Information contained herein is subject to completion or amendment. These
securities offered hereby may not be sold nor may offers to buy be accepted
prior to the completion of the information contained in this prospectus
supplement. This prospectus supplement and accompanying prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED
APRIL 28, 1995, SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED MARCH 8, 1994)
1,500,000 SHARES
[INSERT LOGO]
% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
(LIQUIDATION PREFERENCE $50 PER SHARE)
------------------------
Dividends on the % Cumulative Convertible Preferred Stock, Series B (the
'Preferred Stock'), are cumulative from the date of issue and are payable
quarterly on February 15, May 15, August 15 and November 15 of each year,
beginning on August 15, 1995. See 'Description of Preferred Stock -- Dividends.'
The Preferred Stock is convertible at the option of the holder at any time,
unless previously redeemed, into Common Stock, no par value (the 'Common
Stock'), of Sovereign Bancorp, Inc. ('Sovereign') at a conversion rate of
shares of Common Stock for each share of Preferred Stock (equivalent to
a conversion price of $ per share of Common Stock), subject to
adjustment under certain conditions. See 'Description of Preferred Stock --
Conversion Rights.' On April 27, 1995, the reported last sale price of the
Common Stock on the Nasdaq Stock Market was $8 3/8 per share.
The Preferred Stock may not be redeemed prior to May 15, 1998. Thereafter,
the Preferred Stock is redeemable at the option of Sovereign, in whole or in
part, at $ per share during the twelve months beginning May 15, 1998,
and thereafter at prices declining ratably to par on and after May 15, 2005,
plus, in each case, dividends accrued and unpaid to the redemption date. See
'Description of Preferred Stock -- Redemption.'
Application will be made to list the Preferred Stock for quotation on the
Nasdaq Stock Market.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(4).................................... $ $ $
</TABLE>
(1) Plus accrued dividends, if any, from May , 1995.
(2) Sovereign has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933. See 'Underwriting.'
(3) Before deduction of expenses payable by Sovereign estimated at $ .
(4) Sovereign has granted the several Underwriters an option to purchase up to
an additional 225,000 shares to cover overallotments. If all of such shares
are purchased, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $ , $ and $ , respectively. See
'Underwriting.'
------------------------
The shares of Preferred Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject offers in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about May ,
1995.
------------------------
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
------------------------
The date of this Prospectus Supplement is May , 1995.
<PAGE>
[INSERT MAP HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCHTRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IFCOMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE>
SOVEREIGN
Sovereign Bancorp, Inc. ('Sovereign' or the 'Corporation') is a
Pennsylvania unitary thrift holding company headquartered in a suburb of
Reading, Pennsylvania. Sovereign's principal bank subsidiary is Sovereign Bank,
F.S.B., a federal savings bank (the 'Bank'). At March 31, 1995, Sovereign and
its subsidiaries had total unaudited consolidated assets, deposits, and
stockholders' equity of $6.8 billion, $5.0 billion and $312.2 million,
respectively. Based on total assets at March 31, 1995, Sovereign is the largest
thrift holding company and the sixth largest financial institution headquartered
in Pennsylvania.
Sovereign's primary business consists of attracting deposits from its
network of 126 community banking offices, located in Pennsylvania, New Jersey
and Delaware, and originating residential mortgage loans and home equity lines
of credit in those communities. The Bank originates mortgage loans through its
community banking offices, commissioned employees who conduct business out of
loan production offices and a network of independent mortgage bankers and
brokers. Substantially all loan underwriting is performed by the Bank. Based on
its origination of $1.4 billion of adjustable rate mortgages during the year
ended December 31, 1994, Sovereign believes it is the leading adjustable rate
mortgage lender in the Pennsylvania and New Jersey market areas.
Sovereign's operating strategy emphasizes consistent profitability and
growth. Accordingly, Sovereign seeks to (1) maintain superior asset quality
through emphasis on the origination of single family mortgage loans; (2) limit
interest rate risk through the origination of adjustable rate mortgages for
retention in its portfolio; (3) maintain low overhead expenses and high employee
productivity; and (4) encourage a strong sales and service culture.
Sovereign's principal executive offices are located at 1130 Berkshire
Boulevard, Wyomissing, Pennsylvania 19610 and its telephone number is (610)
320-8400.
RECENT DEVELOPMENTS
RECENT OPERATING RESULTS
Sovereign reported net income of $12.1 million for the three-month period
ended March 31, 1995, compared to $10.9 million for the three-month period ended
March 31, 1994, an increase of 11 percent. Net income per share for the three
months ended March 31, 1995 was $.25 (as adjusted for the 5% stock dividend paid
on April 11, 1995), compared to $.23 for the three months ended March 31, 1994.
Return on average total assets and return on average equity were .70% and
15.14%, respectively, for the three-month period ended March 31, 1995.
Net interest income for the three-month period ended March 31, 1995 was
$42.7 million compared to $36.4 million for the same period in 1994. The
increase is attributable to an increase in balance sheet growth resulting from
recent acquisitions. Sovereign's interest rate spread (the difference between
the yield on total assets and the cost of total liabilities) was 2.50% for the
three-month period ended March 31, 1995 compared to 2.97% for the same period in
1994. The interest rate spread contracted due to the delay in repricing of
discounted introductory rate adjustable loans.
