EX-99.1 2 sb8585ex991.txt EXHIBIT 99.1 Exhibit 99.1 SOVEREIGN BANCORP, INC. ANNOUNCES FOURTH QUARTER AND FULL YEAR 2006 EARNINGS PHILADELPHIA, Jan. 17 /PRNewswire-FirstCall/ -- Sovereign Bancorp, Inc. ("Sovereign") (NYSE: SOV), parent company of Sovereign Bank ("Bank"), today reported for the year ended December 31, 2006 net income of $137 million, or $.30 per share as compared to $676 million, or $1.69 per diluted share, in 2005. Net income in 2006 included the seven-month impact of the acquisition of Independence Community Bancorp, Inc. ("Independence"), which closed in the second quarter of 2006. Also included in 2006 net income were other various charges, including charges related to the recently announced expense reduction initiative and balance sheet restructuring as well as merger charges and additional provision for credit losses related to the Independence acquisition. The charges related to the balance sheet restructuring and expense management initiatives reflect a strategic shift away from wholesale revenues and increased emphasis on improving results in Sovereign's core consumer and commercial businesses. All charges are detailed in the financial tables included in this release. For the fourth quarter of 2006, Sovereign reported a net loss of $129 million, or $(.28) per share, as compared to net income of $165 million, or $.42 per diluted share, for the fourth quarter of 2005. Net income in the fourth quarter of 2006 included an additional provision for credit losses of $192 million after-tax, or $.38 per share, related to the sale of correspondent home equity loans; balance sheet restructuring charges of $42.9 million after-tax, or $.08 per share; severance and restructuring charges of $51.1 million after-tax, or $.10 per share; and merger and integration charges of $6.9 million after-tax, or $.01 per share. Net income in the fourth quarter of 2005 included charges related to proxy and related professional fees of $3.8 million after-tax, or $.01 per share. Effective in the third quarter of 2006, Sovereign refined its definition of operating earnings and related per share amounts to now include the amortization of intangible assets. Sovereign believes this definition is more commonly used in the investment community and will ease comparability of its results with other financial institutions. A reconciliation of net income to operating earnings, as well as the related earnings per share amounts, is included in a later section of this release. Operating earnings for EPS purposes were $692 million, or $1.48 per diluted share, in 2006 as compared to $716 million, or $1.72 per diluted share, in 2005. Operating earnings in 2006 excluded the above-mentioned charges. In 2005, operating earnings excluded after-tax charges related to mergers and acquisitions, restructuring charges and proxy and related professional fees. For the quarter ended December 31, 2006, Sovereign's operating earnings for EPS purposes were $167 million, or $.33 per diluted share, which excluded the charges mentioned above, as compared to $176 million, or $.43 per diluted share a year ago, which also excluded the above-mentioned charges. Commenting on results for the full year 2006 and the fourth quarter of 2006, Joseph P. Campanelli, Sovereign's President and CEO, stated, "Last month we announced expense reduction initiatives and a balance sheet restructuring which we believe are major steps toward achieving the goals announced in October to aggressively reduce costs, strengthen our capital position, improve the customer experience and re-present our company to investors through better communications. While these steps will enhance the quality of our balance sheet and improve the quality of our earnings going forward, a number of large charges were recorded during the fourth quarter as a result of these steps, distorting our fourth quarter and full year 2006 financial results. We believe, however, that these steps reposition Sovereign for sustainable growth in core earnings in the future." Net Interest Income and Margin For the fourth quarter of 2006, Sovereign reported net interest income of $487 million as compared to $403 million in the fourth quarter of 2005. Sovereign's average loan balance, including acquisitions and loans held-for- sale, increased by $19.9 billion over last year and about $950 million on a linked quarter basis to $63.4 billion. The period end loan portfolio decreased by approximately $590 million from third quarter levels, reflecting the sale of approximately $455 million of multi-family loans that settled during the quarter and planned runoff in home equity and residential mortgage loans. This decrease was partially offset by strong commercial loan growth. Sovereign's average core deposits, including acquisitions, increased $8.8 billion over last year and decreased $591 million linked quarter to $36.9 billion, driven by reductions in higher-cost categories. Period-end core deposit balances increased $290 million during the quarter to $36.3 billion, reflecting an annualized growth rate of 3.2%, while time deposits decreased $689 million from the previous quarter to $16.1 billion. Net interest margin was 2.60% for the fourth quarter of 2006 as compared to 2.64% in the third quarter of 2006 and 3.01% in the fourth quarter of 2005. The decline in net interest margin reflects the continued impact of an inverted yield curve and a shift in deposit mix to higher cost categories. The yield on interest earning assets expanded 2 basis points during the quarter while total funding costs expanded 10 basis points during the same period. As previously announced on December 21, 2006, Sovereign has taken steps to reduce the contribution of wholesale earnings to its results by selling loans and reducing wholesale borrowings and brokered money market accounts. Approximately $7.2 billion of loan sales are expected to settle throughout the first quarter of 2007; these loans have been transferred to held-for-sale and recorded at the lower of cost or market value as of December 31, 2006. Sovereign also expects to sell an additional $1.5 billion of multi-family loans and record a non-recurring gain in the first quarter of 2007. Non-Interest Income Total fees and other income before security gains totaled $149 million for the fourth quarter of 2006, down from $160 million a year ago. Included in the period's results were $23.0 million of net special charges that are discussed later in this release; excluding these items, non-interest income increased 7.8% from a year ago. Consumer and commercial banking fees increased 9.3% from a year ago, primarily a result of the Independence acquisition, and were relatively unchanged from the third quarter of 2006. Mortgage banking revenues for the quarter were a loss of $7.6 million, compared to gains of $14.3 million last quarter and $26.5 million in the same quarter a year ago. These losses were driven by two special items - a loss of $28.2 million related to $2.9 billion of residential mortgage loans transferred to held-for-sale, partially offset by a $5.2 million gain related to the sale of approximately $455 million of multi-family loans. Additionally, due to changes in prepayment speeds and interest rates during the quarter, a $3.5 million impairment charge to increase the valuation reserve for mortgage servicing rights was recorded. During the quarter, Sovereign recognized a net loss on securities of $36.0 million, which includes a $43.0 million loss related to $1.5 billion of investment securities that were sold and reinvested during the fourth quarter of 2006 as part of the balance sheet restructuring. This compares to a gain of $29.2 million in the third quarter of 2006 and a net loss on securities of $1.3 million a year ago. Non-Interest Expense G&A expenses were $355 million for the fourth quarter of 2006, up $3.1 million or 3.5% annualized from the third quarter of 2006, primarily due to increased marketing and legal costs. G&A expenses to average assets were 1.56% for the quarter, compared to 1.55% in the third quarter of 2006 and 1.76% a year ago. Due to the aforementioned net interest margin compression and special charges impacting mortgage banking revenues, Sovereign's efficiency ratio increased to 55.8% during the quarter versus 50.0% a year ago. Sovereign has begun to implement several expense reduction initiatives that were previously announced on December 15, 2006. In total Sovereign has identified approximately $100 million of cost reductions and anticipates that $80 million of these reductions will be