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Sovereign Bancorp, Inc.
March 17, 1995
Dear Fellow Shareholder:
Sovereign Bancorp's Annual Meeting of Shareholders will be held on
Thursday, April 20, 1995, at 10:00 a.m. in the Baron Room of The Sheraton
Berkshire Inn, Route 422 West, Papermill Road Exit, Wyomissing, Pennsylvania.
We look forward, as do other members of the board and management, to the
opportunity to greet personally those shareholders who are able to attend
this meeting.
THE NOTICE AND PROXY STATEMENT WHICH ARE CONTAINED IN THE FOLLOWING PAGES
DESCRIBE THE BUSINESS TO BE CONDUCTED AT THE MEETING. PROPOSALS (1) AND (2)
TO BE ACTED ON AT THE ANNUAL MEETING HAVE BEEN UNANIMOUSLY APPROVED AND
RECOMMENDED BY SOVEREIGN'S BOARD OF DIRECTORS. WE URGE YOU TO READ CAREFULLY
THE DESCRIPTION OF THE PROPOSALS AND TO VOTE FOR THEIR ADOPTION.
It is important that your shares be represented at the Annual Meeting
whether or not you are personally able to attend. We urge you to sign and
date the enclosed proxy card and return it in the enclosed envelope as soon
as possible. Please indicate and return the enclosed proxy card and the
enclosed ticket if you intend to be present at the meeting.
We hope you will participate in the Annual Meeting, either in person or by
proxy. Thank you very much for your continued interest and support.
Sincerely,
/s/ Frederick J. Jaindl
-----------------------------------
Frederick J. Jaindl
Chairman of the Board
/s/ Jay S. Sidhu
-----------------------------------
Jay S. Sidhu
President and Chief Executive Officer
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Sovereign Bancorp, Inc.
----------------
NOTICE
OF
ANNUAL MEETING OF SHAREHOLDERS
to be held April 20, 1995
----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Meeting") of Sovereign Bancorp, Inc. ("Sovereign") will be held on April 20,
1995, at 10:00 a.m. (Eastern Time) at The Sheraton Berkshire Inn, Wyomissing,
Pennsylvania, for the following purposes:
(1) To elect three Class II directors of Sovereign to serve for a term
of three years and until their successors shall have been elected and
qualified;
(2) To ratify the appointment by Sovereign's Board of Directors of
Ernst & Young LLP as Sovereign's independent auditors for the fiscal year
ending December 31, 1995; and
(3) To transact such other business as may properly be presented at the
Meeting.
Shareholders of record at the close of business on March 3, 1995, are
entitled to notice of, and to vote at the Meeting.
SHAREHOLDERS ARE URGED TO SIGN, DATE, AND RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Lawrence M. Thompson, Jr.
--------------------------------------
LAWRENCE M. THOMPSON, JR.
SECRETARY
Wyomissing, Pennsylvania
March 17, 1995
<PAGE> 3
SOVEREIGN BANCORP, INC
1130 BERKSHIRE BOULEVARD
WYOMISSING, PENNSYLVANIA 19610
(610) 320-8400
--------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 20, 1995
--------------
GENERAL INFORMATION
Solicitation of Proxies. This Proxy Statement is furnished in connection
with the solicitation of proxies by the Board of Directors of Sovereign
Bancorp, Inc. ("Sovereign"), parent company of Sovereign Bank, a Federal
Savings Bank ("Sovereign Bank"), for use at Sovereign's annual meeting of
shareholders to be held April 20, 1995, or any adjournment thereof (the
"Meeting"). The Proxy Statement and the accompanying proxy are first being
mailed to shareholders of Sovereign on or about March 17, 1995. The expense
of soliciting proxies will be borne by Sovereign. It is expected that the
solicitation of proxies will be primarily by mail. Sovereign's directors,
officers and employees may also solicit proxies personally, by telephone and
by telegraph. In addition, Sovereign has retained Georgeson & Company Inc. to
assist with the solicitation of proxies at an estimated cost of $5,500 plus
reasonable out-of-pocket expenses.
Voting and Revocation of Proxies. The execution and return of the enclosed
proxy will not affect a shareholder's right to attend the Meeting and vote in
person. Any shareholder giving a proxy may revoke it at any time before it is
exercised by submitting written notice of its revocation or a subsequently
executed proxy bearing a later date to the Secretary of Sovereign, or by
attending the Meeting and electing to vote in person. Shareholders of record
at the close of business on March 3, 1995 (the "Record Date") are entitled to
notice of, and to vote at, the Meeting. On the Record Date, there were
45,658,483 shares of Sovereign's common stock outstanding, each of which will
be entitled to one vote at the Meeting.
If the enclosed proxy is appropriately marked, signed and returned in time
to be voted at the Meeting, the shares represented by the proxy will be voted
in accordance with the instructions marked thereon. Signed proxies not marked
to the contrary will be voted "FOR" the election, as directors, of the Board
of Directors' nominees; and "FOR" the ratification of Ernst & Young LLP as
Sovereign's independent auditors for 1995. Signed proxies will be voted "FOR"
or "AGAINST" any other matter which properly comes before the Meeting or any
adjournment thereof, in the discretion of the persons named as proxyholders.
Quorum. The presence, in person or by proxy, of shareholders entitled to
cast at least a majority of the votes that all shareholders are entitled to
cast shall constitute a quorum at the Meeting. Abstentions with respect to
one or more proposals voted upon at the Meeting will be included for purposes
of determining a quorum at the Meeting.
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ELECTION OF DIRECTORS
The Articles of Incorporation of Sovereign provide that Sovereign's
business shall be managed by a Board of Directors of not less than six and
not more than twenty-five persons, with the exact number fixed by the Board
of Directors from time to time. The Board of Directors of Sovereign, as
provided in Sovereign's Articles of Incorporation, is divided into three
classes: Class I, Class II and Class III, with each class being as nearly
equal in number as possible. Pursuant to a Memorandum of Understanding
executed by Sovereign and each member of Sovereign's Board of Directors on
January 18, 1994 (the "MOU"), the Board of Directors of Sovereign was
increased from eight to nine members, with three directors in each class, and
Theodore Ziaylek, Jr. (a director of Sovereign Bank) was added to the Board
as a Class I Director. See "Memorandum of Understanding and Related Matters."
Pursuant to the terms of the Agreement by which Sovereign combined with
Charter FSB Bancorp, Inc. ("Charter"), Sovereign increased the size of its
Board to ten members and elected Patrick J. Petrone, the President, Chief
Executive Officer and a Director of Charter, as a Class I director of
Sovereign. The directors in each class serve terms of three years each and
until their successors are elected and qualified.
The Board of Directors has unanimously nominated Frederick J. Jaindl,
Howard D. Mackey and Daniel K. Rothermel for election as Class II directors
of Sovereign. Messrs. Jaindl, Mackey and Rothermel are presently directors of
Sovereign. Messrs. Jaindl and Rothermel were elected by shareholders at the
1992 Annual Meeting of Sovereign. Mr. Mackey was appointed as a Class II
director to the Sovereign Board of Directors on February 22, 1995, to fill a
vacancy created by the resignation of Arthur A. Haberberger on September 20,
1994. Under the terms of the agreement pursuant to which Sovereign acquired
Charter, Sovereign was required to give first preference to a Charter
director to fill any vacancy occurring on the Sovereign Board and Mr. Mackey,
the former Chairman of the Board of Charter, was appointed to fill this
vacancy. Each of the nominees has consented to being named in this Proxy
Statement and to serve if elected. If any of the nominees become unable to
accept nomination or election, the persons named in the proxy may vote for a
substitute nominee selected by the Board of Directors. Sovereign's
management, however, has no present reason to believe that any nominee listed
below will be unable to serve as a director, if elected.
The By-Laws of Sovereign permit nominations of candidates for election to
the Board of Directors to be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors. Nominations made
by shareholders (other than by the Board of Directors) must be made, in
writing, and delivered or mailed to Sovereign not less than 90 days prior to
the date of a shareholders' meeting. Such notice must contain the same
information, to the extent known to the notifying shareholder, as that
required to be stated by Sovereign in its Proxy Statement with respect to
nominees of the Board of Directors. Any nominations which are not made in
this manner or any votes cast at the Meeting for any candidate not duly
nominated may be disregarded by the chairman of the Meeting.