The provision for possible loan losses was $250,000 for the three-month
period ended March 31, 1995. At March 31, 1995, Sovereign's non-performing
assets were $38.4 million compared to $40.5 million at December 31, 1994. The
ratio of non-performing assets to total assets was .56% at March 31, 1995
compared to .62% at December 31, 1994. The ratio of the allowance for possible
loans losses to non-performing loans was 123.77% at March 31, 1995 compared to
114.11% at December 31, 1994.
Total other expenses were $28.8 million for the three-month period ended
March 31, 1995 compared to $20.5 million for the same period in 1994. The ratio
of general and administrative expenses to average assets for the three-month
period ended March 31, 1995 was 1.50% compared to 1.59% for the same period in
1994. This decrease in the expense ratio is the result of efficiencies realized
from recent acquisitions.
S-3
<PAGE>
BERKELEY ACQUISITION
On January 1, 1995, Sovereign acquired from Berkeley Federal Bank & Trust,
FSB ('Berkeley') 23 offices in New Jersey and Delaware, with $909.3 million of
deposits for a deposit premium of $66.6 million. The Berkeley transaction was an
in-market acquisition which significantly increased Sovereign's market share in
the Essex, Union, Morris, Somerset and Middlesex Counties in central New Jersey.
The Berkeley acquisition also provided Sovereign an opportunity to enter New
Castle County in northern Delaware.
COLLECTIVE TRANSACTION
On April 21, 1995, the Bank completed its transaction with Collective Bank
('Collective') pursuant to which Collective assumed the deposit liabilities and
purchased certain assets associated with seven offices of the Bank located in
southern New Jersey (six of which were acquired from Berkeley) with total
deposits of approximately $112 million. Also pursuant to the agreement, the Bank
assumed approximately $9.1 million in deposit liabilities associated with
Collective's Wilmington, Delaware branch office. In connection with the
transaction, each party paid the other party a deposit premium of 7.5% of the
respective deposit liabilities assumed. As a result of this transaction,
Sovereign reduced the intangible incurred in connection with the Berkeley
transaction by approximately $6.9 million.
COLONIAL ACQUISITION
On March 23, 1995, Sovereign and Colonial State Bank ('Colonial'), a New
Jersey chartered commercial bank with one banking office located in Freehold,
New Jersey, executed an agreement pursuant to which Sovereign will acquire
Colonial for approximately $6.25 million in cash. As of December 31, 1994,
Colonial had approximately $43.8 million in assets, $40.5 million in deposit
liabilities and shareholders' equity of $3.3 million. The Colonial transaction
is subject to certain conditions, including regulatory approval, and is expected
to close in the third quarter of 1995.
ELECTION OF NEW CHAIRMAN
On April 24, 1995, Sovereign announced that its Board of Directors had
elected Richard E. Mohn as Chairman of the Board to succeed Frederick J. Jaindl,
who unexpectedly resigned earlier that day as Chairman and as a Director of
Sovereign. Mr. Mohn has been a member of Sovereign's Board of Directors since
1989 and has served as Chairman of the Bank since 1989. Mr. Jaindl and certain
other directors of Sovereign had been engaged in a policy dispute which resulted
in litigation by Sovereign in December 1993 against Mr. Jaindl and certain other
directors, which litigation was settled in January 1994 upon execution of an
agreement by and among all of the then existing directors and Sovereign. Mr.
Jaindl, in his letter of resignation, cited differences of view between Mr.
Jaindl and other directors relating to Sovereign's operations, policies and
practices, including the 'proper level of tangible capital, interest rate
sensitivity and use of derivatives,' and matters of corporate governance and
strategic direction, as reasons in support of his resignation. Sovereign's Board
has considered these differences and has determined Mr. Jaindl's concerns to be
without merit, and believes that Mr. Jaindl's resignation is a residual result
of the 1993 litigation. Mr. Jaindl's letter of resignation and Sovereign's
responses thereto are included in Sovereign's Current Report on Form 8-K, dated
April 24, 1995, which is incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus. See 'Incorporation of Certain Documents by
Reference.'
USE OF PROCEEDS
Sovereign intends to contribute a substantial portion of the net proceeds
of this offering to the Bank and, if the Colonial transaction is completed, to
the bank subsidiary to be created by such acquisition in order to provide
capital to these institutions sufficient to cause them to be classified as 'well
capitalized' within the meaning of applicable Federal Deposit Insurance
Corporation ('FDIC') and Office of Thrift Supervision ('OTS') regulations. The
Bank, and, if the Colonial transaction is completed, the bank subsidiary created
by such acquisition, will use the net proceeds contributed to them for general
corporate purposes. See 'Recent Developments.'
