholders’ equity to total assets 7.84% 7.57% Book value (5) 12.46 10.72 Tier 1 leverage capital ratio 7.13% 5.27% Common stock price: Tangible equity to tangible assets, excluding OCI 5.28% 4.40% High $22.10 $16.55 Tangible equity to tangible assets, including OCI 4.83% 4.50% Low 19.51 14.07 Capitalization - Bank (6) Close $22.10 $15.65 Weighted average common shares: Stockholders’ equity to total assets 9.12% 9.34% Basic 306.1 262.2 Tier 1 leverage capital ratio 6.84% 6.62% Diluted 311.7 283.9 Tier 1 risk-based capital ratio 8.86% 8.40% End-of-period common shares: Total risk-based capital ratio 12.07% 11.05% Basic 306.2 292.0 Diluted 312.1 295.9 NOTES: (1) Operating earnings represent net income excluding the after-tax effects of special items, including significant gains or losses that are unusual in nature or are associated with acquiring or integrating businesses. Operating earnings are equal to net income for quarters ended June 2004 and June 2003. (2) Cash earnings represents operating earnings excluding the after-tax effects of non-cash charges for the amortization of intangible assets and stock based compensation of $15.8 million or $.05 per share in June of 2004 and $15.3 million or $.05 per share in June 2003. Stock based compensation encompasses arrangements with employees under which the Company’s obligation will be settled by using stock rather than cash and includes expense related to stock options, restricted stock, bonus deferral plans, and ESOP expense. (3) Effective July 1, 2003, Sovereign elected to change the Company’s accounting policy to treat trust preferred securities as liabilities and the associated dividends on the trust preferred securities as interest expense. Previously, this cost was classified within other expenses. This change in accounting policy did not have any impact on consolidated shareholders’ equity or net income; however, it did result in an increase in borrowings and other debt obligations of $207.6 million at July 1, 2003 and an increase in net interest expense, with a corresponding decrease in other expense. Prior periods have not been adjusted to conform with this change in accounting policy. (4) Efficiency ratio equals general and administrative expense excluding merger-related and other integration charges as a percentage of total revenue, defined as the sum of net interest income and total fees and other income before securities transactions. (5) Book value equals stockholders’ equity at period-end divided by common shares outstanding. (6) All capital ratios are calculated based upon adjusted end of period assets consistent with OTS guidelines. The current quarter ratios are estimated as of the date of this report. This Investor Report contains statements of Sovereign’s strategies, plans, and objectives; estimates of future operating results for 2004 and beyond for Sovereign Bancorp, Inc.; as well as estimates of financial condition, operating efficiencies, and revenue generation. These statements and estimates constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.Factors that might cause such a difference include, but are not limited to: general economic conditions; changes in interest rates; inflation; deposit flows; loan demand; real estate values; competition; changes in accounting principles, policies, or guidelines; integration of acquired assets, liabilities, customers, systems and management personnel into Sovereign’s operations and the ability to realize the related revenue synergies and cost savings within expected time frames; possibility that expected merger-related charges are materially greater than forecasted or that final purchase price allocations based on fair value of the acquired assets and liabilities at acquisition date and related adjustments to yield and/or amortization of the acquired assets and liabilities are materially different from those forecasted; deposit attrition, customer loss, revenue loss and business disruption following Sovereign’s acquisitions, including adverse effects on relationships with employees may be greater than expected; anticipated acquisitions may not close on the expected closing date or it may not close; the conditions to closing anticipated acquisitions, including stockholder and regulatory approvals, may not be satisfied; Sovereign’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; the willingness of customers to substitute competitors’ products and services and vice versa; the ability of Sovereign and its third party processing and related systems on a timely and acceptable basis and within projected cost estimates; the impact of changes in financial services policies, laws and regulations, including laws, regulations, policies and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles: technological changes; changes in consumer spending and saving habits; unanticipated regulatory or judicial proceedings; changes in asset quality; employee retention; reserve adequacy; changes in legislation or regulation or policy or the application thereof; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services. Sovereign in the Community ■ The United Way of Berks County, PA recognized Sovereign Bank with ■ Sovereign has provided a $4.9 million revolving line of credit to the a special award “...that exemplifies the corporate commitment to a better Jefferson Square Community Development Corporation ( JSCDC) in community through support of the United Way’s annual campaign.” South Philadelphia, PA. JSCDC is revitalizing a section of the city, known According to the United Way, Sovereign’s rate of participation in Berks as Jefferson Square, by making infrastructure improvements, constructing County increased over the last five years, gaining 270 new givers and more 87 new mixed income properties and rehabilitating six existing homes. than doubling campaign dollars. -2-