The three nominees who receive the highest number of votes cast at the
Meeting will be elected Class II directors. Abstentions and broker non-votes,
although counted for the purpose of determining whether a quorum is present
at the Meeting, will not constitute or be counted as "votes" cast at the
Meeting. Shares represented by properly executed proxies in the accompanying
form will be voted for the Class II nominees named below unless otherwise
specified in the proxy by the shareholder. Any shareholder who wishes to
withhold authority from the proxyholders to vote for the election of
directors or to withhold authority to vote for any individual nominee may do
so by marking his or her proxy to that effect. Shareholders cannot cumulate
their votes for the election of directors. No proxy may be voted for a
greater number of persons than the number of nominees named.
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The following table sets forth certain information concerning the nominees
for election as Class II directors of Sovereign, the continuing Class I and
Class III directors of Sovereign, each named executive officer of Sovereign
set forth in the compensation tables beginning on page 11, and all Sovereign
directors and executive officers as a group, including their ownership of
shares of common stock of Sovereign as of March 3, 1995. Unless otherwise
indicated in a footnote, each Sovereign director and named executive officer
holds sole voting and investment power over the shares listed as beneficially
owned. Unless otherwise indicated in a footnote, shares indicated as being
subject to options are shares issuable pursuant to options outstanding and
vested under the Sovereign Bancorp, Inc. Stock Option Plan (the "1986 Stock
Option Plan") or the Sovereign Bancorp, Inc. 1993 Stock Option Plan (the
"1993 Stock Option Plan").
<TABLE>
<CAPTION>
Amount and Nature of
Director Beneficial Percent of
Name Age Since Ownership(1) Common Stock
- - --------------------------------------------------- ----- ---------- -------------------- --------------
<S> <C> <C> <C> <C>
NOMINEES AS CLASS II DIRECTORS
TO SERVE UNTIL 1998
Frederick J. Jaindl ............................... 67 1988 3,634,082(2) 7.96%
Howard D. Mackey ................................. 68 1973 189,417(3) .41%
Daniel K. Rothermel ............................... 56 1976 22,671(4) .05%
CONTINUING CLASS I DIRECTORS
TO SERVE UNTIL 1997
Richard E. Mohn .................................. 64 1981 298,414(5) .65%
Patrick J. Petrone ................................ 65 1990 193,504(6) .42%
Jay S. Sidhu ...................................... 43 1987 1,123,899(7) 2.44%
Theodore Ziaylek, Jr. ............................ 72 1979 246,237(8) .54%
CONTINUING CLASS III DIRECTORS
TO SERVE UNTIL 1996
Lawrence W. O'Neill ............................... 66 1988 23,650 .05%
G. Arthur Weaver ................................. 62 1971 53,665(9) .12%
Samuel R. Willard, Jr. ............................ 67 1959 395,957(10) .87%
EXECUTIVE OFFICERS
Karl D. Gerhart .................................. 42 N/A 237,934(11) .52%
Lawrence M. Thompson, Jr. ........................ 42 N/A 141,382(12) .31%
All Sovereign Directors and executive officers as a
group (14 persons) ............................... 6,604,510(13) 14.23%
</TABLE>
- - ------
(1) The table reflects data supplied by each director and executive officer.
The table does not reflect a 5% stock dividend declared on February 22,
1995, and payable to shareholders of record on March 31, 1995.
(2) Information is as reported in Mr. Jaindl's Schedule 13D dated September 3,
1986 (as amended through April 26, 1994) and Form 4 dated January 10, 1995,
each filed with the SEC. Shares include 6,600 shares that are held by
Jaindl Turkey Farm Profit Sharing Plan, of which Mr. Jaindl is the sole
trustee.
(3) Shares and percent include 6,800 shares held by Mr. Mackey's wife and
30,600 shares subject to options granted pursuant to the Charter FSB
Bancorp, Inc. Stock Option Plan (the "Charter Stock Option Plan"), which
plan was assumed by Sovereign in connection with Sovereign's acquisition of
Charter in November 1994. Time in service includes years Mr. Mackey served
as a director of Sovereign's and Sovereign Bank's predecessor institutions.
(4) Shares and percent include 763 shares held by Mr. Rothermel's wife with
respect to which Mr. Rothermel disclaims beneficial ownership.
(5) Mr. Mohn holds shared voting and investment power over 34,420 shares. Mr.
Mohn's wife holds 89,414 shares with respect to which Mr. Mohn disclaims
beneficial ownership.
(6) Mr. Petrone holds shared voting and investment power over 47,000 shares.
Shares and percent include 93,500 shares subject to options granted
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pursuant to the Charter FSB Bancorp, Inc. Stock Incentive Plan (the
"Charter Incentive Plan"), which plan was assumed by Sovereign in
connection with Sovereign's acquisition of Charter in November 1994. Time
in service includes years Mr. Petrone served as director of Sovereign Bank
and Sovereign Bank's predecessor banking institutions.
(7) Mr. Sidhu holds shared voting and investment power over 448,440 shares.
Shares and percent include 418,943 shares subject to options, 20,805 shares
held by Mr. Sidhu's wife and 16,236 shares held by Sovereign's 401(k)
Retirement Savings Plan that are allocated to Mr. Sidhu's account. Shares
and percent include 7,870 shares purchased and held by the Sovereign
Employee Stock Ownership Plan (the "Sovereign ESOP") that are allocated to
Mr. Sidhu's account and over which he exercises voting power.
(8) Mr. Ziaylek's shares and percent include 38,916 shares subject to options.
(9) Mr. Weaver holds shared voting power over 11,760 shares and shared
investment power over 23,534 shares.
(10) Mr. Willard's shares and percent include 38,957 shares subject to options.
(11) Mr. Gerhart holds shared voting and investment power over 67,212 shares.
Mr. Gerhart's shares and percent include 37,460 shares held by Sovereign's
401(k) Retirement Plan Savings Plan that are allocated to Mr. Gerhart's
account. Shares and percent include 5,192 shares purchased and held by the
Sovereign ESOP that are allocated to Mr. Gerhart's account and over which
he exercises voting power.
(12) Mr. Thompson holds shared voting and investment power over 23,688 shares.
Mr. Thompson's shares and percent include 109,815 shares subject to
options, and 2,876 shares held by Sovereign's 401(k) Retirement Savings
Plan that are allocated to Mr. Thompson's account. Shares and percent
include 5,003 shares purchased and held by the Sovereign ESOP that are
allocated to Mr. Thompson's account and over which he exercises voting
power.
(13) In the aggregate, these persons hold shared voting power over 595,450
shares and shared investment power over 607,224 shares. Shares and percent
include 749,147 shares subject to options, and 59,635 shares held by
Sovereign's 401(k) Retirement Savings Plan allocated to the executive
officers' accounts. Shares and percent include 20,868 shares purchased and
held by the Sovereign ESOP that are allocated to participant accounts and
over which they exercise voting power.
The principal occupation and business experience during the last five
years of each nominee for election as a director of Sovereign and of each
continuing director of Sovereign is as follows:
Frederick J. Jaindl. Mr. Jaindl became Chairman of the Board of Sovereign
in March 1989. He is sole proprietor of Jaindl Turkey Farms, a concern
engaged in the farming and growing of turkeys, and of Jaindl's, Inc., a
concern engaged in the processing and selling of turkeys.
Howard D. Mackey. Mr. Mackey is retired. Prior to the merger of Charter
with and into Sovereign, and the related merger of Charter Federal Savings
Bank, Charter's wholly owned subsidiary ("Charter Federal") with and into
Sovereign Bank, Mr. Mackey served as Chairman of the Board of Charter and
Charter Federal since 1984. Prior to his retirement in 1986, Mr. Mackey was
owner and president of Mackey Funeral Home.