S-4
<PAGE>
CONSOLIDATED SUMMARY FINANCIAL DATA
The following tables set forth certain historical consolidated summary
financial data of Sovereign and its subsidiaries, which should be read in
conjunction with, and is qualified by reference to, the more detailed financial
and other information included in the documents incorporated herein by
reference. See 'Incorporation of Certain Documents By Reference' in the
Prospectus, including specifically Sovereign's Annual Report on Form 10-K for
the year ended December 31, 1994. The following data do not reflect Sovereign's
pending transactions, except that the Berkeley transaction is included in the
data for the three months ended March 31, 1995. See 'Recent Developments.'
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY STATEMENT OF OPERATIONS
Total interest income........................... $ 111,409 $ 76,693 $ 354,141 $ 282,790 $ 199,431 $ 182,015 $ 176,870
Total interest expense.......................... 68,673 40,332 198,741 153,318 118,585 125,326 130,736
--------- --------- --------- --------- --------- --------- ---------
Net interest income............................. 42,736 36,361 155,400 129,472 80,846 56,689 46,134
Provision for possible loan losses.............. 250 1,537 4,100 8,650 10,080 6,796 8,732
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for possible
loan losses.................................... 42,486 34,824 151,300 120,822 70,766 49,893 37,402
--------- --------- --------- --------- --------- --------- ---------
Other income.................................... 4,867 3,177 14,554 15,167 10,965 5,083 4,472
Other expenses.................................. 28,792 20,529 90,989 77,377 47,036 33,460 29,711
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting principle.............. 18,561 17,472 74,865 58,612 34,695 21,516 12,163
Income tax provision............................ 6,431 6,546 28,467 22,998 15,057 9,534 5,458
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle........................... 12,130 10,926 46,398 35,614 19,638 11,982 6,705
Cumulative effect of change in accounting
principle...................................... -- -- -- 4,800 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income...................................... $ 12,130 $ 10,926 $ 46,398 $ 40,414 $ 19,638 $ 11,982 $ 6,705
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share
Before cumulative effect of change in
accounting principle (1)..................... $ .25 $ .23 $ .95 $ .73 $ .53 $ .39 $ .23
After cumulative effect of change in accounting
principle (1)................................ .25 .23 .95 .84 .53 .39 .23
Dividends per share (1)......................... .0219 .0353 .1112 .1043 .0855 .0608 .0444
Dividend payout ratio........................... 8.76% 18.35% 11.70% 14.29% 16.13% 15.59% 19.30%
PERFORMANCE RATIOS
Return on average equity........................ 15.14% 16.07% 16.47% 14.77% 13.51% 10.40% 6.35%
Return on average risk-adjusted assets (2)...... 1.59 1.89 1.77 1.66 1.44 1.09 .64
Return on average total assets.................. .70 .88 .84 .81 .75 .61 .37
Interest rate spread (3)........................ 2.50 2.97 2.82 2.96 3.10 2.86 2.56
General and administrative expenses to average
total assets................................... 1.50 1.59 1.53 1.68 1.72 1.65 1.64
Earnings to fixed charges (4)
Including interest on deposits................. 1.27x 1.43x 1.38x 1.38x 1.29x 1.17x 1.09x
Excluding interest on deposits................. 1.96x 2.18x 1.97x 2.29x 2.58x 2.13x 1.50x
AT DECEMBER 31,
AT MARCH -----------------------------------------------------
31, 1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.................................................. $6,803,580 $6,564,082 $4,877,166 $3,699,084 $2,274,702 $1,871,053
Loans......................................................... 4,421,422 4,350,898 2,898,014 2,337,382 1,437,247 1,329,177
Allowance for possible loan losses............................ 35,669 36,289 33,099 26,562 13,198 8,823
Mortgage-backed securities.................................... 1,799,113 1,653,042 1,468,403 847,085 582,049 330,281
Goodwill and other intangibles................................ 129,194 64,553 30,437 18,457 7,067 4,254
Investment securities......................................... 225,269 250,926 220,901 154,271 62,012 79,219
Deposits...................................................... 5,007,649 4,027,119 3,183,107 2,961,058 1,815,679 1,396,748
Borrowings.................................................... 1,414,460 2,162,587 1,367,100 427,591 285,059 339,056
Stockholders' equity.......................................... 312,233 303,900 259,121 220,419 137,259 106,458
Shares outstanding at end of period (in thousands)............ 45,278 45,567 41,357 40,682 23,898 19,906
Book value per share at end of period......................... 6.57 6.35 5.50 4.76 3.92 3.75
Tangible book value per share at end of period................ 3.85 5.00 4.86 4.36 3.72 3.60
Share price at end of period.................................. 9 7 3/8 11 1/4 6 3/8 3 1/4 1 1/2
CAPITAL RATIOS (5)
Stockholders' equity to total assets.......................... 4.59% 4.63% 5.31% 5.96% 6.03% 5.69%
Tangible equity to tangible assets............................ 2.74 3.75 4.72 5.49 5.74 5.47
ASSET QUALITY
Residential real estate loans to total loans.................. 98.05% 98.16% 98.29% 96.59% 93.39% 92.04%
Nonperforming assets to total assets.......................... .56 .62 .75 1.15 1.16 1.40
Allowance for possible loan losses to total loans............. .81 .83 1.12 1.11 .92 .66
Allowance for possible loan losses to nonperforming assets.... 92.14 88.24 89.24 61.91 49.00 33.75
Allowance for possible loan losses to nonperforming loans..... 123.77 114.11 136.97 116.72 85.18 53.23
Net charge-offs to average total loans........................ .079 .155 .084 .237 .179 .314
</TABLE>
- ------------------
(1) All per share data have been adjusted to reflect all stock dividends and
stock splits including the 5% stock dividend declared on February 22, 1995
and paid on April 11, 1995.
