2007 AnnuAl RepoRt And FoRm 10-K | nYSe:SoV
®


    America’s Neighborhood Bank
    Sovereign is the 19th largest banking institution in the United States, as ranked ...
NH




                                         MA
                                                                       ...
Executive Management Team
                                                            Joseph P Campanelli
                ...
Dear Fellow Shareholders,
                                                                                           Impr...
Cindy Brown, CEO, Boston Duck Tours—

                        “ The most important thing about Boston Duck

              ...
“Improving the customer experience has one of our top priorities over the past year.”



                                 ...
“We see a great deal of opportunity to continue to grow our core businesses within our footprint.”



                    ...
Joseph Termini Sr., President,
                                                                                           ...
“We believe the next step to enhancing profitability is through better sales and service.”



                            ...
Mike Cardillo, President, CEO and Co-founder,
                                                                            ...
Disciplined and Focused Approach
                    In 2008 we remain committed to maintaining a disciplined and focused ...
Strategic Priorities in 2008                                                                                              ...
Financial Summary

                                                                                                       ...
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                       WASHINGTON, D.C. 20549 | FORM 10-K...
fORM 10 – k CROSS REfERENCE INDEX                                                                                         ...
fORWARD – lOOkING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-loo...
PART I
         Item 1 — Business
         General
         Sovereign is the parent company of Sovereign Bank (“Sovereign ...
Environmental Laws
Environmentally related hazards have become a source of high risk and potentially significant liability...
soverreigh bancorp 2007_annual_report
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soverreigh bancorp 2007_annual_report

  1. 1. 2007 AnnuAl RepoRt And FoRm 10-K | nYSe:SoV
  2. 2. ® America’s Neighborhood Bank Sovereign is the 19th largest banking institution in the United States, as ranked by assets. Our vision is to be recognized in the communities we serve as a customer-centric community bank—one that has the capacity of a large financial institution with superior products and services which are delivered to our customers on a local level. Our strategy is to provide the best aspects of a big bank with a community bank feel. We attract new customers by demonstrating convenience to our locations and offering products that help them manage their lives and businesses more effectively. Our goal is to have a great distribution channel while maintaining local decision making and never losing sight of the fact that we want to be a community provider with team members who live and work in the same neighborhoods. With a strong commitment to these priorities, we’re positioning ourselves as America’s Neighborhood Bank. 2 Sovereign Bancorp, Inc., (NYSE: SOV), is the parent company of Sovereign Bank, an $85 billion financial institution, as of December 31, 2007 with principal markets in the Northeast United States. Sovereign Bank has 750 Community Banking Offices, over 2,300 ATMs and approximately 12,000 team members. Sovereign offers a broad array of financial services and products including retail banking, business and corporate banking, cash management, capital markets, wealth management and insurance.
  3. 3. NH MA Boston NY CT PA RI Providence Sovereign Bancorp Hartford Sovereign’s Deposit Market Share Reading New York in the 5 Largest MSA’s in the Northeast U.S. Number Sovereign’s Sovereign’s 1 MSA of Offices Market Share Rank 165 8.58% 3 Boston Philadelphia 56 10.57% 3 Providence 82 6.90% 6 Philadelphia NJ 26 4.68% 6 Hartford 208 1.95% 11 New York MD FDIC Market Share Data as of June 2007.  Mid-Atlantic Region  Metro New York Region  New England Region
  4. 4. Executive Management Team Joseph P Campanelli . President and Chief Executive Officer Matthew A. Kerin Managing Director of Corporate Specialties Group Roy J. Lever Managing Director of Retail Banking Group Salvatore J. Rinaldi Managing Director of Sovereign Bancorp Corporate Services Group M. Robert Rose Chief Risk Management Officer Patrick J. Sullivan Managing Director of 2 Corporate Banking Group Kirk W. Walters, CPA Chief Financial Officer Joe Campanelli President and Chief Executive Officer
  5. 5. Dear Fellow Shareholders,  Improvement in our productivity and expense management. One of the As expected, 2007 was a year of transition for us. We implemented strategies objectives we established in 2007 was executing better, faster and cheaper. aimed at building our core businesses that have a predictable and sustainable We are pleased that our expense reduction initiatives were completed on earnings stream while exiting non-core businesses that do not meaningfully time and slightly better than planned, as we eliminated more than $100 contribute to our profitability. As a result, we began 2008 with a clear vision for million of annual operating expenses. These savings were partially offset by Sovereign–a strategy of getting back to the basics and strengthening the core value reinvestments in technology, branch infrastructure and marketing. We will of our franchise. continue to search for additional ways to prudently manage expenses and operate more efficiently in 2008. To this end, we are taking advantage of the As you all know, our entire industry is facing significant ongoing challenges. We are new SEC rule allowing companies to furnish proxy materials over the Internet, managing these issues prudently by implementing strategies that will put us in the which will lower our costs and is more environmentally friendly. best position to improve our capital levels as well as our earnings power in future periods. Credit