Richard E. Mohn. Mr. Mohn became Chairman of the Board of Sovereign Bank
in November 1989. He is Chairman of Cloister Spring Water Company, Ephrata,
Pennsylvania, a bottler and distributor of spring water.
Lawrence W. O'Neill. Mr. O'Neill is Chairman of the Board and President of
Victor Balata Belting Co., an industrial belting manufacturing company.
Patrick J. Petrone. Mr. Petrone is President of the Charter Federal
Savings Bank Division of Sovereign Bank. He became Vice Chairman of Sovereign
Bank, upon the merger of Charter Federal into Sovereign Bank in 1994. Prior
to the merger, he served as President and Chief Executive Officer of Charter
and of Charter Federal. Mr. Petrone previously served as President and Chief
Executive Officer of Charter since 1990 and President and Chief Executive
Officer of Charter Federal since 1989.
Daniel K. Rothermel. Mr. Rothermel became President and Chief Executive
Officer of Cumru Associates, Inc., a private holding company in 1989. He
retired, in 1989, as Vice President, General Counsel and Secretary of
Carpenter Technology Corporation, a publicly held specialty steel
manufacturer, a position he held for more than ten years.
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Jay S. Sidhu. Mr. Sidhu became President and Chief Executive Officer of
Sovereign in November 1989, and was named President and Chief Executive
Officer of Sovereign Bank in March 1989. Mr. Sidhu previously served as
Treasurer and Chief Financial Officer of Sovereign since the inception of
Sovereign in 1987.
G. Arthur Weaver. Mr. Weaver is a real estate and insurance executive with
the George A. Weaver Company, New Holland, Pennsylvania.
Samuel R. Willard, Jr. Mr. Willard is President and Chief Executive
Officer of Shearer-Penn, a tree care and agricultural related business based
in Trenton, New Jersey. Mr. Willard served as President and as a director of
Yardley Savings and Loan Association ("Yardley") prior to the merger of
Yardley into Sovereign Bank in 1991 (the "Sovereign-Yardley Merger").
Theodore Ziaylek, Jr. Mr. Ziaylek has served, since 1973, as President of
Ziamatic Corp. in Yardley, Pennsylvania, a manufacturer of fire, safety and
marine equipment. Mr. Ziaylek also served as Chairman of the Board of Yardley
prior to the Sovereign-Yardley Merger.
MEMORANDUM OF UNDERSTANDING AND RELATED MATTERS
On January 18, 1994, Sovereign and each member of its Board of Directors
executed the MOU which settled a policy dispute among the members of the
Board relating to the strategic direction of Sovereign. Directors Jaindl,
O'Neill and Willard and former director Arthur A. Haberberger (Mr.
Haberberger resigned as a director on September 20, 1994), appeared to desire
either to review all strategic options available to Sovereign, including a
sale, or to sell Sovereign at pricing levels then being paid for financial
institutions. Directors Sidhu, Mohn, Rothermel and Weaver appeared to believe
that a sale at such pricing levels would be premature in light of Sovereign's
recent earnings growth and their perception of Sovereign's near and
intermediate term prospects, and that the review of strategic options
proposed by the other four directors was merely part of their plan to sell
Sovereign.
The policy dispute became public when, on December 20, 1993, Sovereign
commenced litigation against Messrs. Jaindl, Haberberger, O'Neill, the Estate
of George B. Gaul, and certain affiliated parties in the United States Court
for the Eastern District of Pennsylvania, Civil Action No. 93-CV-6868 (the
"Civil Action"). The complaint alleged, among other things, that Mr. Jaindl
had agreed to act in concert with others to expand and gain control of
Sovereign's Board and to seek to cause a sale or merger of Sovereign, without
compliance with the disclosure requirements of the federal securities laws.
The complaint sought (i) a declaration by the court that Mr. Jaindl and the
remaining defendants violated federal securities laws; (ii) an order from the
court compelling Mr. Jaindl and the remaining defendants to cure such alleged
violations; and (iii) injunctions against Mr. Jaindl and the remaining
defendants from, among other things, acquiring additional Sovereign stock,
voting any Sovereign stock, soliciting proxies, consents or authorizations
on, or orders to sell, Sovereign stock, and using Sovereign stock as a means
of gaining control of Sovereign, until such time that Mr. Jaindl and the
remaining defendants cured their violations and the effects of their unlawful
conduct had dissipated.
On January 5, 1994, Mr. Jaindl answered the Civil Action complaint, and
together with Mr. O'Neill instituted, individually and derivatively, a
counterclaim against Messrs. Sidhu, Gerhart, Mohn, and Rothermel and certain
unnamed others. In his answer, Mr. Jaindl contended that Mr. Sidhu did not
possess the authority to bring the Civil Action in Sovereign's name, denied
the substantive allegations of the complaint and alleged that the
counterclaim defendants had wasted corporate assets and had violated various
provisions of federal banking laws in bringing the action. The counterclaim
also requested the court to enjoin the use of corporate funds to pay for the
Civil Action and to recover funds already spent; declare that certain of the
counterclaim defendants' actions in connection with bringing the Civil Action
caused Sovereign to commit violations of federal banking laws; declare that
Mr. Sidhu violated federal securities law; and award costs to Mr. Jaindl for
defending the Civil Action and bringing the counterclaim.
On January 12, 1994, a purported shareholder of Sovereign commenced a
class action lawsuit against Sovereign and Jay S. Sidhu, Richard Mohn and
Daniel K. Rothermel in the Court of Common Pleas of Berks County (the "Berks
County Class Action"). The complaint purported to set forth a cause of action
against the defendants for breach of fiduciary duty by allegedly using their
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<PAGE> 8
positions to avoid a sale of Sovereign. Plaintiff sought compensatory damages,
injunctive and declaratory relief and such other relief as the court might deem
appropriate, including attorneys' fees. In February 1994, counsel to plaintiff
indicated to Sovereign that he intended to withdraw and he subsequently withdrew
the Berks County Class Action, without prejudice.
On January 14, 1994, Sovereign amended its complaint to add Sovereign
Investment Corp., a wholly-owned subsidiary of Sovereign, as a plaintiff in
its capacity as a shareholder of Sovereign. The complaint, as amended, no
longer named the Estate of George B. Gaul as a defendant.
At the January 18, 1994, regular meeting of Sovereign's Board of
Directors, after presentation by Sovereign's management of Sovereign's 1993
results and of management's forecast for 1994 and 1995, a review of 1994 and
1995 acquisition opportunities, and a discussion of the adverse impact
protracted litigation could have on Sovereign and its prospects, a consensus
developed among Board members with respect to a resolution of the dispute and
related litigation. During a recess, the MOU was negotiated and, after the
recess, was acted upon by the Board.
Sovereign and each of its directors are parties to the MOU. The MOU
requires Sovereign, the Board, each individual director and each of their
affiliates to (i) cause Sovereign to pursue a course of continued
independence for at least 18 months, with continued growth by acquisition,
(ii) refrain, during such 18-month period, from soliciting or responding to
indications of interest or acquisition proposals for the sale of Sovereign,
absent the recommendation of Sovereign's CEO or an unqualified opinion of
outside counsel to Sovereign that a Pennsylvania court would probably
determine that the failure to effect such solicitation or response
constitutes a violation of such director's fiduciary duty to Sovereign, (iii)
increase the size of the Board from eight to nine members and fill the
vacancy created thereby with Theodore Ziaylek, Jr., a member of the Board of
Directors of Sovereign Bank, (iv) nominate Messrs. Sidhu, Mohn and Ziaylek
for election for a three year term as Class I directors at Sovereign's April
1994 Annual Meeting of Shareholders, and directors Jaindl, Haberberger and
Rothermel for election for a three year term as Class II directors at
Sovereign's Annual Meeting scheduled for April 1995 (Mr. Haberberger resigned
as a director on September 20, 1994), (v) refrain from soliciting proxies in
opposition to nominees and cause shares beneficially owned to be voted in
favor of these nominees, (vi) amend Sovereign's bylaws to eliminate the age
70 restriction for nomination and election as a director, (vii) vote in favor
of retaining Mr. Sidhu as CEO at the reorganization meetings of the Board in
1994 and 1995 and of an amendment to Sovereign's bylaws providing that Mr.