(2) Net income divided by average risk-adjusted assets (total assets adjusted
for credit risk pursuant to OTS regulations).
(3) Represents the difference between the yield on total assets and the costs of
total liabilities and stockholders' equity.
(4) The ratio of earnings to fixed charges has been computed by dividing income
before taxes plus fixed charges by fixed charges. Fixed charges represent
interest expense (ratios are presented both including and excluding interest
on deposits) and amortization of debt.
(5) For capital ratios relating to the Bank, see 'Capitalization.'
S-5
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Sovereign as of March
31, 1995, and as adjusted as of such date to give effect to the issuance and
sale of the Preferred Stock offered by this Prospectus Supplement and the
accompanying Prospectus. This capitalization table should be read in conjunction
with the financial statements and related notes incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1995
------------------------
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Long-Term Debt
FHLB advances, maturing May 1996 to May 1998......................................... $ 133,160 $ 133,160
6.75% subordinated debentures, due 2000.............................................. 49,387 49,387
8.50% subordinated debentures, due 2002.............................................. 19,412 19,412
8.00% subordinated debentures, due 2003.............................................. 48,838 48,838
----------- -----------
Total Long-Term Debt.............................................................. 250,797 250,797
----------- -----------
Stockholders' Equity
Preferred Stock: 7,500,000 shares authorized; ___% Cumulative, Series B; $50
liquidation preference; _____ shares (offered hereby)............................. --
Common stock, no par value; 100,000,000 shares authorized and 45,742,791 issued at
March 31, 1995.................................................................... 226,191 226,191
Unallocated Common Stock held by ESOP; 465,000 shares at
March 31, 1995.................................................................... (4,195) (4,195)
Unrecognized loss on investment and mortgage-backed securities available for sale.... (138) (138)
Retained earnings.................................................................... 90,375 90,375
----------- -----------
Total stockholders' equity........................................................... 312,233
----------- -----------
Total Long-Term Debt and Stockholders' Equity..................................... $ 563,030 $
----------- -----------
----------- -----------
</TABLE>
The following table sets forth the historical capital ratios of Sovereign
and the Bank at March 31, 1995 compared to regulatory requirements. The
following data do not reflect the Colonial or Collective transactions or the
sale of the Preferred Stock offered hereby. See 'Recent Developments' and 'Use
of Proceeds.'
<TABLE>
<CAPTION>
THE REGULATORY
SOVEREIGN(1) BANK REQUIREMENT
------------- --------- ---------------
<S> <C> <C> <C>
Tangible capital to tangible assets.......................................... 2.74% 4.25% 3.00%
Leverage (core) capital to tangible assets................................... 2.74 4.25 1.50
Leverage (core) capital to risk-adjusted assets.............................. 6.01 9.38 4.00
Risk-based capital to risk-adjusted assets................................... 10.81 10.32 8.00
</TABLE>
- ------------------
(1) OTS capital regulations do not apply to thrift holding companies. Ratios for
Sovereign have been computed as if OTS regulations applied to Sovereign.
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The Common Stock is traded in the over-the-counter market and is quoted on
the Nasdaq Stock Market under the symbol 'SVRN.' At March 1, 1995, the total
number of holders of record of the Common Stock was 7,236.
The following table sets forth the high and low sale prices reported on the
Nasdaq Stock Market (formerly referred to as the NASDAQ National Market System)
for the Common Stock, as well as cash dividends paid on the Common Stock, during
the periods indicated. All per share information has been adjusted to reflect
S-6
<PAGE>
the effect of stock dividends and stock splits, including a 5% stock dividend
declared on February 22, 1995 and paid on April 11, 1995.
<TABLE>
<CAPTION>
CASH
PERIOD HIGH LOW DIVIDENDS
------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
1993 1st Quarter................................................. $ 8 1/2 $ 6 $ .0263
2nd Quarter................................................. 8 1/4 7 1/8 .0272
3rd Quarter................................................. 9 3/4 7 3/8 .0265
4th Quarter................................................. 11 1/2 9 1/8 .0243
1994 1st Quarter................................................. 11 1/2 8 1/4 .0353
2nd Quarter................................................. 11 9 1/8 .0269
3rd Quarter................................................. 10 3/4 9 1/8 .0271
4th Quarter................................................. 9 1/2 7 3/8 .0219
1995 1st Quarter................................................. 9 1/4 7 3/8 .0219
2nd Quarter (through April 27, 1995)........................ 9 1/4 8 3/8
</TABLE>
On April 27, 1995, the last reported sale price for the Common Stock on the
Nasdaq Stock Market was $8 3/8 per share.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by Sovereign's Board of Directors out of funds legally available
therefor. The timing and amount of any future dividends will depend on earnings,
capital requirements, federal and state laws, regulations and policies and other
factors deemed relevant by the Board of Directors, including the amounts of
dividends payable to Sovereign by its subsidiaries. Payments of dividends to
Sovereign by the Bank are subject to federal statutes and OTS regulations
governing capital distributions, which include cash dividends, stock redemptions
or repurchases and certain other transactions, by savings associations.
