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soverreigh bancorp 1999_annual_report

  1. 1. 1 9 9 9 A N N U A L R E P O R T SOVEREIGN BANCORP 14 YEAR RECORD OF CONSISTENTLY 1999 HIGHER EARNINGS ANNUAL A pro forma $35 billion bank with REPORT a small community bank touch 600 community banking offices, over 1,000 ATMs extending from north of Boston to south of Philadelphia Internet and technology savvy company
  2. 2. 1999 C O M PA N Y P R O F I L E S overeign Bancorp, Inc., is a pro forma $35 billion company whose • principal subsidiary is Sovereign Bank. Sovereign is the third largest REPORT financial institution headquartered in Pennsylvania. Sovereign has successfully completed 23 acquisitions since 1989, and all of these acquisitions have accelerated Sovereign’s earnings growth. In September 1999, Sovereign announced its pending acquisition of approximately $12 billion of deposits, $9 billion of loans, and 285 branches ANNUAL from FleetBoston and in February 2000, Sovereign announced a restructuring of the acquisition which addresses system conversions, and team member and customer retention issues, and provides Sovereign with additional capital. After giving pro forma effect to this acquisition, Sovereign’s extensive network will include approximately 600 community banking offices reaching from north of Boston to south of Philadelphia. Sovereign will become the SOVEREIGN third largest bank in New England, among the largest commercial lenders in the region, and about the 25th largest financial institution in the country. PRO FORMA 2000 VISION When consumers and businesses think of a World Class • $35 billion financial institution financial services provider they choose Sovereign. • 600 branch and over 1,000 ATM franchise extending from north of Boston to south of Philadelphia MISSION • Deposits of $24 billion Sovereign is a World Class financial services provider, - 27% checking committed to helping our customers succeed by - 34% savings understanding and anticipating their individual - 39% CD’s financial needs and providing customized solutions, • Loans of $24 billion resulting in an average customer having 4+ services - 31% commercial loans - 29% consumer loans with the Bank. - 40% residential loans WORLD CLASS COMMITMENT TO: • Internet and technology savvy company • Focus on clearly defined Critical Success Factors Customers . . . . . . . . . . . . . . . . . . . . . . Page 4 Team Members . . . . . . . . . . . . . . . . . . . Page 9 • Strong, experienced management team Community . . . . . . . . . . . . . . . . . . . . . Page 15 • 9.5% insider ownership (after giving effect to the exercise of options) Shareholders . . . . . . . . . . . . . . . . . . . . Page 16 FORWARD-LOOKING STATEMENTS The following discussion and other portions of this Annual Report contain various forward-looking statements. Please refer to page 18 in this Annual Report for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements.
  3. 3. TA B L E O F C O N T E N T S SOVEREIGN 4 SUPER REGIONAL BANK 14 YEAR RECORD OF CONSISTENTLY 5 HIGHER EARNINGS 10 MAJOR LINES OF BUSINESS 14 INTERNET TECHNOLOGY Sovereign Franchise . . . . . . . . . . . . . . . . . 4 Financial Summary . . . . . . . . . . . . . . . . 17 Executive Summary . . . . . . . . . . . . . . . . . 6 Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . 18 Critical Success Factors . . . . . . . . . . . . . . . 8 Financial Statements and Major Lines of Business . . . . . . . . . . . . . . 10 Supplementary Data . . . . . . . . . . . . . . . . 44 Building Franchise Value . . . . . . . . . . . . . 13 Board of Directors and Corporate Officers . . . . . . . . . . . . . . . 81 Internet Technology . . . . . . . . . . . . . . . . 14 Corporate Sovereign In The New Millennium . . . . . . 16 Information . . . . . . . . . . . Inside Back Cover 3
  4. 4. 1999 T H E O N LY S U P E R - R E G I O N A L B A N K F R O M N O R T H OF BOSTON TO SOUTH OF PHILADELPHIA • REPORT We continually strive to build World Class relationships with our customers by continuously striving to provide excellent service through understanding and anticipating our customers’ needs and exceeding their expectations. Sovereign customers can count on us to deliver customized solutions, products ANNUAL and services to help them achieve their personal and business goals. COMMUNITY Sovereign Bank BANKING Locations ME OFFICES ATMs • Pennsylvania 159 283 • New Jersey 141 173 SOVEREIGN • Delaware 6 14 Maryland 0 4 New York 0 8 • MID ATLANTIC 306 482 Connecticut 37 73 v NH Massachusetts 185 376 v New Hampshire 13 22 v VT Rhode Island 50 89 v Vermont 0 18 v NEW ENGLAND(1) 285 578 TOTAL 591 1,060 MA (1) Pending FleetBoston purchase. BOSTON Key: • Sovereign Bank PROVIDENCE v Sovereign Bank New England HARTFORD RI CT NY PA NJ Pro Forma Franchise Facts ALLENTOWN STATE COLLEGE NYC • 3rd largest banking franchise headquartered in Pennsylvania READING • 5th largest banking franchise in New Jersey TRENTON • Among largest small business lenders in U.S. • 3rd largest banking franchise in New England • #3 market share in Massachusetts PHILADELPHIA • 160+ branches in Boston area • Leading small business lender in Boston area MD • #3 market share in Rhode Island DE • #5 market share in New Hampshire 4 • Strategic concentration in Connecticut