  3. 3. Second Quarter 2004 Investor Report Sovereign and Waypoint filed documents concerning the merger with the Securities and Exchange Commission on Sovereign Bank Footprint for pro forma July 27, 2004, including a registration statement on Form S-4 containing a prospectus/proxy statement which will locations of Waypoint in southcentral be distributed to shareholders of Waypoint. Investors are urged to read the registration statement and the proxy statement/prospectus regarding the proposed transaction and any other relevant documents filed with the SEC, Pennsylvania and northern Maryland areas. as well as any amendments or supplements to those documents, because they will contain important information. Investors can obtain a free copy of the proxy statement/prospectus, as well as other filings containing information about Sovereign and Waypoint, free of charge on the SEC’s Internet site ( In addition, documents filed by Sovereign with the SEC, including filings that will be incorporated by reference in the prospectus/proxy statement, can be obtained, without charge, by directing a request to Sovereign Bancorp, Inc., Investor Relations, 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610 (Tel: 610-988-0300). In addition, documents filed by Waypoint with the SEC, including filings that will be incorporated by reference in the prospectus/proxy statement, can be obtained, without charge, by directing a request to Waypoint Financial Corp., 235 North Second Street, Harrisburg, Pennsylvania 17101, Attn: Richard C. Ruben, Executive Vice President and Corporate Secretary (Tel: 717-236-4041). Directors and executive officers of Waypoint may be deemed to be participants in the solicitation of proxies from the shareholders of Waypoint in connection with the merger. Information about the directors and executive officers of Waypoint and their ownership of Waypoint common stock is set forth in Waypoint’s proxy statement for its 2004 annual meeting of shareholders, as filed with the SEC on May 20, 2004. Additional information regarding the interests of those participants may be obtained by reading the prospectus/proxy statement regarding the proposed merger transaction when it becomes available. INVESTORS SHOULD READ THE PROSPECTUS/PROXY STATEMENT AND OTHER DOCUMENTS TO BE FILED WITH THE SEC CAREFULLY BEFORE MAKING A DECISION CONCERNING THE MERGER. Mellon Investor Services Redesigned Web Site Mellon Introduces the “Tell Me” Telephonic System On June 11, our shareholder services partner, Mellon Investor Services, Mellon Investor Services upgraded its IVR at the end of June 2004 to a launched its enhanced web site at The more sophisticated speech recognition system called the “Tell Me” system. enhancements are based on feedback Mellon received from clients The new “Tell Me” system features Advanced Voice Recognition, one and shareholders for more comprehensive information, easier navigation of the best speech recognition technologies available today; Touchtone and more user-friendly graphics and search protocols. The site enables Recognition; Text-to-Speech, natural sounding text-to-speech using shareholders to review account information, change their address of record, AT&T’s NaturalVoices speech engine; and Barge-In, allowing callers download pre-filled forms, enroll in stock plans, and sign up for electronic to interrupt audio prompts and speak with a CSR immediately. Dial delivery options through MLink. Check out the redesigned site today! 1-800-685-4524—you’ll be able to “tell” the difference. Common Stock Dividend Reinvestment and Stock Purchase Plan Sovereign Bancorp, Inc. offers a Dividend Reinvestment and Stock Purchase Plan to its common stock shareholders of record. This plan provides a convenient method of investing cash payments for shareholders of record in additional shares of Sovereign’s common stock without payment of brokerage commissions or service charges. ■ Next investment date for optional cash payments: ■ Optional cash purchases may be made in any amount from a minimum of October 17 – October 31, 2004 $50 to a maximum of $5,000 per quarter ■ Make checks payable to: Sovereign Bancorp, Inc. ■ All optional cash payments received before October 17, 2004, or after October 31, 2004, will be returned ■ Mail cash payments to: Mellon Investor Services Dividend Reinvestment—Sovereign Bank ■ Enrollment card, prospectus requests and account questions: PO Box 3340, South Hackensack, NJ 07606-1940 1-800-685-4524 continued from page 1 risk-based capital ratio was 12.07%. “After paying dividends and allocating Asset Quality tangible capital to anticipated growth, we still expect to add about $500 Sovereign’s credit quality improved significantly in the second quarter of million to tangible common equity from organic earnings growth next 2004. Non-performing assets (“NPAs”) were $176 million at June 30, 2004, year,” stated Hogan. compared to $212 million at March 31, 2004. NPAs to total assets decreased to .36% during the second quarter of 2004, compared to .45% at March 31, Looking Ahead 2004. Sovereign’s provision for loan losses was $32.0 million this quarter “We continue to be comfortable with management’s guidance of $1.65 to compared to $43.0 million in the first quarter, which included a $6 million $1.70 in operating earnings per share1 excluding after-tax merger related provision related to the First Essex loan portfolio, and $42.0 million in the charges of approximately $.14 for our completed acquisitions of First Essex second quarter of 2003. The allowance for loan losses to total loans decreased and Seacoast Financial,” Jay Sidhu commented. “We are also comfortable to 1.21% at June 30, 2004, as compared to 1.27% at March 31, 2004 and with the analysts’ mean estimate of $1.88 per share for 2005, which implies 1.31% at June 30, 2003, due to improved credit quality and a slight shift an operating earnings growth of 15%. However, management’s goal remains towards a lower risk loan portfolio. to strive for $1.90 to $2.00 in operating earnings per share1, excluding after-tax merger related charges of $.04 to $.06 for our pending acquisition Capital of Waypoint, which is expected to close in January 2005.” “During the quarter, the Tier 1 leverage ratio was 7.13% at June 30, 2004. Tangible common equity to tangible assets was 4.83%. Tangible common Based upon our July 19 stock price of $21.82, Sovereign is trading at a P/E equity to tangible assets, excluding other comprehensive income (“OCI”), of 11.6x for estimated 2005 operating earnings per share, a P/E of only expanded 9 basis points during the quarter to 5.28%. The equity to 10.7x for implied 2005 cash earnings per share and only 175% of current assets ratio was 7.84% at June 30, 2004. Sovereign remains committed to book value. The book value per share at June 30, 2004 was $12.49. achieving a Tier 1 leverage ratio of 6.50% to 7.00% and a tangible common equity to tangible assets ratio of 5.00% to 5.50% by the end of 2005. At 1. GAAP EPS of $1.51 to $1.56 in 2004 and $1.84 to $1.94 in 2005. June 30, 2004, Sovereign Bank’s Tier 1 Leverage was 6.84% and the bank’s -3-
  4. 4. Sovereign Bancorp, Inc., (“Sovereign”) (NYSE: SOV), headquartered in Philadelphia, Pennsylvania, is the parent company of Sovereign Bank, a $55 billion financial institution with nearly 600 community banking offices and 1,000 ATMs and approximately 9,500 team members in Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, and Rhode Island. In addition to full-service retail banking, Sovereign offers a broad array of financial services and products including business and corporate banking, cash management, capital markets, trust and wealth management, and insurance. Pro forma for pending acquisitions, Sovereign is one of the top 20 largest U.S. financial institutions. For more information on Sovereign Bank, visit or call 1-877-SOV-BANK (1-877-768-2265). Corporate Information James D. Hogan, CPA John P Hamill . Sovereign Trust Preferred Capital Securities CONTACT INFORMATION dividends are customarily paid on a quarterly Chief Financial Officer, Bancorp Chairman and Chief Executive Bancorp Headquarters basis on or about March 31, June 30, 610-320-8496 Officer of Sovereign Bank New England 1500 Market Street September 30, and December 31. Division Philadelphia, PA 19102 617-757-5420 Mark R. McCollom, CPA Bank Headquarters REGISTRAR AND Chief Financial Officer, Bank 1130 Berkshire Boulevard TRANSFER AGENT James D. Hogan, CPA 610-208-6426 Wyomissing, PA 19610 Shareholders who wish to change Chief Financial Officer, Bancorp Mailing Address the name, address, or ownership of stock, 610-320-8496 Stacey V. Weikel P.O. Box 12646 report lost stock certificates, Senior Vice President, Reading, PA 19612 or consolidate stock accounts James J. Lynch Investor Relations and should contact: Operator Strategic Planning Chairman and Chief Executive Common Stock – NYSE: SOV 610-320-8400 610-208-6112 Officer of Sovereign Bank Mellon Investor Services Mid Atlantic Division Internet One Mellon Bank Center 267-675-0636 EXECUTIVE MANAGEMENT 500 Grant Street, Room 2122 OFFICE OF THE CHAIRMAN INVESTOR INFORMATION Pittsburgh, PA 15258 Lawrence M. Thompson, Jr., Esq. 1-800-685-4524 Copies of the Annual Report, 10K, Jay S. Sidhu Chief Operating Officer interim reports, press releases, and other Chairman of the Board, Trust Preferred Securities – and President of Consumer communications sent to shareholders are President, and CEO NYSE: SOVPRA Banking Division available at no charge on Sovereign’s web 610-320-8415 The Bank of New York 610-320-8459 site, or via: 2 North LaSalle Street e-mail: 10th Floor Joseph P Campanelli . Investor Relations voice mail: Chicago, IL 60602 President and Chief Operating Officer 1-800-628-2673 312-827-8547 Sovereign Bank New England Division; President of DIVIDENDS FINANCIAL INFORMATION Commercial Markets Group, Cash dividends on common stock are Investors, brokers, security analysts, and Sovereign Bank customarily paid on a quarterly basis on or others desiring financial information should 617-757-3444 about the 15th of February, May, August, and contact: November. Reading, PA 19612 P.O. Box 12646