DESCRIPTION OF PREFERRED STOCK
Under Sovereign's Articles of Incorporation, as amended, the Board of
Directors of Sovereign is authorized without further shareholder action to
provide for the issuance of up to 7,500,000 shares of preferred stock, in one or
more series, with such voting powers, full or limited, and with such
designations, preferences and relative, participating, optional or special
rights, and qualifications, limitations or restrictions thereof, as shall be set
forth in resolutions providing for the issue thereof adopted by the Board of
Directors.
The Board of Directors and the Pricing Committee of the Board of Directors
have adopted resolutions creating the Preferred Stock. When issued, the
Preferred Stock will have a liquidation preference of $50 per share. The
Preferred Stock will be fully paid and nonassessable. The Preferred Stock will
not be subject to any sinking fund or other obligation of Sovereign to
repurchase or retire the Preferred Stock and will have no preemptive rights.
American Stock Transfer and Trust Co. will be the transfer agent, registrar
and dividend disbursing agent for the Preferred Stock.
The following is a brief description of the terms of the Preferred Stock
which does not purport to be complete and is subject to and qualified in its
entirety by reference to the Certificate of Designation for the Preferred Stock,
a form of which will be filed with the Commission.
RANKING
The Preferred Stock will rank prior to Sovereign's Common Stock and Series
A Junior Participating Preferred Stock, and on a parity with all other preferred
stock of Sovereign (unless such other preferred stock is expressly made junior
to the Preferred Stock), with respect to the payment of dividends and amounts
payable upon any voluntary or involuntary liquidation, dissolution or winding up
of Sovereign.
S-7
<PAGE>
DIVIDENDS
Holders of shares of Preferred Stock will be entitled to receive, when and
as declared by the Board of Directors of the Corporation out of assets of the
Corporation legally available for payment, cash dividends payable quarterly at
the rate of ____% per annum. Dividends on the Preferred Stock, calculated as a
percentage of the liquidation preference, will be payable quarterly on February
15, May 15, August 15 and November 15 of each year, with the first dividend
payable on August 15, 1995 to the holders of record as they appear on
Sovereign's stock register on the record date, which shall be not more than 30
days nor less than 10 days preceeding the dividend payment date. Dividends
payable on the Preferred Stock for any period less than a full dividend period
and for any portion of the initial dividend period occurring prior to August 15,
1995 shall be computed on the basis of a 360-day year of four 90-day quarters.
Dividends payable for each full dividend period shall be computed by dividing
the annual dividend rate by four. Each such dividend will be payable to holders
of record as they appear on the stock books of Sovereign on such record dates,
not exceeding thirty days preceding the payment dates thereof, as shall be fixed
by the Board of Directors of Sovereign. Dividends will be cumulative from the
date of issue of the Preferred Stock. If for any dividend period or periods full
cumulative dividends on any shares of preferred stock have not been paid or
declared and set apart for payment or Sovereign is in default or in arrears with
respect to any sinking fund or other arrangement for the purchase or redemption
of any shares of preferred stock, Sovereign may not declare any dividends on, or
make any payment on account of the purchase, redemption or other retirement of,
its Common Stock or any other stock of Sovereign ranking as to dividends or
distribution of assets junior to the preferred stock. If dividends on shares of
the Preferred Stock are in arrears, and there shall be outstanding shares of any
other series of preferred stock ranking on a parity as to dividends with the
shares of the Preferred Stock, Sovereign in making any dividend payment on
account of such arrears, is required to make payments ratably upon all
outstanding shares of the Preferred Stock and shares of such other series of
preferred stock in proportion to the respective amounts of dividends in arrears
on such shares of Preferred Stock and shares of other series of preferred stock.
Sovereign's primary source of funds for the payment of dividends on the
Preferred Stock is dividends from the Bank. From time to time while the
Preferred Stock is outstanding, the Bank and any other bank or thrift
subsidiaries of Sovereign may be subject to regulatory or contractual
constraints that restrict their ability to pay dividends to Sovereign. See
'Business -- Supervision and Regulation' in Sovereign's Annual Report on Form
10-K for the year ended December 31, 1994 for a discussion of regulatory and
other restrictions on the ability of the Bank and other subsidiaries to pay
dividends to Sovereign.