reflected in the 2007 expense base. Sovereign anticipates realizing 75% of the $100 million savings on a run rate basis by the end of the second quarter of 2007 and 100% by the end of 2007. Fourth Quarter Charges Several charges are reflected in Sovereign's financial statements this quarter. These charges relate to the recently announced cost cutting and balance sheet restructuring program, the recent retirement of certain executives from the Company, and the Independence acquisition. Management believes that these events are unusual in nature, and therefore has excluded these charges from its operating earnings definition in order for analysts and investors to obtain a clearer picture of Sovereign's earnings stream going forward. Because these charges impact several categories of Sovereign's income statement, the following table highlights which items management has designated as special charges, and where these charges are reflected: Income Statement Pre-tax Line Item (Charge)/Benefit Explanation Balance Sheet Restructuring Gain/(Loss): Provision for $(296) million Charge related to sale of $4.5 Credit Losses billion correspondent home equity portfolio Mortgage Banking $(28.2) million Charge related to sale of $2.9 Revenue billion residential mortgage loans $5.2 million Gain on sale of $455 million multi-family loans Net gain/(loss) on $(43.0) million Loss on sale of $1.5 billion sale of investments investment securities Expense Reduction Initiative and Independence Acquisition Charges: Other Expense $(46.5) million Executive management severance charges $(32.2) million Reduction in workforce and other restructuring charges $(10.6) million Merger and integration charges related to Independence Additionally, net charge-offs were impacted by the balance sheet restructuring as follows: Net Charge-offs $(389.6) million $382.5 million net charge-off related to sale of $4.5 billion correspondent home equity portfolio $7.1 million net charge-off related to sale of $2.0 billion residential mortgage loans Asset Quality Recent strategic decisions to reduce exposures to wholesale assets impacted certain credit quality statistics for the quarter. Annualized net charge-offs were 2.75% of average loans for the fourth quarter, compared to .23% in the third quarter of 2006 and .21% a year ago. In dollars, net charge-offs were $436.0 million in the fourth quarter versus $35.3 million in the third quarter and $23.2 million a year ago. Included in net charge-offs during the quarter were the credit charges related to $4.5 billion of correspondent home equity loans and $2.9 billion of residential mortgage loans, in the amount of $382.5 million and $7.1 million, respectively. Excluding these special charges, net charge-offs were .29% of average loans. Also included during the fourth quarter were $13.0 million of charge-offs related to the correspondent home equity portfolio prior to its held-for-sale designation and a $14.0 million charge-off related to one commercial credit, which in total impacted the fourth quarter net charge-off rate by 17 basis points. Non-performing loans to total loans held for investment decreased two basis points from third quarter levels to .35%. Non-performing loans decreased by $38.9 million from last quarter to $193.9 million. The allowance for credit losses to non-performing loans was 251% at December 31, 2006, as compared to 240% at September 30, 2006 and 231% at December 31, 2005. Sovereign's provision for credit losses was $366 million this quarter, compared to $45.0 million in the third quarter of 2006 and $26.0 million in the fourth quarter of 2005. As discussed earlier, the provision for credit losses was higher during the recent quarter by $296 million due to special charges related to the pending sale of the correspondent home equity portfolio. Capital Sovereign's capital ratios at December 31, 2006 reflect the charges related to the balance sheet restructuring and expense reduction initiative; however, the reduction in Sovereign's total assets will not be reflected until the loan sales settle in the first quarter of 2007. Sovereign's Tier 1 leverage ratio was 5.73% at December 31, 2006. Tangible equity to tangible assets, which includes preferred stock, was 3.78% excluding other comprehensive income ("OCI") and was 3.73% including OCI. Tangible common equity to tangible assets, excluding other comprehensive income ("OCI") was 3.55% and including OCI was 3.50%. The equity to assets ratio was 9.65% at December 31, 2006. Sovereign Bank's Tier 1 leverage ratio was 6.21% and the Bank's total risk-based capital ratio was 10.08% at December 31, 2006. About Sovereign Sovereign Bancorp, Inc., ("Sovereign") (NYSE: SOV), the parent company of Sovereign Bank, is a $90 billion financial institution with nearly 800 community banking offices, over 2,000 ATMs and approximately 12,000 team members with principal markets in the Northeast United States. 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. Sovereign is the 17th largest banking institution in the United States. For more information on Sovereign Bank, visit http://www.sovereignbank.com or call 1-877-SOV-BANK. Investors, analysts and other interested parties will have the opportunity to listen to a live web-cast of Sovereign's Fourth Quarter 2006 earnings call on Thursday, January 18 beginning at 8:00 a.m. ET at http://www.sovereignbank.com >Investor Relations >News >Conference Calls/Webcasts; or http://phx.corporate-ir.net/phoenix.zhtml?p=irol- eventDetails&c=67999&eventID=1454100. International parties are invited to dial into the conference call at 706-679-7706. The webcast and replay can be accessed anytime from 8:00 a.m. ET on Thursday, January 18, 2007 through 12:00 a.m. ET on April 18, 2007. Questions may be submitted during the call via email accessible from Sovereign Bancorp's broadcast and Investor Relations sites. A telephone replay will be accessible from 11:00 a.m. ET on Thursday, January 18, 2007 through 12:00 a.m. ET (midnight) on Monday, January 29, 2007 by dialing 1-800-642-1687, confirmation id #5934673. Note: This press release contains financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Sovereign's management uses the non-GAAP measure of Operating Earnings, and the related per share amount, in their analysis of the company's performance. This measure, as used by Sovereign, adjusts net income determined in accordance with GAAP to exclude the effects of special items, including significant gains or losses that are unusual in nature or are associated with acquiring and integrating businesses. Operating earnings for 2005 and 2006 EPS purposes represent net income adjusted for the after-tax effects of merger-related and integration charges, certain restructuring charges, other-than-temporary impairment charges on Fannie Mae and Freddie Mac preferred equity securities and proxy and related professional fees. 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 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 they necessarily comparable to non-GAAP performance measures that may be presented by other companies. This press release contains statements of Sovereign's strategies, plans, and objectives, as well as estimates of financial condition, operating and cash efficiencies and revenue generation. These statements and estimates constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; Sovereign's ability in connection with any acquisition to complete such acquisition and to successfully integrate assets, liabilities, customers, systems and management personnel Sovereign acquires into its operations and to realize expected cost savings and revenue enhancements within expected time frame; the possibility that expected one time merger-related charges are materially greater than forecasted or that final purchase price allocations based on the fair value of acquired assets and liabilities and related adjustments to yield and/or amortization of the acquired assets and liabilities at any acquisition date are materially different from those forecasted; other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, integrations, pricing, products and services; and acts of God, including natural disasters. Sovereign Bancorp is followed by several market analysts. Please note that any opinions, estimates, forecasts, or predictions regarding Sovereign Bancorp's performance or recommendations regarding Sovereign's securities made by these analysts are theirs alone and do not represent opinions, estimates, forecasts, predictions or recommendations of Sovereign Bancorp or its management. Sovereign Bancorp does not by its reference to any analyst opinions, estimates, forecasts regarding Sovereign's performance or recommendations regarding Sovereign's securities imply Sovereign's endorsement of or concurrence with such information, conclusions or recommendations. Sovereign Bancorp, Inc. and Subsidiaries FINANCIAL HIGHLIGHTS (unaudited)