  5. 5. FINANCIAL HIGHLIGHTS EARNINGS(1) YEAR ENDED DECEMBER 31, “1999 was ($ in thousands except per share data) 1999 1998 % Change Operating Earnings $ 202,296 $ 169,988 19% the 14th Diluted EPS 1.01 0.85 19% Operating EPS 1.18 1.06 11% Cash EPS 1.34 1.17 15% consecutive (1) Excludes special charges described in the Table: “Reconciliation of Net Income to Operating Earnings” on page 19 of Management’s Discussion and Analysis. BALANCE SHEET AT DECEMBER 31, year of record ($ in thousands) 1999 1998 % Change Total Assets $ 26,607,112 $ 21,913,873 21% Loans 14,226,540 11,285,840 26% 202.3 earnings.” Checking Deposits(2) 2,960,760 2,522,992 17% Total Deposits 11,719,646 12,322,716 (5)% Stockholders’ Equity 1,821,495 1,204,068 51% (2) Includes sweep accounts. REVENUE STATISTICS YEAR ENDED DECEMBER 31, 170.0 ($ in thousands, except per share data) 1999 1998 % Change Total Revenue $ 744,998 $ 598,793 24% Non-Interest Income 130,342 105,181 24% Revenue per share 4.35 3.73 17% GOALS AND PERFORMANCE (1) 1999 5 YEAR AVG. 114.4 Higher than Industry OPERATING EARNINGS (in millions of dollars, EPS Growth 11.3% 13.5% as originally reported) 15% or Higher Average Annual Return on Average Equity 15.5% 14.6% 1% or Higher Return 68.7 on Average Risk Adjusted Assets 1.5% 1.6% 56.4 Meet or Exceed Regulatory Capital Requirements Exceeded Exceeded 46.4 (1) Excluding special charges 35.4 14.0 7.8 5.5 5.4 4.5 5.0 4.3 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 5
  6. 6. 1999 EXECUTIVE SUMMARY Nineteen ninety-nine was another monumental year for Sovereign. Operating earnings per share increased 11%, and diluted earnings per share were up 19%, while Sovereign took numerous steps to improve its franchise. • We are proud to highlight just a few of our team’s main accomplishments during 1999, which have presented REPORT new opportunities to our customers and shareholders, as well as exciting challenges for our team members: • Sovereign achieved solid earnings growth bank in the country, up from about 40th to take our commitment of World Class for the 14th consecutive year. Sovereign’s largest at present time. customer service to a higher level. 1999 net operating income was $202.3 Sovereign’s goal is to remain committed • We successfully integrated Carnegie, million, an increase of 19% from 1998 to achieving above average financial results First Home and Peoples Bancorp ANNUAL net operating income of $170.0 million by following a clearly defined corporate acquisitions onto our operating system excluding merger-related charges. Operating strategy. This strategy is to be a Super and into our culture. earnings per share for the year ended 1999 Regional Bank which closely monitors • We continued our initiative of keeping were $1.18, an increase of 11% compared to asset quality, manages interest rate risk, on the cutting edge of technology, $1.06 reported for 1998. Cash earnings per controls overhead and maintains a high by launching, share were $1.34, up 15% for the year. level of productivity while emphasizing our own internet-only banking initiative. World Class customer service delivered • We announced the pending purchase of This virtual bank offers a unique, by highly motivated and well-trained SOVEREIGN approximately $12 billion of deposits, personalized banking experience to team members. $9 billion of loans and 285 branches from local and national corporations, It is with an eye to the future that FleetBoston and later a restructuring which organizations, and other affinity groups. In Sovereign appreciates its past. The dedication addresses system conversions, customer addition, several significant improvements of our team members, and the support and and team member retention issues and were made to eSovereign for both loyalty of our shareholders and customers provides Sovereign with additional consumer and business customers. has been, and will continue to be, crucial to capital. In addition, we are acquiring fully • Sovereign successfully completed the the success of Sovereign. functioning business units, with the transition to the year 2000 without any Looking ahead, Sovereign intends management, relationship officers, support interruption of service to our customers. to remain a highly focused growth staffs, and other infrastructure necessary for company, while striving to improve • We introduced our enhanced corporate the acquired loans and deposits to be fully financial results and shareholder value. culture initiative, “The Sovereign Way”, serviced. This acquisition will create an unparalleled growth opportunity for Sovereign and its shareholders. We are continuing to work diligently on the objectives necessary to complete the acquisition and effect a smooth transition. Upon the completion of this acquisition, we will be about the 25th largest Sovereign Bancorp, Inc. Officers Pictured (l to r): Dennis S. Marlo, Chief Financial Officer and Treasurer Richard E. Mohn, Chairman of the Board Lawrence M. Thompson, Jr., Esq., Corporate Secretary Jay S. Sidhu, President and Chief Executive Officer 6
  7. 7. OPPORTUNITIES IN THE NEW ENGLAND MARKET On September 7, 1999, Sovereign approximately $35 billion, position us team supported by dedicated team announced the signing of a definitive as one of the strongest lenders to small members, with experience in the New purchase and assumption agreement and mid-sized businesses and consumers England marketplace, to manage and run to acquire from FleetBoston about in the region, plus provide compelling the Sovereign Bank New England $12 billion in deposits, $9 billion in value enhancement for shareholders. The operations. Our ability to draw upon loans, and 285 retail banking offices businesses we are acquiring meet or their best practices and procedures, creating Sovereign Bank New England. enhance all of our critical success factors. together with our proven success in In February 2000, we announced As a result of this acquisition, integrating acquisitions, will help to a restructuring of the acquisition Sovereign will have the third largest banking assure that we realize the full