risk management is a top priority for us in 2008. Having exited  Improvement in our capital position and the quality of our earnings. certain non-core businesses, we are now less exposed to the mortgage turmoil that Consistent with our objective to focus on businesses that will drive earnings many of our peers are facing today. We have very limited sub-prime exposure (less growth, we’ve taken some very specific steps over the last 12 months to than 1.50% of our loans outstanding), no option ARMs and we have never offered Sovereign Bancorp reduce risk. We restructured our balance sheet, selling in excess of $8 billion teaser adjustable-rate mortgages or products with punitive pre-payment penalties. of non-core assets. These actions improved capital levels, reduced earnings Furthermore, we have a dedicated commercial lending and credit staff working volatility going forward and improved our interest rate risk and credit risk together towards earlier identification and intervention in all of our commercial profiles. Included in these asset sales was $3.3 billion of under-performing portfolios. correspondent non-prime home equity loans, which were sold during the fourth quarter of 2006 and first quarter of 2007 prior to a material collapse Last year we implemented several initiatives to achieve our objectives of improving 3 in the value of these assets, ultimately preserving hundreds of millions of the quality of our earnings, providing greater transparency and understanding of the dollars in capital. We also shut down our out-of-footprint wholesale mortgage businesses we are in and better positioning Sovereign for sustainable growth in our production offices during the same period and sold $2.9 billion of Alt-A core businesses. These successes included: residential mortgages. Again, the timing of this sale allowed us to avoid
  6. 6. Cindy Brown, CEO, Boston Duck Tours— “ The most important thing about Boston Duck Tours’ relationship with Sovereign is the high level of trust we’ve established with each other. We have to be able to trust our banking partner to help us with some of the most important facets of our company. There’s no question about that with Sovereign.” Jeff Sweet Regional Vice President Trish Rose, Retail Market Executive— “ Cindy Brown and the Boston Duck Tours’ Trish Rose Retail Market Executive relationship is a great example of how a strong Sovereign Bancorp partnership between business banking and retail Donna Wolfe banking provides added value to our customers. Regional Vice President Cindy trusts us to recommend products and Cindy Brown 4 services that will support her personal needs as CEO Boston Duck Tours well as business goals and objectives. It is truly a pleasure and a privilege to serve one of Boston’s best-known and best-loved companies.”
  7. 7. “Improving the customer experience has one of our top priorities over the past year.” Financial Results Our results in 2007 were impacted significantly by disruption in the credit markets  substantial market deterioration and further incremental write downs. We most and weakness in the residential mortgage market in addition to charges related to the recently decided to exit the auto finance business in out-of-footprint markets in previously mentioned expense reduction initiative. Volatility in the financial markets the Southeast and Southwest–after it became clear that the financial performance and deterioration in the credit environment triggered a non-cash goodwill impairment of this business in these markets was not meeting our expectations. We are charge of $1.6 billion during the fourth quarter. focusing our energy on auto lending within our core geographic footprint, where we have a long history of profitable lending. 2007 financial results were as follows:  Improvement in the customer experience. Improving the retail banking customer  Net loss of $1.3 billion, including all charges, or $(2.85) per share as experience has been one of our top priorities over the past year. To this end, we compared to net income of $137 million or $.30 per share in 2006. have developed a robust retail banking model–named Customer First–which is  Operating earnings for EPS purposes of $539 million or $1.05 per share as being implemented throughout our retail network in 2008 and aims to improve compared to $692 million or $1.48 per share in 2006. our core banking revenues. To date, meaningful progress has been achieved  Total deposits of $50 billion as compared to $52 billion a year earlier, due to a planned through the simplification of our checking account products by reducing 10 reduction of high-cost wholesale deposits in excess of $3.5 billion in 2007. everyday offerings to 5 and consolidating more than 400,000 grandfathered Sovereign Bancorp checking accounts. In addition, we believe that a significant revenue opportunity  Total loans of $58 billion, as compared to $63 billion a year earlier, reduced by exists in selling more banking services to our existing customer base. For sale of non-core wholesale loans. example, about 60% of our approximately 1.8 million households currently utilize  Provision for credit losses of $408 million, which bolstered the allowance for loan two or less services. Households that have four or more products and services are and lease losses to $738 million from $486 million at the end of 2006. This three times more profitable than our limited service households. raised the allowance as a percentage of loans to 1.28% from .88% at December 5 31, 2006. Over the past year, Sovereign’s strategy has deliberately centered on simplifying our business model to reduce risk, improve core profit fundamentals, and improve the  Annualized net loan charge-offs of .25%, unchanged from 2006, which excludes predictability of our income streams. While we know that much of this strategy has .71% of net charge-offs related to the balance sheet restructuring. been clouded by industry conditions and necessary charges that we’ve had to take  Tier 1 Leverage of 5.89% as compared to 5.73% at December 31, 2006. to accomplish this work, we are resolute that the actions taken in 2007 are the right Sovereign’s capital exceeds the levels defined as “well-capitalized” by long-term moves for our company. our regulators.