CONVERSION RIGHTS
Holders of shares of Preferred Stock will have the right, at their option,
to convert shares of Preferred Stock into shares of Common Stock at any time at
the conversion rate reflected on the cover page of this Prospectus Supplement,
provided that if any of the Preferred Stock is called for redemption, the
conversion rights pertaining thereto will terminate at the close of business on
the date fixed for redemption. See 'Description of Common Stock' in the
accompanying Prospectus. No fractional share or scrip representing a fractional
share will be issued upon conversion of the Preferred Stock, but if such
conversion results in a fraction, an equivalent amount will be paid in cash by
Sovereign.
The conversion rate is subject to adjustment in certain events, including:
(i) the issuance of capital stock as a dividend or distribution on the Common
Stock; (ii) subdivisions and combinations of the Common Stock; (iii) the
issuance to all holders of Common Stock of certain rights or warrants entitling
them to subscribe for or purchase Common Stock (or securities convertible into
Common Stock) within 45 days after the date fixed for the determination of the
shareholders entitled to receive such rights or warrants, at less than the
current market price (as defined in the Certificate of Designation); and (iv)
the distribution to all holders of Common Stock of evidences of indebtedness or
assets of the Corporation (excluding those referred to above). In the event that
the Corporation shall distribute any rights or warrants to acquire capital stock
pursuant to clause (iii) above ('Capital Stock Rights'), pursuant to which
S-8
<PAGE>
separate certificates representing such Capital Stock Rights will be
distributed subsequent to the initial distribution of such Capital Stock Rights
(whether or not such distribution shall have occurred prior to the date of the
issuance of the Preferred Stock), such subsequent distribution shall be deemed
to be the distribution of such Capital Stock Rights; provided that the
Corporation may, in lieu of making any adjustment in the conversion rate upon a
distribution of separate certificates representing such Capital Stock Rights,
make proper provision so that each holder of a share of Preferred Stock who
converts such Preferred Stock (or any portion thereof) (a) before the record
date for such distribution of separate certificates shall be entitled to receive
upon such conversion shares of Common stock issued with Capital Stock Rights and
(b) after such record date and prior to the expiration, redemption or
termination of such Capital Stock Rights shall be entitled to receive upon such
conversion, in addition to the shares of Common Stock issuable upon such
conversion, the same number of such Capital Stock Rights as would a holder of
the number of shares of Common Stock that such Preferred Stock so converted
would have entitled the holder thereof to acquire in accordance with the terms
and provisions applicable to the Capital Stock Rights if such Preferred Stock
were converted immediately prior to the record date for such distribution.
Common Stock owned by or held for the account of Sovereign or any majority owned
subsidiary shall not be deemed outstanding for the purpose of any adjustment.
No adjustment in the conversion rate will be made for regular quarterly or
other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from retained earnings. No
adjustments in the conversion rate will be required unless such adjustment would
require a change of at least 1% in the conversion rate then in effect or a
period of three years shall have elapsed from the date of occurrence of any
event requiring any such adjustment; provided, that any adjustment that would
otherwise be required to be made shall be carried forward and taken into account
in any subsequent adjustment. Notwithstanding any of the foregoing, neither the
issuance of Common Stock under Sovereign's Dividend Reinvestment and Stock
Purchase Plan or Employee Stock Purchase Plan or any successor plans providing
for the purchase of shares of Common Stock by Sovereign's shareholders or
employees at a price not less than 90% of the 'average market price' during the
'pricing period,' as such terms, or equivalent terms are defined in, and as
calculated pursuant to, such plans from time to time, nor the granting of any
rights thereunder, shall require an adjustment to the conversion rate. Sovereign
reserves the rights to make such increases in the conversion rate in addition to
those required in the foregoing provisions as Sovereign in its discretion shall
determine to be advisable in order that certain stock-related distributions
hereafter made by Sovereign to its shareholders shall not be taxable. Except as
stated above, the conversion rate will not be adjusted for the issuance of
Common Stock or any securities convertible into or exchangeable for Common
Stock, or securities carrying the right to purchase any of the foregoing.
In the case of (i) any reclassification or change of the Common Stock or
(ii) a consolidation or merger involving the Corporation, or (iii) a sale or
conveyance to another corporation of the property and assets of the corporation
as an entirety or substantially as an entirety, in each case as a result of
which holders of Common Stock shall be entitled to receive stock, securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Preferred Stock then outstanding will be
entitled thereafter to convert such Preferred Stock into the kind and amount of
shares of stock and other securities or property which they would have received
upon such reclassification, changes, consolidation, merger, combination, sale or
conveyance had such Preferred Stock been converted into Common Stock immediately
prior to such reclassification, change, consolidation, merger, combination, sale
or conveyance.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of Sovereign, the holders of shares of Preferred Stock are entitled
to receive out of assets of Sovereign available for distribution to
shareholders, before any distribution of assets is made to holders of Common
Stock or of any other stock of Sovereign ranking as to such distribution junior
to the Preferred Stock, liquidating distributions in the amount of $50 per share
plus accrued and unpaid dividends. If upon any voluntary
S-9
<PAGE>
or involuntary liquidation, dissolution or winding up of Sovereign, the amounts
payable with respect to the Preferred Stock and any other shares of stock of
Sovereign ranking as to any such distribution on a parity with the Preferred
Stock are not paid in full, the holders of the Preferred Stock and of each other
shares will share ratably in any such distribution of assets of Sovereign in
proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of Preferred Stock will not be
entitled to any further participation in any distribution of assets by
Sovereign. A consolidation or merger of Sovereign with or into any other
corporation or corporations or a sale of all or substantially all of the assets
of Sovereign shall not be deemed to be a liquidation, dissolution or winding up
of Sovereign.