benefit which addresses system conversions, presence in New England and we are of this transaction for our shareholders. customer and team member retention delighted to bring our proven brand of Sovereign has completed more than 23 issues and provides Sovereign with community banking, delivered with a acquisitions since 1989, which have all additional capital. This acquisition personal touch, to this region. We will exceeded initial earnings projections. represents the entire former Fleet continue to distinguish ourselves on the Bank retail banking and middle basis of superior customer service. Service ACCELERATE TRANSFORMATION market lending franchise in eastern standards have been introduced to INTO A SUPER-REGIONAL BANK Massachusetts, including Boston customers to reinforce our commitment The acquisition should accelerate our (expected to close June 2000), the to World Class customer service. transformation into a super-regional bank former BankBoston consumer and Following the closing, we expect and result in a loan and deposit mix that middle market franchise in Connecticut Sovereign to be a leading force in a region is more characteristic of a high performing and Rhode Island (expected to close with powerful market demographics, and commercial bank. Sovereign believes that March 2000) and selected FleetBoston the only competitor with a franchise changes in our loan and deposit mix will franchises in central Massachussets and reaching from south of Philadelphia to help us: New Hampshire (expected to close north of Boston. We are a very customer • lower the cost of our funding; July 2000). and shareholder-oriented company, with • improve our net interest margin; We expect that this transaction, the ability, experience and desire to be • increase our non-interest income; and when successfully completed and a strong competitor in New England. • improve our operating earnings. integrated, will establish Sovereign as We have built a talented management a ‘super regional’ bank with assets of “This transaction will establish Sovereign as a ‘super regional’ bank with assets of approximately $35 billion. ” Sovereign Bank New England Office of the Chairman (l to r) Joseph P. Campanelli, Division President & C.O.O., Sovereign Bank New England John P. Hamill, Division Chairman & C.E.O., Sovereign Bank New England 7
  8. 8. 1999 FOCUSON • REPORT CLEARLY DEFINED CRITICAL SUCCESS FACTORS ANNUAL NON-PERFORMING ASSETS TO 1.06 TOTAL ASSETS 0.94 (percent) SOVEREIGN 0.78 Back in 1987, Sovereign defined its four critical success factors as superior asset quality, low interest rate risk, high level of productivity, emphasis on sales and service and growth 0.61 of team members. These have been our consistent and enduring themes. 0.53 Superior Asset Quality S uperior asset quality has been, and will alwaysa be, a top priority at Sovereign. The Company’s 0.32 extensive quality control procedures include team that is independent from the loan officers to review the credit ratings, reviewing corporate credits on at least an annual basis, and performing stress tests on the entire loan portfolio. Sovereign has also created a deep, experienced team of relationship officers and credit risk officers who work very closely with our customers. This personalized service allows Sovereign to better understand the customer’s business and their 94 95 96 97 98 99 financial needs which in turn helps to maintain strong, healthy loan relationships. As the Company continues the transformation of its balance sheet, continued emphasis will be placed on managing asset quality, including building higher levels of loan allowances consistent with the transformation of the loan portfolio. Low Interest Rate Risk I nterest rate risk management will always be an important focus at Sovereign. The Company believes in consistency of earnings, and that earnings must not be materially affected by changes in interest rates. Sovereign’s primary strategy to lower interest rate risk has been to transform the Company’s loan and deposit portfolio mix while managing yield curve risk. Sovereign utilizes sophisticated asset and liability modeling to manage interest rate risk under numerous scenarios. Sovereign Bank’s interest rate risk position will be improved by the acquisition of the Sovereign Bank New England franchise. On a pro forma basis, replacing certain borrowings with longer duration core deposits will neutralize Sovereign’s interest rate risk position. This positioning will reduce the reliance on wholesale borrowings on a forward-looking basis. Following the closing of Sovereign Bank New England, a 25 to 75 basis point further interest rate tightening is not Mike Haney, expected to have a material impact on Sovereign’s net interest income. Financial Analyst, Treasury 8
  9. 9. High Level of Productivity P cornerstone of Sovereign’s success. Alland efficient manneracutely aware of the roviding quality service in a low-cost continues to be a team members are importance of having a highly productive company. For the year ended December 31, We expect nothing but the 1999, Sovereign’s operating efficiency ratio (all general & administrative expenses excluding special charges as a percentage of net best from our team members interest income and recurring non-interest income and in return show extreme – the lower the number, the more efficient you are) was 48.6%. Sovereign’s goal is to maintain an respect for each team efficiency ratio in the mid to high 40s even after our acquisition of Sovereign Bank New England, while member. We encourage most banks have efficiency ratios in the 50s. open communication and Sovereign maintains this high degree of efficiency by entering