Sidhu could be removed only by a vote of at least 77.8% of the directors in
office during the 18 month period ending in July 1995, absent a contrary
directive from the Office of Thrift Supervision, (viii) seek dismissal, with
prejudice, of the Civil Action and related counterclaim and the release of
each named defendant and counterclaim defendant from liability for any act or
omission or violation of law alleged to have occurred through January 18,
1994, (ix) support the defense of the Berks County Class Action and any
related litigation, (x) cause Sovereign to pay the documented legal fees and
certain other expenses of the parties to, or participants in the Civil Action
and related counterclaim, as well as the Berks County Class Action and (xi)
refrain, during such 18 month period, from commencing any litigation against
Sovereign or any of its officers, directors, employees or affiliates arising
out of the dispute or related facts or circumstances (except as necessary to
enforce the MOU). Theodore Ziaylek, Jr. later joined in the execution of the
MOU.
By letter dated January 16, 1995, Chairman and Director Jaindl, in his
capacity as a shareholder of Sovereign, nominated Arthur A. Haberberger for
election as a Class II Director. At a meeting of the Board of Directors held
on February 22, 1995, Lawrence W. O'Neill, in his capacity as a Director,
nominated Messrs. Jaindl, Haberberger and Rothermel as management's nominees
for Class II Directors and, asserted that, in his view, the MOU required that
the Directors who signed the MOU vote in favor of such nominations. After
discussion, Mr. Jaindl, in his capacity as a shareholder, withdrew his
nomination of Mr. Haberberger and Mr. O'Neill's motion failed for lack of a
second. Directors Jaindl, Mackey and Rothermel were unanimously designated as
management's Class II nominees to the Board of Directors. Sovereign, by
action of the Board of Directors, and each of the directors, except for Mr.
O'Neill, who were signatory to the MOU, in their capacity as a director and
individually, have indicated that they will not treat the failure of the
Sovereign Board of Directors to nominate Mr. Haberberger for election as a
Class II Director, and/or the solicitation of proxies for Class II Director
nominees other than Mr. Haberberger, as a breach or rescission of the MOU.
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<PAGE> 9
BOARD MEETINGS AND COMMITTEES
Sovereign's Board of Directors has an Audit Committee, Community
Reinvestment Act Committee, Compensation Committee, Ethics Committee, Merger
and Acquisition Committee, Nominating Committee, Pension Committee and Risk
Management Committee and is authorized, under Sovereign's By-Laws, to create
other Board committees as needed. At present, no other committees have been
established.
Sovereign's Audit Committee, which met one time during 1994, is
responsible for reporting to Sovereign's Board on the general financial
condition of Sovereign and the results of the annual audit. The Audit
Committee consists of Richard E. Mohn, Lawrence W. O'Neill, Daniel K.
Rothermel, G. Arthur Weaver (Chairman) and Theodore Ziaylek, Jr.
Sovereign's Community Reinvestment Act Committee consists of Richard E.
Mohn, Jay S. Sidhu, Daniel K. Rothermel, G. Arthur Weaver and Samuel R.
Willard, Jr., (Chairman). The Community Reinvestment Act Committee met one
time during 1994.
Sovereign's Compensation Committee, which met two times during 1994,
establishes salary guidelines for employees of Sovereign, subject to
ratification by Sovereign's Board of Directors. Sovereign's Compensation
Committee also administers the 1986 Stock Option Plan and the 1993 Stock
Option Plan. In addition, the Compensation Committee administers the Charter
Stock Option Plan and the Charter Incentive Plan, which plans were assumed by
Sovereign in connection with Sovereign's acquisition of Charter in November
1994. Sovereign's Compensation Committee consists of Frederick J. Jaindl,
Richard E. Mohn (Chairman), Lawrence W. O'Neill, Daniel K. Rothermel, G.
Arthur Weaver, Samuel R. Willard, Jr. and Theodore Ziaylek, Jr.
Sovereign's Ethics Committee was formed in 1995 to monitor, oversee and
review compliance by Sovereign's directors, officers and employees with
Sovereign's Code of Conduct. The Ethics Committee consists of Frederick J.
Jaindl (nonvoting), Richard E. Mohn, Daniel K. Rothermel (Chairman), Jay S.
Sidhu (nonvoting), G. Arthur Weaver and Theodore Ziaylek, Jr.
Sovereign's Merger and Acquisition Committee, which met at various times
during 1994, is responsible for reviewing and recommending to Sovereign's
Board of Directors potential merger and acquisition candidates. The Merger
and Acquisition Committee consists of Frederick J. Jaindl, Richard E. Mohn,
Jay S. Sidhu (Chairman) and Samuel R. Willard, Jr.
Sovereign's Nominating Committee, created in 1992, consists of Lawrence W.
O'Neill (Chairman), Richard E. Mohn, Daniel K. Rothermel, G. Arthur Weaver
and Samuel R. Willard, Jr. The Nominating Committee met one time during 1994.
The Nominating Committee makes recommendations to the Board of Directors with
respect to qualifications and nominations of directors. In determining its
recommendations to the Board, the Nominating Committee will consider
candidates recommended by shareholders.
Sovereign's Pension Committee administers the Pension Plan, the Employee
Stock Ownership Plan, the Stock Purchase Plan and the 401(k) Retirement
Savings Plan. The Pension Committee met two times during 1994. The Committee
consists of Frederick J. Jaindl, Richard E. Mohn, Lawrence W. O'Neill, Daniel
K. Rothermel (Chairman), Jay S. Sidhu and Samuel R. Willard, Jr.
Sovereign's Risk Management Committee consists of Frederick J. Jaindl,
Richard E. Mohn, Lawrence W. O'Neill, Daniel K. Rothermel, Jay S. Sidhu, G.
Arthur Weaver, Samuel R. Willard, Jr., and Theodore Ziaylek, Jr. (Chairman).
The Risk Management Committee met one time during 1994.
During 1994, Sovereign's Board of Directors held sixteen meetings
(including regularly scheduled and special meetings). Each director of
Sovereign attended at least 75% of the total number of meetings of
Sovereign's Board of Directors and the committees thereof on which he served.
COMPENSATION PAID TO DIRECTORS
During 1994, Directors of Sovereign who are not employees of Sovereign
received $700 for each meeting of Sovereign's Board of Directors which they
attended. No fees were paid for attendance at Board Committee meetings.
During 1994, in addition to payment of regular directors' fees for attendance
at meetings, the Chairman of the Board of Directors of Sovereign received an
annual retainer fee of $15,000.
7
<PAGE> 10
Sovereign maintains the Sovereign Nonemployee Directors' Incentive Plan
("NDIP") for its nonemployee directors. The NDIP provided for cash
compensation to nonemployee directors if Sovereign's return on beginning
equity exceeded 16% during the plan year ended 1994. Because Sovereign's
return on beginning equity exceeded 16% for the year ended 1994, each
nonemployee director, in office on December 31, 1994, received $12,000 in
addition to fees for attendance at meetings and the annual retainer, if
applicable. These payments were in addition to payment of regular directors'
fees for attendance at meetings. In 1995, the NDIP provides for cash
compensation to directors if Sovereign's return on beginning equity exceeds
15%. In such event, each nonemployee director will receive $12,000 in
addition to fees for attendance at meetings and the annual retainer, if
applicable.
8
<PAGE> 11
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Sovereign's Executive Compensation Program is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
is composed entirely of non-employee directors. The Executive Compensation
Program is structured and administered to support Sovereign's business
mission which is to be a highly focused, quality driven, market led and
results oriented company that continually seeks to outperform the market in
terms of consistency, growth in earnings, quality of earnings and return on
equity.
The Committee recommends to the Board of Directors payment amounts and
award levels for the Chief Executive Officer. Mr. Sidhu, the Chief Executive
Officer, evaluates and approves compensation and awards for the other
executive officers. Such compensation and awards are based upon Sovereign's
performance and each individual's performance in meeting personal and team
objectives.