REDEMPTION
The shares of Preferred Stock are not redeemable prior to May 15, 1998. On
or after May 15, 1998, at any time or from time to time, the shares of Preferred
Stock will be redeemable in whole or in part at the option of Sovereign, upon
not less than 30 nor more than 60 days' notice, at a redemption price as set
forth below plus, in each case, accrued and unpaid dividends to the redemption
date.
<TABLE>
<CAPTION>
IF REDEEMED DURING THE TWELVE MONTHS BEGINNING MAY 15, REDEMPTION PRICE
- ----------------------------------------------------------------------- ----------------
<S> <C>
1998........................................................... $
1999...........................................................
2000...........................................................
2001...........................................................
2002...........................................................
2003...........................................................
2004...........................................................
and at $50 per share thereafter
</TABLE>
If full cumulative dividends on any series of preferred stock ranking on a
parity with or senior to the Preferred Stock have not been paid or declared and
set apart for payment, the Preferred Stock may not be redeemed and Sovereign may
not otherwise purchase or acquire any shares of the Preferred Stock.
VOTING RIGHTS
Except as indicated below, or except as expressly required by applicable
law, the holders of the Preferred Stock will not be entitled to vote.
If the equivalent of six quarterly dividends payable on any series of
preferred stock of Sovereign are in default (whether or not declared or
consecutive), the holders of all outstanding series of preferred stock, voting
as a single class without regard to series, will be entitled to elect two
directors until all dividends in default have been paid or declared and set
apart for payment. The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of Preferred Stock and any other series of
preferred stock, voting as a single class without regard to series, will be
required (i) for any amendment to Sovereign's Articles of Incorporation (or any
certificate supplemental thereto providing for the capital stock of the
Corporation) or Bylaws which will materially and adversely changes the
preferences, privileges, rights or powers of the preferred stock, but, in any
case in which one or more, but not all, series of preferred stock would be
affected as to their preferences, privileges, rights or powers, only the consent
of holders of at least two-thirds of the shares of all such series that would be
so affected, voting separately as a class, shall be required or (ii) to issue
any class of stock which shall have preference as to dividends or distribution
of assets over any outstanding series of preferred stock.
Sovereign's Articles of Incorporation may be amended to increase the number
of authorized shares of preferred stock without the vote of the holders of
outstanding Preferred Stock.
S-10
<PAGE>
ABSENCE OF PUBLIC MARKET
Prior to this offering, there has been no public market for the Preferred
Stock and there can be no assurances that an active trading market will develop
or that, if it develops, it will continue. Application will be made to list the
Preferred Stock for quotation on the Nasdaq Stock Market.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain of the United States
federal income tax consequences of the purchase, ownership and disposition of
the Preferred Stock by investors who hold the Preferred Stock as a capital
asset. This discussion does not purport to be a complete analysis of the
purchase, ownership and disposition of the Preferred Stock, and does not address
all of the tax considerations that may be relevant to particular investors in
light of their individual circumstances or to holders subject to special
treatment under United States federal income tax laws, such as dealers in
securities, insurance companies, foreign persons, tax-exempt organizations and
financial institutions. In addition, this discussion does not address the
application or effect of any state, local, foreign or other tax laws. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
'Code'), Treasury regulations promulgated thereunder, and Internal Revenue
Service rulings and judicial decisions, all of which are subject to change,
possibly with retroactive effect. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK.
Dividend Payments. Dividends paid on the Preferred Stock will be taxable
to the holder as ordinary income to the extent of Sovereign's current or
accumulated earnings and profits (as determined for United States federal income
tax purposes). Dividends deemed to have been paid out of Sovereign's earnings
and profits will be eligible for the 70 percent dividends received deduction
allowable to corporate-holders under Section 243 of the Code, subject to certain
holding period requirements and limitations regarding debt financed portfolio
stock. A corporate-holder will be required to reduce its basis (but not below
zero) in the event any dividends on the Preferred Stock constitute
'extraordinary dividends,' as defined in Section 1059 of the Code, if the holder
has not held its Preferred Stock for more than two years at the time of such
extraordinary dividend. Current dividend payments on the Preferred Stock will
generally not constitute extraordinary dividends. Dividends paid on the
Preferred Stock in excess of Sovereign's current and accumulated earnings and
profits will be treated for United States federal income tax purposes first, as
a return of the holder's tax basis in the Preferred Stock to the extent thereof,
and thereafter, as a gain from the sales or exchange of such Preferred Stock.