  8. 8. “We see a great deal of opportunity to continue to grow our core businesses within our footprint.” We see a great deal of opportunity to continue to grow our core businesses within our Today’s banking environment requires proactive measures to strengthen capital and footprint and to improve our core operating performance. During 2008, we will be mitigate risk. As a result, we have discontinued the quarterly common stock dividend focused on meeting consumer, retail, small business and commercial market needs of to bolster capital and mitigate risk during the ongoing challenges in the financial customers and prospects residing in our footprint. services industry. This step will position the company to prosper when more favorable conditions resume. The Board of Directors will review the dividend policy from time to time and expects to resume dividend payments when industry conditions normalize. Simplified Business Model Strong Franchise Value A key element of Sovereign’s business model is to apply a more centralized and disciplined approach to marketing, pricing and product development supported by the Sovereign is one of the largest banking franchises in the Northeast United States, right key metrics to measure if we are properly capitalizing on our opportunities. This with 750 community banking offices and over 2,300 ATMs. The Northeast is a very approach provides for more consistent, effective management of resources across our consolidated market; the top 15 banks control about half the community banking footprint. To accomplish this, we have reorganized the company by centralizing the offices and almost 60% of the deposit base. Over 20% of the households in the strategy, policies, procedures and operations of our key lines of business. For example, United States are located in our footprint and almost 22% of the business enterprises the management of all aspects of our retail banking activities are now consolidated throughout the United States are in our footprint. It is one of the top regions in the under one individual; the management of the hundreds of thousands of commercial country for per capita income. Over 60% of our community banking offices are in clients is consolidated under another individual; and all of our operations and Sovereign Bancorp markets that represent personal income in excess of 30% of the national average. technology are consolidated under a third individual. The Northeast United States is a very attractive market, with a diversity of income While we believe the centralization of the “manufacturing” aspects of our company stemming from a broad-based regional economy. It has not experienced as dramatic discussed above will yield better results, we also believe that the delivery of these a boom as other parts of the country have, and therefore there is stability within the products and services should be handled in a high-touch, community-based approach. various industries that drive jobs. While year-over-year changes in employment levels Our goal is to make each of the communities we serve feel like it’s our headquarters. 6 and housing prices are affected by national trends, we’re confident that the companies We are excited that we continue to have local representation in every one of our and the individual households in our region are reasonably equipped to manage markets with individuals who live and work there, representing us throughout the through the present economic environment. centers of influence with a solid understanding on how we can best deliver our company to each one of these neighborhoods.
  9. 9. Joseph Termini Sr., President, Hoyt Transportation, Inc.— “ I am loyal to Sovereign because they have always been there when I’ve needed them. From financing to cash management, even personal banking, they handle all my needs. After 28 years, I’m staying right here at Sovereign where I’m comfortable.” Joseph Termini Sr. President, Hoyt Transportation, Inc. Tom Iadanza President, Commercial Banking Metro New York/New Jersey Natalie Bries, Vice President, Business Banking— Natlie Bries Vice President, “ Hoyt is a fast-growing yet traditional, family- Business Banking run business. They value relationships, and Sovereign Bancorp that’s what we’re all about here at Sovereign. We have the people who help them make things happen—people who set them up 7 with the right financial products to match their growing needs.”
  10. 10. “We believe the next step to enhancing profitability is through better sales and service.” Customer First Being America’s Neighborhood Bank We recognize that playing an active role in meeting the needs of our local Our Customer First program, designed to sell more products to our existing communities is critical to our long-term success and the success of the towns, cities customers and to accelerate the acquiring of new customers, was piloted throughout and states in which we do business. As part of our continued commitment to the 25 branches during the fourth quarter of 2007. We are encouraged with the results Community Reinvestment Act (CRA), we constantly strive to maintain and improve of the pilot and are optimistic about the opportunities this program presents. We are the lending, investment and services to low- and moderate-income communities and now rolling out the Customer First business model throughout individuals within our region. Sovereign Bank has received the highest possible CRA all of our community banking offices. rating—“Outstanding”—from our regulator, the Office of Thrift Supervision, for our Built around knowing our customers better than ever before, we have domiciled over community lending and investment performance. 