Quarter Ended ----------------------------------------------------------- (dollars in millions, except Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 per share data) 2006 2006 2006 2006 2005 ----------------------------------- --------- --------- --------- --------- --------- Operating Data Net income (loss) $ (129.4) $ 184.0 $ (59.1) $ 141.4 $ 165.5 Net income (loss) for EPS purposes (133.1) 188.5 (61.5) 147.7 171.8 Operating earnings for EPS purposes (1) 166.6 207.0 163.2 155.2 175.6 Net interest income 487.0 491.8 438.8 404.0 403.2 Provision for credit losses (6) 366.0 45.0 44.5 29.0 26.0 Total fees and other income before securities transactions (7) 149.4 171.9 142.0 134.3 159.9 Net gain (loss) on investment securities (8) (36.1) 29.2 (305.0) 0.0 (1.3) G&A expense 354.9 351.8 303.3 280.0 281.8 Other expenses (9) 134.5 75.3 58.9 44.8 40.0 Performance Statistics Bancorp Net interest margin 2.60% 2.64% 2.86% 3.00% 3.01% Return on average assets -0.57% 0.81% -0.32% 0.90% 1.03% Operating return on average assets (1) 0.73% 0.91% 0.89% 0.98% 1.10% Return on average equity -5.82% 8.47% -3.54% 9.72% 11.49% Operating return on average equity (1) 7.49% 9.52% 9.77% 10.68% 12.20% Return on average tangible equity -15.54% 23.72% -8.16% 19.29% 23.67% Operating return on average tangible equity (1) 20.00% 26.68% 22.54% 21.18% 25.12% Annualized net loan charge-offs to average loans (10) 2.75% 0.23% 0.23% 0.26% 0.21% G & A expense to average assets 1.56% 1.55% 1.66% 1.77% 1.76% Efficiency ratio (3) 55.77% 53.01% 52.22% 52.01% 50.04% Per Share Data Basic earnings (loss) per share (2) $ (0.28) $ 0.39 $ (0.15) $ 0.38 $ 0.44 Diluted earnings (loss) per share (2) (0.28) 0.37 (0.15) 0.36 0.42 Operating earnings per share (1) (2) 0.33 0.41 0.37 0.38 0.43 Dividend declared per share 0.080 0.080 0.080 0.060 0.060 Common book value (4) 17.83 18.07 17.50 16.42 16.21 Common stock price: High $ 25.90 $ 21.60 $ 21.76 $ 21.53 $ 22.37 Low 21.27 20.07 20.19 19.57 19.65 Close 25.39 21.51 20.31 20.87 20.59 Weighted average common shares: (2) Basic 473.4 472.4 412.0 376.9 375.6 Diluted (5) 473.4 506.1 412.0 410.4 409.6 End-of-period common shares: Basic 473.8 472.6 471.8 359.3 358.4 Diluted 508.7 506.5 505.5 391.1 390.5
NOTES: (1) Operating earnings represent net income excluding the after-tax effects of certain items, such as significant gains or losses that are unusual in nature or are associated with acquiring or integrating businesses, and certain other charges. See page H and I for a reconciliation of GAAP and Non-GAAP measures. (2) Prior period earnings per share and weighted average common shares have been restated to reflect the 5% stock dividend paid to shareholders of record on June 15, 2006. (3) Efficiency ratio equals general and administrative expense as a percentage of total revenue, defined as the sum of net interest income and total fees and other income before securities transactions. (4) Common book value equals common stockholders' equity at period-end divided by common shares outstanding. (5) Diluted and basic average common shares outstanding are the same for the fourth and second quarters of 2006 due to the net loss reported for the period. (6) The fourth quarter of 2006 includes a lower of cost or market adjustment on the correspondent home equity portfolio held for sale of $296 million. (7) The fourth quarter of 2006 includes a net lower of cost or market adjustment associated with the residential loan portfolio held for sale of $28.2 million. (8) The fourth quarter of 2006 includes a loss of $43 million associated with the sale of $1.5 billion of CMO investments. (9) The fourth quarter of 2006 includes $78.7 million of severance and restructuring charges. (10) Charge-offs for the fourth quarter of 2006 include $389.5 million of charge-offs related to the lower of cost or market valuation adjustments recorded for correspondent home equity and residential loan portfolios that are held for sale as well as a $14 million charge-off on a large commercial loan. Year to Date ------------------------ (dollars in millions, except Dec. 31 Dec. 31 per share data) 2006 2005 ---------------------------------------- ---------- ---------- Operating Data Net income (loss) $ 136.9 $ 676.2 Net income (loss) for EPS purposes 129.0 701.6 Operating earnings for EPS purposes (1) 692.0 716.2 Net interest income 1,821.6 1,632.1 Provision for credit losses (6) 484.5 90.0 Total fees and other income before securities transactions (7) 597.5 591.0 Net gain (loss) on investment securities (8) (312.0) 11.7 G&A expense 1,290.0 1,089.2 Other expenses (9) 313.5 163.4 Performance Statistics Bancorp Net interest margin 2.75% 3.17% Return on average assets 0.17% 1.11% Operating return on average assets (1) 0.87% 1.18% Return on average equity 1.82% 11.92% Operating return on average equity (1) 9.20% 12.62% Return on average tangible equity 4.46% 24.52% Operating return on average tangible equity (1) 22.55% 25.97% Annualized net loan charge-offs to average loans (10) 0.96% 0.20% G & A expense to average assets 1.62% 1.79% Efficiency ratio (3) 53.33% 49.00% Per Share Data Basic earnings (loss) per share (2) $ 0.30 $ 1.77 Diluted earnings (loss) per share (2) 0.30 1.69 Operating earnings per share (1) (2) 1.48 1.72 Dividend declared per share 0.300 0.170 Common book value (4) 17.83 16.21 Common stock price: High $ 25.90 $ 23.54 Low 19.57 19.17 Close 25.39 20.59 Weighted average common shares: (2) Basic 433.9 381.8 Diluted (5) 433.9 416.0 End-of-period common shares: Basic 473.8 358.4 Diluted 508.7 390.5 NOTES: (1) Operating earnings represent net income excluding the after-tax effects of certain items, such as significant gains or losses that are unusual in nature or are associated with acquiring or integrating businesses, and certain other charges. See page H and I for a reconciliation of GAAP and Non-GAAP measures. (2) Prior period earnings per share and weighted average common shares have been restated to reflect the 5% stock dividend paid to shareholders of record on June 15, 2006. (3) Efficiency ratio equals general and administrative expense as a percentage of total revenue, defined as the sum of net interest income and total fees and other income before securities transactions. (4) Common book value equals common stockholders' equity at period-end divided by common shares outstanding. (5) Diluted and basic average common shares outstanding are the same for the fourth and second quarters of 2006 due to the net loss reported for the period. (6) The fourth quarter of 2006 includes a lower of cost or market adjustment on the correspondent home equity portfolio held for sale of $296 million. (7) The fourth quarter of 2006 includes a net lower of cost or market adjustment associated with the residential loan portfolio held for sale of $28.2 million. (8) The fourth quarter of 2006 includes a loss of $43 million associated with the sale of $1.5 billion of CMO investments. (9) The fourth quarter of 2006 includes $78.7 million of severance and restructuring charges. (10) Charge-offs for the fourth quarter of 2006 include $389.5 million of charge-offs related to the lower of cost or market valuation adjustments recorded for correspondent home equity and residential loan portfolios that are held for sale as well as a $14 million charge-off on a large commercial loan. Sovereign Bancorp, Inc. and Subsidiaries FINANCIAL HIGHLIGHTS (unaudited)