Redemption. If the Preferred Stock is redeemed for cash at or prior to
maturity, such redemption will be a taxable event to the holders. Generally, a
redemption for cash will be treated as a sale or exchange if the redemption
meets one of the tests contained in Section 302(b) of the Code with respect to a
holder, in which event such holder will recognize gain or loss equal to the
difference between the amount of cash received and the holder's basis in the
redeemed Preferred Stock. If the redemption does not satisfy any of the tests
contained in Section 302(b) of the Code, the proceeds will be treated as a
dividend subject to the rules applicable to dividends described above.
Conversion Into Common Stock. No gain or loss will be recognized for
United States federal income tax purposes upon conversion of shares of Preferred
Stock solely into shares of Common Stock. Gain or loss will, however, be
recognized to the extent cash is received in lieu of fractional shares of Common
Stock, which cash will generally be treated as an amount received in redemption
of such fractional share interest and will be taxed under the redemption rules
described above. The tax basis of the Common Stock received upon conversion will
be equal to the tax basis of the shares of Preferred Stock converted (less any
basis allocable to a fractional share interest for which cash was received), and
the holding period of the Common Stock will include the holding period of the
shares of Preferred Stock converted.
S-11
<PAGE>
Adjustment of Conversion Ratio. The Treasury regulations promulgated under
Section 305(c) of the Code treat as taxable events certain constructive
distributions of stock with respect to stock and convertible securities. An
adjustment in the conversion rate of the Preferred Stock to reflect taxable
distributions on the Common Stock will be treated as a constructive distribution
of stock on the Preferred Stock and will be taxable as a dividend to holders to
the extent of the current or accumulated earnings and profits of Sovereign.
Sales of Preferred Stock. Gain or loss upon a sale or exchange of
Preferred Stock will be treated as capital gain or loss, and such gain or loss
will be long-term capital gain or loss if the Preferred Stock has been held for
more than one year.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, Sovereign has agreed to sell to each of the Underwriters named below,
and each of the Underwriters named below has severally agreed to purchase, the
number of shares set forth opposite its name below. In the Underwriting
Agreement, the several Underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares offered hereby if
any of the shares are purchased. In the event of default by an Underwriter, the
Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ---------------------------------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................ $
Salomon Brothers Inc .............................................................
Smith Barney Inc..................................................................
Total.................................................................. $
</TABLE>
The Underwriters have advised Sovereign that they propose initially to
offer the shares to the public at the public offering price set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share on
sales to certain other dealers. After the initial public offering, the public
offering price and such concessions may be changed.
Sovereign has agreed to indemnify each Underwriter against and contribute
toward certain liabilities, including liabilities under the Securities Act of
1933. Sovereign has agreed to reimburse the Underwriters for certain expenses.
Certain of the Underwriters engage in transactions with and perform
services for Sovereign and its subsidiaries in the ordinary course of business.
Sovereign has agreed that it will not, with certain exceptions, offer, sell
or otherwise dispose of any shares of preferred stock or Common Stock, or any
securities convertible into, or exchangeable for, shares of preferred stock or
Common Stock, except the shares of Preferred Stock offered hereby, for ___ days
from the date hereof without the prior written consent of the Underwriters.
Sovereign has granted the Underwriters an option for 30 days after the date
of this Prospectus Supplement to purchase at the public offering price, less the
underwriting discount, as set forth on the cover page of this Prospectus
Supplement, up to 225,000 additional shares of Preferred Stock. The Underwriters
may exercise such option only to cover over-allotments in connection with the
sale of the 1,500,000 shares offered hereby.
S-12
<PAGE>
LEGAL MATTERS
The legality of the shares will be passed upon for Sovereign by Stevens &
Lee, Reading, Pennsylvania, counsel to Sovereign. Joseph E. Lewis, a director of
the Bank, is a principal of the firm of Stevens & Lee. At December 31, 1994,
certain attorneys at Stevens & Lee and members of their immediate families owned
or had investment discretion with respect to an aggregate of less than 150,000
shares of Common Stock. Certain legal matters will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom, New York, New York.
Skadden, Arps, Slate, Meagher & Flom has performed, and may continue to perform,
services for Sovereign from time to time.
S-13
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY SOVEREIGN OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SOVEREIGN SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Sovereign....................................... S-3
Recent Developments............................. S-3
Use of Proceeds................................. S-4
Consolidated Summary Financial Data............. S-5
Capitalization.................................. S-6
Price Range of Common Stock and Dividend
History....................................... S-6
Description of Preferred Stock.................. S-7
Underwriting.................................... S-12
Legal Matters................................... S-13
PROSPECTUS
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Sovereign Bancorp, Inc. ........................ 3
Supervision and Regulation...................... 3
Ratio of Earnings to Fixed Charges.............. 8
Use of Proceeds................................. 8
Description of Debt Securities.................. 9
Description of Capital Securities............... 20
Description of Preferred Shares................. 21
Description of Capital Stock.................... 25
Description of Securities Warrants.............. 27
Certain Tax Considerations...................... 30
Plan of Distribution............................ 30
Legal Matters................................... 31
Experts......................................... 31
</TABLE>
1,500,000 SHARES
[ INSERT LOGO ]
% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES B
(LIQUIDATION PREFERENCE
$50 PER SHARE)
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MAY , 1995
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