85% of our deposit relationships with dedicated account managers. We believe this During 2007, Sovereign Bank provided $3.2 billion in lending and investment. will improve customer retention and cross-sell opportunities. We have adapted our Our commitment assisted first time homebuyers, created affordable rental housing technology to this new model, providing reports and streamlined procedures that we and helped small businesses grow by increasing employment opportunities and believe will enhance the customer experience at Sovereign. strengthening local communities. In conjunction with these programs, the Sovereign While the simplification of our product set and conversion of grandfathered Bank Foundation and the Sovereign Endowment Fund made grants in excess of $6.5 Sovereign Bancorp products has reduced our attrition rates, we believe the next step to enhancing million to organizations that promote community and economic development, youth profitability is through better sales and service. Customer First provides the and education, arts and culture, as well as health and human services. We are also opportunity to increase productivity, increase revenue run rates and tie our customers proud of the volunteer commitment of our team members who give back in so many closer to Sovereign Bank. ways to the communities in which they live and work. 8
  11. 11. Mike Cardillo, President, CEO and Co-founder, Health Advocate, Inc.— “ As a new company starting out more than six years ago, we selected Sovereign to provide all of our banking, financing and investment needs. Sovereign has become a true partner providing us with superior customer service and ongoing strategic advice. Sovereign’s support has helped Health Advocate create a solid foundation which has contributed to our enormous growth. As the nation’s leading health advocacy company, now serving millions of Americans, including Sovereign’s employees and their families, we take great pride in our strong relationship with our banking partner.” Tom Masci Executive Vice President, Randalll Stradling CFO and Co-founder Vice President, Commercial Banking Randy Stradling, Vice President, Commercial Health Advocate, Inc. Mark Gallivan Mike Cardillo Relationship Manager— Market CEO Mid-Atlantic East President, CEO, and Co-founder Health Advocate, Inc. “ Health Advocate, Inc. (HA) has experienced Sovereign Bancorp rapid growth since it’s founding both in size and scale; that has translated into growth and opportunity for Sovereign. During this time, Sovereign’s relationship with HA has grown to include multiple deposit and investment 9 accounts as well several credit facilities, cash management and retail services. HA has been an eager participant in our Partnership Banking program, with multiple new loans and deposit accounts opened at the local Sovereign branch for both HA employees and executives.”
  12. 12. Disciplined and Focused Approach In 2008 we remain committed to maintaining a disciplined and focused approach to running the business and leveraging the value of the core franchise–increasing the rate of acquisition of business customers and households and selling more to our existing customers through the Customer First program. We believe our franchise is the real value of Sovereign. Stock Price Performance | 10-year Sovereign Bancorp, Inc. S & P 500 S & P Bank Index During these challenging economic times, we are committed to building our capital 200 ratios over and above their already well-capitalized status and will remain disciplined 175 on credit risk management practices. With the simplification of our business model and changes to our organizational structure, we are now better positioned to execute 150 Index Value on our strategy of getting back to the basics–gathering deposits and making loans. We 125 thank you for the opportunity to serve you as shareholders and customers. 100 75 Sovereign Bancorp 50 25 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 Joseph P Campanelli . President and Chief Executive Officer 10 P Michael Ehlerman . Non-executive Chairman of the Board
  13. 13. Strategic Priorities in 2008 12/31/05 12/31/06 12/31/07 Non-performing Assets % of Assets 0.32% 0.29% 0.43% Non-performing Loans % of Loans 0.43% 0.38% 0.53% Disciplined Credit Risk Management Annualized Net Charge-offs* 0.20% 0.25% 0.25% Asset quality will be a primary focus in 2008. During 2007, we took steps to increase our loan loss reserves in light of Allowance % of Non-performing Loans 231% 234% 242% the slowdown in the housing sector and signs of a weakening of general economic conditions. Approximately 80% of our Allowance % of Total Loans 1.09% 0.88% 1.28% loan balances are within the Northeast United States. While we are not insulated from a downturn in the economy, we *Excludes $389.5 million of charge-offs related to the lower of cost or market valuation adjustment recorded for the balance sheet restructuring during the fourth quarter of 2006 do believe the Northeast is reasonably equipped to manage through the present economic environment. Commitment to Building Capital Ratios Sovereign Bancorp, Inc.: 12/31/05 12/31/06 We are committed to building our capital ratios over and above their already “well-capitalized” status. Over the past Tier 1 Leverage Capital 5.73% 5.89% 12 months we have taken a number of steps to strengthen our capital base in a weakening economic environment. We Tangible Equity to Tangible Assets 3.73% 3.95% restructured the balance sheet, selling over $8.0 billion of non-core assets which improved capital levels. In addition, Sovereign Bank: we suspended the common shareholder dividend to help bolster capital which conserves approximately $160 million of Tier 1 Leverage Capital 6.22% 6.54% capital in 2008. Our Board of Directors will review this policy from time to time and we are expected to resume dividend Total Risk Based Capital 10.07% 10.40% payments when industry conditions normalize. We have set an interim goal of tangible equity to tangible assets of 4.50% and believe we can reach this goal by the third quarter of 2008. Sovereign Bancorp Successful Implementation of Customer First We believe a significant revenue opportunity exists if we are better able to sell more banking services to our existing customer base and increase the rate of new customer acquisition. We know that households that have four or more products and services are three times more profitable than single service households. During 2007, we designed a robust retail banking model, named Customer First, aimed at improving our core banking revenues. As Customer First is being implemented throughout our branch network in 2008, we believe this will increase productivity and revenue run rates as well as enhance the customer experience at Sovereign. 11 Disciplined Expense Management G&A Expense to 1.79% Average Assets We are pleased that our expense reduction initiatives were completed on time and slightly better than planned, as we eliminated more than $100 million of annual operating expenses in 2007. We will continue to search for ways 1.62% 1.62% to prudently manage expenses and operate more efficiently in 2008. 2006 2007 2005