into strategic outsourcing arrangements an entrepreneurial spirit, for certain costly functions, and by maintaining a flat corporate structure that fights and minimizes always seeking and bureaucracy. implementing ideas and Barbara J. Fischer, Vice President, Conversion & System Operations innovations which help S a l e s , S e r v i c e a n d Te a m M e m b e r Sovereign to excel. Our G r o w t h , “ T h e S o v e r e i g n Wa y ” environment supports T company grows. Weis understand that the way is the foundationjobs has a direct he Sovereign Way our company culture. It from which our personal growth and we perform our continuous learning for all impact on how a customer views Sovereign Bank. We believe team member performance is a major contributor to the success of this company. Our goal is to stand out among our team members. competitors. Sovereign is dedicated to becoming the bank with whom people want to do business. When consumers and businesses think of a World Class financial services provider, we want them to choose Sovereign. “The Sovereign Way” process is helping us build upon our corporate culture. It’s not a way to deliver customer service, but a way of life. The program is comprised of five modules, each module building upon the other, layering skills and strategies for providing World Class service. The modules cover Customer Relationships, Listening and Communication Skills, Accuracy and Productivity, Customized Solutions and Customer Satisfaction. Each module is studied for a minimum of four weeks and team members are observed by leaders during that period to make sure that the concepts are being absorbed and implemented. Certification is given for each module that is successfully completed. The Sovereign Way is Sovereign Bank. It brings the Company’s mission and corporate values to life. We believe that these values are ultimately responsible for producing growth in shareholder wealth. As our company expands into new regions, these values are more important than ever before. Sovereign believes that our continued success is dependent upon World Class team members offering Fay A. Dautrich, Vice President - Manager, World Class service. Team Member Support Services 9
  10. 10. 1999 MAJOR LINES OF BUSINESS • REPORT COMMERCIAL BANKING C o m m e rc i a l B a n k i n g Commercial loan volume Traditional Loans of $3.2 billion in 1999 S overeign offers a full array of commercial products to ANNUAL small and medium sized businesses, including traditional Average corporate credit Lines of Credit loans and lines of credit, asset-based lending, plus cash of $1.0 million management, electronic banking, international banking and private banking services. Sovereign differentiates itself Cash management fees Cash Management Services grew 37% in 1999 on the basis of quality personalized service delivered by very experienced relationship managers who understand and anticipate customers’ financial needs. Sovereign has emerged Electronic Banking E-Commerce over the Net SOVEREIGN as a leading commercial banking service provider in the Mid-Atlantic market, with International Supporting business commercial loans outstanding for 4,075 COMMERCIAL Trade Financing customers 1999 totaling $4.1 billion, up LOANS from $2.3 billion in 1998. ($ in millions) As Sovereign continues to Middle market focus Capital Markets increase its commercial loan activity, it remains committed to a environments. Sovereign’s business portfolio is industry 2,299 strong, conservative credit culture. diverse, and we expect that the pending acquisition in As mentioned previously, one of New England will further reduce Sovereign’s risk to local or Sovereign’s primary critical success regional economies. 1,417 factors is superior asset quality, Additionally, most of Sovereign’s relationship managers 884 and the Company is continually have in excess of fifteen years of commercial lending experience. 656 evaluating itself to ensure that its This veteran group of lending professionals have been through credit standards stay near the top several credit cycles, and this experience helps maintain of the industry. All of Sovereign’s Sovereign’s strong credit quality. This experience also provides large commercial loans are 95 96 97 98 99 our customers the piece of mind that they are dealing with a reviewed and rated annually, and bank that can also be their business advisor, helping them evaluated under various economic and interest rate achieve success and reach their personal financial goals. Having only started its commercial banking unit four years ago, Sovereign is now recognized as one of the top business “Sovereign is now banks in its market area. In 2000, Sovereign intends to continue to build this line of business and become an even stronger recognized as one of commercial banking competitor in its markets. the top business banks in its market area.” TRANSFORMING TO A HIGHER PERFORMING LOAN MIX s Commercial 40.0% 59.8% s Residential s 31.5% 12.5% Consumer 27.7% 28.5% Joseph J. Whalen, President, Sovereign Commercial Banking Division (1) Including the New (1) December 1997 Pro forma 2000 England acquisition. 10