Quarter Ended ----------------------------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 (dollars in millions) 2006 2006 2006 2006 2005 ----------------------------------- --------- --------- --------- --------- --------- Financial Condition Data: General Total assets $ 89,642 $ 90,410 $ 88,753 $ 65,060 $ 63,679 Loans held for investment 55,385 63,178 61,610 45,164 43,804 Total deposits and customer related accounts: 52,385 52,784 52,592 38,820 37,978 Core deposits and other customer related accounts 36,321 36,031 36,593 27,143 26,639 Time deposits 16,064 16,753 15,999 11,678 11,339 Borrowings 26,850 27,101 26,171 19,216 18,721 Minority interests 156 210 209 206 206 Stockholders' equity 8,644 8,734 8,451 5,900 5,811 Goodwill 5,005 4,990 4,930 2,715 2,717 Core deposit and other intangibles 498 533 633 197 214 Asset Quality (1) Non-performing assets $ 221.6 $ 273.1 $ 259.1 $ 200.5 $ 205.6 Non-performing loans $ 193.9 $ 232.8 $ 219.7 $ 183.5 $ 189.5 Non-performing assets to total assets, excluding LHS 0.27% 0.30% 0.29% 0.31% 0.32% Non-performing loans to loans held for investment 0.35% 0.37% 0.36% 0.41% 0.43% Allowance for credit losses $ 486.3 $ 558.1 $ 551.4 $ 438.5 $ 437.8 Allowance for credit losses to total loans held for investment 0.88% 0.88% 0.90% 0.97% 1.00% Allowance for credit losses to non-performing loans 251% 240% 251% 239% 231% Capitalization - Bancorp (2) Stockholders' equity to total assets 9.64% 9.66% 9.52% 9.07% 9.13% Tier 1 leverage capital ratio 5.73% 5.82% 5.69% 6.74% 6.68% Tangible equity to tangible assets, excluding OCI 3.78% 3.89% 3.73% 5.16% 5.05% Tangible common equity to tangible assets, excluding OCI 3.55% 3.66% 3.50% 5.16% 5.05% Tangible equity to tangible assets, including OCI 3.73% 3.78% 3.49% 4.81% 4.73% Tangible common equity to tangible assets, including OCI 3.50% 3.55% 3.25% 4.81% 4.73% Capitalization - Bank (2) Stockholders' equity to total assets 11.75% 11.65% 9.70% 10.59% 10.61% Tier 1 leverage capital ratio 6.21% 6.21% 6.28% 6.97% 6.84% Tier 1 risk-based capital ratio 7.52% 7.67% 7.91% 8.52% 8.21% Total risk-based capital ratio 10.08% 10.34% 10.28% 10.97% 10.66%
(1) Non-performing loans and assets at December 31, 2006 exclude $21.5 million of residential non-accrual loans and $66.0 million of home equity non-accrual loans that are classified as held for sale. (2) All capital ratios are calculated based upon adjusted end of period assets consistent with OTS guidelines. The current quarter ratios are estimated as of the date of this earnings release. Sovereign Bancorp, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (unaudited)
Dec. 31 Sept. 30 June 30 (dollars in thousands) 2006 2006 2006 ----------------------------------- -------------- -------------- -------------- Assets Cash and amounts due from depository institutions $ 1,804,117 $ 1,932,603 $ 1,714,042 Investments: Available-for-sale 13,874,628 12,821,075 12,218,168 Held-to-maturity - - - Other investments 1,003,012 1,020,723 933,507 Total investments 14,877,640 13,841,798 13,151,675 Loans: Commercial 30,472,344 29,984,325 28,999,921 Consumer 24,913,085 33,193,395 32,610,190 Total loans held for investment 55,385,429 63,177,720 61,610,111 Less allowance for loan losses (471,030) (544,482) (537,372) Total loans held for investment, net 54,914,399 62,633,238 61,072,739 Loans held for sale 7,203,167 - - Premises and equipment, net 605,707 591,601 587,254 Accrued interest receivable 422,901 413,018 375,213 Goodwill 5,005,185 4,989,539 4,929,586 Core deposit and other intangibles 498,420 532,626 632,665 Bank owned life insurance 1,725,222 1,704,955 1,686,571 Other assets 2,585,091 3,770,681 4,603,322 Total assets $ 89,641,849 $ 90,410,059 $ 88,753,067 Liabilities and Stockholders' Equity Liabilities: Deposits and other customer related accounts: Core and other customer related accounts $ 36,320,674 $ 36,030,850 $ 36,593,254 Time deposits 16,063,880 16,752,764 15,999,234 Total 52,384,554 52,783,614 52,592,488 Borrowings and other debt obligations 26,849,717 27,100,522 26,170,589 Other liabilities 1,606,794 1,582,174 1,329,383 Total liabilities 80,841,065 81,466,310 80,092,460 Minority interests 156,385 209,972 209,466 Stockholders' equity: Preferred Stock 195,445 195,445 195,445 Common Stock 6,183,281 6,166,992 6,156,925 Warrants and stock options 343,391 338,867 337,637 Unallocated ESOP shares (19,019) (21,396) (21,396) Treasury stock (49,028) (57,646) (65,984) Accumulated other comprehensive loss (24,746) (74,543) (193,186) Retained earnings 2,015,075 2,186,058 2,041,700 Total stockholders' equity 8,644,399 8,733,777 8,451,141 Total liabilities and stockholders' equity $ 89,641,849 $ 90,410,059 $ 88,753,067
Mar. 31 Dec. 31 (dollars in thousands) 2006 2005 ---------------------------------------- -------------- -------------- Assets Cash and amounts due from depository institutions $ 997,447 $ 1,131,936 Investments: Available-for-sale 7,063,492 7,258,402 Held-to-maturity 4,936,066 4,647,627 Other investments 670,353 651,299 Total investments 12,669,911 12,557,328 Loans: Commercial 17,250,897 16,635,646 Consumer 27,913,516 27,168,201 Total loans held for investment 45,164,413 43,803,847 Less allowance for loan losses (421,860) (419,599) Total loans held for investment, net 44,742,553 43,384,248 Loans held for sale - - Premises and equipment, net 408,119 412,017 Accrued interest receivable 275,343 286,300 Goodwill 2,715,217 2,716,826 Core deposit and other intangibles 196,756 213,975 Bank owned life insurance 1,027,403 1,018,125 Other assets 2,027,191 1,957,971 Total assets $ 65,059,940 $ 63,678,726 Liabilities and Stockholders' Equity Liabilities: Deposits and other customer related accounts: Core and other customer related accounts $ 27,142,655 $ 26,639,246 Time deposits 11,677,492 11,338,460 Total 38,820,147 37,977,706 Borrowings and other debt obligations 19,216,159 18,720,897 Other liabilities 917,661 963,764 Total liabilities 58,953,967 57,662,367 Minority interests 206,141 205,660 Stockholders' equity: Preferred Stock - - Common Stock 3,657,038 3,657,543 Warrants and stock options 335,717 337,346 Unallocated ESOP shares (21,396) (21,396) Treasury stock (466,328) (478,734) Accumulated other comprehensive loss (211,760) (170,798) Retained earnings 2,606,561 2,486,738 Total stockholders' equity 5,899,832 5,810,699 Total liabilities and stockholders' equity $ 65,059,940 $ 63,678,726 Sovereign Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarter Ended -------------------------------------------------------------------------- (dollars in thousands, Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 except per share data) 2006 2006 2006 2006 2005 ------------------------- ------------ ------------ ------------ ------------ ------------ Interest and dividend income: Interest on interest-earning deposits $ 6,274 $ 5,408 $ 2,954 $ 2,116 $ 2,605 Interest on investment securities Available for sale 192,084 201,766 116,653 90,095 91,163 Held to maturity 912 1,065 50,473 53,553 51,225 Other 19,508 13,287 13,016 5,603 4,971 Interest on loans 1,035,224 1,019,325 808,922 688,166 661,072 Total interest and dividend income 1,254,002 1,240,851 992,018 839,533 811,036 Interest expense: Deposits and related customer accounts 421,472 412,858 306,030 231,837 201,449 Borrowings 345,498 336,206 247,217 203,738 206,344 Total interest expense 766,970 749,064 553,247 435,575 407,793 Net interest income 487,032 491,787 438,771 403,958 403,243 Provision for credit losses (4) 365,961 45,000 44,500 29,000 26,000 Net interest income after provision for credit losses 121,071 446,787 394,271 374,958 377,243 Non-interest income: Consumer banking fees 73,389 74,298 67,467 60,798 64,696 Commercial banking fees 48,405 47,690 43,949 39,016 46,699 Mortgage banking revenue (1) (7,606) 14,329 4,524 12,992 26,501 Capital markets revenue 7,358 4,009 2,313 3,889 4,053 Bank owned life insurance income 20,237 20,116 15,359 11,327 11,398 Other 7,586 11,409 8,363 6,319 6,538 Total fees and other income before security gains 149,369 171,851 141,975 134,341 159,885 Net gain/(loss) on securities (5) (36,089) 29,154 (305,027) - (1,296) Total non- interest income 113,280 201,005 (163,052) 134,341 158,589 Non-interest expense: General and administrative Compensation and benefits 176,851 182,607 149,467 143,778 137,452 Occupancy and equipment 79,221 78,594 68,155 64,193 61,679 Technology expense 25,680 25,128 23,114 21,566 22,562 Outside services 19,920 17,928 16,592 14,755 17,174 Marketing expense 15,731 14,552 14,548 10,222 15,103 Other administrative expenses 37,496 33,009 31,417 25,465 27,828 Total general and administrative 354,899 351,818 303,293 279,979 281,798 Other expenses: Amortization of intangibles 34,302 34,092 24,225 17,219 17,766 Other minority interest expense and equity method expense 10,974 12,850 17,033 16,034 16,406 Loss on economic hedges - - 11,387 - - Proxy and related professional fees - - - 14,337 5,827 Restructuring and other employee severance charges 78,668 - - - - Merger-related and integration charges 10,558 28,403 6,257 (2,798) - Total other expenses 134,502 75,345 58,902 44,792 39,999 Total non- interest expense 489,401 427,163 362,195 324,771 321,797 Income/ (loss) before income taxes (255,050) 220,629 (130,976) 184,528 214,035 Income tax expense/ (benefit) (125,610) 36,620 (71,920) 43,130 48,540 Net income/ (loss) $ (129,440) $ 184,009 $ (59,056) $ 141,398 $ 165,495 (1) Mortgage banking activity is summarized below: Gains on sale of mortgage loans and related securities, multifamily loans, and home equity loans (2) (3) $ (7,838) $ 14,665 $ 3,136 $ 9,762 $ 22,708 Net gains/(loss) recorded under SFAS 133 821 (423) (663) 1,090 (1,039) Mortgage servicing fees, net of mortgage servicing rights amortization 2,863 3,758 2,051 2,140 914 Mortgage servicing right (impairments) /recoveries (3,452) (3,671) - - 3,918 Total mortgage banking revenues $ (7,606) $ 14,329 $ 4,524 $ 12,992 $ 26,501