  14. 14. Financial Summary Reconcilement of Operating Earnings to Reported Earnings Financial Data at or for the Year Ended December 31 (dollars in millions, except per share data) Year Ended December 31, Balance Sheet Data 2007 2006 2005 2004 2003 2007 2006 2005 2004 2003 ($ in millions) Total assets $ 84,746 $ 89,642 $ 63,679 $ 54,489 $ 43,517 Net income as reported $ (1,349) $ 137 $ 676 $ 454 $ 402 Loans held for investment, net of allowance 56,523 54,506 43,073 36,103 25,696 (8) - - - Dividends on preferred stock (15) Loans held for sale 548 7,612 312 137 137 $ 129 $ 676 $ 454 $ 402 Net income available to common shareholders $ (1,364) Investment securities 15,142 14,878 12,557 11,547 12,619 Deposits and other customer accounts 49,916 52,385 37,978 32,556 27,344 Net income available to common shareholders $ (1,364) $ 129 Borrowings and other debt obligations 26,126 26,850 18,721 16,140 12,198 Contingently convertible trust preferred interest 25 25 21 26 expense, net of tax Stockholders’ equity 6,992 8,644 5,811 4,988 3,260 $ (1,338) $ (2.85) $ 154 $ 0.30 $ 702 $ 1.69 $ 475 $ 1.29 $ 402 $ 1.32 Net income for EPS purposes Operating Data Net income for Operating earnings EPS $ (1,338) $ (2.62) $ 154 $ 0.33 $ 702 $ 1.69 $ 454 $ 1.31 $ 402 $ 1.32 purposes Net income $ (1,349) $ 137 $ 676 $ 454 $ 402 Merger-related and integration costs 1 0.00 28 0.06 8 0.02 30 0.09 - - Net income for EPS purposes (1,364) 129 702 475 402 Provision for loan loss 31 0.06 200 0.43 - - 4 0.01 - - Operating earnings for EPS purposes 539 692 716 551 421 Loss on economic hedge - - 7 0.02 - - - - - - Net interest income $ 1,864 $ 1,822 $ 1,632 $ 1,437 $ 1,228 Restructuring of balance sheet - - 198 0.42 - - 43 0.12 19 0.06 Total fees and other income before securities transactions 531 598 591 468 456 Restructuring charges 40 0.08 51 0.11 3 0.01 - - - - (176) (312) 12 14 66 Net gain (loss) on investment securities Impairment charge for FNMA and FHLMC 116 0.23 44 0.09 - - 21 0.06 - - Net revenue $ 2,219 $ 2,107 $ 2,235 $ 1,919 $ 1,750 preferred stock Proxy and professional fees - - 9 0.02 4 0.01 - - - - Provision for credit losses $ 408 $ 484 $ 90 $ 127 $ 162 Goodwill impairment 1,577 3.08 - - - - - - - - G&A expense 1,346 1,290 1,089 943 852 ESOP expense related to freezing of plan 40 0.08 - - - - - - - - 1,875 314 163 236 158 Other expense Hedge loss on sale of multifamily loans (4) (0.01) - - - - - - - - Net expense $ 3,629 $ 2,088 $ 1,342 $ 1,306 $ 1,172 0.15 - - - - - - - - Writedown on correspondent home equity loans 76 Sovereign Bancorp Per Share Data 539 $ 1.05 $ 692 $ 1.48 $ 716 $ 1.72 $ 551 $ 1.59 $ 421 $ 1.38 Operating earnings for EPS purposes $ Basic earnings per share $ (2.85) $ 0.30 $ 1.77 $ 1.34 $ 1.38 Weighted average diluted shares for GAAP EPS 479 434 416 368 305 Diluted earnings per share (2.85) 0.30 1.69 1.29 1.32 Adjustment to share count (1) 34 - (23) - 33 Operating earnings per share 1.05 1.48 1.72 1.59 1.38 Adjusted weighted average diluted shares 468 416 345 305 512 for operating EPS Dividends declared per common share 0.32 0.30 0.17 0.12 0.10 Common book value 14.12 17.83 15.46 13.74 10.59 (1) In 2006 and 2007 for operating EPS purposes we have added back diluted shares not factored into GAAP diluted shares. Operating earnings and operating earnings per share for 2004 exclude the impact of adopting EITF04-8. Performance Statistics 12 Return on average assets -1.62% 0.17% 1.11% 0.90% 0.97% Non-GAAP Financial Measures: This report contains financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Sovereign’s Operating return on average assets 0.65% 0.87% 1.18% 1.09% 1.02% management uses the non-GAAP measures of Operating Earnings, and the related per share amount, in its analysis of the Company’s performance. Operating Return on average equity -15.40% 1.82% 11.92% 10.74% 13.41% earnings for EPS purposes represents net income excluding the after-tax effects of certain items, such as significant gains or losses that are unusual in nature or are Operating return on average equity 6.16% 9.20% 12.62% 13.05% 14.04% associated with acquiring or integrating businesses and certain other charges. Since certain of these items and their impact on Sovereign’s performance are difficult to predict, management believes presentations of financial measures excluding the impact of these items provide useful supplemental information in evaluating the Return on average tangible equity -40.59% 4.46% 24.52% 19.54% 27.20% operating results of Sovereign’s core businesses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are Operating return on average tangible equity 16.23% 22.55% 25.97% 23.74% 25.31% they necessarily comparable to non-GAAP performance measures that may be presented by other companies. The above table reconciles GAAP earnings to Operating earnings for EPS purposes. Net interest margin 2.73% 2.75% 3.17% 3.31% 3.42% Forward Looking Statements: Net charge-offs/average loans 0.25% 0.96% 0.20% 0.36% 0.55% Certain portions of this Annual Report contain various forward-looking statements. Please refer to page 3 of the Form 10-K for a discussion of the various factors that could Efficiency ratio 56.20% 53.33% 49.00% 50.33% 51.31% adversely affect the future results – causing them to differ materially from those expressed herein.