  11. 11. of Sovereign’s sales and service training plus the commitment Consumer Lending & of its team members, Sovereign continued to make Community Banking meaningful progress in transitioning its deposit base. During 1999, checking accounts and other demand deposit accounts grew about 17%, and now total 24.6% of Sovereign’s total “Checking deposits customer deposits. This success is due to Sovereign’s sales grew 17% in 1999.” and service program, called Star Power. The Star Power retail process is used to measure and track product sales throughout our Melissa A. Gettler, Vice President, community banking offices. Associate Director of Creative Services Since Star Power was initiated three years ago, it has become an integral part of our corporate culture. It is a powerful tool that Sovereign uses S lending division overeign’s consumer to manage its retail banking sales process. More importantly, it is also a well-established means of providing customized continued to grow solutions and World Class customer service to our customers. during 1999 through Sovereign’s focused efforts on transitioning the deposit increased emphasis on base have resulted in lowering its deposit funding cost by home equity loans and approximately 55 basis points in 1999 as compared to 1998. highly targeted marketing techniques. Sovereign’s emphasis on sales and service resulted in the cross-selling of many CONSUMER LENDING & consumer loan products to deposit customers. By taking COMMUNITY BANKING advantage of these techniques and an alliance with® Sovereign has also been able to substantially , increase loan originations via the Internet. At December 31, Consumer loan 1999, the consumer loan portfolio was $4.5 billion and portfolio grew to comprised 31% of Sovereign’s loan portfolio, up from $4.5 billion $3.8 billion at December 31, 1998. Consumer Lending Web & phone-based At year-end 1999, Sovereign’s branch network consisted of origination platforms 306 community banking offices, plus an extensive network Emphasizes home of over 450 ATMs throughout eastern and northcentral equity loans Pennsylvania, New Jersey, and northern Delaware. Sovereign’s extensive community banking network is staffed with eSovereign approximately 2,400 well-trained team members. As a result Web Banking TRANSFORMING TO A STABLE LOW COST DEPOSIT MIX High Touch Supported Personalized service By High Tech with latest technology s Checking s 38.9% 56.4% Time Deposits s Other Core 26.9% 14.0% Pro forma 34.2% 29.6% Community Banking 600 community Delivery Channels banking offices and over 1,000 ATMs (1) Including the New (1) December 1997 Pro forma 2000 England acquisition. 11
  12. 12. 1999 MAJOR LINES OF BUSINESS continued • Mortgage Banking REPORT Trust & Investment Management Services • Living Trust • Investment “Sovereign has emerged Management • Trust Under Wills as the #2 mortgage • Investment Advisory • Charitable Trusts • Custody • Standby Trusts lender in the Estate Settlement, Estate Planning, Institutional Trust Philadelphia Area.” ANNUAL Services and Rollover IRAs are also available. Joseph M. Blaston, PRODUCT OFFERINGS Executive Vice President, Director of Mortgage Banking In addition to Sovereign’s extensive franchise, Sovereign offers both traditional SOVEREIGN and state of the art products to businesses, government units and consumers. S conventional, jumbo,rangeincome and other non-including COMMERCIAL SERVICES overeign offers a full of mortgage products low Full Range of Commercial Auto Finance conforming loans. Sovereign markets and sells these products Banking Services Commercial Real Estate through diversified delivery channels such as Sovereign’s Small Business Internet Banking community banking network, the internet, retail loan production Banking Services offices and correspondent networks. Government Banking A significant focus of mortgage banking is to generate Cash Management Capital Equipment & non-interest income by selling a portion of loan originations. Commercial Vehicle International Banking When Sovereign originates certain residential loans and sells Lease Funding Services/Trade Financing them to a third party, it continues to service these loans to ensure Capital Markets Asset-Based Lending quality of service to its customers. Mortgage banking revenues for 1999 were very strong at $29.9 million, up from $28.2 PERSONAL SERVICES million for 1998. Consumer Banking Mortgage Banking Due to planned strategic initiatives and the current interest rate environment, Sovereign’s residential loan portfolio continues to Insurance Services Private Banking play a less significant role within the total loan portfolio. While at Investment Services Trust and Investment December 31, 1999, residential loans increased by $500 million Management Services eSovereign from 1998, and now represent only 40% of the total loan portfolio. With Sovereign’s emphasis on commercial and consumer loan originations, it is the Company’s goal to have residential loans “A large full-service equal to less than one-third of the loan portfolio by the year 2002. bank with a small MORTGAGE BANKING bank touch, committed to out-local the nationals and Total revenues of $29.9 Loan Originations out-national million in 1999 the locals.” Home equity & Cross-Selling Missy Orlando, deposit accounts Chief Marketing Officer, Executive Vice President $6 billion portfolio Servicing 12