COMPENSATION PHILOSOPHY
The Executive Compensation Program of Sovereign has been designed to:
o Align the interests of executives with the long-term interests of
shareholders through award opportunities that can result in ownership of
common stock.
o Motivate key employees to achieve a superior level of quality performance
and financial results by rewarding them for their achievement.
o Support a pay for performance policy that supplements overall company
compensation amounts based on company-wide results, team oriented results,
and individual performance.
COMPONENTS OF COMPENSATION
At present, the Executive Compensation Program is comprised of salary,
annual cash incentive opportunities, long-term incentive opportunities in the
form of stock options and employee benefits typically offered to executives
by growth oriented companies. As an executive's level of responsibility
increases, a greater portion of his or her potential total compensation
opportunity is based on performance incentives and less on salary and
employee benefits, causing greater variability in the individual's absolute
compensation from year-to-year. Base salary levels for the executive officers
of Sovereign are set below average compared to other companies within its
peer group, which consists of other Middle Atlantic region thrifts and thrift
holding companies in the $5 billion to $10 billion asset range. The peer
group used in determining compensation is different from and broader than the
peer group (the five largest Pennsylvania bank holding companies) used in the
performance graph (see "Performance Graph") because, although Sovereign is
the sixth largest financial institution headquartered in Pennsylvania, it is
smaller in asset size than all of the companies in the performance graph peer
group. Executives can have the opportunity for total cash compensation to
exceed the average salary for peer group companies upon Sovereign's
achievement of predetermined financial goals and objectives set by the
Compensation Committee and the Board. The intent is to have incentive
compensation tied to performance results.
The Chief Executive Officer has not received a salary increase since July
1992. The Compensation Committee based the Chief Executive Officer's base
salary in 1993 and 1994 on a variety of factors including the salaries of the
chief executive officers of comparable high-performing companies in the
financial services industry to which it compares its financial results. The
salary increase granted to the Chief Executive Officer in 1992 was not based
on any mathematical formula and did not directly relate to any quantitative
factors. The increase was determined in the Compensation Committee's sole
discretion after its consideration of competitive data, the Board's
assessment of his performance during 1991 and 1992, and recognition of
Sovereign's performance, which for 1991 and 1992 was generally above its peer
group in terms of return on equity, net income and growth in assets through
mergers and acquisitions. The other named executive officers were granted
salary increases each year based on individual performance, contributions to
Sovereign and level of responsibility.
SHORT-TERM INCENTIVE COMPENSATION
Incentive compensation awards in 1995 were based on a review of
Sovereign's 1994 performance. This review included an assessment of how
Sovereign met and exceeded financial goals for return on equity, earnings,
9
<PAGE> 12
capital levels, asset quality and successful completion of certain strategic
acquisitions. The goals reflect the Board of Directors' determination of the
appropriate goals for a growth oriented company. No bonus would have been paid
if Sovereign's return on equity was less than 16%. If Sovereign's return on
beginning equity was 16% or better, Mr. Sidhu was entitled to a bonus based on a
sliding scale of various percentages of Sovereign's profits beginning at 0.7%
for a 16% return on equity to 0.9% for a 17% or better return on equity. Mr.
Sidhu was also entitled to receive special bonuses if Sovereign's profits
exceeded $43,350,000 or if Sovereign acquired institutions with assets in excess
of $1.0 billion. The Compensation Committee determined the amount of bonus paid
to Mr. Sidhu, and Mr. Sidhu determined the bonuses paid to the other named
executives. Mr. Sidhu's bonus is increased by 5% if he agrees to use the bonus
to purchase Sovereign common stock. The bonuses of certain executive officers,
from time to time, are also increased if they agree to purchase Sovereign common
stock. Because Sovereign's profits exceeded $43,350,000 and Mr. Sidhu agreed to
purchase Sovereign common stock with his bonus, Mr. Sidhu was paid an incentive
compensation award of $422,158, representing 0.88% of Sovereign's profits for
1994.
LONG-TERM INCENTIVE COMPENSATION
Sovereign's 1986 Stock Option Plan and 1993 Stock Option Plan are
long-term incentive plans designed to align a significant portion of the
Executive Compensation Program with shareholder interests. The 1986 Stock
Option Plan was adopted by shareholders in 1986 and permits Sovereign to
grant certain officers a right to purchase shares of common stock over a ten
year period, at the fair market value per share at the date the option is
granted. The 1993 Stock Option Plan was adopted by shareholders in 1993 and
permits Sovereign to grant eligible employees a similar right to purchase
shares of common stock at a price equal to at least the fair market value per
share on the date the option is granted. Upon adoption, nonemployee directors
of Sovereign were automatically granted nonqualified stock options on a
one-time basis. In granting incentive stock options to Mr. Sidhu and the
other executive officers, the Compensation Committee took into account the
financial performance of Sovereign, long term strategic goals of Sovereign to
increase shareholder value, the executive's level of responsibility and
contributions to Sovereign.
The tables which follow and accompanying narrative and footnotes, reflect
the decisions covered by the above discussion. This report has been furnished
by the Compensation Committee.
THE COMPENSATION COMMITTEE
Richard E. Mohn, Chairman
Daniel K. Rothermel Lawrence W. O'Neill
Samuel R. Willard, Jr. G. Arthur Weaver
Frederick J. Jaindl Theodore Ziaylek, Jr.
10
<PAGE> 13
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to Sovereign for the
fiscal years ended December 31, 1994, 1993 and 1992, of those persons who
during 1994, (i) served as Sovereign's chief executive officer or (ii) were
executive officers (other than the chief executive officer) whose total
annual salary and bonus exceeded $100,000 (collectively with the chief
executive officer, the "Executive Officers"):
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------- ---------------------
Securities Underlying All Other
Name and Salary Bonus Options/SARs(1)(2) Compensation(3)(5)
Principal Position Year ($) ($)(4) (#) ($)
- - ------------------------- ------ --------- --------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Jay S. Sidhu 1994 195,000 422,158 0 4,710
President and 1993 195,000 351,422 237,600 4,497
Chief Executive Officer 1992 188,320 259,625 24,149 4,364
Karl D. Gerhart 1994 103,846 40,000 0 3,115
Chief Financial 1993 100,500 50,000 31,680 4,497
Officer & Treasurer 1992 95,098 55,343 12,075 2,709
Lawrence M. Thompson, Jr. 1994 103,462 40,000 0 3,104
Secretary and 1993 96,833 50,000 31,680 3,863
General Counsel 1992 87,881 52,169 12,075 2,602
Patrick J. Petrone 1994 200,000 0 0 4,344
Vice Chairman 1993 177,404 0 0 4,790
Sovereign Bank 1992 157,828 0 0 4,035
</TABLE>
- - ------
(1) Options granted are adjusted to reflect a 10% stock dividend declared on
January 21, 1992; a 10% stock dividend declared on April 21, 1992; a 10%
stock dividend declared on July 21, 1992; a 20% stock split declared on
October 13, 1992; a 5% stock dividend declared on December 22, 1992; a 20%
stock split declared on April 7, 1993; a 20% stock split declared on October
19, 1993; and a 10% stock dividend declared on April 19, 1994. Options do
not reflect a 5% stock dividend declared on February 22, 1995, and payable
to shareholders of record on March 31, 1995.
(2) On November 17, 1994, the Sovereign Board of Directors authorized the
Sovereign ESOP to borrow funds to purchase up to 4 million shares of
Sovereign common stock. This leveraged purchase program was not implemented
in 1994. On February 2, 1995, Sovereign and the trustee of the Sovereign
ESOP entered into a loan agreement pursuant to which Sovereign will lend to
the trustee of the Sovereign ESOP up to $5 million to purchase common stock.
The table does not reflect shares purchased in 1995 by the Sovereign ESOP.
Shares of common stock purchased with the proceeds of this loan are held in
a suspense account as collateral for the debt and will be allocated to the
account of participants as the debt is repaid.
(3) Amounts appearing in this column are Company contributions on behalf of each
named person under the Sovereign Bancorp, Inc. 401(k) Retirement Savings
Plan.