(2) The results for the fourth quarter of 2005 includes a gain of $18.4 million related to the sale of $898 million and $503 million of home equity loans. (3) Fourth quarter of 2006 includes a $28.2 million lower of cost or market adjustment on the residential loans held for sale, as well as a $5.2 million gain on sale of $455 million of multi-family loans. (4) The fourth quarter of 2006 includes a lower of cost or market adjustment on the correspondent home equity portfolio held for sale of $296 million as well a $14 million commercial loan charge-off. (5) The fourth quarter of 2006 includes a loss of $43 million associated with the sale of $1.5 billion of CMO investments. Year to Date -------------------------------- (dollars in thousands, Dec. 31 Dec. 31 except per share data) 2006 2005 ---------------------------------------- -------------- -------------- Interest and dividend income: Interest on interest-earning deposits $ 16,752 $ 8,756 Interest on investment securities Available for sale 600,598 359,692 Held to maturity 106,003 189,059 Other 51,414 18,058 Interest on loans 3,551,637 2,387,022 Total interest and dividend income 4,326,404 2,962,587 Interest expense: Deposits and related customer accounts 1,372,197 624,590 Borrowings 1,132,659 705,908 Total interest expense 2,504,856 1,330,498 Net interest income 1,821,548 1,632,089 Provision for credit losses (4) 484,461 90,000 Net interest income after provision for credit losses 1,337,087 1,542,089 Non-interest income: Consumer banking fees 275,952 256,617 Commercial banking fees 179,060 149,274 Mortgage banking revenue (1) 24,239 88,117 Capital markets revenue 17,569 17,821 Bank owned life insurance income 67,039 47,285 Other 33,677 31,837 Total fees and other income before security gains 597,536 590,951 Net gain/(loss) on securities (5) (311,962) 11,713 Total non-interest income 285,574 602,664 Non-interest expense: General and administrative Compensation and benefits 652,703 538,912 Occupancy and equipment 290,163 246,993 Technology expense 95,488 84,185 Outside services 69,195 60,989 Marketing expense 55,053 52,362 Other administrative expenses 127,387 105,763 Total general and administrative 1,289,989 1,089,204 Other expenses: Amortization of intangibles 109,838 73,821 Other minority interest expense and equity method expense 56,891 67,055 Loss on economic hedges 11,387 - Proxy and related professional fees 14,337 5,827 Restructuring and other employee severance charges 78,668 3,982 Merger-related and integration charges 42,420 12,744 Total other expenses 313,541 163,429 Total non-interest expense 1,603,530 1,252,633 Income/ (loss) before income taxes 19,131 892,120 Income tax expense/ (benefit) (117,780) 215,960 Net income/ (loss) $ 136,911 $ 676,160 (1) Mortgage banking activity is summarized below: Gains on sale of mortgage loans and related securities, multifamily loans, and home equity loans (2) (3) $ 19,725 $ 78,730 Net gains/(loss) recorded under SFAS 133 825 645 Mortgage servicing fees, net of mortgage servicing rights amortization 10,812 2,798 Mortgage servicing right (impairments)/recoveries (7,123) 5,944 Total mortgage banking revenues $ 24,239 $ 88,117 (2) The results for the fourth quarter of 2005 includes a gain of $18.4 million related to the sale of $898 million and $503 million of home equity loans. (3) Fourth quarter of 2006 includes a $28.2 million lower of cost or market adjustment on the residential loans held for sale, as well as a $5.2 million gain on sale of $455 million of multi-family loans. (4) The fourth quarter of 2006 includes a lower of cost or market adjustment on the correspondent home equity portfolio held for sale of $296 million as well a $14 million commercial loan charge-off. (5) The fourth quarter of 2006 includes a loss of $43 million associated with the sale of $1.5 billion of CMO investments. Sovereign Bancorp, Inc. and Subsidiaries AVERAGE BALANCE, INTEREST AND YIELD/RATE ANALYSIS (unaudited)
Quarter Ended December 31, 2006 -------------------------------------------- Average (dollars in thousands) Balance Interest (1) Yield/Rate ------------------------------------------ ------------- ------------- ------------ Earning assets: Investment securities $ 15,546,680 $ 239,227 6.15% Loans: Commercial 24,196,553 437,496 7.18% Multi-Family 6,103,412 97,708 6.39% Consumer: Residential mortgages 17,897,922 252,415 5.64% Home equity loans and lines of credit 10,145,548 166,656 6.53% Total consumer loans secured by real estate 28,043,470 419,071 5.96% Auto Loans 4,628,603 74,578 6.39% Other 427,026 9,375 8.71% Total Consumer 33,099,099 503,024 6.06% Total loans 63,399,064 1,038,228 6.52% Allowance for loan losses (544,425) Total earning assets 78,401,319 $ 1,277,455 6.49% Other assets 11,743,219 Total assets $ 90,144,538 Funding liabilities: Deposits and other customer related accounts: NOW accounts $ 6,807,893 $ 26,160 1.53% NOW accounts - government & wholesale 3,977,652 51,616 5.15% Customer repurchase agreements 1,499,900 17,953 4.75% Savings accounts 4,755,332 7,722 0.64% Money market accounts 12,688,091 122,362 3.83% Core and other customer related accounts 29,728,868 225,813 3.01% Time deposits 16,469,164 195,659 4.71% Total 46,198,032 421,472 3.62% Borrowings: Wholesale borrowings 21,523,167 267,556 4.95% Other borrowings 5,389,251 77,942 5.76% Total borrowings 26,912,418 345,498 5.12% Total funding liabilities 73,110,450 766,970 4.17% Non-interest bearing DDA 6,596,008 Other liabilities 1,621,142 Total liabilities 81,327,600 Stockholders' equity 8,816,938 Total liabilities and stockholders' equity $ 90,144,538 Net interest income $ 510,485 Interest rate spread 2.32% Contribution from interest free funds 0.28% Net interest margin 2.60%
(1) Tax equivalent basis
Quarter Ended September 30, 2006 -------------------------------------------- Average (dollars in thousands) Balance Interest (1) Yield/Rate ------------------------------------------ ------------- ------------- ------------ Earning assets: Investment securities $ 15,886,584 $ 241,045 6.06% Loans: Commercial 23,034,009 419,552 7.24% Multi-Family 6,184,739 95,298 6.16% Consumer: Residential mortgages 17,860,553 256,417 5.74% Home equity loans and lines of credit 10,519,717 173,914 6.59% Total consumer loans secured by real estate 28,380,270 430,331 6.05% Auto Loans 4,394,903 66,220 5.98% Other 451,333 10,296 9.05% Total Consumer 33,226,506 506,847 6.08% Total loans 62,445,254 1,021,697 6.52% Allowance for loan losses (537,690) Total earning assets 77,794,148 $ 1,262,742 6.47% Other assets 12,160,105 Total assets $ 89,954,253 Funding liabilities: Deposits and other customer related accounts: NOW accounts $ 6,526,816 $ 22,218 1.33% NOW accounts - government & wholesale 4,328,149 58,034 5.32% Customer repurchase agreements 1,273,055 15,230 4.75% Savings accounts 5,013,163 8,409 0.67% Money market accounts 13,067,468 121,062 3.68% Core and other customer related accounts 30,208,651 224,953 2.95% Time deposits 16,504,794 187,905 4.52% Total 46,713,445 412,858 3.51% Borrowings: Wholesale borrowings 20,847,228 254,407 4.86% Other borrowings 5,606,261 81,799 5.82% Total borrowings 26,453,489 336,206 5.06% Total funding liabilities 73,166,934 749,064 4.07% Non-interest bearing DDA 6,707,400 Other liabilities 1,458,009 Total liabilities 81,332,343 Stockholders' equity 8,621,910 Total liabilities and stockholders' equity $ 89,954,253 Net interest income $ 513,678 Interest rate spread 2.40% Contribution from interest free funds 0.24% Net interest margin 2.64%
(1) Tax equivalent basis