  13. 13. BUILDING Bill Belekewicz, Vice President, Sovereign Bank New England, FRANCHISE Structured Finance Group Financial Manager VALUE I n 1996, Sovereign unveiled its “super-community banking” strategy, and outlined several strategic goals to be achieved by 2000. A Tammy Sibalic, Assistant Vice President, cornerstone of this strategy was Budget/Profitability developing a loan and deposit mix Manager that is more characteristic of a high performing commercial bank. We have exceeded this goal by focusing on building or acquiring businesses that meet or enhance all of our critical success factors: superior asset quality, low interest rate risk, high productivity and a commitment to a strong sales and service culture. By focusing on asset and deposit purchases, as opposed to whole-bank acquisitions, Sovereign has transformed its balance sheet and enhanced its million of commercial and consumer complete our super-community banking revenue stream without paying the high loans, furthering the Company’s transformation. The Sovereign Bank acquisition premiums that the market migration to a commercial bank New England acquisition will extend has recently commanded. In 1997, balance sheet. our banking system from south of Sovereign started this transformation On September 7, 1999, Sovereign Philadelphia to north of Boston, creating with the purchase of Fleet’s auto finance announced the pending acquisition the third largest bank in New England. division, which brought the Company of $12 billion in deposits and 285 In addition to the announcement $2.0 billion of commercial and branches from FleetBoston. In February of the Sovereign Bank New England consumer loans, a fully functioning 2000, Sovereign announced a acquisition, the Company completed origination and servicing unit, and restructuring of this acquisition which two other acquisitions during the year layers of management depth. In 1998, addresses system conversions, and which enhanced Sovereign’s franchise. the 93 branch acquisition from customer and team member retention On June 15, 1999, Sovereign acquired CoreStates Financial added $2.2 billion issues and provides Sovereign with The Network Companies with unique of commercial bank deposits and $725 additional capital. This acquisition will products that provide funding for the purchase or lease of equipment and specialty vehicles plus other specialty Sovereign’s Growth products for other businesses. On June 30, 1999, Sovereign completed its acquisition of Peoples 1986(1) 1999 Pro forma (2) Bancorp, Inc., a $1.4 billion financial Assets $660 million $27 billion $35 billion institution. This acquisition included 14 branch offices that are a strong strategic Branches 19 306 591 fit with Sovereign’s existing franchise in central New Jersey, and also added solid Market Position 20th in PA 40th largest 25th largest in US in US trust and money management capabilities to Sovereign. (1) As originally reported. (2) Including the New England Acquisition. 13
  14. 14. Cliff Lavin, President & Managing Director, 1999 INTERNET TECHNOLOGY • and is also in negotiations with several other large organizations. REPORT The strategic objective of the Focusing on the Internet Bank is to generate bottom line value for Sovereign through increased Affinity Market sales revenue resulting in long-term On September 1, 1999, Sovereign’s value for our shareholders. The Internet Internet Bank, 1stwebbankdirect, had its Bank will operate under the same four test site launched and during the fourth critical success factors that have guided eSovereign ANNUAL quarter of 1999 it became fully opera- Sovereign throughout the years: superior tional. 1stwebbankdirect is a virtual internet asset quality, low interest rate risk, high Products and telephone bank, focusing on “affinity productivity and emphasis on sales, marketing.” It focuses on developing service quality and team member personalized banking relationships with Netbanking growth. It is our vision to create a similar entireorganizations. Sovereign has been type of market with affinity banking Sovereign customers can bank on-line introducing this unique delivery relationships for the Internet Bank that any time of day or night with our SOVEREIGN system to corporations, universities and national credit card companies have Netbanking product. They can check balances, see account histories, transfer not-for-profit organizations. Currently, developed over the past few years. Sovereign funds between accounts, pay bills and Sovereign has entered into definitive is pleased with the response and interest in much more. Banking on-line with agreements with multiple affinity groups 1stwebbankdirect thus far and will continue Sovereign provides secure transactions (with over 8 million potential customers) its focused marketing campaign. so a customer can conduct business transactions with peace of mind. eSovereign–Technology in AT M the New Millennium Sovereign has a large network of ATMs available 24 hours a day, 7 days a week, and is expanding that network into New T successfully Technology Team he Internet envelope and enhanced on-line calculators England. Including the acquisition, transformed the called “Visual Planners”, regular and sustained Sovereign ATMs will total over 1,000 website this submission of our URLs to the major search machines. year into a “Web Suite”, a very successful engines, and redesign of the site to make it one-stop shopping experience where the user-friendly. To maintain this momentum CheckCard customer can find all of the information Sovereign Bank is developing a revised Customers can use the Sovereign and products they need to reach their financial marketing strategy to target potential clients CheckCard to make purchases just as goals without ever leaving their home or and customers. they would a check but without the office. Customers will now find our online In addition, Sovereign introduced its hassle of writing the check and applications all in one place - whether they new Customized Solutions Center in presenting identification. Plus, the are looking to open a checking account or November 1999, an interactive kiosk featuring Sovereign CheckCard doubles as an ATM card allowing the customer fast would like to apply for an auto loan. a computer and telephone. A pilot version access to their money at almost any ATM. They will find the applications right where of the Customized Solutions Center is now they need them while reading about our located in the Bell Tower Community Te l e p h o n e B a n k i n g