(4) Mr. Sidhu's bonus was increased by 5% because Mr. Sidhu agreed to purchase
Sovereign common stock with the proceeds.
(5) Mr. Petrone's compensation includes a term life insurance premium of
$1,344.
Stock options were not granted to Executive Officers during the fiscal
year ended December 31, 1994.
11
<PAGE> 14
The following table sets forth information concerning exercised and
unexercised options to purchase Sovereign's common stock:
TABLE III
AGGREGATED OPTIONS EXERCISED IN LAST YEAR AND
DECEMBER 31, 1994 OPTION VALUE
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, December 31, 1994
1994(#) ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- - -------------------------- --------------- -------------- --------------- -------------------
<S> <C> <C> <C> <C>
Jay S. Sidhu ................ 150,000 1,212,750 418,943/237,600 2,413,836/192,456
Karl D. Gerhart ............ 63,138 471,520 40,000/31,680 248,400/25,660
Lawrence M. Thompson, Jr. ... 5,000 39,800 109,815/31,680 635,647/25,660
</TABLE>
- - ------
(1) Table does not reflect 5% stock dividend declared on February 22, 1995,
and payable to shareholders of record on March 31, 1995.
PENSION PLAN
Sovereign maintains a defined benefit retirement plan ("Pension Plan") for
all employees who have attained age 21 and have completed one year of
eligibility service. The following table sets forth the estimated annual
benefits payable upon retirement to participants at normal retirement age, in
the average annual salary and years of service classifications specified.
SOVEREIGN BANCORP, INC. PENSION PLAN
ILLUSTRATION OF BENEFITS AT DECEMBER 31, 1994
<TABLE>
<CAPTION>
Five Year
Average Benefits Payable Per Years of Service(1)(2)
-----------------------------------------------------------
Remuneration(3) 15 20 25 30 35
- - -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 60,000 $11,707 $15,601 $19,512 $23,414 $27,317
80,000 17,407 23,210 29,012 34,814 40,617
100,000 23,107 30,810 38,512 46,214 53,917
120,000 28,807 38,410 48,012 57,614 67,217
140,000 34,507 46,010 57,512 69,014 80,517
160,000 37,357(4) 49,180(4) 62,262(4) 74,714(4) 87,167(4)
180,000 37,357(4) 49,180(4) 62,262(4) 74,714(4) 87,167(4)
200,000 37,357(4) 49,180(4) 62,262(4) 74,714(4) 87,167(4)
220,000 37,357(4) 49,180(4) 62,262(4) 74,714(4) 87,167(4)
240,000 37,357(4) 49,180(4) 62,262(4) 74,714(4) 87,167(4)
</TABLE>
- - ------
(1) The following are the years of credited service under Sovereign's Pension
Plan for the persons named in the cash compensation table: Mr. Sidhu -- 8
years; Mr. Thompson -- 9 years; Mr. Gerhart -- 18 years. At December 31,
1994, Mr. Petrone was not credited with any years of service under the
Pension Plan because, in the acquisition of Charter, past service was not
granted for benefit accrual.
(2) Benefits are computed in single life annuity amounts on the basis of an
assumed year of birth of 1950 and without any deduction for Social Security
or other offset amounts.
(3) Represents the highest average remuneration received over a consecutive five
year period during the last ten years, excluding deferred compensation other
than 401(k) Retirement Savings Plan contributions, subject in Messrs.
Sidhu's case to a compensation limit of $150,000 in 1994.
(4) The 1994 maximum annual benefit permitted when the Internal Revenue Code's
annual compensation limit of $150,000 and maximum annual benefit limit are
applied to the Pension Plan's benefit formula.
12
<PAGE> 15
CERTAIN TRANSACTIONS
EMPLOYMENT AGREEMENTS
Sovereign entered into an employment agreement, dated September 15, 1992,
with Jay S. Sidhu, which superseded in its entirety Mr. Sidhu's then existing
employment agreement. Mr. Sidhu's agreement has an initial term of three
years and unless terminated as set forth therein, is automatically extended
at designated dates to provide a new term of three years except that at
certain times notice of nonextension may be given, in which case, the
agreement will expire at the end of its then current term. The agreement
provides a base salary which, if increased by action of the Board of
Directors, becomes the new base salary provided thereafter by the agreement.
In addition, the agreement provides, among other things, a right to
participate in any bonus plan approved by the Board of Directors and
insurance, vacation, pension and other fringe benefits for Mr. Sidhu.
If Mr. Sidhu's employment is terminated without "Cause," or if Mr. Sidhu
voluntarily terminates employment for "Good Reason" (as defined in the
agreement), Mr. Sidhu becomes entitled to severance benefits under the
agreement. "Good Reason" includes the assignment of duties and
responsibilities inconsistent with Mr. Sidhu's status as President and Chief
Executive Officer, a reduction in salary or benefits or a reassignment which
requires Mr. Sidhu to move his principal residence more than 100 miles from
Sovereign's principal executive office. If any such termination occurs prior
to September 15, 1997, the benefits are monthly cash payments in the
aggregate amount of $1.5 million, plus insurance and other fringe benefits,
payable for the longer of 36 months or the end of the contract term. If any
such termination occurs on or after September 15, 1997, the benefits are
monthly cash payments in the aggregate amount of the greater of (i) $1.5
million or (ii) three times base salary and bonus (equal to the average bonus
for the prior three years), plus insurance and other fringe benefits, payable
for the longer of 36 months or the end of the contract term. Cash benefits
payable upon any such termination are reduced by an amount equal to 25% of
any compensation earned from another employer. The agreement contains a
provision restricting the executive's right to compete after a voluntary
termination of employment without "Good Reason" or any termination for
"Cause;" in all other circumstances, after termination of employment, there
is no covenant not to compete.
Sovereign has also entered into employment agreements with Karl D. Gerhart
and Lawrence M. Thompson, Jr., each dated September 15, 1992, which
superseded in their entirety the executives' then existing employment
agreements. Each agreement, has an initial term of two years and unless
terminated as set forth therein, is automatically extended at certain dates
to provide a new term of two years except that at certain times notice of
nonextension may be given, in which case the agreement will expire at the end
of its then current term. Each agreement provides a base salary which, if
increased by action of the Board of Directors, becomes the new base salary
provided thereafter by the agreement. In addition, each agreement provides,
among other things, a right to participate in any bonus plan approved by the
Board of Directors and insurance, vacation, pension and other fringe benefits
for the executive.
If Mr. Thompson's or Mr. Gerhart's employment is terminated without
"Cause" (as defined in the agreements), whether or not a "Change in Control"
(as defined in the agreements) of Sovereign has occurred, or if Mr. Thompson
or Mr. Gerhart voluntarily terminates employment for "Good Reason" (as
defined in the agreements) following a "Change in Control," the executive
becomes entitled to severance benefits under the agreement. The benefits are
continuation of salary, bonus (equal to the average bonus for the three prior
years), and insurance and other fringe benefits for two years. If, in the
absence of a "Change in Control," Mr. Gerhart's or Mr. Thompson's employment
is terminated without "Cause," cash benefits payable under the agreement are
reduced by an amount equal to 25% of any compensation received from another
employer. Each agreement contains a provision restricting the executive's
right to compete after a voluntary termination of employment without "Good
Reason" or any termination for "Cause"; in all other circumstances, after
termination of employment, there is no covenant not to compete.
In connection with the acquisition of Charter and Charter Federal,
Sovereign assumed Patrick J. Petrone's employment agreement. The employment
agreement has an initial term of three years and, unless terminated as set
forth therein, is automatically extended on January 1 of each year for a 36
month period. The agreement may be terminated at the end of the then
remaining term by either party giving written notice prior to January 1 of
each succeeding year, after which notice, the agreement will no longer
automatically be extended each January 1.
13
<PAGE> 16
Mr. Petrone may terminate his employment upon or after the occurrence of a
change in control if, within the period of two years following such change in
control (as defined in the agreement), (i) he is assigned to a position of
lesser rank or status or to a different base employment area, (ii) his base
salary is reduced, or (iii) Sovereign breaches the agreement.