  15. 15. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 | FORM 10-K R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, for the fiscal Indicate by check mark whether the registrant is a well-known year ended December 31, 2007, or seasoned issuer, as defined in Rule 405 of the Securities Act. Yes R No £ £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, for If this report is an annual or transition report, indicate by check mark the transition period from N/A to ____________. if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes £ No R Commission File Number 001-16581 Indicate by check mark whether the Registrant (1) has filed all SOVEREIGN BANCORP INC. , reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such (Exact name of Registrant as specified in its charter) shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £ PENNSylVANIA 23-2453088 Indicate by check mark if disclosure of delinquent filers pursuant to (State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) Item 405 of Regulation S-K is not contained herein, and will not be 1500 MARkET STREET, PHIlADElPHIA, PENNSylVANIA 19102 contained, to the best of Registrant’s knowledge, in definitive proxy (Address of Principal Executive Offices) (Zip Code) or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £ (267) 256-8601 Registrant’s Telephone Number Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule SECURITIES REGISTERED PURSUANT TO SECTION 12(B) Of THE ACT: 12b-2 of the Act): Large accelerated filer R Accelerated filer £ Non-accelerated filer £ Smaller reporting company £ Name of Indicate by check mark whether the Registrant is a shell company (as Exchange on defined in Rule 12b-2 of the Exchange Act). Yes £ No R Title Which Registered The aggregate market value of the shares of Common Stock Common stock, no par value NYSE of the Registrant held by nonaffiliates of the Registrant was Depository Shares for Series C non-cumulative preferred stock NYSE $10,094,102,958 at June 30, 2007. As of February 14, 2008, the 7.75% Capital Securities (Sovereign Capital Trust V) NYSE Registrant had 481,772,254 shares of Common Stock outstanding. 8.50% Cumulative Trust Preferred Securities (Seacoast Capital Trust I) NASDAQ SECURITIES REGISTERED PURSUANT TO SECTION 12(G) Of THE ACT: (Sovereign Capital Trust IV) PIERS Units Sovereign Bancorp | 1
  16. 16. fORM 10 – k CROSS REfERENCE INDEX PAGE fORWARD-lOOkING STATEMENTS ........................................................................................................................................................................................................ 3 PART I Item 1 Business ........................................................................................................................................................................................................................... 4-8 Item 1A Risk Factors ...................................................................................................................................................................................................................... 8-10 Item 1B Unresolved Staff Comments ................................................................................................................................................................................................ 10 Item 2 Properties .......................................................................................................................................................................................................................... 10 Item 3 Legal Proceedings .............................................................................................................................................................................................................. 10 Item 4 Submission of Matters to a Vote of Security Holders .............................................................................................................................................................. 11 Item 4A Executive Officers of the Registrant ...................................................................................................................................................................................... 11 PART II Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities..................................................................... 12 Item 6 Selected Financial Data ...................................................................................................................................................................................................... 13 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................................................................................................... 14-56 Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................................................................................................................................... 56 Item 8 Financial Statements and Supplementary Data ..................................................................................................................................................................... 56-121 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................................................................................ 122 Item 9A Controls and Procedures ...................................................................................................................................................................................................... 122 Item 9B Other Information ............................................................................................................................................................................................................... 122 PART III Item 10 Directors, Executive Officers and Corporate Governance ......................................................................................................................................................... 123 Item 11 Executive Compensation ..................................................................................................................................................................................................... 123 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........................................................................................ 123-128 Item 13 Certain Relationships and Related Transactions, and Director Independence ........................................................................................................................... 128 Item 14 Principal Accountant Fees and Services ............................................................................................................................................................................... 128 PART IV Item 15 Exhibits and Financial Statement Schedules ......................................................................................................................................................................... 129-131 Signatures ......................................................................................................................................................................................................................................... 132 2 | Sovereign Bancorp