product information. Office, 1717 Arch Street in Philadelphia. The A customer can access an account from This alternative delivery channel generated Customized Solutions Center offers quick, any touch-tone telephone - at home, the business equivalent to several community easy-to-use Internet access and telephone office, on the road or on vacation. banking offices. Last year, $68 million in banking, as well as mortgage and auto loan Telephone banking allows a customer to on-line applications were submitted resulting information, financial calculators, Sovereign’s request information on both Sovereign in $24 million of loans recorded. Several home website ( and deposit accounts as well as Sovereign factors contributed to this success: banner, which is a tutorial banking loans, including mortgage loans, simply advertising and targeted direct marketing to website for children. The Customized Solu- by calling 1-877-SOV-BANK. promote discounted on-line Home Equity tions Center is designed to offer convenient loans, our new Home Equit-e-Loan virtual banking options for the on-the-go customer. 14
  15. 15. The SovNet Connection S isovNet, Sovereign’s Intranet site, and much, much more. designed as a comprehensive SovNet is an excellent information vehicle to provide team reference source for our team members with access to information members to stay informed regarding all of Sovereign’s products and about the many changes that teams. SovNet provides our team occur within the various teams members with the capability to order and to obtain up-to-date supplies on-line, locate fellow team information on these changes. At members the ability to connect with members at the touch of their finger tips, Sovereign we have increased our focus on teams outside of their own and learn view internal newsletters detailing the team member Intranet use. We feel that it about what other areas have to offer. latest news, review sales materials sent to contributes to our ability to deliver World When you know more, you do customers, access rate sheets, calculators Class customer service by giving our team more and that’s The Sovereign Way. A COMMITMENT TO OUR COMMUNITY the Caron Foundation and The Children’s Home of Sovereign has been expanding by more than just Reading. We were also named the official acquisitions. As World Class SOVEREIGN bank of the Philadelphia Eagles football service providers, Sovereign team for the 2000, 2001 and 2002 seasons and its team members look and continue as the sponsor of for, and find ways, to grow the Channel 6 ABC Philadelphia and enrich the communities SUCCESS Thanksgiving Day parade. In where we work and live. CLASSIC addition, Sovereign Bank New Sovereign believes in the England has been named the revitalization and success of official bank sponsor of the our communities, and to FEATURING demonstrate our commitment L P G A P L A Y E R S Boston Red Sox radio network. Along with all this, our Sovereign sought and was individual banking offices and awarded the financing and naming rights support service teams continue for the Civic Center in downtown Reading, to support fundraising for local Pennsylvania and the naming rights for the organizations helping to Mercer County Arena in Trenton, New Jersey. improve the quality of The new facility in Reading is scheduled to life in our communities. open in 2001 and will be called the “Sovereign Center”. The facility in Trenton was opened in October of 1999 and is named the “Sovereign Bank Arena”. At Sovereign we believe that community projects bring together joint partnerships between private, public and community enterprises. These Sovereign is a committed, socially responsible partnerships lead to sustainable economic development corporate citizen, supporting worthwhile for the city and county. In addition, Sovereign sponsored the Second Annual Sovereign Success community activities and encouraging our Classic, a pro-am tournament with LPGA players team members to be actively involved in which raised $80,000 for two local children’s charities. In 1999, $40,000 was awarded each to our communities. 15
  16. 16. 1999 SOVEREIGN IN THE NEW MILLENNIUM S overeign believes long-term performance belongs to The Sovereign Team, team members and directors, has growth companies that have a clear cut, highly focused and embraced these strategic goals. As a team, we are committed to • disciplined strategy. The Company’s goal over the past decade producing growth in shareholder value through meeting or has been to deliver an above average growth rate in exceeding these strategic goals. Sovereign’s Team owned REPORT operating earnings while increasing franchise and shareholder approximately 10% of outstanding shares of Sovereign common value. Over the past five years, Sovereign’s operating earnings stock (after giving effect to the exercise of options) at December have grown at an average annual rate of 19% and shareholder 31, 1999, making them the largest shareholder group of the value has grown at an average annual rate of 20%. Company, and clearly aligning Sovereign Team’s interest with Following are the main strategic goals Sovereign plans to those of its shareholders. achieve and improve upon over the next 12 to 18 months: ANNUAL s Focus on completing and successfully integrating the 1.34 CASH EPS(1) New England franchise. 