In the event of any such termination or in the event of termination
without just cause, as defined in the agreement, within two years following a
change in control, Mr. Petrone is entitled to receive as severance pay a lump
sum payment equal to the aggregate amount of the future base salary payments
that he would have received if he continued in the employ of Sovereign until
the later of (a) the expiration of the then current segment of the term of
the agreement, or (b) 36 months following the termination date. The lump sum
payment is to be calculated at the highest rate of base salary paid to him at
any time under the agreement, with such payments discounted to present value
at an annual rate of 5%.
Sovereign may terminate the employment of Mr. Petrone at any time for just
cause, as defined. In the event of a termination for just cause, Sovereign's
obligation to Mr. Petrone terminates.
The employment agreement provides that, after termination of employment
with Sovereign, Mr. Petrone will not be employed by, control, manage or
otherwise participate in the business of a "significant competitor," as
defined in the agreement, for a period of two (2) years after the termination
of employment. If, within two (2) years after a change in control, Mr.
Petrone terminates his employment or is terminated by Sovereign and is
entitled to receive as severance pay a lump sum payment as described above,
then the noncompetition provisions of the agreement are inoperative.
INDEMNIFICATION
The bylaws of Sovereign provide for (1) indemnification of directors,
officers, employees and agents of Sovereign and its subsidiaries and (2) the
elimination of a director's liability for monetary damages, each to the
fullest extent permitted by Pennsylvania law. Pennsylvania law provides that
a Pennsylvania corporation may indemnify directors, officers, employees and
agents of the corporation against liabilities they may incur in such
capacities for any action taken or any failure to act, whether or not the
corporation would have the power to indemnify the person under any provision
of law, unless such action or failure to act is determined by a court to have
constituted recklessness or willful misconduct. Pennsylvania law also permits
the adoption of a bylaw amendment, approved by shareholders, providing for
the elimination of a director's liability for monetary damages for any action
taken or any failure to take any action unless (1) the director has breached
or failed to perform the duties of his office and (2) the breach or failure
to perform constitutes self-dealing, willful misconduct or recklessness.
Directors and officers of Sovereign are also insured against certain
liabilities for their actions, as such, by an insurance policy obtained by
Sovereign.
On December 21, 1993, Sovereign Bank entered into an Indemnification
Agreement (the "Indemnification Agreement") with Mr. Sidhu. The
Indemnification Agreement provides that Sovereign Bank will indemnify Mr.
Sidhu to the fullest extent permitted by applicable law and regulation for
all expenses, judgments, fines and penalties incurred in connection with, and
amounts paid in settlement of, any claim relating to, among other things, the
fact that Mr. Sidhu is or was a director or officer of Sovereign or Sovereign
Bank (an "Indemnifiable Claim"). Sovereign Bank will also advance expenses
upon Mr. Sidhu's request in connection with any Indemnifiable Claim.
Sovereign Bank's indemnification obligations are subject to the condition
that a Reviewing Party (as defined in the Indemnification Agreement) shall
not have determined that Mr. Sidhu would not be permitted to be indemnified
under applicable law. To the extent that it is subsequently determined that
Mr. Sidhu is not entitled to indemnification, he shall reimburse Sovereign
Bank for any amounts previously paid.
Upon a Change in Control (as defined in the Indemnification Agreement) of
Sovereign or Sovereign Bank, all determinations regarding Sovereign Bank's
indemnification obligations under the Agreement shall be made by Independent
Legal Counsel (as defined in the Indemnification Agreement). Upon a Potential
14
<PAGE> 17
Change in Control (as defined in the Indemnification Agreement) of Sovereign or
Sovereign Bank, Sovereign Bank shall, upon written request by Mr. Sidhu, create
and fund a trust for the benefit of Mr. Sidhu in order to ensure satisfaction of
Sovereign Bank's indemnification obligations under the Indemnification
Agreement.
INDEBTEDNESS OF MANAGEMENT
Prior to August 1989, Sovereign Bank offered consumer and residential
mortgage loans to directors of Sovereign and its subsidiaries, full-time
employees with six months continuous service at Sovereign Bank, and part-
time employees with one year of continuous service at Sovereign Bank, at
preferential terms with respect to interest rates and loan fees.
Specifically, interest rates offered to such persons were up to 1% lower than
rates offered to nonaffiliated persons for similar transactions, and certain
loan origination fees were waived. As a result of the enactment in August
1989 of the Financial Institutions Reform, Recovery and Enforcement Act of
1989, which made Section 22(h) of the Federal Reserve Act applicable to
Sovereign and Sovereign Bank, any credit extended by Sovereign Bank to
executive officers and directors of Sovereign Bank and Sovereign, and to the
extent otherwise permitted, principal shareholders of Sovereign or any
related interest of the foregoing must be (i) on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions by Sovereign Bank with non-affiliated
parties, and (ii) not involve more than the normal risk of repayment or
present other unfavorable features.
The following table sets forth certain information with respect to each
director and executive officer of Sovereign, whose aggregate indebtedness to
Sovereign Bank exceeded $60,000 as of December 31, 1994, and whose loan was
granted on preferential terms applicable to directors, officers and employees
of Sovereign Bank and Sovereign at the time the loan was made.
<TABLE>
<CAPTION>
Highest
Principal
Balance from
Jan. 1, 1994 to Balance at Interest Year
Name Type of Loan Dec. 31, 1994 Dec. 31, 1994 Rate Made
- - -------------- --------------- --------------- --------------- ------------ ------
<S> <C> <C> <C> <C> <C>
Jay S. Sidhu .. Consumer Loan $91,749 $75,046 1.0% 1987
above
prime rate
</TABLE>
Except as set forth above, all loans made by Sovereign Bank to directors
and executive officers of Sovereign (i) were made in the ordinary course of
business, (ii) were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and (iii) did not involve more than the
normal risk of collectability or present other unfavorable features.
ADDITIONAL INFORMATION REGARDING DIRECTORS AND OFFICERS.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Sovereign's officers and directors, and any persons
owning ten percent or more of Sovereign's common stock, to file in their
personal capacities initial statements of beneficial ownership, statements of
changes in beneficial ownership and annual statements of beneficial ownership
with the Securities and Exchange Commission (the "SEC"). Persons filing such
beneficial ownership statements are required by SEC regulation to furnish
Sovereign with copies of all such statements filed with the SEC. The rules of
the SEC regarding the filing of such statements require that "late filings"
of such statements be disclosed in Sovereign's proxy statement. Based solely
on Sovereign's review of any copies of such statements received by it, and on
written representations from directors and officers that no annual statements
of beneficial ownership were required to be filed by such persons, Sovereign
believes that during 1994 Messrs. Sidhu and Gerhart each, inadvertently or
based on erroneous advise of counsel or others, neglected to file, on a
timely basis, one such statement and Mr. O'Neill inadvertently failed to
timely file two such statements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frederick J. Jaindl, Chairman of the Board of Sovereign, and Richard E.
Mohn, Chairman of the Board of the Bank, serve as members of Sovereign's
Compensation Committee, although they do not participate in or vote on
matters concerning their own compensation.
15
<PAGE> 18
PERFORMANCE GRAPH
Set forth below is a graph and table comparing the yearly percentage
change in the cumulative total shareholder return on Sovereign's common stock
against (1) the cumulative total return on the S&P 500 Index and (2) the
cumulative total return on the largest five Pennsylvania bank holding
companies (CoreStates Financial Corp., Integra Financial Corp., Mellon Bank
Corp., Meridian Bancorp, Inc. and PNC Bank Corp.) for the five year period
commencing January 1, 1990, and ending December 31, 1994.
Cumulative total return on Sovereign's common stock, the S&P 500 Index and
the common stock of the largest five Pennsylvania bank holding companies
equals the total increase in value since January 1, 1990, assuming
reinvestment of all dividends paid into Sovereign's common stock, the S&P 500
Index or the common stock of the largest five Pennsylvania bank holding
companies, respectively. The graph and table were prepared assuming that $100
was invested on January 1, 1990, in Sovereign's common stock, the S&P 500 and
the common stock of the largest five Pennsylvania bank holding companies.