Quarter Ended December 31, 2005 -------------------------------------------- Average (dollars in thousands) Balance Interest (1) Yield/Rate ------------------------------------------ ------------- ------------- ------------ Earning assets: Investment securities $ 12,700,310 $ 165,785 5.22% Loans: Commercial 16,515,988 277,924 6.68% Multi-Family - - 0.00% Consumer: Residential mortgages 11,859,646 164,689 5.55% Home equity loans and lines of credit 10,176,307 148,285 5.80% Total consumer loans secured by real estate 22,035,953 312,974 5.67% Auto Loans 4,454,501 62,528 5.57% Other 490,069 9,395 7.61% Total Consumer 26,980,523 384,897 5.69% Total loans 43,496,511 662,821 6.06% Allowance for loan losses (416,118) Total earning assets 55,780,703 $ 828,606 5.92% Other assets 7,707,153 Total assets $ 63,487,856 Funding liabilities: Deposits and other customer related accounts: NOW accounts $ 5,176,007 $ 8,867 0.68% NOW accounts - government & wholesale 4,278,169 44,518 4.13% Customer repurchase agreements 1,007,347 8,794 3.46% Savings accounts 3,573,771 6,521 0.72% Money market accounts 8,112,584 39,444 1.93% Core and other customer related accounts 22,147,878 108,144 1.94% Time deposits 10,376,654 93,305 3.57% Total 32,524,532 201,449 2.46% Borrowings: Wholesale borrowings 14,393,317 156,103 4.31% Other borrowings 4,417,688 50,241 4.49% Total borrowings 18,811,005 206,344 4.36% Total funding liabilities 51,335,537 407,793 3.15% Non-interest bearing DDA 5,340,623 Other liabilities 1,098,993 Total liabilities 57,775,153 Stockholders' equity 5,712,703 Total liabilities and stockholders' equity $ 63,487,856 Net interest income $ 420,813 Interest rate spread 2.77% Contribution from interest free funds 0.24% Net interest margin 3.01%
(1) Tax equivalent basis Sovereign Bancorp, Inc. and Subsidiaries AVERAGE BALANCE, INTEREST AND YIELD/RATE ANALYSIS (unaudited)
Year to Date December 31, 2006 -------------------------------------------- Average Yield/ (dollars in thousands) Balance Interest (1) Rate ------------------------------------------ ------------- ------------- ------------ Earning assets: Investment securities $ 14,600,283 $ 850,163 5.82% Loans: Commercial 20,833,022 1,489,484 7.15% Multi-Family 3,612,737 224,290 6.21% Consumer: Residential mortgages 15,770,676 888,546 5.63% Home equity loans and lines of credit 10,119,375 654,760 6.47% Total consumer loans secured by real estate 25,890,051 1,543,306 5.96% Auto loans 4,457,932 266,806 5.98% Other 452,029 37,201 8.23% Total Consumer 30,800,012 1,847,313 6.00% Total loans 55,245,771 3,561,087 6.45% Allowance for loan losses (489,775) Total earning assets 69,356,279 $ 4,411,250 6.36% Other assets 10,139,116 Total assets $ 79,495,395 Funding liabilities: Deposits and other customer related accounts: NOW accounts $ 5,990,180 $ 70,303 1.17% NOW accounts - government & wholesale 4,293,111 215,557 5.02% Customer repurchase agreements 1,229,845 55,158 4.48% Savings accounts 4,286,355 29,660 0.69% Money market accounts 10,904,581 362,969 3.33% Core and other customer related accounts 26,704,072 733,647 2.75% Time deposits 14,461,441 638,550 4.42% Total 41,165,513 1,372,197 3.33% Borrowings: Wholesale borrowings 18,322,761 854,241 4.66% Other borrowings 5,054,931 278,418 5.51% Total borrowings 23,377,692 1,132,659 4.85% Total funding liabilities 64,543,205 2,504,856 3.88% Non-interest bearing DDA 6,020,184 Other liabilities 1,412,368 Total liabilities 71,975,757 Stockholders' equity 7,519,638 Total liabilities and stockholders' equity $ 79,495,395 Net interest income $ 1,906,394 Interest rate spread 2.48% Contribution from interest free funds 0.27% Net interest margin 2.75%
Year to Date December 31, 2005 -------------------------------------------- Average Yield/ (dollars in thousands) Balance Interest (1) Rate ------------------------------------------ ------------- ------------- ------------ Earning assets: Investment securities $ 12,246,225 $ 626,822 5.12% Loans: Commercial 15,904,425 983,461 6.18% Multi-Family - - 0.00% Consumer: Residential mortgages 10,588,935 568,831 5.37% Home equity loans and lines of credit 10,157,824 567,548 5.59% Total consumer loans secured by real estate 20,746,759 1,136,379 5.48% Auto loans 4,356,121 233,283 5.36% Other 535,616 40,468 7.56% Total Consumer 25,638,496 1,410,130 5.50% Total loans 41,542,921 2,393,591 5.76% Allowance for loan losses (420,879) Total earning assets 53,368,267 $ 3,020,413 5.66% Other assets 7,363,707 Total assets $ 60,731,974 Funding liabilities: Deposits and other customer related accounts: NOW accounts $ 5,296,828 $ 33,232 0.63% NOW accounts - government & wholesale 3,435,963 120,045 3.49% Customer repurchase agreements 887,614 24,230 2.73% Savings accounts 3,779,333 25,347 0.67% Money market accounts 8,244,406 131,354 1.59% Core and other customer related accounts 21,644,144 334,208 1.54% Time deposits 9,581,336 290,382 3.03% Total 31,225,480 624,590 2.00% Borrowings: Wholesale borrowings 13,459,346 539,990 4.01% Other borrowings 4,247,821 165,918 3.91% Total borrowings 17,707,167 705,908 3.99% Total funding liabilities 48,932,647 1,330,498 2.72% Non-interest bearing DDA 5,294,135 Other liabilities 831,296 Total liabilities 55,058,078 Stockholders' equity 5,673,896 Total liabilities and stockholders' equity $ 60,731,974 Net interest income $ 1,689,915 Interest rate spread 2.94% Contribution from interest free funds 0.23% Net interest margin 3.17%
(1) Tax equivalent basis Sovereign Bancorp, Inc. and Subsidiaries SUPPLEMENTAL INFORMATION (unaudited) NON-PERFORMING ASSETS
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 (dollars in thousands) 2006 2006 2006 2006 2005 ----------------------------------- ----------- ----------- ----------- ----------- ----------- Non-accrual loans: Consumer: Residential mortgages $ 33,682 $ 35,365 $ 34,812 $ 31,874 $ 30,393 Home equity loans and lines of credit 10,312 62,002 63,632 61,078 55,543 Auto loans 191 327 388 363 476 Other consumer loans 2,764 1,384 2,524 1,920 1,913 Total consumer loans 46,949 99,078 101,356 95,235 88,325 Commercial real estate 77,196 64,138 48,494 31,531 31,800 Commercial and industrial and other 69,207 68,995 69,264 56,035 68,572 Total non-accrual loans 193,352 232,211 219,114 182,801 188,697 Restructured loans 557 570 576 692 777 Total non-performing loans (1) 193,909 232,781 219,690 183,493 189,474 Real estate owned, net 22,562 34,775 35,899 13,622 11,411 Other repossessed assets 5,126 5,500 3,487 3,352 4,678 Total non-performing assets 221,597 273,056 259,076 200,467 205,563 Non-performing loans as a percentage of loans held for investment 0.35% 0.37% 0.36% 0.41% 0.43% Non-performing assets as a percentage of total assets, excluding loans held for sale 0.27% 0.30% 0.29% 0.31% 0.32% Non-performing assets as a percentage of total loans held for investment, real estate owned and repossessed assets 0.40% 0.43% 0.42% 0.44% 0.47% Allowance for credit losses as a percentage of non- performing loans 251% 240% 251% 239% 231%
NET LOAN CHARGE-OFFS
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Quarters ended (in thousands) 2006 2006 2006 2006 2005 ----------------------------------- ----------- ----------- ----------- ----------- ----------- Commercial real estate $ (282) $ 1,188 $ 3,938 $ (744) $ 564 Commercial and industrial and other 18,651 6,402 4,718 8,948 4,877 Total Commercial 18,369 7,590 8,656 8,204 5,441 Residential mortgages 8,028 422 156 159 554 Home equity loans and lines of credit 399,609 19,909 15,032 10,654 6,998 Total consumer loans secured by real estate 407,637 20,331 15,188 10,813 7,552 Auto loans 9,574 7,271 5,678 7,995 9,137 Other consumer loans 453 135 (97) 1,286 1,079 Total Consumer 417,664 27,737 20,769 20,094 17,768 Total $ 436,033 $ 35,327 $ 29,425 $ 28,298 $ 23,209
COMPONENTS OF THE PROVISION OF CREDIT LOSSES AND ALLOWANCE FOR CREDIT LOSSES
Quarters ended Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 (in thousands) 2006 2006 2006 2006 2005 ----------------------------------- ----------- ----------- ----------- ----------- ----------- Provision for loan losses 364,309 45,437 47,113 30,559 26,263 Provision/(recoveries) for unfounded commitments 1,652 (437) (2,613) (1,559) (263) Total provision for credit losses $ 365,961 $ 45,000 $ 44,500 $ 29,000 $ 26,000 Allowance for loan losses 471,030 544,482 537,372 421,860 419,599 Reserve for unfounded commitments 15,255 13,603 14,040 16,653 18,212 Total allowance for credit losses $ 486,285 $ 558,085 $ 551,412 $ 438,513 $ 437,811
(1) Non-performing loans at December 31, 2006 exclude $21.5 million of residential non-accrual loans and $66.0 million of home equity non- accrual loans that are classified as held for sale. (2) The fourth quarter of 2006 includes a $14 million commercial loan charge-off. (3) Fourth quarter of 2006 includes a $7 million charge-off related to the lower of cost or market adjustment on the residential loans held for sale. (4) The fourth quarter of 2006 includes $382.5 million of charge-offs related to the lower of cost or market adjustment on the correspondent home equity portfolio held for sale. (5) The fourth quarter of 2006 includes a lower of cost or market adjustment on the correspondent home equity portfolio held for sale of $296 million. Sovereign Bancorp, Inc. and Subsidiaries SUPPLEMENTAL INFORMATION (unaudited) DEPOSIT AND OTHER CUSTOMER RELATED ACCOUNT COMPOSITION - End of period