  17. 17. fORWARD – lOOkING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Sovereign Bancorp, Inc. (“Sovereign” or the “Company”). Sovereign may from time to time make forward-looking statements in Sovereign’s filings with the Securities and Exchange Commission (the “SEC” or the “Commission”) (including this Annual Report on Form 10-K and the Exhibits hereto), in its reports to shareholders (including its 2007 Annual Report) and in other communications by Sovereign, which are made in good faith by Sovereign, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the statements made by Sovereign, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” anticipate,” “estimate,” “intend,” “plan,” “strive,” “hopefully,” “try,” “assume” or similar expressions constitute forward-looking statements. These forward-looking statements include statements with respect to Sovereign’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of Sovereign. Although Sovereign believes that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors (some of which are beyond Sovereign’s control). Among the factors, which could cause Sovereign’s financial performance to differ materially from that expressed in the forward-looking statements are: the strength of the United States economy in general and the strength of the regional and local economies in which Sovereign conducts operations; n the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; n inflation, interest rate, market and monetary fluctuations; n adverse changes in the securities markets, including those related to the financial condition of significant issuers in our investment portfolio; n revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs; n changing market conditions may force us to alter the implementation or continuation of cost savings or revenue enhancement strategies; n Sovereign’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; n the willingness of customers to substitute competitors’ products and services and vice versa; n the ability of Sovereign and its third party vendors to convert and maintain Sovereign’s data processing and related systems on a timely and acceptable basis and within projected cost estimates; n the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, n securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles in the United States; technological changes; n competitors of Sovereign may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than Sovereign; n changes in consumer spending and savings habits; n acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters; n regulatory or judicial proceedings; n changes in asset quality; n the outcome of ongoing tax audits by federal, state and local income tax authorities may require additional taxes be paid by Sovereign as compared to what has been accrued or paid n as of period end. Sovereign’s success in managing the risks involved in the foregoing. n If one or more of the factors affecting Sovereign’s forward-looking information and statements proves incorrect, then its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, Sovereign cautions you not to place undue reliance on any forward-looking information and statements. The effect of these factors is difficult to predict. New factors emerge from time to time and we cannot assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward looking statement. Any forward looking statements only speak as of the date of this document. Sovereign does not intend to update any forward-looking information and statements, whether written or oral, to reflect any change. All forward-looking statements attributable to Sovereign are expressly qualified by these cautionary statements. Sovereign Bancorp | 3
  18. 18. PART I Item 1 — Business General Sovereign is the parent company of Sovereign Bank (“Sovereign Bank” or “the Bank”), a federally chartered savings bank. Sovereign had approximately 750 community banking offices, over 2,300 ATMs and about 12,000 team members as of December 31, 2007 with principal markets in the Northeastern United States. Sovereign’s primary business consists of attracting deposits from its network of community banking offices, and originating small business and middle market commercial loans, multi-family loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans in the communities served by those offices. Sovereign is a Pennsylvania business corporation and its principal executive offices are located at 1500 Market Street, Philadelphia, Pennsylvania. Sovereign Bank is headquartered in Wyomissing, Pennsylvania, a suburb of Reading, Pennsylvania. Sovereign was incorporated in 1987 as a holding company for Sovereign Bank. Sovereign Bank was created in 1984 under the name Penn Savings Bank, F.S.B. through the merger of two financial institutions with market areas primarily in Berks and Lancaster counties, Pennsylvania. Sovereign Bank assumed its current name on December 31, 1991. Sovereign has acquired 28 financial institutions, branch net- works and/or related businesses since 1990. Eighteen of these acquisitions, with assets totaling approximately $52 billion, have been completed since 1995. Sovereign’s latest acquisition was Independence Community Bank Corp. (“Independence”) effective June 1, 2006 for $42 per share in cash, representing an aggregate transaction value of $3.6 billion. Sovereign funded this acquisition using the proceeds from the $2.4 billion equity offering to Banco Santander Central Hispano (“Santander”), net proceeds from issuances of perpetual and trust preferred securities, and cash on hand. Sovereign issued 88.7 mil- lion shares to Santander, in connection with the equity offering which made Santander Sovereign’s largest shareholder. Independence was headquartered in Brooklyn, New York, had assets which totaled $17 billion and deposits of $11 billion and 125 community banking offices in the five boroughs of New York City, Nassau and Suffolk Counties and New Jersey. Sovereign acquired Independence to connect their Mid-Atlantic geographic footprint to New England and create new markets in certain areas of New York. Business Strategy Sovereign believes that as a result of continuing consolidation in the financial services industry, there is an increasing need for a super-community bank in the Northeastern United States. Sovereign considers a super-community