Sovereign Bancorp
Performance Graph
700|-----------------------------------------------------------------------|
| |
| |
| |
| |
| |
600|-----------------------------------------------------------------------|
| # |
D | |
O | |
L | |
L | |
A 500|-----------------------------------------------------------------------|
R | |
S | |
| |
| |
| |
400|-----------------------------------------------------------------------|
| # |
| |
| # |
| |
300|-----------------------------------------------------------------------|
| |
| |
| |
| |
200|-----------------------------------------------------------------------|
| # @ @ @ |
| |
| @ & & |
| *& * * & |
100|---------&------------------------------------------------------*------|
| *#@ |
| |
| |
| |
0|---------|-------------|---------------|------------|-----------|------|
1990 1991 1992 1993 1994
S&P 500 = & S&P Savings & Loans = * Sovereign Bancorp = #
Top 5 Banks in PA(1) = @
1990 1991 1992 1993 1994
-------- --------- --------- --------- ---------
S&P 500 ................... $93.44 $118.59 $123.29 $131.99 $129.96
S&P Savings & Loans ....... $76.42 $114.91 $116.86 $118.58 $ 99.72
Sovereign Bancorp ......... $66.44 $170.29 $334.91 $593.94 $390.14
Top 5 Banks in PA(1)....... $70.20 $133.09 $183.47 $185.08 $173.74
- - ------
(1) Includes CoreStates Financial Corp., Integra Financial Corp., Mellon Bank
Corp., Meridian Bancorp, Inc. and PNC Bank Corp.
16
<PAGE> 19
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding persons known by
Sovereign to own more than 5% of the outstanding shares of Sovereign's common
stock as of March 3, 1995. The table does not give effect to a 5% stock
dividend declared on February 22, 1995 and payable to shareholders of record
on March 31, 1995.
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Common Stock
- - --------------------- ----------------------- --------------
Frederick J. Jaindl ................ 3,634,082(1) 7.96%
3150 Coffeetown Road
Orefield, PA 18069
- - ------
(1) See "ELECTION OF DIRECTORS".
PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of Sovereign has appointed Ernst & Young LLP,
certified public accountants, as Sovereign's independent auditors for the
fiscal year ending December 31, 1995, subject to ratification of such
appointment by shareholders. No determination has been made as to what action
Sovereign's Board of Directors would take if shareholders do not ratify the
appointment.
Ernst & Young LLP has conducted the audit of the financial statements of
Sovereign and its subsidiaries for the year ended December 31, 1994.
Representatives of Ernst & Young LLP are expected to be present at the
Meeting, will be given an opportunity to make a statement if they desire to
do so, and will be available to answer appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
APPOINTMENT OF ERNST & YOUNG LLP AS SOVEREIGN'S INDEPENDENT AUDITORS FOR THE
1995 FISCAL YEAR. Abstentions and broker non-votes, although counted for the
purpose of determining whether a quorum is present at the Meeting, will not
constitute or be counted as "votes" cast for purposes of the Meeting. All
proxies will be voted "FOR" ratification of the appointment unless a
shareholder specifies to the contrary on such shareholder's proxy card.
SHAREHOLDER PROPOSALS
FOR 1996 ANNUAL MEETING AND NOMINATIONS FOR DIRECTORS
Sovereign's 1996 Annual Meeting of Shareholders will be held on or about
April 18, 1996.
In accordance with the By-Laws of Sovereign, a shareholder who desires to
propose a matter for consideration at an annual meeting of shareholders must
provide notice thereof in writing, delivered or mailed by first- class United
States mail, postage prepaid, to the Secretary of Sovereign, not less than 90
days nor more than 150 days prior to such annual meeting.
Any shareholder who desires to submit a proposal to be considered for
inclusion in Sovereign's proxy materials relating to its 1996 Annual Meeting
of Shareholders must submit such proposal in writing, addressed to Sovereign
Bancorp, Inc. at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610
(Attn: Secretary), on or before January 18, 1996.
For candidates to be considered by the Nominating Committee in connection
with the nomination of Class III directors for election in 1996, such
shareholder recommendations must be made in writing no later than January 18,
1996, addressed to the Nominating Committee, Sovereign Bancorp, Inc., 1130
Berkshire Boulevard, Wyomissing, Pennsylvania 19610 and should contain the
following information with respect to the recommended candidates: (1) name,
age, business address and, if known, residence address; (2) principal
occupation; (3) number of shares of Sovereign's common stock beneficially
owned and earliest date any such shares were acquired; and (4) any other
information the shareholder considers material or otherwise helpful to the
Nominating Committee in its consideration of such candidate.
17
<PAGE> 20
ANNUAL REPORT
Sovereign's Annual Report to the Shareholders for the year ended December
31, 1994, is enclosed herewith. Sovereign's Annual Report is furnished to
shareholders for their information. No part thereof is incorporated by
reference herein.
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF SOVEREIGN'S ANNUAL
REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1994, INCLUDING A
LIST OF THE EXHIBITS THERETO, REQUIRED TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO RULE 13a-1 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, MAY BE OBTAINED, WITHOUT CHARGE, FROM LAWRENCE M. THOMPSON, JR.,
SECRETARY, SOVEREIGN BANCORP, INC., 1130 BERKSHIRE BOULEVARD, WYOMISSING,
PENNSYLVANIA 19610. EACH REQUEST MUST SET FORTH A GOOD FAITH REPRESENTATION
THAT, AS OF THE RECORD DATE, THE PERSON MAKING THE REQUEST WAS A BENEFICIAL
OWNER OF SOVEREIGN'S COMMON STOCK ENTITLED TO VOTE AT THE MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ LAWRENCE M. THOMPSON, JR.
-------------------------------------
LAWRENCE M. THOMPSON, JR.
Secretary
PLEASE REMEMBER TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR IMPORTANT VOTE WILL BE COUNTED AT
THE ANNUAL MEETING.
18
<PAGE> 21
[X] Please mark your
votes as in this
example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING.
Matter No. 1: FOR WITHOUT AUTHORITY MATTER NO. 2 FOR AGAINST ABSTAIN
ELECTION OF [ ] [ ] to vote for RATIFICATION OF [ ] [ ] [ ]
CLASS II all nominees INDEPENDENT
DIRECTORS. listed below AUDITORS
all nominees listed below The undersigned hereby acknowledges
(except as marked to the receipt of the Proxy Statement dated
contrary below) March 17, 1995 and hereby revokes
any proxy or proxies heretofore
Nominees: Frederick J. Jaindl; given to vote shares at said
Howard D. Mackey; Daniel K. Rothermel meeting or any adjournment thereof.
(INSTRUCTION: TO WITHHOLD (PLEASE DATE, SIGN AND RETURN
AUTHORITY TO VOTE FOR ANY THIS PROXY IN THE ENCLOSED ADDRESSED
INDIVIDUAL NOMINEE STRIKE A ENVELOPE)
LINE THROUGH THE NAME IN
THE LIST ABOVE.)
Signature(s)------------------------------------Date-----------------, 1995
Please sign exactly as name(s) appears hereon.
SOVEREIGN BANCORP, INC.
I/We hereby appoint Karl D. Gerhart, Anita I. Oas and Dana J.
Albera, or any one of them acting in the absence of others, as
proxyholders, each with the power to appoint his or her substitute,
and hereby authorize them to represent and to vote, as designated on
the reverse side, all the shares of common stock of Sovereign
Bancorp, Inc. held of record by me/us on March 3, 1995, at the
Annual Meeting of Shareholders to be held on April 20, 1995, or any
adjournment thereof.
This proxy when properly executed will be voted in the manner
directed on the reverse side. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF DIRECTORS AND FOR THE RATIFICATION
OF INDEPENDENT AUDITORS. This proxy will be voted, in the discretion
of the proxyholders, upon such other business as may properly come
before the Annual Meeting of Shareholders or any adjournment
thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
Please vote and sign on the other side.