Dec. 31 Sept. 30 June 30 Quarters ended (in thousands) 2006 2006 2006 ------------------------------------ -------------- -------------- -------------- Demand deposit accounts $ 6,577,583 $ 6,687,150 $ 6,821,660 NOW accounts 7,052,861 6,917,455 6,628,680 NOW accounts - government & wholesale 3,573,862 3,600,363 4,426,508 Customer repurchase agreements 1,487,251 1,457,129 1,205,345 Savings accounts 4,637,346 4,919,190 5,189,459 Money market accounts 12,991,771 12,449,563 12,321,602 Time deposits 16,063,880 16,752,764 15,999,234 Total $ 52,384,554 $ 52,783,614 $ 52,592,488
LOAN COMPOSITION - End of period
Dec. 31 Sept. 30 June 30 Quarters ended (in thousands) 2006 2006 2006 ------------------------------------ -------------- -------------- -------------- Commercial real estate $ 11,514,983 $ 11,401,902 $ 10,817,068 Commercial industrial loans 12,654,746 11,212,315 10,722,844 Multi-family 5,768,451 5,970,795 6,134,167 Other 534,164 1,399,313 1,325,842 Total commercial loans 30,472,344 29,984,325 28,999,921 Residential mortgages 17,404,730 17,817,283 17,236,025 Home equity loans and lines of credit 9,443,560 10,506,607 10,515,700 Total consumer loans secured by real estate 26,848,290 28,323,890 27,751,725 Auto loans 4,848,204 4,431,891 4,399,047 Other consumer loans 419,758 437,614 459,418 Total consumer loans 32,116,252 33,193,395 32,610,190 Total loans $ 62,588,596 $ 63,177,720 $ 61,610,111
DEPOSIT AND OTHER CUSTOMER RELATED ACCOUNT COMPOSITION - Average
Dec. 31 Sept. 30 June 30 Quarters ended (in thousands) 2006 2006 2006 ------------------------------------ -------------- -------------- -------------- Demand deposit accounts $ 6,596,008 $ 6,707,400 $ 5,662,902 NOW accounts 6,807,893 6,526,816 5,538,431 NOW accounts - government & wholesale 3,977,652 4,328,149 4,807,682 Customer repurchase agreements 1,499,900 1,273,055 1,114,934 Savings accounts 4,755,332 5,013,163 3,956,176 Money market accounts 12,688,091 13,067,468 9,598,706 Time deposits 16,469,164 16,504,794 13,193,359 Total $ 52,794,040 $ 53,420,845 $ 43,872,190
LOAN COMPOSITION - Average
Dec. 31 Sept. 30 June 30 Quarters ended (in thousands) 2006 2006 2006 ------------------------------------ -------------- -------------- -------------- Commercial real estate $ 11,421,431 $ 10,869,370 $ 8,358,231 Commercial industrial loans 11,347,975 10,805,007 9,564,869 Multi-family 6,103,412 6,184,739 1,992,727 Other 1,427,147 1,359,632 1,189,303 Total commercial loans 30,299,965 29,218,748 21,105,130 Residential mortgages 17,897,922 17,860,553 14,467,374 Home equity loans and lines of credit 10,145,548 10,519,717 10,129,080 Total consumer loans secured by real estate 28,043,470 28,380,270 24,596,454 Auto loans 4,628,603 4,394,903 4,396,659 Other consumer loans 427,026 451,333 453,383 Total consumer loans 33,099,099 33,226,506 29,446,496 Total loans $ 63,399,064 $ 62,445,254 $ 50,551,626
Sovereign Bancorp, Inc. and Subsidiaries SUPPLEMENTAL INFORMATION (unaudited) DEPOSIT AND OTHER CUSTOMER RELATED ACCOUNT COMPOSITION - End of period Mar. 31 Dec. 31 Quarters ended (in thousands) 2006 2005 -------------------------------------- -------------- -------------- Demand deposit accounts $ 5,165,140 $ 5,331,659 NOW accounts 5,210,717 5,280,872 NOW accounts- government & wholesale 3,899,288 3,564,003 Customer repurchase agreements 1,086,010 1,012,574 Savings accounts 3,397,183 3,460,292 Money market accounts 8,384,317 7,989,846 Time deposits 11,677,492 11,338,460 Total $ 38,820,147 $ 37,977,706 LOAN COMPOSITION - End of period Mar. 31 Dec. 31 Quarters ended (in thousands) 2006 2005 -------------------------------------- -------------- -------------- Commercial real estate $ 7,128,116 $ 7,209,180 Commercial industrial loans 8,994,845 8,354,768 Multi-family - - Other 1,127,936 1,071,698 Total commercial loans 17,250,897 16,635,646 Residential mortgages 13,161,773 12,462,802 Home equity loans and lines of credit 9,892,235 9,793,124 Total consumer loans secured by real estate 23,054,008 22,255,926 Auto loans 4,400,980 4,434,021 Other consumer loans 458,528 478,254 Total consumer loans 27,913,516 27,168,201 Total loans $ 45,164,413 $ 43,803,847 DEPOSIT AND OTHER CUSTOMER RELATED ACCOUNT COMPOSITION - Average Mar. 31 Dec. 31 Quarters ended (in thousands) 2006 2005 -------------------------------------- -------------- -------------- Demand deposit accounts $ 5,086,989 $ 5,340,623 NOW accounts 5,065,037 5,176,007 NOW accounts- government & wholesale 4,059,477 4,278,169 Customer repurchase agreements 1,025,807 1,007,347 Savings accounts 3,411,827 3,573,771 Money market accounts 8,190,873 8,112,584 Time deposits 11,597,261 10,376,654 Total $ 38,437,271 $ 37,865,155 LOAN COMPOSITION - Average Mar. 31 Dec. 31 Quarters ended (in thousands) 2006 2005 -------------------------------------- -------------- -------------- Commercial real estate $ 7,193,994 $ 7,203,433 Commercial industrial loans 8,603,198 8,273,795 Multi-family - - Other 1,087,391 1,038,760 Total commercial loans 16,884,583 16,515,988 Residential mortgages 12,777,623 11,859,646 Home equity loans and lines of credit 9,673,570 10,176,307 Total consumer loans secured by real estate 22,451,193 22,035,953 Auto loans 4,409,850 4,454,501 Other consumer loans 476,946 490,069 Total consumer loans 27,337,989 26,980,523 Total loans $ 44,222,572 $ 43,496,511 Sovereign Bancorp, Inc. and Subsidiaries RECONCILIATION OF OPERATING EARNINGS TO REPORTED EARNINGS (unaudited) Operating 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 associated with acquiring or integrating businesses, and certain other charges. The table below reconciles our GAAP earnings to operating earnings for EPS purposes. (dollars in thousands, except per share data - all amounts are after tax)
Quarter Ended Total dollars ---------------------------------------------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 2006 2006 2006 2006 2005 ------------ ------------ ------------ ------------ ------------ Net income (loss) as reported $ (129,440) $ 184,009 $ (59,056) $ 141,398 $ 165,495 Dividends on preferred stock (3,650) (1,825) (2,433) - - Net income available to common shareholders (133,090) 182,184 (61,489) 141,398 165,495 Contingently convertible trust preferred interest expense, net of tax - 6,344 - 6,327 6,354 Net income (loss) for EPS purposes $ (133,090) $ 188,528 $ (61,489) $ 147,725 $ 171,849 Non GAAP adjustments to adjust antidilutive EPS Net income available to common shareholders $ (133,090) $ 182,184 $ (61,489) $ 141,398 $ 165,495 Trust IV expense, net of tax 6,354 6,344 6,335 6,327 6,354 Antidilutive net income/(loss) for operating EPS calculation $ (126,736) $ 188,528 $ (55,154) $ 147,725 $ 171,849 Reconciliation to Operating earnings EPS Net income (loss) for Operating earnings EPS purposes $ (126,736) $ 188,528 $ (55,154) $ 147,725 $ 171,849 Merger related and integration costs 6,863 18,463 4,067 (1,819) - Provision for loan losses- Independence / SFC 192,374 - 8,125 - - Loss on economic hedges - - 7,402 - - Loss on investment restructuring 27,961 - 154,884 - - Loss on mortgage banking loan sale restructuring charges 14,954 - - - - Loss on restructuring and other employee severance charges 51,134 - - - - Impairment on FNMA and FHLMC preferred stock - - 43,875 - - Proxy and professional fees - - - 9,319 3,788 Operating earnings for EPS purposes $ 166,550 $ 206,991 $ 163,199 $ 155,225 $ 175,637 Weighted average diluted shares for GAAP EPS 473,404 506,135 412,000 410,366 409,581 Add back of diluted shares for operating EPS not factored into GAAP diluted shares due to antidilution (1) 34,583 - 33,599 - - Adjusted weighted average diluted shares for Operating EPS 507,987 506,135 445,599 410,366 409,581
(1) Due to the GAAP net loss recorded in the fourth and second quarters of 2006, the conversion of warrants and equity awards and the after-tax add back of Sovereign's contingently convertible trust preferred interest expense was excluded from Sovereign's GAAP diluted earnings per share calculation for the quarters ended December 31, 2006 and June 30, 2006 since the result would have been anti-dilutive. However, for operating earning purposes these items are dilutive and as a result they have been added back for operating earnings and operating earnings per share purposes.