1.17 s Continue to focus on critical success factors by: • Maintaining asset quality with above average coverage 0.99 of non-performing loans 0.87 • Managing interest rate risk 0.75 • Maintaining an efficiency ratio in the 40’s SOVEREIGN • Focusing on superior service and sales culture s Continue to increase tangible capital levels, which may result in: • Higher P/E • Improved credit ratings s Continue to improve the quality of the balance sheet by lowering borrowings, having higher core deposits and loans, and higher capital ratios. s Build upon our philosophy of being a “Marketing Company 95 96 97 98 99 with a Bank Charter”- building our “brick and click” model (1) Cash earnings are operating earnings excluding amortization and delivering World Class service. of intangible assets and ESOP related expenses. s Strive to continuously achieve these key ratio targets: • ROA = 1.2% to 1.4% Linda A. Hagginbothom Assistant Vice President, • ROE = 15% to 18% Investor Relations • EPS Growth = above industry average Our Beliefs & Principles We achieve our mission and practice our values in an ethical, moral and legal atmosphere, where mutual trust and understanding are practiced. Sovereign is a driven We keep our promises, admit our mistakes and abide by these basic principles in decision making and the way we do business: World Class financial • We encourage all team members to have a Business Plan and a Personal Development Plan, suggesting and supporting stretch goals. services provider, • We give individuals the authority to use their capabilities to the fullest continually striving to to provide solutions for our customers’ needs. • We communicate frequently with candor, listening to each other, outperform the market regardless of level or position or tenure. in terms of quality of • We focus on situation, issue or behavior, not on the person. • We acknowledge problems openly and honestly and deal with earnings, growth in earnings, conflicts as they arise. • We believe in maintaining the self-confidence and self-esteem of others. and return on equity. • We always strive to make things better, while maintaining constructive relationships and leading by example. 16
  17. 17. FINANCIAL SUMMARY (1) BALANCE SHEET DATA AT DECEMBER 31, ($ in thousands) 1999 1998 1997 1996 1995 ______________ _____________ ______________ _____________ _____________ Total assets $ 26,607,112 $ 21,913,873 $ 17,655,455 $ 15,298,690 $ 13,082,579 Loans 14,226,540 11,285,840 11,324,122 9,595,495 7,591,107 Deposits 11,719,646 12,322,716 9,515,294 8,660,684 8,548,888 Borrowings 12,663,138 7,902,239 6,863,643 5,599,109 3,566,857 Stockholders’ equity 1,821,495 1,204,068 1,047,795 889,751 843,733 STOCK STATISTICS(2) AT DECEMBER 31, (in thousands) 1999 1998 1997 1996 1995 ______________ _____________ ______________ _____________ _____________ Common shares outstanding 225,470 159,727 141,218 134,000 130,762 Common share price at end of period $ 7 29/64 $ 14 1/4 $ 17 5/16 $ 9 1/8 $ 6 11/16 Book value per share at end of period(3) 8.08 7.54 7.42 6.64 6.45 Dividends paid per common share (4) 0.098 0.084 0.114 0.140 0.119 Dividend payout ratio(4) 9.7% 9.9% 17.3% 23.7% 18.0% SUMMARY STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, (2) ($ in thousands, except per share data) 1999 1998 1997 1996 1995 ______________ _____________ ______________ _____________ _____________ Total interest income $ 1,607,329 $ 1,355,371 $ 1,178,777 $ 1,016,826 $ 838,261 Total interest expense 992,673 861,759 746,695 629,860 518,483 _________ _________ _________ _________ _________ Net interest income (5) 614,656 493,612 432,082 386,966 319,778 Provision for loan losses(6) 30,000 27,961 41,125 22,685 13,119 _________ _________ _________ _________ _________ Net interest income after provision for loan losses 584,656 465,651 390,957 364,281 306,659 _________ _________ _________ _________ _________ Other income 130,342 105,181 48,688 63,379 42,908 Other expenses 446,384 309,694 250,559 249,625 199,647 Merger-related charges - 49,932 19,224 - - Non-recurring SAIF assessment - - - 40,148 - _________ _________ _________ _________ _________ Income before taxes 268,614 211,206 169,862 137,887 149,920 Income tax provision 89,315 74,751 67,324 47,509 51,051 _________ _________ _________ _________ _________ Net income $ 179,299 $ 136,455 $ 102,538 $ 90,378 $ 98,869 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Operating Earnings(7) $ 202,296 $ 169,988 $ 139,270 $ 115,265 $ 98,869 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Diluted EPS $ 1.01 $ 0.85 $ 0.66 $ 0.59 $ 0.66 Operating EPS 1.18 1.06 0.89 0.76 0.66 Cash EPS (8) 1.34 1.17 0.99 0.87 0.75 (1) All financial summary numbers have been restated to reflect all acquisitions which have been accounted for under the pooling-of-interests method of accounting. (2) All per share data have been adjusted to reflect all stock dividends and stock splits. (3) Book value is calculated using equity divided by common shares outstanding at end of period. (4) The higher dividend rate and higher dividend payout ratio in prior periods is the result of acquisitions which were accounted for as a pooling-of-interests. (5) Included in net interest income is $4.7 million of negative carry from escrowed financing proceeds relating to the pending acquisition of Sovereign Bank New England. Sovereign was required to raise $1.8 billion of debt and equity capital by December 15, 1999. Substantially all of the proceeds were required to be escrowed with limited ability to reinvest between closing of the financings and the assumption of the FleetBoston branches. (6) For 1997, includes $24.9 million (after-tax) of merger-related charges classified as provision for loan losses resulting from acquisitions during the year. (7) See a “Recociliation of Net Income to Operating Earnings” in Management’s Discussion and Analysis for explanation of special charges excluded from operating earnings. (8) Cash earnings are operating earnings excluding amortization of intangible assets and ESOP–related expense. 17