bank to be a bank with the size and range of commercial, business and consumer products to compete with larger institutions, but with the orientation to relationship banking and personalized service usually found at smaller community banks. We believe that our institution has these characteristics. Subsidiaries Sovereign had three direct consolidated wholly-owned subsidiaries at December 31, 2007: Sovereign Bank is the only material subsidiary. Employees At December 31, 2007, Sovereign had 10,427 full-time and 1,549 part-time employees. None of these employees are represented by a collective bargaining agreement, and Sovereign believes it enjoys good relations with its personnel. Competition Sovereign is subject to substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits include the ability to offer attractive rates, the convenience of office locations, and the availability of alternate channels of distribution. Direct competition for deposits comes primarily from national and state banks, thrift institutions, and broker dealers. Competition for deposits also comes from money market mutual funds, corporate and government securities, and credit unions. The primary factors driving commercial and consumer competition for loans are interest rates, loan origination fees, service levels and the range of products and services offered. Competition for origination of loans normally comes from other thrift institutions, national and state banks, mortgage bankers, mortgage brokers, finance companies, and insurance companies. 4 | Sovereign Bancorp
  19. 19. Environmental Laws Environmentally related hazards have become a source of high risk and potentially significant liability for financial institutions relative to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, Sovereign Bank may require an environmental examination of, and report with respect to, the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration the potential loss to the institution in relation to the burdens to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the costs of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter a prospective borrower from entering into a loan transaction with Sovereign Bank. Sovereign is not aware of any borrower who is currently subject to any environmental investigation or clean up proceeding that is likely to have a material adverse effect on the financial condition or results of operations of the Company. Supervision and Regulation General. Sovereign is a “savings and loan holding company” registered with the Office of Thrift Supervision (“OTS”) under the Home Owners’ Loan Act (“HOLA”) and, as such, Sovereign is subject to OTS oversight and reporting with respect to certain matters. Sovereign Bank is chartered as a federal savings bank, and is highly regulated by the OTS as to all its activities, and subject to extensive OTS examination, supervision, and reporting. Sovereign Bank is required to file reports with the OTS describing its activities and financial condition and is periodically examined to test compliance with various regulatory requirements. The deposits of Sovereign Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”). Sovereign Bank is also subject to examination by the FDIC. Such examinations are conducted for the purpose of protecting depositors and the insurance fund and not for the purpose of protecting holders of equity or debt securities of Sovereign or Sovereign Bank. Sovereign Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, Boston and New York, which are part of the twelve regional banks comprising the FHLB system. Sovereign Bank is also subject to regulation by the Board of Governors of the Federal Reserve System with respect to reserves maintained against deposits and certain other matters. As a result of the investment in Sovereign by Santander in May, 2006 as described below under “Control of Sovereign,” Sovereign is also now considered a subsidiary of a bank holding company for purposes of the Bank Holding Company Act of 1956, as amended. As such, Sovereign is prohibited from engaging in any activity, directly or through a subsidiary, that is not permissible for subsidiaries of bank holding companies. Generally, financial activities are permissible, while commercial and industrial activities are not. Holding Company Regulation. The HOLA prohibits a registered savings and loan holding company from directly or indirectly acquiring control, including through an acquisition by merger, consolidation or purchase of assets, of any savings association (as defined in HOLA to include a federal savings bank) or any other savings and loan holding company, without prior OTS approval. Generally, a savings and loan holding company may not acquire more than 5% of the voting shares of any savings association unless by merger, consolidation or purchase of assets. Federal law empowers the Director of the OTS to take substantive action when the Director determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of any particular activity constitutes a serious risk to the financial safety, soundness or stability of a savings and loan holding company’s subsidiary savings institution. Specifically, the Director of the OTS may, as necessary, (i) limit the payment of dividends by the savings institution; (ii) limit transactions between the savings institution, the holding company and the subsidiaries or affiliates of either; (iii) limit any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Any such limits could be issued in the form of a directive having the legal efficacy of a cease and desist order. Because Sovereign is also considered a subsidiary of Santander for Bank Holding Company Act purposes, Santander may be required to obtain approval from the Federal Reserve if Sovereign were to acquire shares of any depository institution (bank or savings institution) or any holding company of a depository institution. In addition, Santander may have to provide notice to the Federal Reserve if Sovereign acquires any financial entity that is not a depository institution, such as a lending company. Control of Sovereign. Under the Savings and Loan Holding Company Act and the related Change in Bank Control Act (the “Control Act”), individuals, corporations or other entities acquiring Sovereign common stock may, alone or together with other investors, be deemed to control Sovereign and thereby Sovereign Bank. If deemed to control Sovereign, such person or group will be required to obtain OTS approval to acquire Sovereign’s common stock and could be subject to certain ongoing reporting procedures and restrictions under federal law and regulations. Ownership of more than 10% of the capital stock may be deemed to constitute “control” if certain other control factors are present. Sovereign Bancorp | 5

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