Quarter Ended Per share --------------------------------------------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 2006 2006 2006 2006 2005 ------------ ------------ ------------ ------------ ------------ Net income (loss) as reported Dividends on preferred stock Net income available to common shareholders Contingently convertible trust preferred interest expense, net of tax Net income (loss) for EPS purposes $ (0.28) $ 0.37 $ (0.15) $ 0.36 $ 0.42 Non GAAP adjustments to adjust antidilutive EPS Net income available to common shareholders Trust IV expense, net of tax Antidilutive net income/(loss) for operating EPS calculation Reconciliation to Operating earnings EPS Net income (loss) for Operating earnings EPS purposes $ (0.25) $ 0.37 $ (0.12) $ 0.36 $ 0.42 Merger related and integration costs 0.01 0.04 0.01 (0.00) - Provision for loan losses- Independence / SFC 0.38 - 0.02 - - Loss on economic hedges - - 0.02 - - Loss on investment restructuring 0.06 - 0.34 - - Loss on mortgage banking loan sale restructuring charges 0.03 - - - - Loss on restructuring and other employee severance charges 0.10 - - - - Impairment on FNMA and FHLMC preferred stock - - 0.10 - - Proxy and professional fees - - - 0.02 0.01 Operating earnings for EPS purposes $ 0.33 $ 0.41 $ 0.37 $ 0.38 $ 0.43 Weighted average diluted shares for GAAP EPS Add back of diluted shares for operating EPS not factored into GAAP diluted shares due to antidilution (1) Adjusted weighted average diluted shares for Operating EPS
(1) Due to the GAAP net loss recorded in the fourth and second quarters of 2006, the conversion of warrants and equity awards and the after-tax add back of Sovereign's contingently convertible trust preferred interest expense was excluded from Sovereign's GAAP diluted earnings per share calculation for the quarters ended December 31, 2006 and June 30, 2006 since the result would have been anti-dilutive. However, for operating earning purposes these items are dilutive and as a result they have been added back for operating earnings and operating earnings per share purposes.
Year to Date ---------------------------------------------------------- Total dollars Per Share ---------------------------- --------------------------- Dec. 31 Dec. 31 Dec. 31 Dec. 31 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Net income (loss) as reported $ 136,911 $ 676,160 Dividends on preferred stock (7,908) - Net income available to common shareholders 129,003 676,160 Contingently convertible trust preferred interest expense, net of tax - 25,427 Net income (loss) for EPS purposes $ 129,003 $ 701,587 $ 0.30 $ 1.69 Non GAAP adjustments to adjust antidilutive EPS Net income available to common shareholders $ 129,003 $ 676,160 Trust IV expense, net of tax 25,360 25,427 Antidilutive net income/(loss) for operating EPS calculation $ 154,363 $ 701,587 Reconciliation to Operating earnings EPS Net income (loss) for Operating earnings EPS purposes $ 154,363 $ 701,587 $ 0.33 $ 1.69 Merger related and integration costs 27,574 8,284 0.06 0.02 Provision for loan losses- Independence / SFC 200,499 - 0.43 - Loss on economic hedges 7,402 - 0.02 - Loss on investment restructuring 182,845 - 0.39 - Loss on mortgage banking loan sale restructuring charges 14,954 - 0.03 - Loss on restructuring and other employee severance charges 51,134 2,589 0.11 0.01 Impairment on FNMA and FHLMC preferred stock 43,875 - 0.10 - Proxy and professional fees 9,319 3,788 0.02 0.01 Operating earnings for EPS purposes $ 691,965 $ 716,248 $ 1.48 $ 1.72 Weighted average diluted shares for GAAP EPS 433,908 415,996 Add back of diluted shares for operating EPS not factored into GAAP diluted shares due to antidilution (1) 33,840 - Adjusted weighted average diluted shares for Operating EPS 467,748 415,996
(1) Due to the GAAP net loss recorded in the fourth and second quarters of 2006, the conversion of warrants and equity awards and the after-tax add back of Sovereign's contingently convertible trust preferred interest expense was excluded from Sovereign's GAAP diluted earnings per share calculation for the quarters ended December 31, 2006 and June 30, 2006 since the result would have been anti-dilutive. However, for operating earning purposes these items are dilutive and as a result they have been added back for operating earnings and operating earnings per share purposes. Sovereign Bancorp, Inc. and Subsidiaries RECONCILIATION OF AVERAGE EQUITY TO AVERAGE TANGIBLE EQUITY AND RELATED OPERATING RETURN ON AVERAGE TANGIBLE EQUITY (unaudited) Reconciliation of Equity to Tangible Equity and Operating Return on Average Equity to Tangible Returns on Average Equity
Quarter Ended ---------------------------------------------------- Dec. 31 Sept. 30 June 30 2006 2006 2006 -------------- -------------- -------------- Average Equity $ 8,816,938 $ 8,621,910 $ 6,698,547 Average Goodwill (4,992,610) (4,932,536) (3,452,687) Average CDI and other intangibles (519,891) (611,329) (342,279) Average Tangible Equity 3,304,437 3,078,045 2,903,581 Operating Return on Average Equity 7.49% 9.52% 9.77% Effect of Goodwill 11.32% 15.26% 11.62% Effect of CDI and other intangibles 1.18% 1.89% 1.15% Tangible Return on Average Equity 20.00% 26.68% 22.54%
Reconciliation of Equity to Tangible Equity and Operating Return on Average Equity to Tangible Returns on Average Equity Quarter Ended --------------------------------- Mar. 31 Dec. 31 2006 2005 -------------- -------------- Average Equity $ 5,896,739 $ 5,712,703 Average Goodwill (2,716,324) (2,714,150) Average CDI and other intangibles (207,908) (225,049) Average Tangible Equity 2,972,507 2,773,504 Operating Return on Average Equity 10.68% 12.20% Effect of Goodwill 9.76% 11.93% Effect of CDI and other intangibles 0.75% 0.99% Tangible Return on Average Equity 21.18% 25.12% Reconciliation of Equity to Tangible Equity and Operating Return on Average Equity to Tangible Returns on Average Equity Year-to-Date --------------------------------- Dec. 31 Dec. 31 2006 2005 -------------- -------------- Average Equity 7,519,638 5,673,896 Average Goodwill (4,029,857) (2,666,113) Average CDI and other intangibles (421,730) (249,934) Average Tangible Equity 3,068,051 2,757,849 Operating Return on Average Equity 9.20% 12.62% Effect of Goodwill 12.09% 12.20% Effect of CDI and other intangibles 1.26% 1.14% Tangible Return on Average Equity 22.55% 25.97% Sovereign Bancorp, Inc. and Subsidiaries SUPPLEMENTAL INFORMATION (unaudited) Purchase of Independence Community Bank Corp. ("Independence") On June 1, 2006, Sovereign completed the purchase of Independence and the results of its operations are included from the purchase date through June 30, 2006. Sovereign made a cash payment of $3.6 billion to acquire and convert all outstanding Independence common shares and outstanding equity awards at $42 per share. The preliminary purchase price was allocated to acquired assets and liabilities of Independence based on fair value as of June 1, 2006. The company is in the process of finalizing these values and as such the allocation of the purchase price is subject to revision. Assets and Liabilities Acquired from Independence: (dollars in millions) ----------------------- Assets Liabilities Investments $ 3,126.7 Deposits: Loans: Core $ 6,960.8 Multifamily 5,571.2 Time 4,070.1 Commercial 5,313.3 Total deposits 11,030.9 Consumer 517.2 Borrowings and other Residential debt obligations 5,488.8 mortgages 1,829.0 Other liabilities 586.8 Total loans 13,230.7 Less allowance Total liabilities $ 17,106.5 for loan losses (97.8) Total loans, net 13,132.9 Cash paid, net of cash acquired (2,713.2) Bank owned life insurance 343.3 Premises and equipment, net 167.9 Other assets 371.9 Core deposit and other intangibles 394.2 Goodwill 2,282.8 Total assets $ 17,106.5 SOURCE Sovereign Bancorp, Inc. -0- 01/17/2007 /CONTACT: FINANCIAL CONTACTS: Mark McCollom, +1-610-208-6426, mmccollo@sovereignbank.com, or Stacey Weikel, +1-610-208-6112, sweikel@sovereignbank.com; MEDIA CONTACT: Ed Shultz, +1-610-378-6159, eshultz1@sovereignbank.com, all of Sovereign Bancorp, Inc./ /Web site: http://www.sovereignbank.com / (SOV)